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EX-32 - EXHIBIT 32 - CurAegis Technologies, Inc.ex32.htm
EX-31.2 - EXHIBIT 31.2 - CurAegis Technologies, Inc.ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - CurAegis Technologies, Inc.ex31-1.htm

 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

FORM 10-K

 

(Mark One)

 

 

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

For the Fiscal Year Ended DECEMBER 31, 2016

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 number 000-24455

 

CURAEGIS TECHNOLOGIES, INC. 

(Name of Small Business Issuer in its charter)

 

NEW YORK 

 

16-1509512

(State or other jurisdiction of 

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

 

 

1999 Mount Read Blvd., Building 3

 

 

Rochester, New York 

 

14615

(Address of principal executive offices) 

 

(Zip Code)

 

Issuer’s Telephone Number, including Area Code: (585) 254-1100

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class 

 

Name of each exchange on which registered

 None.

 

 N/A

 

Securities registered pursuant to Section 12(g) of the Exchange Act:

$.01 par value common voting stock 

(Title of class) 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No ☑

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑ No ☐

 

 
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Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

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

Large accelerated filer ☐ 

Accelerated filer ☐ 

Non-accelerated filer ☐

Smaller reporting company ☑

 

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

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $19,866,000.

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of March 17, 2017: 47,369,265.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain portions of the registrant’s definitive proxy statement relating to the 2017 annual meeting of shareholders are specifically incorporated by reference in Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K. The definitive proxy statement or an amendment to this Form 10-K will be filed no later than 120 days after the close of the registrant’s fiscal year. 

 

 
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CURAEGIS TECHNOLOGIES, INC.

 

 

TABLE OF CONTENTS

 

 

PAGE

PART I

 

 

Item 1. Business

5

 

 

Item 1A. Risk Factors

9

 

 

Item 1B. Unresolved Staff Comments

12

 

 

Item 2. Properties

12

 

 

Item 3. Legal Proceedings

12

 

 

Item 4. Mine Safety Disclosures

12

 

 

PART II

 

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

13

 

 

Item 6. Selected Financial Data

14

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

21

 

 

Item 8. Financial Statements and Supplementary Data

21

 

 

 

Report of Independent Registered Public Accounting Firm

23

 

 

 

 

Consolidated Balance Sheets as of December 31, 2016 and 2015

24

 

 

 

 

Consolidated Statements of Operations for each of the years ended December 31, 2016 and December 31, 2015

25

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for each of the years ended December 31, 2016 and December 31, 2015

26

 

 

 

 

Consolidated Statements of Cash Flows for each of the years ended December 31, 2016 and December 31, 2015

27

 

 

 

 

Notes to Consolidated Financial Statements

28

 

 

 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

42

 

 

Item 9A. Controls and Procedures

42

 

 

Item 9B. Other Information

42

 

 

PART III

 

 

Item 10. Directors, Executive Officers and Corporate Governance

43

 

 

Item 11. Executive Compensation

43

 

 
3

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

43

 

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

43

 

 

Item 14. Principal Accountant Fees and Services

43

 

 

PART IV

 

 

 

Item 15. Exhibits, Financial Statement Schedules

43

 

 

 

 

SIGNATURE PAGE

44

 

 

EXHIBIT INDEX

46

 

 

 

Exhibit 3.1

 

 

Exhibit 3.2

 

 

Exhibit 3.3

 

 

Exhibit 3.4

 

 

Exhibit 3.5

 

 

Exhibit 3.6

 

 

Exhibit 3.7

 

 

Exhibit 3.8

 

 

Exhibit 3.9

 

  Exhibit 3.10  

 

Exhibit 10.1

 

 

Exhibit 10.2

 

 

Exhibit 10.3

 

 

Exhibit 10.4

 

 

Exhibit 10.5

 

 

Exhibit 10.6

 

 

Exhibit 10.7

 

 

Exhibit 10.8

 

 

Exhibit 10.9

 

 

Exhibit 10.10

 

 

Exhibit 10.11

 

 

Exhibit 10.12

 

 

Exhibit 10.13

 

 

Exhibit 10.14

 

  Exhibit 10.15  
  Exhibit 10.16  
  Exhibit 10.17  
  Exhibit 10.18  
  Exhibit 10.19  

 

Exhibit 21

 

 

Exhibit 24

 

 

Exhibit 31.1

 

 

Exhibit 31.2

 

 

Exhibit 32

 

 

 
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PART I

 

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, technical failures, environmental regulations, and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements set forth herein. When used in this report, the words “anticipate”, “believe”, “estimate” or “expect” or words of similar import are intended to identify forward-looking statements. For further discussion of certain of the matters described above and other risks and uncertainties, see “Risk Factors” in Item 1A of this annual report.

 

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 annual report on Form 10-K to reflect new information, future events or other developments.

 

As used in this annual report, unless otherwise indicated, the terms “we”, “our”, “us”, “the Company” and “CurAegis” refer to CurAegis Technologies, Inc.

  

Item 1.  BUSINESS

 

History and Development of Our Technology  

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 June 2016 in connection with the establishment of its two business divisions. The CURA division is engaged in the fatigue management business and the Aegis division is engaged in the power and hydraulic business.

 

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

  

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

 

 

the myCadian watch and app,

 

real-time alertness monitoring,

 

the Group Wellness Index and

 

the Z-Coach Wellness Program. 

 

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

 

 

smaller and lighter than conventional pumps and motors,

 

more efficient,

 

as reliable,

 

price competitive, and

 

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

 

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

   

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

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

 

 
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CurAegis Technologies has been engaged in validation testing with a number of sleep study experts and neurologists in connection with the introduction of our new technologies. The Company believes a solutions approach can be created to indicate a “degradation of alertness” and thus give immediate and important information to the user and other parties. These degradations can be caused by drowsiness, alcohol or other drugs, sickness, psychological problems and thought distractions. Action taken upon a warning of a change in alertness will lead to a better and safer environment. The myCadian™ watch paired with the CURA™ System is a real time alertness and emergency monitoring system that addresses sleep and fatigue management solutions. This is especially important when an individual’s alertness is essential in properly performing tasks, fulfilling responsibilities and averting disasters.  The Company has filed for patent protection for these inventions.

  

The myCadian™ watch is a wearable device developed using physiological monitoring hardware and our proprietary CURA™ (Circadian User Risk Assessment) software that predicts and detects a degradation of alertness in a user and reveals sleep and fatigue problems. The myCadian™ watch will contain an emergency notification function through the use of a panic button which would generate a third party notification. The CURA™ System will include:

 

 

a proprietary tool that combines signal processing and pattern recognition to guide users and third parties about the alertness of the wearer,

 

a risk assessment that identifies the degradation of alertness potentially affecting the wearer’s ability to perform tasks,

 

a comprehensive assessment for wellness, alertness and sleep,

 

real-time reporting that distills complex data into actionable information on mobile and desktop platforms,

 

predictive reporting for a user to take action when alertness begins to wane, before fatigue becomes dangerous,

 

flexible settings to provide employers a customized CURA tool within existing safety definitions and to create protocols for a unique environment,

 

pricing that makes it affordable across a broad based workforce.

 

The Company estimates the possible market opportunity for the CURA System and the myCadian watch at approximately 700 million users worldwide.

 

The Z-Coach e-learning tool is a critical component of the CURA System and was originally created by highly respected fatigue management scientists. We acquired the Z-Coach e-learning tool in September 2015. Z-Coach learning topics include: Risks and Costs of Fatigue, Fundamentals of Sleep, Fatigue Mitigation and Countermeasures. Z-Coach participants gain an awareness of the dangers inherent in the lack of sleep and learn to utilize lifestyle tools to make changes to improve their health, mood, productivity and safety.

 

The first Z-Coach e-learning module, Z-Coach Aviation, was designed for aviation professionals, from flight and ground crews, to scheduling, dispatch, administration and management. Z-Coach Aviation was first offered for sale in the first quarter of 2016.  During 2016, the Company completed the design of the Z-Coach Pro module which will be marketed to a broad range of organizations for fatigue learning and mitigation as well as modules tailored to the trucking and busing industry. Future versions of the Z-Coach learning modules will include training for first responders, 911 operations and other municipal employee groups as well as to medical industries. These industry-specific Z-Coach modules will be included in the launch of the CURA™ System and the myCadian watch.  

 

Aegis Division: Hydraulic Pump  

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

 

 
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Since 2012, we have invested in software, test equipment and personnel to enhance our development efforts and began a design of the hydraulic pump to improve the overall performance while maintaining the advantages we have in size and weight. We have built an internal testing facility, which would have otherwise required third party testing fees and support. Our engineering and design team has progressively made adjustments to the sealing technology and each change has resulted in an improvement in the measured efficiency of the pump. We have filed for patent protection for our novel non-rotating group pump concept, and we are also working on additional patents as a result of engineering breakthroughs in our design process.  

   

We will continue to design modifications to enhance the overall pump technology. Although there is still much to be done, we continue to be extremely encouraged by our testing.

 

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.

   

   

Competition, Industry and Market Acceptance  

Competition in both the wearable device market and the hydraulic device market is, and is expected to remain, intense. The competition ranges from development stage companies to major domestic and international companies, many of which have financial, technical, marketing, sales, manufacturing, distribution and other resources significantly greater than ours. As we commercialize our technologies and begin to sell product, we expect to compete on the basis of performance, uniqueness of design, reliability, and price. There can be no assurance that our technologies and products will not be rendered obsolete by developments in competing technologies that are currently under development or that may be developed in the future or that our competitors will not market competing products that obtain market acceptance more rapidly than ours.

  

We believe that the technologies we are developing have significant advantages relative to similar products manufactured in the worldwide wearable device and hydraulic device marketplaces. With respect to our mechanical device technologies, we believe that our development efforts represent a paradigm shift with respect to presently known technology. With respect to our wearable device technology, we believe that our development efforts are focused on a market that is seeking a better solution to predicting an individual’s level of alertness. Although we have not yet generated revenues from the commercialization of our technologies, we are focusing our efforts toward those areas where we believe we can get to market quickly and successfully.

 

Patents, Trade Secrets and Trademarks 

Our ability to compete effectively depends in part on our ability to maintain the proprietary nature of our technology, products and manufacturing processes. We principally rely upon patent, trademark, trade secrets and contract law to establish and protect our proprietary rights. Despite our efforts to protect our proprietary information, there can be no assurance that others will not either develop the same or similar information independently or obtain access to our proprietary information. In addition, there can be no assurance that we would prevail if we asserted our intellectual property rights against third parties, or that third parties will not successfully assert infringement claims against us in the future.

 

We currently hold patents and have a number of patent applications in process in various countries including the United States, Australia, Canada, Europe, Japan, China, India and South Korea.

 

All key employees are required to enter into agreements providing for confidentiality and the assignment of rights to inventions made by them while employed by us. These agreements also contain certain noncompetition and non-solicitation provisions effective during the employment term and for varying periods thereafter depending on position and location. There can be no assurance that we will be able to enforce these agreements. All of our employees agree to abide by the terms of a Code of Ethics policy that provides for the confidentiality of certain information received during the course of their employment.

 

Trademarks are an important aspect of our business. The following are our registered trademarks: CurAegis®, myCadian™, CurAegis™, CURA™ and Z-Coach™.

 

Website 

Our website address is www.CurAegis.com. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports, available on the investor information portion of our website. The reports are free of charge and are available as soon as reasonably practicable after they are filed with the Securities and Exchange Commission. We have posted our Corporate Governance guidelines, Board committee charters and Code of Ethics to the investor information portion of our website. This information is available in print to any shareholder upon request. All requests for these documents should be made to our chief financial officer by calling (585) 254-1100.

 

 
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Executive Officers 

Our executive officers as of December 31, 2016, were as follows:

 

Richard A. Kaplan, age 71, has served as chief executive officer and as a director since October, 2010. From 2000 to 2010, Mr. Kaplan was the chief executive officer of Pictometry International Corp., a visual information systems company that experienced exponential growth under his leadership. Previously, Mr. Kaplan led and developed a number of other successful businesses in industries including retail floor covering, advertising and marketing, computer software, real estate development and human resource development.

 

Mr. Kaplan currently is on the boards of two startup companies: Cerebral Assessment Systems and Viggi Corporation. He has also been very active in the community in academic institutions and charitable organizations, including present roles on the Board of Trustees at Rochester Institute of Technology (“RIT”), Nazareth College, and the University of Rochester Medical Center as well as directorships at Venture Creations (an RIT business incubator), Camp Good Days and Special Times, Rochester’s Child, Rochester Broadway Theatre League, George Eastman House, and the Center for Governmental Research.

 

Mr. Kaplan’s business success and contributions within the community have been recognized by multiple awards, including the prestigious Herbert W. Vanden Brul Entrepreneurial Award presented by the RIT E. Philip Saunders College of Business in April 2007. Mr. Kaplan was also designated the “Businessperson of the Year” in 2007. In 2012, he was inducted into the Rochester Business Hall of Fame. 

 

Mr. Kaplan has an extensive background in economics, accounting, management and executive leadership. He is regularly sought out by startups, universities and other organizations for which he has done private consulting and guest lecturing on marketing, economics and organizational development. He attended Rochester Institute of Technology and the University of Buffalo where he majored in accounting and minored in economics.

 

Keith E. Gleasman, age 69, is a co-founder of the Company and has served as president and as a director since the company’s inception in September 1996. From 2005 to 2010 he held the title of chief technology officer. From 1985 to 1988, Mr. Gleasman was the vice president of sales for the Power Systems Division at Gleason Works.

 

Mr. Gleasman is a co-inventor on a notable number of the Company’s patents. His strengths include his extensive marketing and sales executive experience, in addition to his design and development knowledge. His particular expertise has been in the area of defining and demonstrating the products to persons within all levels of the automotive industry, race crew members, educators and students. He has spent virtually his entire career involved with inventing and manufacturing new and creative mechanical components for the automotive industry, working closely with his father, Vernon E. Gleasman.

 

Mr. Gleasman earned his B.S. degree from Ashland University in Ashland, Ohio.

 

Kathleen A. Browne, age 61, has served as chief financial officer, corporate secretary and principal accounting officer since April 2015. From 2007 to 2015, Ms. Browne was the sole owner of a professional services and consulting business. Ms. Browne provided consulting services to the company from April 2015 through August 2015 and joined the Company in September 2015. From 2007 to 2015 she served as chief financial officer in several development stage businesses including: U-Vend, Inc. and NaturalNano, Inc. Ms. Browne also served as the Controller and Chief Accountant for Paychex (2001-2004) and W. R. Grace (1996-2001). Ms. Browne spent thirteen years in public accounting with PricewaterhouseCoopers.

 

Ms. Browne is a CPA with a degree in accounting from St. John Fisher College in Rochester, NY.

 

Engineering, Research and Development

 

For the years ended December 31, 2016 and 2015, the Company spent approximately $1,700,000 and $1,305,000 on product engineering, design, development and testing on its technology and products.

 

Employees  

As of December 31, 2016, we employed a total of 24 permanent and temporary employees, 9 of which are primarily devoted to engineering and development, and 16 focused on sales, marketing and administration. All of these individuals are employed in the U.S. None of our employees is represented by a labor union.

 

 
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Item 1A.  RISK FACTORS

 

We face a variety of risks inherent in perfecting our technologies to production-ready models and in our efforts to commercialize these technologies to generate revenues and profits. Below are certain significant factors that could adversely affect us and our prospects. Because of the following risks and uncertainties, our past financial performance should not be considered as an indicator of future performance.

 

We are a company focused on developing new technology and have not yet generated significant revenues.

 

We have a limited operating history and have not generated significant revenues since our founding in 1996. If revenue-generating sales and/or licenses of our technologies do not materialize or do not materialize on a timely basis, we will be compelled to seek additional equity financing or to incur debt to sustain operations which could have a material adverse effect on our business, financial condition and results of operations.

 

The results of our research and development efforts are uncertain and there can be no assurance of the commercial success of our technologies or future products.

 

The products currently under development or future product developments may not be technologically successful. In addition, the length of our product development cycle may be greater than we anticipate and we may experience delays in future product development. Even if our resulting products are technologically successful, they may not achieve market acceptance or compete effectively with our competitors’ products.

 

More specifically, our efforts to develop the CURA System, a wearable device consisting of hardware and software designed to measure a degradation of alertness in a person’s ability to perform a task or job, may not be technologically successful. Our efforts to develop our Aegis hydraulic pump, an innovative hydraulic pump that is smaller, lighter, more efficient and cost competitive than other such pumps in the market, may not be technologically successful. The timetable for our product development may be longer than we anticipate and we may experience delays in future product development. Even if one or more of our resulting products 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.

 

We have only recently entered into the fatigue management business and we cannot predict our future results from operations of that business.

 

We entered the fatigue management business in October 2014. We have been developing and testing our initial fatigue management product and consequently there are currently no revenues from this line of business. Given our lack of operating history in this line of business, it is difficult to predict our future results. Investors should consider the risks and uncertainties that we may encounter as a pre-revenue-stage company in a new and unproven market. These uncertainties include:

 

 

our ability to design and engineer products having the desired technological features in a cost-efficient manner,

 

consumer demand for, and acceptance of products utilizing our technologies,

 

our ability to demonstrate the benefits of our products and services to end users, and

 

our ability to raise additional capital when needed on commercially acceptable terms.

 

Because we have not begun the production of our products, we cannot be certain of the cost to make these products, if and at what point meaningful production would begin and therefore we cannot be sure whether we can profitably produce and sell our products.

 

We are in the process of developing and producing limited quantities of products based on our present technology, and therefore we have not yet generated meaningful product sales. While we believe that we have a reasonable understanding of the approximate cost it will take to manufacture our products at varying production volumes, such costs are only estimates. Our business strategy assumes that our cost to manufacture our products will decrease as production volumes increase, but there can be no assurances that such cost savings will be realized at all or in the amounts that we assume. If we are unable to decrease our cost to manufacture as production volumes increase, we may not be as successful generating profit margins that we expect, which could adversely affect our financial condition or business. 

 

 
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If we are unable to adequately protect our intellectual property, our anticipated competitive advantage may disappear.

 

Our success will be determined in part by our ability to retain and obtain United States and foreign patent protection for our technology. Because of the substantial length of time and expense associated with developing new technology, we place considerable importance on patent protection. We intend to continue to rely on a combination of patent protection, technical measures, and nondisclosure agreements with our employees, suppliers and customers to establish and protect the ideas, concepts and documentation of technology developed by us. Our ability to compete and the ability of our business to grow could suffer if these intellectual property rights are not adequately protected. There can be no assurance that our patent applications will result in patents being issued or that current or future patents will afford protection against competitors. We rely on a combination of patents, trademarks and contractual rights to establish and protect our intellectual property. Failure of our patents, trademarks, non-disclosure agreements and other measures to provide protection of our technology and our intellectual property rights could enable our competitors to more effectively compete with us and have an adverse effect on our business, financial condition and results of operations. In addition, our trade secrets and proprietary know-how may otherwise become known or be independently discovered by others. No guarantee can be given that others will not independently develop substantially equivalent proprietary information or techniques, or otherwise gain access to our proprietary technology. In addition, we may be required to litigate in the future to enforce our intellectual property rights, or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition or results of operations, and there can be no assurances of the success of any such litigation.

 

Although we believe that our technology does not and will not infringe upon the patents or violate the proprietary rights of others, it is possible such infringement or violation has occurred or may occur which could have a material adverse effect on our business.

 

Our business is heavily reliant upon patented and patentable technology. We are not aware of any infringement by us. In the event that products we sell are determined or alleged to infringe upon the patents or proprietary rights of others, we could be required to modify our products or obtain a license for the manufacture and/or sale of such products. In such event, there can be no assurance that we would be able to do so in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do any of the foregoing could have a material adverse effect upon our business. Moreover, there can be no assurance that we will have the financial or other resources necessary to enforce or defend a patent infringement or proprietary rights violation action. In addition, if our products or proposed products are determined or alleged to infringe or likely to infringe upon the patents or proprietary rights of others, we could be subject to injunctive relief and, under certain circumstances, become liable for damages, which could also have a material adverse effect on our business and our financial condition.

 

If we fail to retain our key personnel and attract and retain additional qualified personnel, we might not be able to pursue our growth strategy.

 

Our future success depends upon the continued service of our management team and engineering staff who possess longstanding industry relationships and technical knowledge of our technology, products and operations. The loss of any of our key employees could negatively impact our ability to pursue our growth strategy and conduct operations. Although we believe that our relationship with these individuals is positive, there can be no assurance that the services of these individuals will continue to be available to us in the future.

 

Future growth in our business could make it difficult to manage our resources.

 

If we are successful in executing our business plan, we will place a significant strain on our business operations, management, and financial resources. Significant growth in our business may require us to expand our production capabilities, improve our operational, financial and information systems, and to effectively grow and manage our employee base. There can be no assurance that we will be able to successfully manage any substantial expansion of our business, including attracting and retaining qualified personnel. Any failure to properly manage our future growth could negatively impact our business and operating results.

 

We cannot predict our future capital needs and we may not be able to secure additional financing.

 

To date we have relied on sales of our equity securities and debt financing to finance our operations. We may need to raise additional funds in the future to fund our working capital needs, to fund more aggressive expansion of our business, to complete development, testing and marketing of our products, or to make strategic acquisitions or investments. We may require additional equity or debt financings, collaborative arrangements with corporate partners or funds from other sources for these purposes. No assurance can be given that necessary funds will be available for us to finance our development on acceptable terms, if at all. Furthermore, such additional financings may involve substantial dilution of our stockholders or may require that we relinquish rights to certain of our technologies or products. In addition, we may experience operational difficulties and delays due to working capital restrictions. If adequate funds are not available from operations or additional sources of financing, we may have to delay or scale back our growth plans. 

 

There is currently a limited public market for our Common Stock, which may result in volatility and negatively impacting our trading price, and potentially causing investors to have difficulty when trying to sell the Common Stock issuable upon conversion of their Shares.

 

We are not required to meet certain quantitative and qualitative listing standards established by stock exchanges for the protection of investors. The market for our Common Stock is extremely limited, meaning that at any time and from time to time, there may not be enough sellers in the market to fill purchase orders and/or enough buyers in the market to fill sell orders for transactions where a given price is stipulated (i.e. “limit orders”). Such orders, therefore, may expire unfilled. Our Common Stock is volatile, meaning that purchase and/or sell orders for a numerically small number of shares (e.g. 500) may have a disproportionate positive or negative impact on the trading price at any time during any given trading day but especially, during the first and the last half-hour of trading. The market for our Common Stock is disproportionately influenced by market makers (i.e. broker/dealers) who agree to buy a limited number of shares of our Common Stock (e.g. 500 share blocks) during the course of a given trading day at various specified prices (the “bid”) who may negatively affect the trading price by periodically “lowering the bid” for our Common Stock without regard to company performance and/or disclosure of material events regarding our activities.

 

 
10

 

 

Our Common Stock is deemed to be a “penny stock,” which may make it more difficult for investors to sell their shares due to suitability requirements.

 

Unless the trading price for our Common Stock is $5.00 or more, the stock is classified as a “penny stock” by the Securities and Exchange Commission. This classification means that broker/dealers are required to determine whether our stock is a “suitable” investment for their customers, required to disclose to the customer certain bids, offers and quotations in our stock at least two days before executing a transaction and additionally are required to deliver certain information regarding the risks generally associated with penny stocks (e.g. lack of liquidity, volatility and the potential that the investor will lose his entire investment) at least two days prior to executing a penny stock transaction. These requirements may reduce the number of individuals who otherwise may purchase our Common Stock in the open market.

 

We may issue additional shares of capital stock in the future, which could cause dilution to all shareholders.

 

We are authorized to issue up to 400,000,000 shares of our Common Stock, of which a total of 120,077,000 shares are outstanding or are reserved for future issuance due to the exercise of outstanding stock options, warrants or the conversion of convertible debt or preferred stock. As of December 31, 2016, we have the authority to issue an additional 279,923,000 shares of Common Stock without obtaining shareholder approval.

 

We are authorized to issue up to 100,000,000 shares of our Preferred Stock, of which a total of 46,633,000 shares have been issued and are outstanding. As of December 31, 2016, our board has the authority to approve the issuance of an additional 53,367,000 shares of Preferred Stock subject to the approval of the holders of the outstanding Preferred Stock.   

 

In the future, we may need to raise additional capital through the issuance of equity securities to finance our operations. Prior issuances of stock have resulted in substantial dilution to our shareholders, and such dilution may continue if we are required to finance our business with additional sales of our stock. Any issuance of additional shares of our Common Stock or Preferred Stock will dilute the percentage ownership interest of all shareholders and may dilute the book value per share of the Common Stock issuable upon conversion of the Shares.

 

The exercise of our outstanding options and warrants and conversion of our preferred stock may depress our stock price.

 

As of December 31, 2016, we had outstanding stock options and warrants to purchase an aggregate of 13,666,000 shares of our Common Stock at exercise prices ranging from $0.01 to $5.00 per share. In addition, we had 47,345,000 shares of Preferred Stock (including the impact of accrued dividends) with stated values ranging from $0.20 to $0.50 per share, convertible into shares of our Common Stock at a 1:1 ratio. To the extent that these securities are converted into Common Stock, dilution to our shareholders will occur, which may result in a decrease in the market price of our Common Stock.

 

Certain investors in our equity securities have significant voting power over management and corporate transactions.

 

As of December 31, 2016, we have one principal shareholder who controls approximately 42% of our outstanding voting securities. This principal shareholder and one other together control approximately 52% of our outstanding voting securities. If these shareholders act together, they will be able to exert significant control over our management and affairs requiring shareholder approval, including approval of significant corporate transactions.

  

We do not anticipate paying dividends in the foreseeable future, and the lack of dividends may have a negative effect on the stock price.

 

We have never declared or paid any cash dividends on our stock. We currently intend to retain our future earnings to support operations and to commercialize our products and, therefore, do not anticipate paying any cash dividends on our capital stock in the foreseeable future.

 

We cannot predict our future capital needs and we may not be able to secure additional financing.

 

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

 

 
11

 

 

The terms of any future financing arrangements may restrict our operations.

 

In the future, we may enter into financing arrangements with financial institutions or other lenders. These financing arrangements would likely require us to satisfy many financial covenants that could limit our ability to incur other indebtedness, pay dividends or engage in certain other types of transactions in the future. 

 

 

Item 1B.  UNRESOLVED STAFF COMMENTS

 

Not Applicable.

 

 

Item 2.  PROPERTIES

 

We occupy a facility located at 1999 Mount Read Blvd., Rochester, New York. The facility consists of approximately 13,650 square feet with executive and engineering offices, conference rooms, manufacturing and assembly space, testing and lifts facilities. We currently occupy this space through a lease agreement. In October 2014, we extended our lease for a three-year renewal term through May 31, 2018. The current rental rate is $6,256 per month ($75,070 per annum), for the remainder of the lease term. In addition, we are required to pay a proportionate share of yearly real estate taxes and yearly common area operating costs. The lease agreement has a three-year renewal option with a 9% rate increase at the renewal period.

 

We believe that, given our present circumstances, the facility located at Mount Read Blvd. is sufficient to meet our anticipated plant requirements for the next twelve months. This situation could change if we were to receive orders requiring volume production of one or more of our technologies and we were to elect to fill any such orders ourselves.

  

 

Item 3.  LEGAL PROCEEDINGS

 

There are no litigation matters, actions and/or proceedings to which we are a party or to which our properties are subject.

 

 

Item 4.  MINE SAFETY DISCLOSURES

 

Not Applicable.

 

 
12

 

 

PART II

 

Item 5.  MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information  

 

Our common stock is traded on the over-the-counter market which is an alternative stock exchange listing for companies that either choose not to be listed on a U.S. stock exchange or do not meet the relevant listing requirements. The over-the-counter market and the broker-dealers’ activities in the market are regulated by the Financial Industry Regulatory Authority (“FINRA”), the U.S. Securities and Exchange Commission (“SEC”) and various state regulators.

 

Our common stock is regularly quoted on the OTC Link System, an inter-dealer quotation system, operated by OTC Markets Group Inc. OTC Markets Group has developed the OTC Market Tiers in order to bring increased clarity, transparency and disclosure to the OTC market. Quotations for our common stock within the OTC Market Tiers are found on the OTCQB which is limited to companies whose quoted equity is registered with the SEC and that are current in their reporting requirements.

 

The following table presents the range of high and low bid prices for our common stock for each quarter during the last two calendar years. The source of the high and low bid price information is the OTCQB. The market represented by the OTCQB is extremely limited, is heavily influenced by market makers and the price for our common stock quoted on the OTCQB is not necessarily a reliable indication of the value of our common stock. We also believe that the price of our common stock is significantly impacted by short-selling. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

2016

 

High

   

Low

 

1st Quarter

  $ 0.55     $ 0.33  

2nd Quarter

  $ 0.60     $ 0.26  

3rd Quarter

  $ 0.64     $ 0.37  

4th Quarter

  $ 0.70     $ 0.32  

 

2015

 

High

   

Low

 

1st Quarter

  $ 0.26     $ 0.16  

2nd Quarter

  $ 0.29     $ 0.13  

3rd Quarter

  $ 0.69     $ 0.19  

4th Quarter

  $ 0.45     $ 0.25  

 

 

Holders of Common Stock  

As of December 31, 2016, we had approximately 330 shareholders of record of our common stock. As of December 31, 2016, we had 47,066,765 common shares issued and outstanding.

 

Dividend Policy on Common Stock  

We have not paid any dividends on our common stock since the inception of the Company. The declaration or payment of dividends, if any, on our common stock is within the discretion of the board of directors and will depend upon our earnings, capital requirements, financial condition and other relevant factors. Given our current financial condition, the board of directors does not anticipate payment of any dividends on our common stock in the foreseeable future. 

 

The declaration and payment of dividends on our common stock is limited by provisions of the New York Business Corporation Law which permits the payment of dividends only if after the dividends are paid, a company’s net assets are at least equal to its stated capital. Payment of dividends on our common stock is also subordinated to the requirement that we pay all current and accumulated dividends on our Class A and Class B Preferred Shares prior to the payment of any dividends on our common stock.

 

 
13

 

 

Securities Authorized for Issuance under Equity Compensation Plans as of December 31, 2016

 

Plan Category  

Number of

securities

to be issued upon

exercise of

outstanding

options,

warrants and

rights

   

Weighted

average exercise

price of

outstanding

options,

warrants and

rights

   

Number of securities

remaining available

for

future issuance

under equity

compensation plans

(excluding securities

reflected in col. (a))

 
                         

Equity compensation plans approved by security holders

    9,447,000  (1)   $ 0.53       3,453,000  

Equity compensation plans not approved by security holders

    1,373,000  (2)   $ 1.48  (3)  

None

 

Total

    10,820,000     $ .65       3,453,000  

 

(1)

 

Represents the aggregate number of common stock options outstanding under the 2011 and 2016 Stock Option Plans, as well as other stock options granted to certain executive officers and non-management directors. There have been no grants of common stock options under the 2016 Stock Option Plan.

  

  

  

(2)

 

Represents common stock warrants issued to certain business, engineering, financial, and technical consultants.

  

  

  

(3)

  

Excludes the impact of 1,750,000 unvested warrants with no determined exercise price.

 

Unregistered Sales of Equity Securities and Use of Proceeds 

The Company issued a total of $3,000,000 of 6% Senior Convertible Notes and warrants to accredited investors during the year ended December 31, 2016. The convertible notes were offered and sold without registration under the Securities Act of 1933 pursuant to Rule 506(c) of Regulation D under the Securities Act of 1933. The offering was made only to “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act of 1933.

 

Also during 2016, the Company issued a total of 6,042,000 shares of Series C-3 Voting Convertible Preferred Stock in a private placement transaction, generating gross proceeds of $1,510,500. The offering was made only to “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act of 1933. The Series C-3 Preferred Shares were offered and sold without registration under the Securities Act of 1933 pursuant to Rule 506(c) of Regulation D under the Securities Act of 1933 and are convertible into shares of common stock at the rate of one-to-one.

 

Reports to Shareholders  

We furnish our shareholders with an annual report containing audited financial statements and such other periodic reports as we may determine to be appropriate or as may be required by law. We comply with periodic reporting, proxy solicitation and certain other requirements of the Securities Exchange Act of 1934.

 

Transfer Agent and Registrar  

Continental Stock Transfer & Trust Company has been appointed as our Transfer Agent and Registrar for our common stock and for our preferred stock. Continental’s mailing address is 17 Battery Place, New York, New York 10004, and the main telephone number is (212) 509-4000.

 

 

Item 6.  SELECTED FINANCIAL DATA

 

As a smaller reporting company, we are not required to include information otherwise required by this Item.  

 

 
14

 

 

Item 7.  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 “Risk Factors” in Item 1A of this annual report.

 

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 annual report on Form 10-K to reflect new information, future events or other developments.

 

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

 

Overall Business Strategy 

 

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

 

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

   

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

 

 

the myCadian watch and app,

 

real-time alertness monitoring,

 

the Group Wellness Index and

 

the Z-Coach Wellness Program. 

 

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

 

 

smaller and lighter than conventional pumps and motors,

 

more efficient,

 

as reliable,

 

price competitive, and

 

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

 

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

 

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

 

 
15

 

 

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

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

 

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

 

The myCadian watch is a wearable device developed using physiological monitoring hardware and our proprietary CURA (Circadian User Risk Assessment) software and is designed to predict and detect a degradation of alertness in a user and reveal sleep and fatigue problems. The myCadian watch will contain an emergency notification function through the use of a panic button or in sensing a lack of motion would generate a third party panic notification. The CURA System will include:

 

 

a proprietary tool that combines signal processing and pattern recognition to guide users and third parties about the alertness of the wearer,

 

a risk assessment that identifies the degradation of alertness potentially affecting the wearer’s ability to perform tasks,

 

a comprehensive assessment for wellness, alertness and sleep,

 

real-time reporting that distills complex data into actionable information on mobile and desktop platforms,

 

predictive reporting for a user to take action when alertness begins to wane - before fatigue becomes dangerous,

 

flexible settings to provide employers a customized tool within existing safety definitions and to create protocols for a unique environment, and

 

pricing that makes it affordable across a broad-based workforce.

 

Management is developing marketing and sales programs in support of the beta phase planned for the second quarter of 2017. The beta phase will include multiple industry instances in an active user program to compare and align the user experience with our product definitions and objectives. Management anticipates customer shipments will begin in the second or third quarter of 2017.

 

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

 

The Z-Coach e-learning tool is a critical component of the CURA System and was originally created by highly respected fatigue management scientists. We acquired the Z-Coach e-learning tool in September 2015. Z-Coach learning topics include: Risks and Costs of Fatigue, Fundamentals of Sleep, Fatigue Mitigation and Countermeasures. Z-Coach participants gain an awareness of the dangers inherent in the lack of sleep and learn to utilize lifestyle tools to make changes to improve their health, mood, productivity and safety.

 

The first Z-Coach e-learning module, Z-Coach Aviation, was designed for aviation professionals, from flight and ground crews, to scheduling, dispatch, administration and management. Z-Coach Aviation was first offered for sale in the first quarter of 2016.  During 2016, the Company completed the design of the Z-Coach Pro module which will be marketed to a broad range of organizations for fatigue learning and mitigation as well as modules tailored to the trucking and busing industry. Future versions of the Z-Coach learning modules will include training for first responders, 911 operations and other municipal employee groups as well as to medical industries. These industry-specific Z-Coach modules will be included in the launch of the CURA™ System and the myCadian watch.  

 

Aegis Division: Hydraulic Pump

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

 

 
16

 

 

Since 2012, we have invested in software, test equipment and personnel to enhance our development efforts and began a design of the hydraulic pump to improve the overall performance while maintaining the advantages we have in size and weight. We have built our own testing facility, which would have otherwise taken place at a third party testing facility. Our engineer and design team has progressively made adjustments to the sealing technology and each change has resulted in an improvement in the measured efficiency of the pump. We have filed for patent protection for our novel non-rotating group pump concept, and we are also working on additional patents as a result of engineering breakthroughs in our design process.   

 

In 2016, the Company submitted the Aegis hydraulic pump for testing at the Fluid Power Institute at the Milwaukee School of Engineering (“MSOE”). The MSOE research laboratories provide custom in-depth testing, systems analysis solutions, and evaluations. The Aegis pump evaluated by MSOE was our test pump, not a production prototype, thus the tested unit was not completely optimized. The MSOE test results demonstrated that our pump can achieve the high speed and pressure levels needed and should result in greater efficiencies and power density than current axial piston hydraulic pumps in the market. We also believe the testing at MSOE confirmed our test stand accuracy and the mathematical models used in our design development. Our next steps will be to begin the manufacture of a production prototype in tandem with a potential customer thereby designing to a specific customer application. Management believes that the design and manufacture of a production prototype will be completed in the third quarter of 2017.

 

Results of Statement of Operations for the years ended December 31, 2016 and 2015

 

Revenue, Cost of Revenue and Gross Margin (Loss)

 

   

For the year ended December 31,

   

Variance

 
   

2016

   

2015

   

Incr (decr)

 

Revenue

  $ 26,000     $ -     $ 26,000  

Cost of revenue

    127,000       -       127,000  

Loss on revenue

  $ (101,000 )   $ -     $ (101,000 )

 

The Company recorded $26,000 in revenue for the year ended December 31, 2016. The Company began offering the Z-Coach Aviation program in the first quarter of 2016. Z-Coach provides fatigue safety training over a twelve month subscription period. The user has unlimited access to this e-learning 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. There was no revenue earned during the year ended December 31, 2015. 

 

During the year ended December 31, 2016, 467 Z-Coach Aviation subscriptions were sold to fourteen customers resulting in total customer sales of $48,000 of which $26,000 was recognized as revenue in 2016. In anticipation of the launch of the CURA System, the Company reduced the price of the Z-Coach subscription fees effective October 1, 2016. In connection with this pricing strategy, customers that were still within their initial subscription year as of this date received a credit against future purchases of Z-Coach or the CURA System measured at this lower pro-rated price. As of December 31, 2016, the Company has deferred revenue of $22,000 attributed to Z-Coach subscription revenue that will be recognized ratably as our performance obligations are satisfied.

 

The Company recorded $127,000 in cost of revenue during the year ended December 31, 2016 related to Z-Coach aviation subscriptions. During the year ended December 31, 2016, software amortization of $106,000 and hosting fees of $21,000 were reflected in cost of revenue. Software amortization is based upon the straight-line amortization of the capitalized software over an estimated useful life of 36 months. The Company engaged a service provider for hosting of the on-line Z-Coach subscriptions for the twelve-month period ending January 2017. The Company paid $22,500 to this provider and recognized hosting expense as a product cost over the contract period.

 

Engineering and Development Costs and Expenses

 

   

For the year ended December 31,

   

Variance

 
   

2016

   

2015

   

Incr (decr)

 

Wages and benefits

  $ 829,000     $ 727,000     $ 102,000  

Professional fee and advisors

    584,000       207,000       377,000  

Parts and shop supplies

    180,000       185,000       (5,000 )

Computer and software maintenance

    48,000       57,000       (9,000 )

Depreciation and amortization

    55,000       62,000       (7,000 )

Other costs and expenses

    22,000       59,000       (37,000 )
    $ 1,718,000     $ 1,297,000     $ 421,000  

Stock compensation expense

    27,000       8,000       19,000  

Total Engineering and Development

  $ 1,745,000     $ 1,305,000     $ 440,000  

 

 
17

 

 

Engineering and development expenses for the year ended December 31, 2016 amounted to $1,745,000 as compared to $1,305,000 in 2015. Non-cash stock-based compensation expense attributable to stock options for the year ended December 31, 2016 was $27,000, compared with $8,000 for the year ended December 31, 2015. The increase in stock compensation expense reflects the grant of employee stock options in the year ended December 31, 2016. Excluding the non-cash stock-based compensation expense, engineering and development expenses increased by $421,000 for the year ended December 31, 2016 compared to the comparable period in 2015. The increased spending in 2016 is attributable to (i) wages and benefits and (ii) outside consulting services in the technical developmental of the myCadian watch and CURA software.

 

General and Administrative Costs and Expenses

 

   

For the year ended December 31,

   

Variance

 
   

2016

   

2015

   

Incr (decr)

 

Wages and benefits

  $ 1,183,000     $ 377,000     $ 806,000  

Professional fee and advisors

    342,000       227,000       115,000  

Facilities and occupancy

    151,000       141,000       10,000  

Insurance

    80,000       69,000       11,000  

Auto, meals and travel

    95,000       52,000       43,000  

Shareholder relations

    48,000       61,000       (13,000 )

Depreciation and amortization

    11,000       65,000       (54,000 )

Other costs and expenses

    121,000       63,000       58,000  
    $ 2,031,000     $ 1,055,000     $ 976,000  

Stock compensation expense

    118,000       396,000       (278,000 )

Total General and Administrative

  $ 2,149,000     $ 1,451,000     $ 698,000  

 

General and administrative expense for the year ended December 31, 2016 amounted to $2,149,000 compared to $1,451,000 in 2015. Non-cash stock-based compensation expense for the year ended December 31, 2016 was $118,000 compared to $396,000 for the year ended December 31, 2015. The decrease in stock compensation expense reflects the vesting of certain grants made in the third quarter of 2015. Excluding the non-cash stock-based compensation expense, general and administrative expense for the year ended December 31, 2016 amounted to $2,031,000 compared to $1,055,000 in 2015. The increase of $976,000 of spending in 2016 is primarily attributed to headcount increases in our sales and operations teams in 2016.

 

Other Income and Expense

 

   

For the year ended December 31,

   

Variance

 
   

2016

   

2015

   

Incr (decr)

 

Interest expense

  $ (129,000 )   $ -     $ 129,000  

Other income (expense)

    (38,000 )     39,000       77,000  
    $ (167,000 )   $ 39,000     $ 206,000  

 

Other (expense) income reflects interest expense of $35,000 accrued on the 6% convertible notes and $94,000 of discount amortization related to convertible notes issued in 2016. During the year ended December 31, 2016, the Company recognized losses on the disposition of certain property and equipment no longer used in the business. During the year ended December 31, 2015, the Company recognized gains on the disposition of certain property and equipment no longer used in the business.

 

Net Loss and Net Loss Attributed to Common Shareholders

 

The net loss for the year ended December 31, 2016 was $4,162,000, compared with a net loss in 2015 of $2,717,000.

 

In connection with the issuance of the 6,042,000 shares of Series C-3 Preferred stock, the Company valued the non-cash beneficial conversion feature associated with the right to convert the shares into common stock on a one-for-one basis. We compared the fair value of our common stock on the date of issuance with the effective conversion price, and determined that the value of the non-cash beneficial conversion feature was $885,000, and is reflected in our consolidated statements of operations for the year ended December 31, 2016 as an adjustment to arrive at the net loss attributable to common stockholders.  Preferred stock dividends amounted to $248,000 and $255,000 in the years ended December 31, 2016 and 2015, respectively.

 

The net loss attributable to common stockholders for the year ended December 31, 2016 was $5,295,000 as compared to a net loss attributable to common stockholders $2,972,000 for the year ended December 31, 2015. The weighted average basic and diluted common shares outstanding amounted to 46,119,000 and 45,758,000 for each of the years ended December 31, 2016 and 2015, respectively. Basic and diluted loss per common share for the years ended December 31, 2016 and 2015 were $0.11 and $0.06 respectively.

 

 
18

 

 

Liquidity and Capital Resources  

 

As of December 31, 2016, cash and cash equivalents totaled $2,009,000, a net increase of $768,000 since the beginning of the year. During the year ended December 31, 2016, we used $3,603,000 of cash in operating activities. A net loss of $4,162,000 was adjusted for $414,000 in non-cash expenses for depreciation, amortization and stock-based compensation, $40,000 for a non-cash loss on property and equipment and $105,000 in changes in working capital components which resulted in $3,603,000 of cash used by operating activities. The increase in cash used in operations of $1,414,000 in 2016 over the comparable period in 2015 was driven by the increase in the net loss in the current period. In 2015, the net loss of $2,717,000 was adjusted for $531,000 in non-cash expenses for depreciation, amortization and stock-based compensation, $24,000 of gains on asset dispositions, $20,000 of bad debt recovery and $41,000 in changes in components of working capital.

  

We invested $94,000 in capitalized software and property and equipment in the year ended December 31, 2016 compared to the investment of $360,000 in the year ended December 31, 2015. The 2015 investments included $308,000 for the purchase of the Z-Coach fatigue management software and related software enhancements offset by $74,000 in proceeds from the sales of fixed assets.

 

During the year ended December 31, 2016, the Company generated $4,465,000 in cash from financing activities. Net proceeds of $2,972,000 was generated from the issuance of the 6% senior convertible notes and $1,495,000 in net proceeds were generated from the issuance of the Series C-3 convertible preferred shares. During the years ended December 31, 2016 and 2015, we used $2,000 and $8,000, respectively, in cash in the repayment on outstanding capital lease obligation.

  

Current Cash Outlook and Management Plans 

 

As of December 31, 2016, we have cash on hand of $2,009,000, working capital of $1,786,000, stockholders’ equity of $1,583,000 and an accumulated deficit of $75,418,000. During the year ended December 31, 2016 we raised $1,510,000 in gross proceeds through the sale of our Series C-3 preferred stock and $3,000,000 through the issuance of 6% convertible notes and warrants. The proceeds from these private placements are being used to support the ongoing development and marketing of our core technologies and product initiatives.

 

Management estimates that the 2017 cash needs, based on its current development and product plans, will range from $4.0 to $4.6 million. As of December 31, 2016, the Company’s cash and cash equivalents on hand may not be sufficient to cover the Company’s future working capital requirements. This raises substantial doubt as to the Company’s ability to continue as a going concern. Management continues to use its best efforts to develop financing opportunities to fund the development and commercialization of the CURA and Aegis products.

 

As described in Note 14 to the consolidated financial statements, subsequent to December 31, 2016, the board of directors authorized the issuance of Senior Convertible Promissory Notes and Warrants to be sold 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 will be made only to “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act of 1933. The Company will offer up to $3 million in 6% senior convertible promissory notes with a five-year maturity. The conversion price of the notes will be fixed on the date of issuance at the lower of $0.50 per share or 60% of the market price as determined based on the 90-day volume weighted average price on the date of the agreement. The investors will receive warrants to purchase an aggregate number of shares of the Company’s common stock to equal 10% of the number of shares issuable upon the conversion of the notes. The exercise price of the warrants will will be fixed on the date of issuance at the lower of $0.50 per share or 60% of the market price as determined based on the 90-day volume weighted average price on the date of the agreement. No notes had been issued as of the date of this filing.

 

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

 

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

  

Critical Accounting Policies  

 

Revenue Recognition  

The Company began offering the Z-Coach Aviation Wellness Program in the first quarter of 2016. The Z-Coach Program provides fatigue safety training over an annual subscription period of twelve months. The Z-Coach Program allows the user unlimited access during the annual subscription period. Customers are billed at the acceptance of the subscription, and revenue is recognized ratably over the subscription period as our performance obligations are satisfied and when collection is reasonably assured. Our collection terms provide customers standard terms of net 30 days. Future performance obligations are reflected in deferred revenue.

 

 
19

 

 

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 December 31, 2016, and December 31, 2015, 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. We elected to adopt the alternative method of calculating the historical pool of windfall tax benefits as permitted by FASB ASC 718-10-65. This is a simplified method to determine the pool of windfall tax benefits that is used in determining the tax effects of stock compensation in the results of operations and cash flow reporting for awards that were outstanding as of the adoption of FASB ASC 718-10.

  

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

 

FASB ASC 718-20 requires that modifications of the terms or conditions of equity awards be treated as an exchange of the original award for a new award.  Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified. 

 

Safe Harbor

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, technical failures, environmental regulations, and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements set forth herein. When used in this report, the words “anticipate”, “believe”, “estimate” or “expect” or words of similar import are intended to identify forward-looking statements.

 

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 annual report on Form 10-K to reflect new information, future events or other developments.

 

Recent Accounting Pronouncements

 

See Note 2 to the Company’s consolidated financial statements for discussion of recently issued, but not yet effective, accounting pronouncements.

 

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 technology 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.

 

 
20

 

 

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company, we are not required to include information otherwise required by this Item.  

 

 

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 
21

 

 

CURAEGIS TECHNOLOGIES, INC.

 


Contents


Financial Statements

 

 

 

PAGE

 

 

Report of Independent Registered Public Accounting Firm

23

 

 

Consolidated Balance Sheets as of December 31, 2016 and 2015

24

 

 

Consolidated Statements of Operations for each of the years ended December 31, 2016 and December 31, 2015

 25

 

 

Consolidated Statements of Changes in Stockholders’ Equity for each of the years ended December 31, 2016 and 2015

 26

 

 

Consolidated Statements of Cash Flows for each of the years ended December 31, 2016 and December 31, 2015

 27

 

 

Notes to Consolidated Financial Statements

 28

 

 
22

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

 

 

Board of Directors and Shareholders

CurAegis Technologies, Inc.

 

We have audited the accompanying consolidated balance sheets of CurAegis Technologies, Inc. (formerly Torvec, Inc.) and its subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, cash flows, and changes in stockholders’ equity for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of the Company’s internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CurAegis Technologies, Inc. and its subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's losses from operations raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

/s/ Freed Maxick CPAs, P.C.

Buffalo, New York
March 20, 2017

 

 
23

 

 

CURAEGIS TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

 

   

December 31,

2016

   

December 31,

2015

 

ASSETS

               

Current Assets:

               

Cash and equivalents

  $ 2,009,000     $ 1,241,000  

Accounts receivable

    10,000       -  

Inventory

    24,000       -  

Prepaid expenses and other current assets

    48,000       37,000  

Total current assets

    2,091,000       1,278,000  
                 

Software (net)

    227,000       303,000  

Property and equipment (net)

    117,000       160,000  

Total non-current assets

    344,000       463,000  
                 

Total Assets

  $ 2,435,000     $ 1,741,000  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current Liabilities:

               

Accounts payable

  $ 143,000     $ 84,000  

Other current liabilities

    103,000       67,000  

Deferred revenue

    22,000       -  

Accrued interest

    35,000       -  

Capital lease obligation - current

    2,000       1,000  

Total current liabilities

    305,000       152,000  
                 

Capital lease obligation, non-current

    4,000       6,000  

Senior convertible notes (net)

    543,000       -  
                 

Total Liabilities

    852,000       158,000  
                 

Commitments and other matters (Note 13)

    -       -  
                 

Stockholders' Equity:

               

Preferred stock, $.01 par value, 100,000,000 shares authorized

               

Series C, voting, convertible, no dividend, shares issued and outstanding at December 31, 2016 and 2015: 16,000,000 and 16,250,000, respectively

    160,000       162,000  

Series C-2, voting, convertible, no dividend, shares issued and outstanding at December 31, 2016 and 2015: 25,000,000 and 25,000,000, respectively

    250,000       250,000  

Series C-3, voting, convertible, no dividend, shares issued and outstanding at December 31, 2016 and 2015: 5,022,000 and 0, respectively

    50,000       -  

Class A, non-voting, convertible, cumulative dividend $.40 per share per annum, shares issued and outstanding at December 31, 2016 and 2015: 543,221 and 543,221, respectively

    5,000       5,000  

Class B, non-voting, convertible, cumulative dividend $.50 per share per annum, shares issued and outstanding at December 31, 2016 and 2015: 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 December 31, 2016 and 2015: 47,066,765 and 45,796,765, respectively

    470,000       458,000  

Additional paid-in capital

    76,065,000       71,963,000  

Accumulated deficit

    (75,418,000

)

    (71,256,000

)

                 

Total Stockholders' Equity

    1,583,000       1,583,000  
                 

Total Liabilities and Stockholders' Equity

  $ 2,435,000     $ 1,741,000  

 

 

See notes to consolidated financial statements.

 

 
24

 

 

CURAEGIS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

   

Year Ended

December 31,

2016

   

Year Ended

December 31,

2015

 
                 

Revenue

  $ 26,000     $ -  

Cost of Revenue

    127,000       -  
                 

Loss on Revenue

    (101,000 )     -  
                 

Costs and expenses:

               

Engineering and development:

               

E&D costs, excluding stock-based compensation

    1,718,000       1,297,000  

Stock-based compensation

    27,000       8,000  

Total engineering and development

    1,745,000       1,305,000  

General and administrative:

               

G&A costs, excluding stock-based compensation

    2,031,000       1,055,000  

Stock-based compensation

    118,000       396,000  

Total general and administrative

    2,149,000       1,451,000  
                 

Total costs and expenses

    3,894,000       2,756,000  
                 

Loss from operations

    (3,995,000

)

    (2,756,000

)

                 

Interest expense

    (129,000 )     -  

Other income (expense)

    (38,000 )     39,000  
      (167,000

)

    39,000  
                 
                 

Loss before income taxes

    (4,162,000

)

    (2,717,000

)

                 

Income taxes

    -       -  
                 

Net Loss

    (4,162,000

)

    (2,717,000

)

                 

Preferred stock beneficial conversion feature

    885,000       -  

Preferred stock dividends

    248,000       255,000  
                 

Net Loss attributable to common stockholders

  $ (5,295,000

)

  $ (2,972,000

)

                 

Net Loss per share attributable to common stockholders:

               

Basic and Diluted

  $ (0.11

)

  $ (0.06

)

                 

Weighted average number of shares of common stock:

               

Basic and Diluted

    46,119,000       45,758,000  

 

 

See notes to consolidated financial statements. 

 

 
25

 

 

CURAEGIS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

 

 

   

Series C

Preferred Stock

   

Series C-2

Preferred Stock

   

Series 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     Equity  

Balance at January 1, 2015

    16,250,000     $ 162,000       25,000,000     $ 250,000       -       -       587,101     $ 6,000       67,500     $ 1,000       45,716,298     $ 457,000     $ 71,559,000     $ (68,539,000 )   $ 3,896,000  

Conversion of preferred shares to common shares

                                                    (43,880 )   $ (1,000 )                     43,880     $ 1,000                     $ -  

Payment of accrued dividends in common shares

                                                                                    36,587                             $ -  

Stock-based compensation

                                                                                                  $ 404,000             $ 404,000  

Net Loss

                                                                                                          $ (2,717,000 )   $ (2,717,000 )

Balance at December 31, 2015

    16,250,000       162,000       25,000,000     $ 250,000       -       -       543,221     $ 5,000       67,500     $ 1,000       45,796,765     $ 458,000     $ 71,963,000     $ (71,256,000 )   $ 1,583,000  
                                                                                                                         

Issuance of Series C 3 preferred shares

                                    6,042,000     $ 60,000                                                     $ 1,435,000             $ 1,495,000  

Conversion of preferred shares to common shares

    (250,000 )   $ (2,000                     (1,020,000 )   $ (10,000 )                                     1,270,000     $ 12,000                       -  

Stock-based compensation

                                                                                                  $ 145,000             $ 145,000  

Issuance of warrants with convertible note

                                                                                                  $ 465,000             $ 465,000  

Beneficial conversion feature on convertible note

                                                                                                  $ 2,057,000             $ 2,057,000  

Net Loss

                                                                                                          $ (4,162,000 )   $ (4,162,000 )
                                                                                                                         

Balance at December 31, 2016

    16,000,000       160,000       25,000,000       250,000       5,022,000       50,000       543,221       5,000       67,500       1,000       47,066,765       470,000     $ 76,065,000     $ (75,418,000 )   $ 1,583,000  

 

 

See notes to consolidated financial statements.

 

 
26

 

 

CURAEGIS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

   

Year Ended

December 31,

2016

   

Year Ended

December 31,

2015

 
                 

Cash flows from operating activities:

               

Net loss

  $ (4,162,000

)

  $ (2,717,000

)

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation and amortization

    173,000       127,000  

Amortization of discount reported as interest

    96,000       -  

Stock-based compensation

    145,000       404,000  

Loss (gain) on disposition of property and equipment

    40,000       (24,000

)

Recovery of bad debt

    -       (20,000

)

Changes in working capital items:

               

Accounts receivable

    (10,000

)

    20,000  

Inventory

    (24,000

)

    -  

Prepaid expenses and other current assets

    (11,000

)

    (22,000

)

Accounts payable and other accrued expenses

    128,000       43,000  

Deferred revenue

    22,000       -  
                 

Net cash used in operating activities

    (3,603,000

)

    (2,189,000

)

                 

Cash flows from investing activities:

               

Purchase of software, property and equipment

    (94,000

)

    (360,000

)

Proceeds from sale of property and equipment

    -       74,000  
                 

Net cash used in investing activities

    (94,000

)

    (286,000

)

                 

Cash flows from financing activities:

               

Gross proceeds from issuance of senior convertible note

    3,000,000       -  

Cost incurred in issuance of senior convertible note

    (28,000

)

    -  

Net proceeds from sales of preferred stock

    1,495,000       -  

Repayment of capital lease obligation

    (2,000

)

    (8,000

)

                 

Net cash provided by (used in) financing activities

    4,465,000       (8,000

)

                 

Net increase (decrease) in cash and cash equivalents

    768,000       (2,483,000

)

                 

Cash and cash equivalents at beginning of year

    1,241,000       3,724,000  
                 

Cash and cash equivalents at end of year

  $ 2,009,000     $ 1,241,000  
                 
                 
                 

Supplemental Disclosures:

               

Cash used for payment of interest expense

  $ -     $ -  

Cash used for payment of income taxes

  $ -     $ -  

Debt discount related to warrants and beneficial conversion feature

  $ 2,523,000     $ -  

Acquisition of equipment through capital lease

  $ -     $ 9,000  

Conversion of preferred shares to common

  $ 305,000     $ 176,000  

Conversion of preferred dividends to common

  $ -     $ 146,000  

                                   

 

See notes to consolidated financial statements.

 

 
27

 

 

CURAEGIS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2016

 

  

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 June 2016 in connection with the establishment of its two business divisions. The CURA division is engaged in the fatigue management business and the Aegis division is engaged in the power and hydraulic business.

 

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

  

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

 

the myCadian watch and app,

 

real-time alertness monitoring,

 

the Group Wellness Index and

 

the Z-Coach wellness program. 

 

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

 

smaller and lighter than conventional pumps and motors,

 

more efficient,

 

as reliable,

 

price competitive, and

 

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

 

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

 

Current Cash Outlook and Management Plans

 

As of December 31, 2016, we have cash on hand of $2,009,000, working capital of $1,786,000, stockholders’ equity of $1,583,000 and an accumulated deficit of $75,418,000. During the year ended December 31, 2016 we raised $1,510,000 in gross proceeds through the sale of our Series C-3 preferred stock and $3,000,000 through the issuance of 6% convertible notes and warrants. The proceeds from these private placements are being used to support the ongoing development and marketing of our core technologies and product initiatives.

 

Management estimates that the 2017 cash needs, based on its current development and product plans, will range from $4.0 to $4.6 million. As of December 31, 2016, the Company’s cash and cash equivalents on hand may not be sufficient to cover the Company’s future working capital requirements. This raises substantial doubt as to the Company’s ability to continue as a going concern. Management continues to use its best efforts to develop financing opportunities to fund the development and commercialization of the CURA and Aegis products.

 

As described in Note 14 to the consolidated financial statements, subsequent to December 31, 2016, the board of directors authorized the issuance of Senior Convertible Promissory Notes and Warrants to be sold 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 will be made only to “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act of 1933. The Company will offer up to $3 million in 6% senior convertible promissory notes with a five-year maturity. The conversion price of the notes will be fixed on the date of issuance at the lower of $0.50 per share or 60% of the market price as determined based on the 90-day volume weighted average price on the date of the agreement. The investors will receive warrants to purchase an aggregate number of shares of the Company’s common stock to equal 10% of the number of shares issuable upon the conversion of the notes. The exercise price of the warrants will be fixed on the date of issuance at the lower of $0.50 per share or 60% of the market price as determined based on the 90-day volume weighted average price on the date of the agreement. No notes had been issued as of the date of this filing.

 

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

 

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

 

 
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

 

Consolidation: The financial statements include the accounts of the Company, our wholly-owned subsidiary Iso-Torque Corporation, and our majority-owned subsidiary, Ice Surface Development, Inc. (56% owned at December 31, 2016). As of December 31, 2016, each of the subsidiaries is non-operational. The Company intends to let Ice Surface Development, Inc. dissolve by proclamation. All material intercompany transactions and account balances have been eliminated in consolidation.

 

Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles (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 and Equivalents: Cash and equivalents may include time deposits, certificates of deposit, and highly liquid debt instruments with original maturities of three months or less. We maintain cash and cash equivalents at financial institutions which periodically may exceed federally insured amounts. We have a corporate credit card program through our primary financial institution, JPMorgan Chase Bank, N.A. In connection with this, the Company granted a security interest to the bank in our money market account to act as collateral for the activity within the corporate card program, up to $25,000. 

 

Inventory: Inventory is stated at the lower of cost or market with cost determined under the average cost method. We record provisions for excess, obsolete or slow-moving inventory based on changes in customer demand, technology developments or other economic factors. The allowance for excess, obsolete or slow-moving inventory was zero at December 31, 2016 and December 31, 2015.

 

Accounts Receivable: We carry our accounts receivable at invoice amount less an allowance for doubtful accounts.  On a periodic basis, we evaluate our accounts receivable and establish an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit conditions.  We do not accrue interest on past due invoices.  The allowance for doubtful accounts was zero at December 31, 2016 and December 31, 2015.

  

Software, Property and Equipment: Capitalized software, property and equipment are stated at cost. Estimated useful lives are as follows: 

 Software (in years)

 

3

 

 Office equipment (in years)

5

-

7

 Leasehold improvements

lesser of useful life or lease term

 

Depreciation and amortization are computed using the straight-line method. Betterments, renewals and significant repairs that extend the life of the assets are capitalized. Other repairs and maintenance costs are expensed when incurred. When disposed, the cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is recognized in other income (expense). Depreciation and software amortization expense for the years ended December 31, 2016 and 2015 amounted to $173,000 and $127,000, respectively.

 

Whenever events or circumstances indicate, our long-lived assets including any intangible assets with finite useful lives are tested for impairment by using the estimated future cash flows directly associated with, and that are expected to arise as a direct result of, the use of the assets. If the carrying amount exceeds the estimated undiscounted cash flows, impairment may be indicated. The carrying amount is compared to the estimated discounted cash flows and if there is an excess such amount is recorded as impairment. During the years ended December 31, 2016 and 2015, we recorded no impairment charges.

 

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 December 31, 2016. The carrying amount of cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, deferred revenue and accrued expenses approximates their fair value due to their short maturity. The carrying amount of capital lease obligations approximates fair value because stated or implied interest rates approximate current interest rates that are available for debt with similar terms. The 6% senior convertible notes can be converted into common stock which have an underlying value of $8,160,000 as of December 31, 2016 based on the trading price on December 31, 2016.

 

 
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Revenue Recognition and Deferred Revenue: The Company began offering the Z-Coach Aviation program in the first quarter of 2016. The Z-Coach program provides fatigue safety training over a subscription period of twelve months. The Z-Coach program allows the user unlimited access during the annual subscription period. Customers are billed at the acceptance of the subscription and revenue is recognized ratably over the subscription period as our performance obligations are satisfied and when collection is reasonably assured. One customer accounted for 50% of total sales made during the year ended December 31, 2016. Our collection terms provide customers standard terms of net 30 days. Future performance obligations are reflected in deferred revenue.

 

Engineering and Development and Patents: Engineering and development costs and patent expenses are charged to operations as incurred. Engineering and development includes personnel-related costs, materials and supplies, depreciation and consulting services.

  

Patent costs for the years ended December 31, 2016 and 2015 amounted to $96,000 and $83,000, respectively, and are included in general and administrative expenses.

 

Stock-based Compensation: FASB Accounting Standards Codification (“ASC”) 718-10 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values on the grant date. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity in accordance with ASC 718-10. No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets.   

 

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

 

FASB ASC 718-20 requires that modifications of the terms or conditions of equity awards be treated as an exchange of the original award for a new award.  Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified.

 

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 December 31, 2016, and December 31, 2015, 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 December 31, 2016 and 2015, we excluded 72,385,000 and 54,215,000 potential common shares, respectively, relating to convertible preferred stock, convertible notes, options and warrants outstanding from the diluted net loss per common share calculation because their inclusion would be anti-dilutive. In addition, we excluded 625,000 warrants from the diluted net loss per common share calculation at December 31, 2016 and 2015 as the conditions for their vesting are not time-based.  

  

Recent Accounting Pronouncements:  

FASB Accounting Pronouncements Related to Revenue from Contracts with Customers (Topic 606)

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 recognizes revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. 

 

 
30

 

 

In May 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers” extending the date of implementation of this guidance for public companies to reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08 “Revenue from Contracts with Customers” to provide guidance on the topic of principal versus agent considerations. In 2016, the FASB issued 2016-12 and ASU No. 2016-10 and ASU No. 2016-20 to further clarify and identify performance obligations and licensing instances, narrow-scope improvements and identify practical expedients relative to Topic 606. 

 

These standards are effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect recognized at the date of adoption (which includes additional footnote disclosures).

 

The Company continues to evaluate the impact of the adoption of FASB accounting pronouncements related to revenue from Contracts with Customers (Topic 606). Since the Company has had minimal revenue since inception the impact of adoption is anticipated to be nominal.

 

Other FASB Accounting Pronouncements  

In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash Flows (Topic 230). This update requires that a statement of cash flows explain the change in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This change is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not believe that the adoption of this standard will have a material effect on our consolidated financial statements and related disclosures.

 

In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic 230). There is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This pronouncement addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments are effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not believe that the adoption of this standard will have a material effect on our consolidated financial statements and related disclosures.

 

In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326) “Measurement of Credit Losses on Financial Instruments.” The pronouncement affects entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets that have the contractual right to receive cash. This pronouncement will affect an entity to varying degrees depending on the credit quality of the assets held, their duration, and how the entity applies current GAAP. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements and related disclosures.

 

On March 30, 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which amends the current stock compensation guidance. The amendments simplify the accounting for the taxes related to stock based compensation, including adjustments as to how excess tax benefits and a company's payments for tax withholdings should be classified. The standard is effective for fiscal periods beginning after December 15, 2016, with early adoption permitted. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements and related disclosures.

 

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

 

 
31

 

 

NOTE 3 - 6% SENIOR CONVERTIBLE NOTES AND WARRANTS

 

During the third quarter of 2016, the board of directors authorized the issuance of up to $3 million in 6% Senior Convertible Promissory Notes and Warrants (the “Convertible Notes”) in connection with the August 25, 2016 Securities Purchase Agreement (the “2016 SPA”). The Convertible Notes have five year maturity dates ranging from August 2021 through December 2021 and a fixed annual interest rate of 6%. The initial year of interest expense will be paid to the note holders on the first anniversary of each note's issuance and quarterly thereafter. Principal is due in full on each note's maturity date.

 

The conversion rate of the notes has been fixed at $0.25 per share as determined at the close of business on August 25, 2016. The investors have been 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 year ended December 31, 2016, the Company issued Convertible Notes aggregating $3,000,000 pursuant to the 2016 SPA. In connection with the notes, the Company granted 1,200,000 warrants with an exercise price of $0.25 per share and 10 year terms. The Company incurred $28,000 in debt issuance costs in connection with the issuance of the Convertible Notes. In accordance with FASB ASU 2015-03 Interest-Imputation of Interest (Subtopic 835-30), these debt issuance costs have been presented as a direct deduction from the carrying amount of the Convertible Note liability and reflected as a component of debt discount which is amortized and included in interest expense over the five-year term of the Convertible Notes.

 

The Company allocated $2,551,000 of the proceeds to debt discount based on the computed fair value of the warrants issued, the beneficial conversion feature and the debt issuance costs. During the year ended December 31, 2016 the Company recorded $129,000 in interest expense including amortization of debt discount of $94,000. As of December 31, 2016, the Convertible Notes have a face value of $3,000,000 and are presented net of unamortized debt discount of $2,457,000 related to warrants, beneficial conversion feature and debt issuance costs resulting in a carrying value of $543,000.

 

 

NOTE 4 - CAPITAL LEASE OBLIGATION

 

In 2015, we entered into a capital lease for a copy machine over a 5 year term, with a fair market value buyout option. The capitalized value of the lease was approximately $9,000 and the monthly payment is approximately $170 with an implicit interest rate of 5.3%. Future payments remaining under this lease agreement are less than $2,000 per year through the lease expiration date in 2020.

  

 

NOTE 5 - SOFTWARE

 

The Company invested in software for the CURA System during the years ended December 31, 2016 and 2015. These assets are amortized over an estimated useful life of 3 years. Amortization expense recognized for the years ended December 31, 2016 and 2015 was $114,000 and $33,000, respectively. The net value of capitalized software at December 31, 2016 and 2015 was $227,000 and $303,000, respectively. Future amortization expense is expected to be $121,000 in 2017, $92,000 in 2018, $10,000 in 2019, and $4,000 thereafter.

 

 

NOTE 6 - PROPERTY AND EQUIPMENT

 

At December 31, 2016 and 2015 property and equipment consist of the following:

 

   

December 31,

2016

   

December 31,

2015

 

Office equipment

  $ 244,000     $ 235,000  

Shop equipment

    173,000       226,000  

Leasehold improvements

    253,000       253,000  
      670,000       714,000  
                 

Less accumulated depreciation

    553,000       554,000  

Net property and equipment

  $ 117,000     $ 160,000  

 

 Depreciation expense for the years ended December 31, 2016 and 2015 was $59,000 and $94,000 respectively.  

 

 
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NOTE 7- BUSINESS SEGMENTS

 

The Company has two operating business segments. The CURA business operates in the fatigue management industry and the Aegis business is focused in the power and hydraulic industry.

 

Segment information for the years ended December 31, 2016 for the company’s business segments follows: 

 

   

CURA

   

Aegis

   

Corporate

   

Total

 
                                 

Revenue

  $ 26,000     $ -     $ -     $ 26,000  

Loss on revenue

    101,000       -       -       101,000  

Total costs and expenses

    2,078,000       527,000       1,289,000       3,894,000  

Loss from operations

    2,179,000       527,000       1,289,000       3,995,000  

Other expense

    -       -       (167,000

)

    (167,000

)

Net loss

  $ 2,179,000     $ 527,000     $ 1,456,000     $ 4,162,000  
                                 

Stock compensation expense

  $ 96,000     $ 8,000     $ 41,000     $ 145,000  

Depreciation and amortization

  $ 124,000     $ 38,000     $ 11,000     $ 173,000  

Capital expenditures

  $ 86,000     $ -     $ 8,000     $ 94,000  

Assets at December 31, 2016

  $ 311,000     $ 46,000     $ 2,078,000     $ 2,435,000  

 

 

 

Segment information for the years ended December 31, 2015 for the company’s business segments follows: 

 

   

CURA

   

Aegis

   

Corporate

   

Total

 
                                 

Loss from operations

  $ 998,000     $ 657,000       1,101,000     $ 2,756,000  

Other income

    -       -       (39,000

)

    (39,000

)

Net loss

  $ 998,000     $ 657,000     $ 1,062,000     $ 2,717,000  
                                 

Stock compensation expense

  $ 226,000     $ 6,000     $ 172,000     $ 404,000  

Depreciation and amortization

  $ 33,000     $ 62,000     $ 32,000     $ 127,000  

Capital expenditures

  $ 336,000     $ 7,000     $ 17,000     $ 360,000  

Assets at December 31, 2015

  $ 303,000     $ 134,000     $ 1,304,000     $ 1,741,000  

 

 

NOTE 8 - 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 bases 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.

 

The provision (benefit) for income taxes for the years ended December 31, 2016 and 2015 is summarized below:

 

   

December 31,

2016

   

December 31,

2015

 

Current tax expense (benefit):

               

Federal

  $ 0     $ 0  

State

    0       0  
                 

Deferred tax expense (benefit):

               

Federal

    (787,000

)

    (615,000

)

State

    (462,000

)

    (65,000

)

Increase in valuation allowance

    1,249,000       680,000  
                 

Provision for income taxes

  $ 0     $ 0  

  

 
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The difference between income taxes at the statutory federal income tax rate and income taxes reported in the statements of operations is attributable to the following:

 

   

December 31,

2016

   

December 31,

2015

 
                 

Income tax benefit at the federal statutory rate

  $ (1,415,000

)

  $ (924,000

)

State income tax (benefit), net of effect of federal taxes

    (305,000

)

    (43,000

)

Expiration of non-qualified stock options

    31,000       178,000  

Expiration of warrants

    424,000       68,000  

Other

    16,000

 

    41,000  

Increase in valuation allowance

    1,249,000       680,000  
                 

Provision for income taxes

  $ 0     $ 0  

 

The deferred tax asset at December 31, 2016 and 2015 consists of the following:

 

   

2016

   

2015

 

Deferred income tax assets:

               

Net operating loss carryforwards

  $ 3,284,000     $ 2,613,000  

Deferred startup costs

    13,906,000       12,929,000  

Stock-based compensation

    2,193,000       2,635,000