UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2020
OR
☐ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File No. 000-24455
CURAEGIS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
New York | 16-1509512 |
350 Linden Oaks Rochester, New York 14625
(Address of principal executive offices and Zip Code)
(585) 254-1100
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ���
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☒ |
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| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
None | N/A | N/A |
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class |
| Number of Shares Outstanding at November 12, 2020 |
Common Stock, $0.01 par value |
| 51,452,810 |
INDEX
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Item 1. | 3 | |
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| Condensed Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019 | 3 |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 |
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Item 3. | 25 | |
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Item 4. | 25 | |
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Item 1. | 25 | |
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Item 1A. | 25 | |
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Item 2. | 25 | |
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Item 3. | 25 | |
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Item 4. | 25 | |
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Item 5. | 25 | |
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Item 6. | 26 | |
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27 | ||
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EXHIBITS |
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| Exhibit 31.1 |
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| Exhibit 31.2 |
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| Exhibit 32 |
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CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, (Unaudited) | December 31, 2019 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash | $ | 87,000 | $ | 18,000 | ||||
Prepaid expenses | 12,000 | 2,000 | ||||||
Total current assets | 99,000 | 20,000 | ||||||
Right to use asset (net) | 156,000 | 193,000 | ||||||
Property and equipment (net) | 29,000 | 38,000 | ||||||
Total non-current assets | 185,000 | 231,000 | ||||||
Total Assets | $ | 284,000 | $ | 251,000 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIENCY | ||||||||
Current Liabilities: | ||||||||
Liability for inventory | $ | 1,740,000 | $ | 1,764,000 | ||||
Demand notes | 650,000 | 650,000 | ||||||
Promissory notes | 425,000 | 425,000 | ||||||
Accounts payable | 366,000 | 420,000 | ||||||
Accrued interest | 877,000 | 509,000 | ||||||
Current right-to-use obligation | 67,000 | 64,000 | ||||||
Other current liabilities | 20,000 | 36,000 | ||||||
Accrued wages and benefits | 58,000 | 50,000 | ||||||
Total current liabilities | 4,203,000 | 3,918,000 | ||||||
Non-current right-to-use obligation | 83,000 | 126,000 | ||||||
PPP loan | 228,000 | - | ||||||
Senior convertible notes (net) | 9,992,000 | 8,410,000 | ||||||
Total Liabilities | 14,506,000 | 12,454,000 | ||||||
Commitments and other matters | ||||||||
Stockholders' Deficiency: | ||||||||
Preferred stock, $.01 par value, 100,000,000 shares authorized | ||||||||
Series C, voting, convertible, no dividend, shares issued and outstanding at September 30, 2020 and December 31, 2019: 15,687,500 and 15,687,500, respectively | 157,000 | 157,000 | ||||||
Series C-2, voting, convertible, no dividend, shares issued and outstanding at September 30, 2020 and December 31, 2019: 24,500,000 and 24,500,000, respectively | 245,000 | 245,000 | ||||||
Series C-3, voting, convertible, no dividend, shares issued and outstanding at September 30, 2020 and December 31, 2019: 3,238,000 and 3,238,000, respectively | 32,000 | 32,000 | ||||||
Class A, non-voting, convertible, cumulative dividend $.40 per share per annum, shares issued and outstanding at September 30, 2020 and December 31, 2019: 468,221 and 468,221, respectively | 5,000 | 5,000 | ||||||
Class B, non-voting, convertible, cumulative dividend $.50 per share per annum, shares issued and outstanding at September 30, 2020 and December 31, 2019: 67,500 and 67,500, respectively | 1,000 | 1,000 | ||||||
Common stock, $.01 par value, 400,000,000 shares authorized; shares issued and outstanding at September 30, 2020 and December 31, 2019: 51,452,810 and 50,979,964 respectively | 515,000 | 510,000 | ||||||
Additional paid-in capital | 77,695,000 | 78,272,000 | ||||||
Accumulated deficit | (92,872,000 | ) | (91,425,000 | ) | ||||
Total Stockholders' Deficiency | (14,222,000 | ) | (12,203,000 | ) | ||||
Total Liabilities and Stockholders' Deficiency | $ | 284,000 | $ | 251,000 |
See notes to condensed consolidated financial statements.
Condensed Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenue and Cost of revenue: | ||||||||||||||||
CURA revenue | $ | 2,000 | $ | 4,000 | $ | 7,000 | $ | 13,000 | ||||||||
Cost of revenue | 2,000 | 2,000 | 15,000 | 11,000 | ||||||||||||
Gross Profit (Loss) | - | 2,000 | (8,000 | ) | 2,000 | |||||||||||
Costs and expenses: | ||||||||||||||||
Recovery on inventory reserve | (74,000 | ) | (13,000 | ) | (97,000 | ) | (13,000 | ) | ||||||||
Engineering and development | 98,000 | 178,000 | 254,000 | 727,000 | ||||||||||||
General and administrative (recovery) | (456,000 | ) | 339,000 | 200,000 | 1,326,000 | |||||||||||
Total costs and expenses (income) | (432,000 | ) | 504,000 | 357,000 | 2,040,000 | |||||||||||
Income (Loss) from operations | 432,000 | (502,000 | ) | (365,000 | ) | (2,038,000 | ) | |||||||||
Non-operating expense: | ||||||||||||||||
Interest expense | (352,000 | ) | (320,000 | ) | (1,030,000 | ) | (898,000 | ) | ||||||||
Debt issuance cost | - | (304,000 | ) | - | (304,000 | ) | ||||||||||
Vendor penalty | - | (300,000 | ) | - | (300,000 | ) | ||||||||||
Other (expense) income | 47,000 | 9,000 | (52,000 | ) | 10,000 | |||||||||||
Non-operating expense | (305,000 | ) | (915,000 | ) | (1,082,000 | ) | (1,492,000 | ) | ||||||||
Income (Loss) before income taxes | 127,000 | (1,417,000 | ) | (1,447,000 | ) | (3,530,000 | ) | |||||||||
Income taxes | - | - | - | - | ||||||||||||
Net Income (Loss) | 127,000 | (1,417,000 | ) | (1,447,000 | ) | (3,530,000 | ) | |||||||||
Preferred stock dividends | 54,000 | 55,000 | 163,000 | 163,000 | ||||||||||||
Net loss attributable to common stockholders | $ | 73,000 | $ | (1,472,000 | ) | $ | (1,610,000 | ) | $ | (3,693,000 | ) | |||||
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Net loss per common share attributable to common stockholders | ||||||||||||||||
Basic and Diluted | $ | 0.00 | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.07 | ) | |||||
Weighted average number of shares of common stock | ||||||||||||||||
Basic and Diluted | 51,447,000 | 50,776,000 | 51,325,000 | 50,565,000 |
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
(Unaudited)
For the Three and Nine Months Ended September 30. 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Class C Preferred Stock | Class C-2 Preferred Stock | Class C-3 Preferred Stock | Class A Preferred Stock | Class B Preferred Stock | Common Stock | Additional Paid in | Accumulated | Total Stockholders' | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficiency | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | 15,687,500 | $ | 157,000 | 24,500,000 | $ | 245,000 | 3,238,000 | $ | 32,000 | 468,221 | $ | 5,000 | 67,500 | $ | 1,000 | 50,979,964 | $ | 510,000 | $ | 78,272,000 | $ | (91,425,000 | ) | $ | (12,203,000 | ) | ||||||||||||||||||||||||||||||||||
Stock-based compensation | 39,000 | 39,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common shares issued for interest | 94,772 | 1,000 | 16,000 | 17,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common shares issued with convertible notes | 112,500 | 1,000 | 9,000 | 10,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Loss | (753,000 | ) | (753,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | 15,687,500 | 157,000 | 24,500,000 | 245,000 | 3,238,000 | 32,000 | 468,221 | 5,000 | 67,500 | 1,000 | 51,187,236 | 512,000 | 78,336,000 | (92,178,000 | ) | (12,890,000 | ) | |||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | (28,000 | ) | (28,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common shares issued for interest | 123,074 | 1,000 | 20,000 | 21,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common shares issued with convertible notes | 105,000 | 1,000 | 9,000 | 10,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Loss | (821,000 | ) | (821,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | 15,687,500 | 157,000 | 24,500,000 | 245,000 | 3,238,000 | 32,000 | 468,221 | 5,000 | 67,500 | 1,000 | 51,415,310 | 514,000 | 78,337,000 | (92,999,000 | ) | (13,708,000 | ) | |||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | (645,000 | ) | (645,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common shares issued for interest | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common shares issued with convertible notes | 37,500 | 1,000 | 3,000 | 4,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Income | 127,000 | 127,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2020 | 15,687,500 | $ | 157,000 | 24,500,000 | $ | 245,000 | 3,238,000 | $ | 32,000 | 468,221 | $ | 5,000 | 67,500 | $ | 1,000 | 51,452,810 | $ | 515,000 | $ | 77,695,000 | $ | (92,872,000 | ) | $ | (14,222,000 | ) |
For the Three and Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | 15,687,500 | $ | 157,000 | 24,500,000 | $ | 245,000 | 3,268,000 | $ | 33,000 | 468,221 | $ | 5,000 | 67,500 | $ | 1,000 | 50,364,549 | $ | 504,000 | $ | 77,725,000 | $ | (87,149,000 | ) | $ | (8,479,000 | ) | ||||||||||||||||||||||||||||||||||
Stock-based compensation | 59,000 | 59,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common shares issued for interest | 35,996 | 8,000 | 8,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Warrants issued with convertible note | 63,000 | 63,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Loss | (1,148,000 | ) | (1,148,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2019 | 15,687,500 | 157,000 | 24,500,000 | 245,000 | 3,268,000 | 33,000 | 468,221 | 5,000 | 67,500 | 1,000 | 50,400,545 | 504,000 | 77,855,000 | (88,297,000 | ) | (9,497,000 | ) | |||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 45,000 | 45,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common shares issued for interest | 39,156 | 10,000 | 10,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common shares issued with convertible notes | 90,000 | 1,000 | 11,000 | 12,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Warrants issued with convertible note | 2,000 | 2,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Loss | (965,000 | ) | (965,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | 15,687,500 | 157,000 | 24,500,000 | 245,000 | 3,268,000 | 33,000 | 468,221 | 5,000 | 67,500 | 1,000 | 50,529,701 | 505,000 | 77,923,000 | (89,262,000 | ) | (10,393,000 | ) | |||||||||||||||||||||||||||||||||||||||||||
Employeee stock-based compensation | 7,000 | 7,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common shares issued for interest | 33,973 | 1,000 | 8,000 | 9,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common shares issued with convertible notes | 75,000 | 1,000 | 6,000 | 7,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common shares issued with demand notes | 165,000 | 1,000 | 16,000 | 17,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share rights issued with demand notes | 250,000 | 250,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Loss | (1,417,000 | ) | (1,417,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2019 | 15,687,500 | $ | 157,000 | 24,500,000 | $ | 245,000 | 3,268,000 | $ | 33,000 | 468,221 | $ | 5,000 | 67,500 | $ | 1,000 | 50,803,674 | $ | 508,000 | $ | 78,210,000 | $ | (90,679,000 | ) | $ | (11,520,000 | ) |
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (1,447,000 | ) | $ | (3,530,000 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Amortization of debt discount reported as interest | 607,000 | 546,000 | ||||||
Depreciation and amortization | 46,000 | 109,000 | ||||||
Fair market value of share rights issued with demand notes | - | 250,000 | ||||||
Stock-based compensation | (634,000 | ) | 111,000 | |||||
Interest paid in shares | 38,000 | 27,000 | ||||||
Changes in working capital items: | ||||||||
Prepaid expenses | (10,000 | ) | 22,000 | |||||
Liability for inventory | (24,000 | ) | 315,000 | |||||
Accounts payable | (57,000 | ) | 73,000 | |||||
Accrued interest | 330,000 | 210,000 | ||||||
Other current liabilities | (16,000 | ) | 35,000 | |||||
Accrued wages and benefits | 8,000 | 14,000 | ||||||
Net cash used in operating activities | (1,159,000 | ) | (1,818,000 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of senior convertible notes (net) | 1,000,000 | 825,000 | ||||||
Proceeds from demand notes | - | 550,000 | ||||||
Proceeds from issuance of unsecured subordinated notes | - | 575,000 | ||||||
Proceeds from PPP loan | 228,000 | - | ||||||
Cash used in repayment of unsecured promissory notes | - | (150,000 | ) | |||||
Net cash provided by financing activities | 1,228,000 | 1,800,000 | ||||||
Net increase (decrease) in cash | 69,000 | (18,000 | ) | |||||
Cash at beginning of period | 18,000 | 53,000 | ||||||
Cash at end of period | $ | 87,000 | $ | 35,000 | ||||
Supplemental Disclosures: | ||||||||
Cash used for payment of interest expense | $ | 19,000 | $ | 86,000 | ||||
Debt discount related to issuance of convertible notes | $ | 24,000 | $ | 65,000 | ||||
Common shares issued in payment of interest expense | $ | 38,000 | $ | - | ||||
Right to use asset | $ | 156,000 | $ | 212,000 |
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
CurAegis Technologies, Inc. (“CurAegis”, “the Company”) was incorporated as a New York business corporation in September 1996 under the name Torvec, Inc. The Company’s name was changed to CurAegis Technologies, Inc. in 2016 in connection with the establishment of its two business divisions. The CURA division is engaged in the fatigue management business and the Aegis division is engaged in the development of technologies for the power and hydraulic industry.
The Company is focused on the commercialization of a wellness and safety system (the CURA System) and a uniquely designed hydraulic pump that will be smaller, lighter, less expensive and more efficient than current technology. The Company has not had any significant revenue-producing operations.
The Company has created the CURA app to offer products that reduce fatigue risk in the workplace and help individuals manage their sleep and improve alertness. The CURA System consists of a real-time alertness measurement and the Z-Coach wellness program.
The Aegis hydraulic pump technology brings to the hydraulic industry a unique technology that is designed to be: smaller, lighter, less expensive, and more efficient than conventional pumps and motors. During 2019, the Company initiated discussions with investment advisors and certain hydraulics companies to evaluate the possible monetization of the Aegis technologies. On April 8, 2020, the Company reported that it had initiated a temporary suspension of this evaluation process. This decision was linked to the COVID-19 pandemic which adversely impacted and is expected to continue to adversely impact the Company’s ability to generate industry interest in the Aegis technologies. Recent updates with interested parties have indicated that companies in the hydraulics industry are currently focused on internal processes, technology, and employees.
It is important to note that the cycle time from the initiation of the sales process to revenue realization can be highly variable especially as a start-up entity. In addition to the activities to be undertaken to implement our plan of operations, we may expand and/or refocus our activities depending upon future circumstances and developments.
Current Cash Outlook and Management Plans
As of September 30, 2020, we had cash on hand of $87,000, negative working capital of $4,104,000, an accumulated deficit of $92,872,000 and a stockholders' deficiency of $14,222,000. During the nine months ended September 30, 2020 we raised $1,000,000 in proceeds through the issuance of convertible notes and $235,000 from the PPP loan and SBA EIDL grant. The proceeds from these sources have been used to support the ongoing development and marketing of our core technologies and product initiatives.
Management estimates that the 2020 cash needs will run between $1.7 and $2 million, based upon the cash used in operations in the nine months ended September 30, 2020. As of September 30, 2020, the Company’s cash on hand is not sufficient to cover the Company’s future working capital requirements. This raises substantial doubt as to the Company’s ability to continue as a going concern. Management will continue to use its best efforts to develop financing opportunities to fund the development and commercialization of the CURA and Aegis products.
Since inception, we have financed our operations by the sale of our securities and debt financings. We need to raise additional funds to meet our working capital needs, to fund expansion of our business, to complete development, testing and marketing of our products, or to make strategic acquisitions or investments. No assurance can be given that necessary funds will be available for us on acceptable terms, if at all. Furthermore, additional financings will involve dilution to our shareholders or may require that we relinquish rights to certain of our technologies or products. In addition, we will experience operational difficulties and delays due to working capital restrictions. If adequate funds are not available from additional sources of financing, we will have to delay or scale back our plans.
The Company’s ability to fund its current and future commitments from its available cash depends on its ability to launch and generate sales from the CURA app. If the Company cannot generate revenue from the CURA app, it would need to raise funds in order to meet its working capital needs and pursue its growth strategy. Although there can be no such assurances, management believes that sources for these additional funds will be available through either current or future investors.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U. S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, the condensed consolidated financial statements do not include all information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for interim periods are not necessarily indicative of what the results will be for the fiscal year. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2019 contained in the Company’s 2019 Annual Report on Form 10-K filed with the SEC.
Consolidation: The condensed consolidated financial statements include the accounts of the Company, our wholly owned subsidiary Iso-Torque Corporation, and our majority-owned subsidiary, Ice Surface Development, Inc. (56% owned). As of September 30, 2020, each of the subsidiaries are non-operational.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates are subject to a high degree of judgment and potential change. Actual results could differ from those estimates.
Reclassifications: Certain reclassifications may have been made to prior year balances to conform to the current year’s presentation.
Cash: We maintain cash at financial institutions that periodically may exceed federally insured amounts. We have a corporate credit card program through JPMorgan Chase Bank, N.A. In connection with this, the Company granted a security interest to the bank to act as collateral for the activity within the corporate card program, up to $5,000.
Inventory: Inventory is stated at the lower of cost or net realizable value with cost determined using the average cost method. Inventory on hand at September 30, 2020 and December 31, 2019 has been fully reserved.
Depreciation and amortization: Depreciation and amortization are computed using the straight-line method. Depreciation and amortization expense for the three and nine months ended September 30, 2020 and 2019 are as follows:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Right-to use building | $ | 17,000 | $ | 29,000 | $ | 37,000 | $ | 81,000 | ||||||||
Software amortization | - | 2,000 | - | 8,000 | ||||||||||||
Property and equipment | 3,000 | 6,000 | 9,000 | 20,000 | ||||||||||||
$ | 20,000 | $ | 37,000 | $ | 46,000 | $ | 109,000 |
Right to use building asset: ASU No. 2016-02, “Leases,” requires a lessee to recognize on its balance sheet the assets and liabilities related to long-term leases that were classified as operating leases under previous guidance. An asset is recognized when the Company can retain the economic benefits and control of the underlying asset. A corresponding liability is recognized related to the Company's obligation to make lease payments over the term of the lease. The standard became effective for the Company on January 1, 2019. The Company utilized the modified retrospective approach to measure the right to use operating lease agreement associated with the office building used for our business operations. The adoption of this accounting standard did not impact our consolidated loss from operations and had no impact on cash flows.
Software, Property and Equipment: Capitalized software, property and equipment are stated at cost. Estimated useful lives for capitalized software is 3 years and for property and equipment is 5 to 7 years. Betterments, renewals and significant repairs that extend the life of the assets are capitalized. Other repairs and maintenance costs are expensed when incurred. When disposed, the cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is recognized in non-operating income (expense).
Whenever events or circumstances indicate, our long-lived assets including any intangible assets with finite useful lives are tested for impairment by using the estimated future cash flows directly associated with, and that are expected to arise as a direct result of, the use of the assets. If the carrying amount exceeds the estimated undiscounted cash flows, impairment may be indicated. The carrying amount is compared to the estimated discounted cash flows and if there is an excess such amount is recorded as impairment.
Fair Value of Financial Instruments: As defined by U.S. GAAP, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A hierarchy for ranking the quality and reliability of the information is used to determine fair values. Assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that are not corroborated by market data
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The Financial Accounting Standards Board’s (“FASB”) guidance for the disclosure about fair value of financial instruments requires disclosure of an estimate of the fair value of certain financial instruments. The fair value of financial instruments pursuant to FASB’s guidance for the disclosure about fair value of financial instruments approximated their carrying values at September 30, 2020 and December 31, 2019. The carrying amount of cash, prepaid expenses, accounts payable, accrued expenses, demand and promissory notes approximates their fair value due to their short maturity. The senior convertible and demand notes can be converted into common stock with an underlying value of $2,977,000 as of September 30, 2020 based on the trading price on that date.
Revenue Recognition and Deferred Revenue: The Company accounts for revenue in accordance with FASB ASC 606, "Revenue from Contracts with Customers" and all related amendments. For contracts where performance obligations are satisfied at a point in time, the Company recognizes revenue when the product is shipped to the customer. For contracts where the performance obligation is satisfied over time, as in the Z-Coach sales, the Company recognizes revenue over the subscription period. Revenue from the sale of the Company's products is recognized net of cash discounts, sales returns and allowances.
The Company's revenue is derived primarily from domestic customers. For the three- and nine-month periods ended September 30, 2020 revenue from products transferred over time amounted to $2,000 and $ 7,000 respectively. One customer accounted for 100% of total Z-Coach subscription sales made during the three- and nine-month periods ended September 30, 2020. Our collection terms provide customers standard terms of net 30 days. Future performance obligations are reflected in deferred revenue.
CURA revenue is recognized (a) upon receipt of payment at the point of sale of the CURA app, (b) upon the delivery of myCadian products and (c) upon the Company’s performance of all obligations as described in customer agreements. The Z-Coach program provides fatigue training over an annual subscription period of twelve months and allows the user unlimited access during the annual subscription period. Customers are billed at the acceptance of the subscription, and revenue is recognized ratably over the subscription period as performance obligations are satisfied.
Engineering and Development: Engineering and development costs are charged to operations as incurred. Engineering and development include personnel-related costs, materials and supplies, depreciation, and consulting services.
General and Administrative: Patent expenses are charged to operations as incurred. Patent costs for the three months ended September 30, 2020 and 2019 amounted to $0 and $14,000 respectively and are included in general and administrative expenses. Patent costs for the nine months ended September 30, 2020 and 2019 amounted to $17,000 and $35,000 respectively
Stock-based Compensation: FASB Accounting Standards Codification (“ASC”) 718-10 requires all share-based payments be recognized as expense over the service period (generally the vesting period) based on the fair value on the grant date. The realization of tax benefits in excess of amounts recognized for financial reporting purposes are recognized as a financing activity in accordance with ASC 718-10. No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets.
Income Taxes: We account for income taxes using the asset and liability method, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all the deferred tax assets will not be realized.
We account for uncertain tax positions using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax benefits that meet the more-likely-than-not recognition threshold should be measured as the largest amount of tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. It is our policy to recognize interest and penalties related to income tax matters as general and administrative expenses. As of September 30, 2020, and December 31, 2019, there were no accrued interest or penalties related to uncertain tax positions.
Loss per Common Share: FASB’s ASC 260-10 (“Earnings Per Share”) requires the presentation of basic earnings per share, which is based on weighted average common stock outstanding, and dilutive earnings per share, which gives effect to options, warrants and convertible securities in periods when they are dilutive. At September 30, 2020 and 2019, we excluded 107,992,768 and 104,288,815 potential common shares, respectively, relating to convertible preferred stock, convertible notes, future share rights issued with the demand notes, options and warrants outstanding from the diluted net loss per common share calculation because their inclusion would be anti-dilutive. We excluded 625,000 warrants from the diluted net loss per common share calculation at September 30, 2020 and 2019 as the conditions for their vesting are not time-based.
NOTE 3 – INVENTORY AND VENDOR LIABILITY
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||
Raw materials |
| $ | 1,568,000 |
|
| $ | 1,665,000 |
|
Finished goods |
|
| 69,000 |
|
|
| 69,000 |
|
|
|
| 1,637,000 |
|
|
| 1,734,000 |
|
Less: Reserve |
|
| (1,637,000 | ) |
|
| (1,734,000 | ) |
Inventory (net) |
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
Liability for inventory |
| $ | 1,740,000 |
|
| $ | 1,764,000 |
|
During 2017, the Company initiated a purchase order with a third-party vendor to manufacture and assemble the myCadian watch. In connection with this agreement, the Company agreed to a cancellation charge for products purchased on behalf of the Company in the instance that the purchase order is subsequently modified, delayed or cancelled. The Company has recorded a reserve for all inventory and components.
During the nine months ended September 30, 2020, the Company recovered $97,000 upon the sale of certain raw material and component parts. Management will continue to evaluate this reserve in future reporting periods.
NOTE 4 - DEMAND NOTE
On July 23, 2019, the Company entered into a credit facility with a commercial bank for up to $1,500,000 in advances to support working capital needs of the business. The demand notes issued in connection with this commercial bank are supported by individual co-borrowing agreements from certain accredited investors. In connection with this credit agreement, the Company entered into a general security agreement that provides the bank a continuing security interest in all the Company's personal property and fixtures.
The co-borrowers participating in this credit facility received 30,000 common shares for each $100,000 in principal co-borrowed. The fair market value of these shares was estimated on the date of the note issuance and is reflected as debt issuance costs. The co-borrowers were also granted the right to purchase common shares up to the amount co-borrowed, at a price per share determined based on the closing price of the Company’s common stock one day prior to the agreement. The fair market value of these future rights is reflected as debt issuance costs in the results of operations. The price per share for these future share purchase rights is fixed at the higher of the closing price of the Company’s common stock one day prior to the co-borrowing arrangement or $0.15 per share. Each co-borrower has the right to purchase these common shares until the indebtedness is paid in full or within five business days after the consummation of the sale of the Company’s Aegis division.
As of September 30, 2020, the Company had issued $650,000 in demand notes and issued 195,000 shares of common stock in connection with the co-borrowing demand notes. The common shares issued in connection with the co-borrowing demand notes were valued at $21,000 on the date of issuance and were reported as debt issuance costs. Coincident with the issuance of these notes, these co-borrowers also received the right to purchase up to 4,333,333 shares of the Company’s common stock at a fixed price of $0.15 per share. The fair market value of these future share rights was estimated at $276,000 on the date of the issuance of the notes utilizing the Black Scholes valuation model and were reported as debt issuance costs.
Advances drawn under this facility have been issued as demand notes with an adjustable interest rate set at the bank’s prime rate, which was 3.25% as of September 30, 2020. The Company recognized $5,000 in interest expense on the demand notes during each of the three months ended September 30, 2020 and September 30, 2019. The Company recognized $19,000 and 12,000 in interest expense on the demand notes during the nine months ended September 30, 2020 and September 30, 2019, respectively.
The common shares issued with these demand notes are being offered and sold in a private placement exempt from registration under Section 4(a)(2) of the Securities Act of 1933 (“Securities Act”), as amended, and Rule 506 of Regulation D as promulgated by the United States Securities and Exchange Commission thereunder. The shares of the Company’s Common Stock will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
NOTE 5 – PAYCHECK PROTECTION PLAN LOAN
On April 20, 2020 the Company received a $228,000 loan under the Small Business Administration Paycheck Protection Program (the “PPP”). The note was issued under the Coronavirus Aid, Relief, and Economic Security (CARES) Act which, according to guidance from the SBA and U.S. Department of Treasury, provides for certain loan forgiveness based on a calculation of the Company’s payroll expenses and qualified rent and utilities payments made within eight weeks after the disbursement of the loan. The loan has an interest rate of 1% per annum and payments of interest and principal begin 6 months after the date of disbursement, with the balance payable over a remaining 18 month period.
NOTE 6 - SENIOR CONVERTIBLE NOTES
At September 30, 2020, the Company had $11,310,000 in convertible notes outstanding which have been presented net of unamortized debt discounts of $1,318,000, resulting in a carrying value of $9,992,000. As of December 31, 2019, the Company had $10,310,000 in convertible notes outstanding, presented net of unamortized debt discounts of $1,901,000 resulting in a carrying value of $8,409,000.
Scheduled maturities on the Company’s convertible notes is as follows: $2,990,000 in the twelve months ending December 31, 2021, $2,775,000 in the twelve months ending in December 31, 2022; $3,395,000 in the twelve months ending December 31, 2023, $1,150,000 in the twelve months ending December 31, 2024 and $1,000,000 thereafter.
Included in the face value of convertible notes outstanding at September 30, 2020 and December 31, 2019, is $2,402,000 and $2,477,000 respectively in convertible notes payable to various directors of the Company. Also included in the face value of the convertible notes are $2,070,000 and $1,170,000 as of September 30, 2020 and December 31, 2019, respectively, in convertible notes payable to an investor that is deemed an affiliate.
Total
| 2019 6% Notes | JULY 2018 Notes | 2018 Notes | 2017 6% Notes | 2016 6% Notes | |||||||||||||||||||
Face value December 31, 2019 | $ | 10,310,000 | $ | 650,000 | $ | 1,675,000 | $ | 625,000 | $ | 4,370,000 | $ | 2,990,000 | ||||||||||||
Notes issued | 1,000,000 | 1,000,000 | - | - | - | - | ||||||||||||||||||
Face value September 30, 2020 | $ | 11,310,000 | $ | 1,650,000 | $ | 1,675,000 | $ | 625,000 | $ | 4,370,000 | $ | 2,990,000 | ||||||||||||
Debt discount December 31, 2019 | $ | (1,901,000 | ) | $ | (3,000 | ) | $ | (354,000 | ) | $ | (185,000 | ) | $ | (362,000 | ) | $ | (997,000 | ) | ||||||
Debt discount issued | (24,000 | ) | (24,000 | ) | - | - | - | - | ||||||||||||||||
Amortization reported as interest | 607,000 | 21,000 | 62,000 | 36,000 | 83,000 | 405,000 | ||||||||||||||||||
Debt discount September 30, 2020 | $ | (1,318,000 | ) | $ | (6,000 | ) | $ | (292,000 | ) | $ | (149,000 | ) | $ | (279,000 | ) | $ | (592,000 | ) | ||||||
Senior Convertible Notes (net) | $ | 9,992,000 | $ | 1,644,000 | $ | 1,383,000 | $ | 476,000 | $ | 4,091,000 | $ | 2,398,000 |
2019 Convertible Notes
In April 2019, the board of directors authorized the issuance of up to $2.5 million in 6% Convertible Promissory Notes (the “2019 Convertible Notes”) in connection with the May 28, 2019 Securities Purchase Agreement (the “2019 SPA”). The 2019 Convertible Notes mature on the earlier of: five days after the sale of substantially all the assets of the Aegis division or five years from the date of issuance.
The conversion rate of the notes is fixed at the greater of: $0.15 per share and the closing market price of the Company’s common stock on the trading day immediately prior to the issuance of the note. Investors receive 30,000 shares of common stock for each $100,000 investment in the 2019 Convertible Notes. The notes were offered in a private placement exempt from registration under Section 4(a)(2) of the Securities Act of 1933 as amended (the "Securities Act") and Rule 506(c) of Regulation D as promulgated by the Securities and Exchange Commission. The offering was available only to “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act.
During the three- and nine- month periods ended September 30, 2020, the Company issued $275,000 and $1,000,000, respectively, in new notes and allocated $5,000 and $24,000, respectively, of the proceeds to debt discount based on the estimated fair value of the common shares issued on the date of investment. During the three and nine month periods ended September 30, 2020, the Company recorded $32,000 and $78,000 in interest expense which includes amortization of debt discount. During the three- and nine- month periods ended September 30, 2019, the Company recorded $15,000 and $19,000, in interest expenses respectively which includes amortization of debt discount.
JULY 2018 Convertible Notes
In July 2018, the board of directors authorized the issuance of up to $2.5 million in non-interest bearing Senior Convertible Promissory Notes and Warrants (the “JULY 2018 Convertible Notes”) in connection with the July 24, 2018 Securities Purchase Agreement (the “JULY 2018 SPA”). The JULY 2018 Convertible Notes have a five-year maturity. In April 2019, the Company’s board approved a resolution to complete this offering.
The conversion rate of the notes was fixed at $0.25 per share as determined at the close of business on July 24, 2018. Investors in this offering were granted warrants to purchase common shares equal to 10% or 25% of the number of shares issuable upon the conversion of the notes based upon the amount of their investment. The warrants have a fixed exercise price of $0.25 and a ten-year term from the date of issuance. The notes were offered in a private placement exempt from registration under Section 4(a)(2) of the Securities Act of 1933 as amended (the "Securities Act") and Rule 506(c) of Regulation D as promulgated by the Securities and Exchange Commission. The offering was available only to “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act.
During the three- and nine-month periods ended September 30, 2020 the Company recorded $21,000 and $62,000 respectively in interest expense which reflects the amortization of debt discount. During the three- and nine-month periods ended September 30, 2019 the Company recorded $20,000 and $52,000 respectively in interest expense which reflects the amortization of debt discount.
2018 Convertible Notes
In May 2018, the board of directors authorized the issuance of up to $1 million in non-interest bearing Senior Convertible Promissory Notes and Warrants (the “2018 Convertible Notes”) in connection with the May 8, 2018 Securities Purchase Agreement (the “2018 SPA”). The 2018 Convertible Notes have five-year maturity. On July 19, 2018, the Company’s board approved a resolution to complete this offering.
The conversion rate of the notes was fixed at $0.25 per share as determined at the close of business on May 8, 2018. Investors in this offering were granted warrants to purchase common stock equal to 10% or 25% of the number of shares issuable upon the conversion of the notes based upon the amount of their investment. The warrants have a fixed exercise price of $0.25 and a ten-year term from the date of issuance. The notes were offered in a private placement exempt from registration under Section 4(a)(2) of the Securities Act of 1933 as amended (the "Securities Act") and Rule 506(c) of Regulation D as promulgated by the Securities and Exchange Commission. The offering was available only to “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act.
During the three-and nine-month periods ended September 30, 2020 the Company recorded $12,000 and $36,000 respectively in interest expense which reflects the amortization of debt discount. During the three-and nine-month periods ended September 30, 2019 the Company recorded $11,000 and $34,000 respectively in interest expense which reflects the amortization of debt discount.
2017 Convertible Notes
The board of directors authorized the issuance of up to $5 million in 6% Senior Convertible Promissory Notes and Warrants (the “2017 Convertible Notes”) in connection with the May 31, 2017 Securities Purchase Agreement (as amended, the “2017 SPA”). The 2017 Convertible Notes have a five-year maturity and a fixed annual interest rate of 6%. Investors in this offering were granted warrants to purchase warrants equal to 10% or 25% of the number of shares issuable upon the conversion of the notes based upon the amount of their investment.
The conversion rate of the 2017 Notes was originally set at $0.50 per share and subsequently modified in November 2018 to $0.333 per share. The exercise price of related warrants issued in connection with the 2017 Notes was also subsequently modified in November 2019 to $0.333 per share. The 2017 Convertible Notes were offered in a private placement exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506(c) of Regulation D as promulgated by the Securities and Exchange Commission. The offering was available only to “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act.
During the three-and nine- month periods ended September 30, 2020 the Company recorded $94,000 and $279,000, respectively, in interest expense including amortization of debt discount. During the three-and nine- month periods ended September 30, 2019 the Company recorded $92,000 and $264,000, respectively, in interest expense including amortization of debt discount.
2016 Convertible Notes
During 2016, the board of directors authorized, and the Company issued, $3 million in 6% Senior Convertible Promissory Notes and Warrants (the “2016 Convertible Notes”) in connection with the August 25, 2016 Securities Purchase Agreement (the “2016 SPA”). The 2016 Convertible Notes have five-year maturity dates ranging from August 2021 through December 2021 and a fixed annual interest rate of 6%.
The conversion rate of the notes was fixed at $0.25 per share as determined at the close of business on August 25, 2016. The investors were granted warrants to purchase an aggregate number of shares of common stock equal to 10% of the number of shares issuable upon the conversion of the notes. The warrants have a fixed exercise price of $0.25 and a ten-year term from the date of issuance. The notes were offered in a private placement exempt from registration under Section 4(a)(2) of the Securities Act of 1934, as amended and Rule 506(c) of Regulation D as promulgated by the Securities and Exchange Commission. The offering was available only to “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act of 1933.
During the three-and nine- month periods ended September 30, 2020 the Company recorded $182,000 and $539,000, respectively, in interest expense including amortization of debt discount. During the three-and nine- month periods ended September 30, 2019 the Company recorded $174,000 and $516,000, respectively, in interest expense including amortization of debt discount.
NOTE 7 - UNSECURED SUBORDINATED PROMISSORY NOTES
The Company had $425,000 in unsecured subordinated promissory notes payable to a board member as of September 30, 2020 and December 31, 2019. These notes bear interest at a rate of 6% per annum and have a maturity date of October 15, 2020. During the three- and nine- months ended September 30, 2020, the Company recognized interest expense of $6,000 and $19,000, respectively, on these notes. During the three- and nine- months ended September 30, 2019, the Company recognized interest expense of $4,000 and $10,000, respectively, on these notes. Interest accrued and outstanding on the promissory notes was $34,000 and $15,000 as of September 30, 2020 and December 31, 2019, respectively.
NOTE 8 - RIGHT TO USE BUILDING ASSET
The FASB issued ASU No. 2016-02, “Leases,” which requires a lessee to recognize in its balance sheet the assets and liabilities related to long-term leases that were classified as operating leases under previous guidance. An asset is recognized related to the right to use the underlying asset and a liability is recognized related to the obligation to make lease payments over the term of the lease. The standard became effective for the Company January 1, 2019. As of January 1, 2019, the Company utilized the modified retrospective approach to measure the right to use operating lease agreement associated with the office building. The adoption of this accounting standard did not impact our consolidated loss from operations and had no impact on cash flows.
Upon adoption, the Company determined the present value of future lease costs at $257,000, which included monthly rental, common area costs, and taxes. The Company assumed an incremental borrowing rate of 6% as the building lease agreement did not include an implicit rate. On September 1, 2019, the Company vacated this property at the request of the landlord and relocated to a new office. The Company terminated the lease obligation without penalty or liability for unused periods associated with the original lease obligation and as such, the Company did not incur an impairment as a result of this change in lease term. Operating lease costs for the three-and nine- month periods ended September 30, 2019 for the terminated lease obligation was $19,000 and $80,000, respectively.
On August 1, 2019, the Company entered into an operating lease obligation for office space located at 350 Linden Oaks in Rochester New York. The Company determined the present value of future lease costs at the inception of the lease was $212,000. The Company assumed an incremental borrowing rate of 6% as the building lease agreement did not include an implicit rate. The lease has a termination date of December 30, 2022. Operating lease costs for the three- and nine-month periods ended September 30, 2020 were $15,000 and $46,000, respectively. Future maturing lease obligations as follows: $17,000 for the remainder of 2020; $67,000 in 2021 and $67,000 in 2022. Total future lease payments are $162,000 including imputed interest of $11,000.
NOTE 9 - PROPERTY AND EQUIPMENT
At September 30, 2020 and December 31, 2019 property and equipment consist of the following:
September 30, 2020 | December 31, 2019 | |||||||
Office equipment | $ | 199,000 | $ | 199,000 | ||||
Shop equipment | 132,000 | 132,000 | ||||||
Gross Property and equipment | 331,000 | 331,000 | ||||||
Less accumulated depreciation | (302,000 | ) | (293,000 | ) | ||||
Net property and equipment | $ | 29,000 | $ | 38,000 |
NOTE 10 - BUSINESS SEGMENTS
The Company has two operating business segments. The CURA business operates in the fatigue management industry and the Aegis business is focused in the power and hydraulic industry.
Segment information for the three months ending September 30, 2020 for the Company’s business segments follows:
CURA | Aegis | Corporate | Total | |||||||||||||
Revenue | $ | 2,000 | $ | - | $ | - | $ | 2,000 | ||||||||
Gross Profit (Loss) | - | - | - | - | ||||||||||||
Total costs and expenses | 42,000 | 5,000 | (479,000 | ) | (432,000 | ) | ||||||||||
Income (Loss) from operations | (42,000 | ) | (5,000 | ) | 479,000 | 432,000 | ||||||||||
Non-operating expense (Income) | - | (3,000 | ) | (302,000 | ) | (305,000 | ) | |||||||||
Net income (loss) | $ | (42,000 | ) | $ | (8,000 | ) | $ | 177,000 | $ | 127,000 | ||||||
Stock based compensation | $ | 17,000 | $ | - | $ | (662,000 | ) | $ | (645,000 | ) | ||||||
Depreciation and amortization | $ | - | $ | 3,000 | $ | - | $ | 3,000 | ||||||||
Assets at September 30, 2020 | $ | - | $ | 29,000 | $ | 255,000 | $ | 284,000 |
Segment information for the nine months ending September 30, 2020 for the Company’s business segments follows:
CURA | Aegis | Corporate | Total | |||||||||||||
Revenue | $ | 7,000 | $ | - | $ | - | $ | 7,000 | ||||||||
Gross Loss | (8,000 | ) | - | - | (8,000 | ) | ||||||||||
Total costs and expenses | 225,000 | 57,000 | 75,000 | 357,000 | ||||||||||||
(Loss) from operations | (233,000 | ) | (57,000 | ) | (75,000 | ) | (365,000 | ) | ||||||||
Non-operating expense | - | (3,000 | ) | (1,079,000 | ) | (1,082,000 | ) | |||||||||
Net loss | $ | (233,000 | ) | $ | (60,000 | ) | $ | (1,154,000 | ) | $ | (1,447,000 | ) | ||||
Stock based compensation | $ | 57,000 | $ | (33,000 | ) | $ | (658,000 | ) | $ | (634,000 | ) | |||||
Depreciation and amortization | $ | - | $ | 9,000 | $ | 37,000 | $ | 46,000 | ||||||||
Assets at September 30, 2020 | $ | - | $ | 29,000 | 255,000 | $ | 284,000 |
Segment information for the three months ending September 30, 2019 for the Company’s business segments follows:
CURA | Aegis | Corporate | Total | |||||||||||||
Revenue | $ | 4,000 | $ | - | $ | - | $ | 4,000 | ||||||||
Gross profit | 2,000 | - | - | 2,000 | ||||||||||||
Total costs and expenses | 62,000 | 127,000 | 315,000 | 504,000 | ||||||||||||
Loss from operations | (60,000 | ) | (127,000 | ) | (315,000 | ) | (502,000 | ) | ||||||||
Non-operating expense | - | - | (915,000 | ) | (915,000 | ) | ||||||||||
Net loss | $ | (60,000 | ) | $ | (127,000 | ) | $ | (1,230,000 | ) | $ | (1,417,000 | ) | ||||
Stock based compensation | $ | (12,000 | ) | $ | 0 | $ | 19,000 | $ | 7,000 | |||||||
Depreciation and amortization | $ | 3,000 | $ | 4,000 | $ | 30,000 | $ | 37,000 | ||||||||
Assets at September 30, 2019 | $ | 3,000 | $ | 40,000 | $ | 241,000 | $ | 284,000 |
Segment information for the nine months ending September 30, 2019 for the Company’s business segments follows:
CURA | Aegis | Corporate | Total | |||||||||||||
Revenue | $ | 13,000 | $ | - | $ | - | $ | 13,000 | ||||||||
Gross profit | 2,000 | - | - | 2,000 | ||||||||||||
Total costs and expenses | 577,000 | 446,000 | 1,017,000 | ) | 2,040,000 | |||||||||||
Loss from operations | (575,000 | ) | (446,000 | ) | (1,017,000 | ) | (2,038,000 | ) | ||||||||
Non-operating expense | - | - | (1,492,000 | ) | (1,492,000 | ) | ||||||||||
Net loss | $ | (575,000 | ) | $ | (446,000 | ) | $ | (2,509,000 | ) | $ | (3,530,000 | ) | ||||
Stock based compensation | $ | 2,000 | $ | 13,000 | $ | 96,000 | $ | 111,000 | ||||||||
Depreciation and amortization | $ | 12,000 | $ | 14,000 | $ | 83,000 | $ | 109,000 | ||||||||
Assets at September 30, 2019 | $ | 3,000 | $ | 40,000 | $ | 241,000 | $ | 284,000 |
NOTE 11 - PREFERRED and COMMON STOCK
Common Stock
We have authorized 400,000,000 shares of common stock, with a par value of $0.01 per share.
During the three- and nine-month periods ended September 30, 2020 the Company issued 0 and 217,846 shares of common stock at payment of interest on the Company’s 2016, 2017 and 2019 Convertible Notes. During the three- and nine-month periods ended September 30, 2019 the Company issued 33,973 and 109,125 shares of common stock in payment of interest on the Company’s 2016, 2017 and 2019 Convertible Notes.
Preferred Stock
Our certificate of incorporation permits the Company to issue up to 100,000,000 shares of $.01 par value preferred stock.
Class A Preferred Stock
At September 30, 2020 and December 31, 2019 there were 468,221 outstanding shares of Class A Preferred stock, of which 8,709 shares resulted from the settlement of dividends due to conversion, and those shares no longer accrue dividends. The value of dividends payable upon the conversion of the remaining 459,512 outstanding shares of Class A Preferred stock was $2,851,000 at September 30, 2020 and $2,713,000 at December 31, 2019.
In the event of a liquidation, dissolution and winding up of the Company, and subject to the liquidation rights and privileges of our Class C Preferred stockholders, Class A Preferred stockholders and Class B stockholders have a liquidation preference with respect to all accumulated and unsettled dividends. The value of the Class A Preferred stockholders’ liquidation preference was $2,851,000 and $2,713,000 at September 30, 2020 and December 31, 2019, respectively. In the event of liquidation, dissolution or winding up of the Company, unpaid accumulated dividends on the Class A Preferred are payable in Class A Preferred at a rate of 1 share of Class A Preferred for each $4.00 of dividends.
Class B Preferred Stock
At September 30, 2020 and December 31, 2019, there were 67,500 outstanding shares of Class B Preferred stock. The value of dividends payable upon the conversion of the outstanding shares of Class B Preferred stock was $513,000 at September 30, 2020 and $488,000 at December 31, 2019.
In the event of liquidation, dissolution and winding up of the Company, and subject to the liquidation rights and privileges of our Class C Preferred stockholders, our Class A Preferred stockholders and our Class B Preferred stockholders have a liquidation preference with respect to all accumulated and unsettled dividends. In the event of a liquidation, dissolution or winding up of the Company, unpaid accumulated dividends on the Class B Preferred are payable in Class B Preferred shares at a rate of one share of Class B Preferred for each $5.00 of dividends.
Series C Preferred Stock
At September 30, 2020 and December 31, 2019, there were 15,687,500 shares of Series C Preferred stock outstanding. The value of the Series C Preferred stockholders’ liquidation preference was $6,275,000 at September 30, 2020 and at December 31, 2019.
The Series C Preferred shares have a liquidation preference at their stated value per share of $0.40 that is senior to our common stock, and the Company’s Class A Non-Voting Cumulative Convertible Preferred Shares and Class B Non-Voting Cumulative Convertible Preferred Shares. The liquidation preference is payable upon a liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or upon a deemed liquidation of the Company.
The Series C Preferred shares have no right to receive dividends and have no redemption right. The Series C Preferred shares vote with the common stock on an as-converted basis.
Series C-2 Preferred Stock
At September 30, 2020 and December 31, 2019, there were 24,500,000 shares of Preferred C-2 stock outstanding. The value of the Series C-2 Preferred stockholders’ liquidation preference was $4,900,000 at September 30, 2020 and December 31, 2019.
The Series C-2 Preferred Shares are not entitled to receive preferred dividends and have no redemption right, but are entitled to participate, on an as converted basis; with holders of outstanding shares of common stock in dividends and distributions on liquidation after all preferred shares have received payment in full of any preferred dividends or liquidation preferences. The Series C-2 Preferred Shares vote with the common stock on an as-converted basis. We may not, without approval of the holders of at least two-thirds of the Series C-2 Preferred Shares, (i) create any class or series of stock that is pari passu or senior to the Series C-2 Preferred Shares, (ii) create any class or series of stock that would share in the liquidation preference of the Series C-2 Preferred Shares or that is entitled to dividends payable other than in common stock or Series C-2 Preferred Shares of its own series, (iii) acquire any equity security or pay any dividend, except dividends on a class or series of stock that is junior to the Series C Preferred Shares, payable in such junior stock, (iv) reissue any Series C-2 Preferred Shares, (v) declare or pay any dividend that would impair the payment of the liquidation preference of the Series C-2 Preferred Shares, (vi) authorize or issue any additional Preferred Shares, (vii) change the Certificate of Incorporation to adversely affect the rights of the holders of the Series C-2 Preferred Shares, or (viii) authorize, commit to or consummate any liquidation, dissolution or winding up in which the liquidation preference of the Series C-2 Preferred Shares would not be paid in full.
Series C-3 Preferred Stock
At September 30, 2020 and December 31, 2019, there were 3,238,000 shares of Preferred C-3 stock outstanding.
NOTE 12 - STOCK OPTIONS
2016 Stock Option Plan The shareholders approved the 2016 Stock Option Plan (the “2016 Plan”) which provides for the grant of up to 3,000,000 common stock options to provide equity incentives to directors, officers, employees and consultants. Two types of options may be granted under the 2016 Plan: non-qualified stock options and incentive stock options. As of September 30, 2020, there are 342,500 options available for future grant under the 2016 Plan.
2011 Stock Option Plan The shareholders approved the 2011 Stock Option Plan (the “2011 Plan”) which provides for the grant of up to 3,000,000 common stock options to provide equity incentives to directors, officers, employees and consultants. Two types of options may be granted under the 2011 Plan: non-qualified stock options and incentive stock options. As of September 30, 2020, there are 316,000 options available for future grant under the 2011 Plan.
Under the 2016 and 2011 Stock Option Plans, non-qualified stock options may be granted to our officers, directors, employees and outside consultants. Incentive stock options may be granted only to our employees, including officers and directors who are also employees. In the case of incentive stock options, the exercise price may not be less than such fair market value and in the case of an employee who owns more than 10% of our common stock, the exercise price may not be less than 110% of such market price. Options generally are exercisable for ten years from the date of grant, except that the exercise period for an incentive stock option granted to an employee who owns more than 10% of our stock may not be greater than five years.
During the nine months ended September 30, 2020 the Company granted 2,100,000 stock options to certain employees, board members and a consultant. No stock option grants were made during the nine months ended September 30, 2019.
Summary For the three- and nine- month period ended September 30, 2020, the Company recognized a net credit to stock compensation of $645,000 and $634,000, respectively. The Company recorded $676,000 in forfeitures in the third quarter of 2020 and $782,000 in forfeitures during the nine months ended September 30, 2020 reflecting employee turnover during these periods.
As of September 30, 2020, there was $118,000 of total unrecognized compensation costs related to outstanding stock options, which are expected to be recognized over a weighted average of 1 year.
The weighted average grant date fair value of stock options issued during the nine months ended September 30, 2020 was $0.15 per share. The weighted average grant date fair value of stock options vested during the nine months ended September 30, 2020 and September 30, 2019 was $88,000 and $125,000, respectively.
The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
2020 | 2019 | |||||||
Expected term (years) | 6.3 | - | ||||||
Expected forfeiture rate | 0 | % | - | |||||
Risk-free rate | 1.3 | % | - | |||||
Volatility | 179 | % | - | |||||
Dividend yield | 0.0 | % | - |
The average risk-free interest rate is based on the U.S. treasury security rate in effect as of the grant date. We determined expected volatility using the historical closing stock price. The expected life was generally determined using the simplified method as we do not believe we have enough historical stock option exercise experience on which to base the expected term.
The following summarizes the activity of our outstanding stock options for the nine months ended September 30, 2020:
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
Shares | Price | Term (years) | Value | |||||||||||||
Outstanding at January 1, 2020 | 10,740,500 | $ | 0.50 | 2.6 | $ | - | ||||||||||
Granted | 2,100,000 | .10 | ||||||||||||||
Exercised | - | - | ||||||||||||||
Canceled or expired | (6,249,000 | ) | .40 | |||||||||||||
Outstanding at September 30, 2020 | 6,591,500 | $ | 0.47 | 5.1 | $ | - | ||||||||||
Exercisable at September 30, 2020 | 4,552,000 | $ | 0.61 | 3.6 | $ | - |
During the nine months ended September 30, 2020, 6,249,000 options were canceled due to employee turnover and expiration of unexercised options, and no options were exercised. During the nine months ended September 30, 2019, 216,750 options were canceled due to employee turnover, no options expired unexercised and no options were exercised. As of September 30, 2020, the exercise prices on outstanding stock options ranged from $.07 per share to $1.58 per share.
NOTE 13 - WARRANTS
The following summarizes the activity of our outstanding warrants for the nine months ended September 30, 2020:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||||
Outstanding at January 1, 2020 | 7,731,707 | 0.45 | (A) | 6.2 | (B) | $ | 33,000 | |||||||||||
Granted | - | - | ||||||||||||||||
Exercised | - | - | ||||||||||||||||
Canceled or expired | (100,000 | ) | 2.50 | |||||||||||||||
Outstanding at September 30, 2020 | 7,631,707 | 0.42 | (A) | 5.6 | (B) | $ | 0 | |||||||||||
Exercisable at September 30, 2020 | 7,006,707 | $ | 0.46 | 5.6 | (C) | $ | 0 |
| (A) | The weighted average exercise price for warrants outstanding as of September 30, 2020 and 2019 excludes 1,750,000 warrants in each period with no determined exercise price. |
| (B) | The weighted average remaining contractual term for warrants outstanding as of September 30, 2020 and 2019 excludes 743,500 warrants with no expiration date. |
| (C) | The weighted average remaining contractual term for warrants exercisable as of September 30, 2020, and 2019 excludes 118,500 warrants with no expiration date. |
NOTE 14 - RELATED PARTY TRANSACTIONS
As of September 30, 2020, and December 31, 2019, the Company had $2,402,000 and $2,477,000, respectively, in principal amounts of senior convertible notes outstanding that were held by various members of our board of directors. These notes represent 9,338,228 of potential shares of common stock at September 30, 2020 and 9,388,378 of potential shares of common stock at December 31, 2019. Underlying warrants issued and outstanding in connection with these notes represent 1,184,273 and 1,239,288 of potential shares of common stock at September 30, 2020 and December 31, 2019. The Company had $222,000 and $164,000 at September 30, 2020 and December 31, 2019, respectively in accrued interest on convertible notes due to board members.
As of September 30, 2020 and December 31, 2019, the Company had outstanding $2,070,000 and $1,170,000, respectively, in principal amount of a senior convertible note held by an investor that is deemed an affiliate. These notes represent 10,680,000 of potential shares of common stock at September 30, 2020 and 4,680,000 of potential shares at December 31, 2019. Underlying warrants issued and outstanding in connection with these notes represent 468,000 of potential shares of common stock at September 30, 2020 and at December 31, 2019. The Company had $160,000 and $88,000, respectively in accrued interest on convertible notes due to this investor at September 30, 2020 and December 31, 2019.
As of September 30, 2020 and December 31, 2019, the Company had unsecured subordinated promissory notes outstanding of $425,000 payable to a board member. As of September 30, 2020, the Company had $34,000 in accrued interest on the promissory notes. These notes earn interest at 6% per annum and have a maturity date of October 15, 2020.
NOTE 15 - SUBSEQUENT EVENTS
Issuance of Convertible Promissory Note
Subsequent to September 30, 2020, the Company issued $50,000 in convertible promissory notes due in 12 months.
Contingent Liability:
Subsequent to September 30, 2020, the Company received a request for arbitration on a total claim of $ 1,948,000, requesting the Company to go through mediation or arbitration. The inventory liability is accrued on the balance sheet as at September 30, 2020.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Item 1A of our 2019 annual report on Form 10-K.
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.
Impact of COVID-19 Outbreak
The Company has two business divisions: the CURA division, an all-in-one health & fitness app developer solutions platform, and the Aegis division, which is engaged in the development of technologies in the power and hydraulic industry. The Company is focused on providing solutions to challenges faced by health & fitness app developers, and a uniquely designed hydraulic pump that will be smaller, lighter, less expensive and more efficient than current technology.
It is important to note that the cycle time from the initiation of the sales process to revenue realization can be highly variable especially as a start-up entity. In addition to the activities to be undertaken to implement our plan of operations, we may expand and/or refocus our activities depending upon future circumstances and developments.
CURA Division: The Cardian Platform
The Company’s CURA division has created an all-in-one platform, the Cardian Platform, for health & fitness app developers in order to solve challenges such as the amount of time, effort, resources, and money it takes to develop these apps, cross-platform challenges, data privacy and compliance challenges, challenges concerning features, updates, and maintenance, and more.
The Cardian platform is designed to provide health & fitness app developers with the powerful tools needed to create better and more engaging user experiences cost-efficiently, with a much quicker time to market. The Cardian platform provides:
● | Simple, Cross-Platform Tools: Standardized access to health & fitness data across all platforms - whether Apple Health, Google Fit, or Samsung Health. Request user health data in iOS or Android. Customize for tailored experiences & setup automated rules & feature updates. |
● | Faster Time to Market: Simple setup & integration across all platforms to build your product within days - not months. Spend less time on the onboarding process & less time on maintenance. Cardian's onboarding process enables the creation of a seamless user experience with greater conversion and user-retention. |
● | User Privacy Management: Eliminating the burden and challenge of regulatory compliance - Cardian securely manages all data privacy and compliance concerns for developers. |
● | 99.9% Uptime Built with Amazon Web Services: Designed for scale, Cardian leverages Amazon Web Services (AWS) boasting a 99.9% uptime and reaching customers around the world. Cardian leverages highly-available, fault-tolerant solutions to ensure we're always able to support developers as they scale from small projects to a large enterprise. |
● | Pricing that Scales with Businesses: Keep costs low while starting out with usage-based pricing and decide how long data is stored. |
Aegis Division: Hydraulic Pump
During 2019, the Company initiated discussions with investment advisors to evaluate the possible monetization of the Aegis technologies. On April 8, 2020, the Company reported that it had initiated a temporary suspension of this evaluation process. This decision was linked to the COVID-19 pandemic which adversely impacted and is expected to continue to adversely impact the Company’s ability to generate industry interest in the Aegis technologies. Recent updates with interested parties have indicated that companies in the hydraulics industry are currently focused on internal processes, technology, and employees.
The Aegis hydraulic pump technology brings to the hydraulic pumps and motors industry a unique technology that is designed to be: smaller, lighter, less expensive, and is more efficient and as reliable as conventional pumps and motors. The Company has completed a production prototype and had achieved significant milestones in the design and testing of this prototype. We have filed for patent protection for our novel non-rotating group pump concept.
In addition to the activities to be undertaken to implement our plan of operation detailed above, 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.
Results of Operations for the three months ended September 30, 2020 and 2019
Revenue, Cost of Revenue and Margin
For the three months ended September 30, |
Variance | |||||||||||
2020 | 2019 | Incr (decr) | ||||||||||
CURA revenue | $ | 2,000 | $ | 4,000 | $ | (2,000 | ) | |||||
Cost of revenue | 2,000 | 2,000 | - | |||||||||
Gain profit | $ | - | $ | 2,000 | $ | (2,000 | ) |
The Company recorded $2,000 and $4,000 in Z-Coach sales during the three months ended September 30, 2020 and 2019, respectively in each period. As of September 30, 2020, and December 31, 2019, the Company has deferred revenue of $2,000 and $ 4,000, respectively at each reporting date attributed to Z-Coach subscription revenue that will be recognized ratably as our performance obligations are satisfied. The Z-Coach training module provides fatigue safety training over a twelve-month subscription period and the user has unlimited access to the 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.
Engineering and Development Costs and Expenses
For the three months ended September 30, | Variance | |||||||||||
2020 | 2019 | Incr (decr) | ||||||||||
Wages and benefits | $ | 74,000 | $ | 126,000 | $ | (52,000 | ) | |||||
Professional fee and advisors | - | 61,000 | (61,000 | ) | ||||||||
Facilities | 5,000 | - | 5,000 | |||||||||
Computer and software maintenance | 2,000 | 1,000 | 1,000 | |||||||||
Depreciation and amortization | - | 5,000 | (5,000 | ) | ||||||||
81,000 | 193,000 | (112,000 | ) | |||||||||
Stock based compensation | 17,000 | (15,000 | ) | 32,000 | ||||||||
Total Engineering and Development | $ | 98,000 | $ | 178,000 | $ | (80,000 | ) |
Engineering and development expenses decreased during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 reflecting the reduction in wages and professional fees. These cost reductions reflect the temporary suspension of the Company’s efforts to monetize the Aegis technologies, as previously reported, as a result of the Covid-19 pandemic.
General and Administrative Costs and Expenses
For the three months ended September 30, | Variance | |||||||||||
2020 | 2019 | Incr (decr) | ||||||||||
Wages and benefits | $ | 81,000 | $ | 205,000 | $ | (124,000 | ) | |||||
Professional fees and advisors | 40,000 | 8,000 | 32,000 | |||||||||
Facilities and occupancy | 20,000 | 35,000 | (15,000 | ) | ||||||||
Insurance | 24,000 | 23,000 | 1,000 | |||||||||
Sales and marketing | 22,000 | 0 | 22,000 | |||||||||
Patents | 0 | 14,000 | (14,000 | ) | ||||||||
Computer and software maintenance | 8,000 | 11,000 | (3,000 | ) | ||||||||
Shareholder | 2,000 | 8,000 | (6,000 | ) | ||||||||
Travel | - | 7,000 | (7,000 | ) | ||||||||
Other costs and expenses | 9,000 | 6,000 | 3,000 | |||||||||
206,000 | 317,000 | (111,000 | ) | |||||||||
Stock based compensation | (662,000 | ) | 22,000 | (684,000 | ) | |||||||
Total General and Administrative | $ | (456,000 | ) | $ | 339,000 | $ | (795,000 | ) |
General and administrative expense decreased during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due: staff reductions and from the recognition of stock compensation forfeitures reflecting employee turnover. General and administrative headcount was two and five at September 30, 2020 and 2019, respectively.
Non-operating Expense
For the three months ended September 30, | Variance | |||||||||||
2020 | 2019 | Incr/(decr) | ||||||||||
Interest expense | $ | (352,000 | ) | $ | (320,000 | ) | $ | 32,000 | ||||
Debt issuance cost | - | (304,000 | ) | (304,000 | ) | |||||||
Vendor penalty | - | (300,000 | ) | (300,000 | ) | |||||||
Other income | 47,000 | 9,000 | (38,000 | ) | ||||||||
$ | (305,000 | ) | $ | (915,000 | ) | $ | (610,000 | ) |
Interest expense increased by $32,000 for the three months ended September 30, 2020 compared to the prior year quarter. The Company has $11,310,000 in face value of convertible notes outstanding compared to $10,310,000 at December 31, 2019. During the three months ended September 30, 2020, the Company recognized $352,000 in interest expense on the convertible, demand and promissory notes which includes $207,000 of amortization on debt discount that is classified as interest expense. The increase in interest expense since 2019 reflects $1,000,000 of new 2019 convertible notes with an interest rate of 6% per annum, interest on $650,000 of demand notes with a variable interest rate of 3.25% that were issued in the third quarter of 2019, and additional amortization of debt discount on the 2018 and July 2018 convertible notes issued in the first half of 2019. The 2020 interest expense also reflects $6,000 in interest recognized on 6% unsecured promissory notes. During the three months ended September 30, 2019 the Company recognized $320,000 in interest expense on the convertible notes including $195,000 of amortization on debt discount classified as interest expense related to the convertible notes.
Net Income/ Loss for the three months ended September 30, 2020 and 2019
The net income for the three months ended September 30, 2020 was $127,000, compared with a net loss in the three months ended September 30, 2019 of $1,417,000. The net income attributable to common stockholders for the third quarter of 2020 was $73,000 as compared to a net loss of $1,472,000 for the third quarter of 2019.
The weighted average basic and diluted common shares outstanding for the quarter ended September 30, 2020 amounted to 51,447,000 and 50,776,000 for the three month period ended September 30, 2020 and 2019, respectively.
Basic and diluted income per common share for the three-month period ended September 30, 2020 was $0.00 and basic and diluted loss per common share for three-month period ending September 2019 was $0.03. Preferred stock dividends of $54,000 and $55,000 was recorded in the three-month periods ended September 30, 2020 and 2019, respectively.
Results of Operations for the nine months ended September 30, 2020 and 2019
Revenue, Cost of Revenue and Margin
For the nine months ended September 30, |
Variance | |||||||||||
2020 | 2019 | Incr (decr) | ||||||||||
CURA revenue | $ | 7,000 | $ | 13,000 | $ | (6,000 | ) | |||||
Cost of revenue | 15,000 | 11,000 | 4,000 | |||||||||
Gain profit (Loss) | $ | (8,000 | ) | $ | 2,000 | $ | (10,000 | ) |
The Company recorded $7,000 and $13,000 in Z-Coach sales during the nine months ended September 30, 2020 and 2019, respectively in each period. The decrease in revenue during nine months ended September 30, 2020 compared to nine month months ended September 30, 2019 is primarily due to decrease in sales. The Z-Coach training module provides fatigue safety training over a twelve-month subscription period and the user has unlimited access to the 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. The Company is presently re-launching its software package after an extensive re-build over the past 6 months.
Engineering and Development Costs and Expenses
For the nine months ended September 30, | Variance | |||||||||||
2020 | 2019 | Incr (decr) | ||||||||||
Wages and benefits | $ | 236,000 | $ | 456,000 | $ | (220,000 | ) | |||||
Professional fee and advisors | 1,000 | 224,000 | (223,000 | ) | ||||||||
Facilities | 21,000 | 12,000 | 9,000 | |||||||||
Computer and software maintenance | 6,000 | 13,000 | (7,000 | ) | ||||||||
Depreciation and amortization | 6,000 | 18,000 | (12,000 | ) | ||||||||
270,000 | 723,000 | (453,000 | ) | |||||||||
Stock based compensation | (16,000 | ) | 4,000 | (20,000 | ) | |||||||
Total Engineering and Development | $ | 254,000 | $ | 727,000 | $ | (473,000 | ) |
Engineering and development expenses decreased during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to the decrease in wages, professional fees, computer, and software expenses. These cost reductions reflect the temporary suspension of the Company’s efforts to monetize the Aegis technologies, as previously reported, as a result of the Covid-19 pandemic.
General and Administrative Costs and Expenses
For the nine months ended September 30, | Variance | |||||||||||
2020 | 2019 | Incr (decr) | ||||||||||
Wages and benefits | $ | 379,000 | $ | 690,000 | $ | (311,000 | ) | |||||
Professional fees and advisors | 182,000 | 150,000 | 32,000 | |||||||||
Facilities and occupancy | 62,000 | 114,000 | (52,000 | ) | ||||||||
Insurance | 65,000 | 66,000 | (1,000 | ) | ||||||||
Sales and marketing | 63,000 | 62,000 | 1,000 | |||||||||
Patents | 17,000 | 35,000 | (18,000 | ) | ||||||||
Travel | 6,000 | 23,000 | (17,000 | ) | ||||||||
Computer and software maintenance | 18,000 | 24,000 | (6,000 | ) | ||||||||
Shareholder | 12,000 | 19,000 | (7,000 | ) | ||||||||
Other costs and expenses | 15,000 | 36,000 | (21,000 | ) | ||||||||
819,000 | 1,219,000 | (400,000 | ) | |||||||||
Stock based compensation | (619,000 | ) | 107,000 | (726,000 | ) | |||||||
Total General and Administrative | $ | 200,000 | $ | 1,326,000 | $ | (1,126,000 | ) |
General and administrative expense decreased during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to: headcount decreases, lower facility costs resulting from the relocation of office space in the second quarter of 2019 and reduced spending for patent and travel costs. The company also recognized $619,000 in forfeiture of stock-based compensation during the nine months ended September 30, 2020. The 2019 expense included $62,000 in outside marketing efforts related to the CURA product. General and administrative headcount was two and eight at September 30, 2020 and 2019, respectively.
Non-operating Expense
For the nine months ended September 30, | Variance | |||||||||||
2020 | 2019 | Incr/(decr) | ||||||||||
Interest expense | $ | (1,030,000 | ) | $ | (898,000 | ) | $ | 132,000 | ||||
Debt issuance cost | - | (304,000 | ) | (304,000 | ) | |||||||
Vendor penalty | - | (300,000 | ) | (300,000 | ) | |||||||
Other (expense) income | (52,000 | ) | 10,000 | (62,000 | ) | |||||||
$ | (1,082,000 | ) | $ | (1,492,000 | ) | $ | (410,000 | ) |
Interest expense increased by $132,000 for the nine months ended September 30, 2020 compared to the prior year period. The Company has $11,310,000 in face value of convertible notes outstanding compared to $10,310,000 at December 31, 2019. During the nine months ended September 30, 2020, the Company recognized $ 1,030,000 in interest expense on the convertible, demand and promissory notes which includes $607,000 of amortization on debt discount that is classified as interest expense. The increase in interest expense since 2019 reflects $1,000,000 of new 2019 convertible notes with an interest rate of 6% per annum, interest on $650,000 of demand notes with a variable interest rate of 3.25% at quarter-end which were issued in the third quarter of 2019, and amortization of debt discount on the 2019 and July 2018 notes issued in the nine months ended September 30, 2020. The 2020 interest expense includes $19,000 in interest recognized on 6% unsecured promissory notes. During the nine months ended September 30, 2019 the Company recognized $898,000 in interest expense on the convertible notes including $546,000 of amortization on debt discount classified as interest expense related to the convertible notes.
In accordance with ASC 420, for the nine months ended September 30, 2020 the Company recognized $56,000 in one-time termination benefits costs in connection with two employees whose employment with the company terminated during the third quarter of 2020. These costs will be paid over the coming payroll periods through January 2021.
Net Loss for the nine months ended September 30, 2020 and 2019
The net loss for the nine months ended September 30, 2020 was $1,447,000, compared with a net loss in the nine months ended September 30, 2019 of $3,530,000. The net loss attributable to common stockholders for the nine months ended September 30, 2020 was $1,610,000 as compared to $3,693,000 for the nine months of 2019.
The weighted average basic and diluted common shares outstanding for the nine months ended September 30, 2020 and September 30, 2019 amounted to 51,325,000 and 50,565,000, respectively.
Basic and diluted loss per common share for the nine-month periods ended September 30, 2020 and 2019 was $0.03 and $0.07, respectively. Preferred stock dividends of $163,000 was recorded in each of the nine-month periods ended September 30, 2020 and 2019, respectively.
Liquidity and Capital Resources
During the nine months ended September 30, 2020 the company used $1,159,000 of cash in operating activities. A net loss of $1,447,000 was adjusted for $57,000 in non-cash expenses for: amortization of debt discount, depreciation and amortization, the non-cash expense recognized for stock-based compensation and common shares issued in connection with interest expense associated with convertible notes issued in the quarter. The Company reported $231,000 in changes in working capital components during the nine months ended September 30, 2020. The decrease in cash used in operations in the three quarters of 2020 compared to the three quarters of 2019 was driven primarily by the decrease in the net loss from operations.
During the nine months ended September 30, 2020, the Company received proceeds of $1,000,000 on the issuance of senior convertible notes. During the nine months ended September 30, 2019, the Company received proceeds of $825,000 in senior convertible debt and $575,000 in proceeds from the issuance of unsecured promissory notes.
Current Cash Outlook and Management Plans
As of September 30, 2020, we had cash on hand of $87,000, negative working capital of $4,104,000, an accumulated deficit of $92,872,000 and a stockholders' deficiency of $14,222,000. During the nine months ended September 30, 2020 we raised $1,000,000 in proceeds through the issuance of convertible notes and $235,000 from the PPP loan and SBA EIDL grant. The proceeds from these sources have been used to support the ongoing development and marketing of our core technologies and product initiatives.
Management estimates that the 2020 cash needs will run between $1.7 and $2 million, based upon the cash used in operations in the nine months ended September 30, 2020. As of September 30, 2020, the Company’s cash on hand is not sufficient to cover the Company’s future working capital requirements. This raises substantial doubt as to the Company’s ability to continue as a going concern. Management will continue to use its best efforts to develop financing opportunities to fund the development and commercialization of the CURA and Aegis products.
Since inception, we have financed our operations by the sale of our securities and debt financings. We need to raise additional funds to meet our working capital needs, to fund expansion of our business, to complete development, testing and marketing of our products, or to make strategic acquisitions or investments. No assurance can be given that necessary funds will be available for us on acceptable terms, if at all. Furthermore, additional financings will involve dilution to our shareholders or may require that we relinquish rights to certain of our technologies or products. In addition, we will experience operational difficulties and delays due to working capital restrictions. If adequate funds are not available from additional sources of financing, we will have to delay or scale back our plans.
The Company’s ability to fund its current and future commitments from its available cash depends on its ability to launch and generate sales from the CURA app. If the Company cannot generate revenue from the CURA app, it would need to raise funds in order to meet its working capital needs and pursue its growth strategy. Although there can be no such assurances, management believes that sources for these additional funds will be available through either current or future investors.
Critical Accounting Policies
Revenue Recognition and Deferred Revenue: The Company accounts for revenue in accordance with FASB ASC 606, "Revenue from Contracts with Customers" and all related amendments. For contracts where performance obligations are satisfied at a point in time, the Company recognizes revenue when the product is shipped to the customer. For contracts where the performance obligation is satisfied over time, as in the Z-Coach sales, the Company recognizes revenue over the subscription period. Revenue from the sale of the Company's products is recognized net of cash discounts, sales returns and allowances. Our collection terms provide customers standard terms of net 30 days. Future performance obligations are reflected in deferred revenue.
Income Taxes
We account for income taxes using the asset and liability method, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
We account for uncertain tax positions using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax benefits that meet the more-likely-than-not recognition threshold should be measured as the largest amount of tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. It is our policy to recognize interest and penalties related to income tax matters as general and administrative expenses. As of September 30, 2020, and December 31, 2019, there were no accrued interest or penalties related to uncertain tax positions.
Stock-Based Compensation
FASB ASC 718-10 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the requisite service period (generally the vesting period) in the consolidated financial statements based on their fair values on the grant date. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity in accordance with FASB 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.
Impact of Inflation
Inflation has not had a significant impact on our operations to date and we are currently unable to determine the extent inflation may impact our operations in future periods.
Quarterly Fluctuations
Since we are currently focused on developing our technologies for commercialization and we have not yet engaged in significant revenue producing operations, we do not have any meaningful quarterly fluctuations that impact our financial performance.
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
The Chief Executive Officer and our Chief Financial Officer evaluated 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 September 30, 2020, 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 three months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
In addition to the other information set forth in this Quarterly Report of Form 10-Q, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes in the Company's risk factors from those disclosed in Part I, Item 1A. of the Company's Annual Report on for 10-K for the fiscal year ended December 31, 2019 with the exception of the following item:
The results of engineering and development efforts may be uncertain and there can be no assurance of the commercial success of our technology or future products.
The development of our products and services is complex and costly. Some products currently under development or future product developments, including specific product features or functions, may not technologically successful. In addition, the cost and length of our product development may be greater than we anticipate, and we may experience delays in future product development or problems in the design or quality of our products. Unanticipated problems in developing products or services could also divert substantial research and development resources, which may impair our ability to develop products and services and could substantially increase our costs. If new or enhanced product or service introductions are delayed or not successful, we may not be able to achieve an acceptable return, if any, on our product development efforts. Even if our resulting products are technologically successful, they may not achieve market acceptance or compete effectively with our competitor's products. Our efforts to develop the CURA software platform, designed to measure a degradation of alertness in a person's ability to perform a task or job, may not be technologically successful. We continue to design and refine the myCadian software focused on optimizing the user experience.
Our efforts to develop and monetize our Aegis hydraulic pump, an innovative hydraulic pump that is smaller, lighter, and more efficient and cost-competitive than other such pumps in the market, may not be successful. We have experienced and expect to continue to experience a decrease in industry interest in the Aegis technologies as a result of the COVID-19 pandemic, which has caused, among other things, companies in the hydraulics industry to shift focus to their internal processes, technologies, and employees during the pandemic-related pause in the worldwide economy. As a result, we initiated a temporary suspension of our pursuit of the monetization of our Aegis pump and motor technologies.
The timetable for our product development may be longer than we anticipate and we may experience delays in future product development or may elect not to pursue such development. Even if one or more of our resulting product features is technologically successful, it may not achieve market acceptance or compete effectively with our competitors' technologies. In addition, there can be no assurance that our patent applications will result in patents being issued or that current or additional patents will afford protection against competitors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company issued $275,000 of 2019 Convertible Notes during the three months ended September 30, 2020 and subsequently issued $50,000 in convertible promissory notes through the filing of this quarterly report on Form 10-Q.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
None.
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.
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100 | XBRL-related documents |
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101 | The following materials from CurAegis Technologies, Inc.’s Quarterly Report on Form 10-Q for the three month period ended September 30, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three month periods ended September 30, 2020 and 2019 (ii) Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, (iii) Condensed Consolidated Statements of Cash Flows for the three month periods ended September 30, 2020 and 2019, (iv) Condensed Consolidated Statements of Stockholders’ Deficiency for the three month periods ended September 30, 2020 and 2019 and (v) Notes to Condensed Consolidated Financial Statements* |
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| * 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. |
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: November 13, 2020 | By: | /s/ James R. Donnelly |
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| James R. Donnelly |
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| Chief Executive Officer |
Dated: November 13, 2020 | By: | /s/ Jason Burke |
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| Jason Burke |
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| Chief Financial and Accounting Officer |