CRGS CurAegis Technologies Inc (CE)

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION

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

The Company develops and markets advanced technologies in the areas of safety, wellness and power. The Company is focused on the commercialization of a wellness and safety system (the CURA System and 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:

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:

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

Current Cash Outlook and Management Plans

As of March 31, 2018, we have cash on hand of $192,000, working capital of $20,000, a stockholders’ deficit of $4,482,000 and an accumulated deficit of $82,136,000. During the three months ended March 31, 2018 we raised $1,200,000 in gross proceeds through the issuance of 6% convertible notes and warrants. The proceeds from this private placement have been used to support the ongoing development and marketing of our core technologies and product initiatives.

Management estimates that the 2018 cash needs, based on its current development and product plans, will range from $4.5 to $5.0 million. As of March 31, 2018, the Company’s cash on hand is not sufficient to cover the Company’s future working capital requirements. This raises substantial doubt as to the Company’s ability to continue as a going concern. Management continues to use its best efforts to develop financing opportunities to fund the development and commercialization of the CURA and Aegis products.

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

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  

Basis of Presentation: The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10 -Q and Article 8 - 03 of Regulation S- X of the Securities and Exchange Commission (“SEC”). Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for interim periods are not necessarily indicative of what the results will be for the fiscal year. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2017 contained in the Company’s 2017 Annual Report on Form 10 -K filed with the SEC.

Consolidation: The financial statements include the accounts of the Company, our wholly-owned subsidiary Iso-Torque Corporation, and our majority-owned subsidiary, Ice Surface Development, Inc. ( 56% owned). As of March 31, 2018, 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: We maintain cash at financial institutions which periodically may exceed federally insured amounts. We have a corporate credit card program through our primary financial institution, JPMorgan Chase Bank, N.A. In connection with this, the Company granted a security interest to the bank in our money market account to act as collateral for the activity within the corporate card program, up to $15,000.  

Inventory : Inventory is stated at the lower of cost or net realizable value with cost determined under 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 $6,000 at March 31, 2018 and December 31, 2017, respectively.

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 March 31, 2018 and December 31, 2017.

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

Depreciation and amortization are computed using the straight-line method. Betterments, renewals and significant repairs that extend the life of the assets are capitalized. Other repairs and maintenance costs are expensed when incurred. When disposed, the cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is recognized in Other income.

Depreciation and software amortization expense for the three months ended March 31, 2018 and 2017 amounted to $44,000 and $46,000, 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 three months ended March 31, 2018 and March 31, 2017 no impairment charges were recorded.

Fair Value of Financial Instruments: As defined by U.S. GAAP , fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A hierarchy for ranking the quality and reliability of the information is used to determine fair values. Assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories: 

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data

Level 3: Unobservable inputs that are not corroborated by market data 

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The Financial Accounting Standards Board’s (“FASB”) guidance for the disclosure about fair value of financial instruments requires disclosure of an estimate of the fair value of certain financial instruments. The fair value of financial instruments pursuant to FASB’s guidance for the disclosure about fair value of financial instruments approximated their carrying values at March 31, 2018 and December 31, 2017. The carrying amount of cash, accounts receivable, prepaid expenses and other current assets, accounts payable, deferred revenue and accrued expenses approximates their fair value due to their short maturity. The carrying amount of capital lease obligations approximates fair value because stated or implied interest rates approximate current interest rates that are available for debt with similar terms. The 6% senior convertible notes can be converted into common stock with an underlying value of $7,949,000 as of March 31, 2018 based on the trading price on March 31, 2018. 

Revenue Recognition and Deferred Revenue: On January 1, 2018, the Company adopted FASB ASC 606,  "Revenue from Contracts with Customers" and all related amendments for all contracts using the modified retrospective method.  There was no impact upon the adoption of ASC 606. The Company has determined that the adoption of this standard did not require a cumulative effect adjustment. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. For contracts where performance obligations are satisfied at a point in time, the Company recognizes revenue when the product is shipped to the customer. For contracts where the performance obligation is satisfied over time, as in the Z-Coach sales, the Company recognizes revenue over the subscription period.  Revenue from the sale of the Company's products is recognized net of cash discounts, sales returns and allowances. The Company has two sources of revenue: (i) from the sale of CURA System products and (ii) from stand-alone Z-Coach subscriptions.

The Company's net revenue is derived primarily from domestic customers.  For the three months ended March 31, 2018 net revenue from products transferred over time amounted to approximately $4,000 and net revenue from products transferred at a point in time amounted to $4,000.

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

One customer accounted for 87% of total Z-Coach subscription sales made during the three months ended March 31, 2018. 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 three months ended March 31, 2018 and March 31, 2017 amounted to $31,000 and $30,000, respectively, and are included in general and administrative expenses.

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

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

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

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

We account for uncertain tax positions using a more-likely-than- not recognition threshold based on the technical merits of the tax position taken. Tax benefits that meet the more-likely-than- not recognition threshold should be measured as the largest amount of tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. It is our policy to recognize interest and penalties related to income tax matters as general and administrative expenses. As of March 31, 2018, and December 31, 2017, there were no accrued interest or penalties related to uncertain tax positions.

Loss per Common Share: FASB’s ASC 260 - 10 (“Earnings Per Share”) requires the presentation of basic earnings per share, which is based on weighted average common stock outstanding, and dilutive earnings per share, which gives effect to options, warrants and convertible securities in periods when they are dilutive. At March 31, 2018 and 2017 we excluded 84,560,427 and 72,282,657 potential common shares, respectively, relating to convertible preferred stock, convertible notes, options and warrants outstanding from the diluted net loss per common share calculation because their inclusion would be anti-dilutive. In addition, we excluded 625,000 warrants from the diluted net loss per common share calculation at March 31, 2018 and 2017 as the conditions for their vesting are not time-based.    

   Recent Accounting Pronouncements :   

In May 2017, the FASB issued ASU No. 2017 - 09  Compensation -Stock Compensation (Topic 718 ) "Scope of Modification Accounting." This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This amendment is effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years. The Company believes the adoption of this standard on our consolidated financial statements and related disclosures is not  material.

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 believes the adoption of this standard on our consolidated financial statements and related disclosures will not be material. 

On February 25, 2016, the FASB issued ASU No.   2016 - 02, “Leases,” a comprehensive new lease standard which will supersede previous lease guidance. The standard requires a lessee to recognize 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 believes the adoption of this standard on our consolidated financial statements and related disclosures will not be material.

During 2017, the Company initiated an agreement with a vendor to manufacture and assemble the myCadian watch. In connection with this agreement, the Company agreed to a cancellation charge for products purchased on behalf of the Company in the instance that the purchase order is subsequently modified, delayed or cancelled. As of March 31, 2018, the Company has $1,681,000 in inventory and components which were purchased by the vendor on our behalf and a related liability of $1,512,000 for amounts payable in connection with this agreement.

The board of directors has authorized the issuance of up to $5 million in 6% Senior Convertible Promissory Notes and Warrants (the “2017 Convertible Notes”) in connection with the May 31, 2017 Securities Purchase Agreement (the “2017 SPA”). The 2017 Convertible Notes have a five year maturity and a fixed annual interest rate of 6%. The initial year of interest expense will be paid to the note holders on the first anniversary of each note's issuance and quarterly thereafter. Principal is due in full on each note's maturity date.

The conversion rate of the notes was originally fixed at $0.50 per share as determined at the close of business on May 31, 2017 and subsequently modified on November 30, 2017 to $0.333 per share. Invesotrs making investments of less than $500,000 were granted warrants to purchase an aggregate number of shares of common stock equal to 10% of the number of shares issuable upon the conversion of the notes and investors making investments of $500,000 and greater were granted warrants to purchase an aggregate number of shares of common stock equal to 25% of the number of shares issuable upon the conversion of the notes. Originally the warrants had a fixed exercise price of $0.50 and a ten -year term from the date of issuance. The conversion price for the warrants was also modified on November 30, 2017 to $0.333 per share. In connection with this amendment, $2,450,000 of face value notes were re-issued, in the fourth quarter of 2017, to reflect a reduction of the conversion price on the notes from $0.50 per share to $0.333 per share. The exercise price of the underlying warrants was also reduced from $0.50 per share to $0.333 per share. The amendment and reissuance of these 2017 Convertible Notes was accounted for as an extinguishment and re-issuance of the replacement notes and warrants in 2017.

The 2017 Convertible Notes were offered in a private placement exempt from registration under Section 4 (a)( 2 ) of the Securities Act 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.

The Company issued $1,200,000 in Convertible Notes during the three months ended March 31, 2018 representing 3,603,604 potential common stock shares and 777,027 warrants. The Company allocated $219,000 of the proceeds from the proceeds received in the first quarter of 2018 to debt discount based on the computed fair value of the warrants issued and the beneficial conversion feature. 

During the three months ended March 31, 2018, the Company recorded $74,000 in interest expense including amortization of debt discount of $21,000.  As of March 31, 2018, the 2017 Convertible Notes had a face value of $4,026,000 and are presented net of unamortized debt discount of $461,000 related to warrants, issued in connection with this offering resulting in a carrying value of $3,565,000.

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

The conversion rate of the notes was fixed at $0.25 per share as determined at the close of business on August 25, 2016. The investors were granted warrants to purchase an aggregate number of shares of common stock equal to 10% of the number of shares issuable upon the conversion of the notes. The warrants have a fixed exercise price of $0.25 and a ten -year term from the date of issuance. The notes were offered in a private placement exempt from registration under Section 4 (a)( 2 ) of the Securities Act of 1934, as amended and Rule 506 (c) of Regulation D as promulgated by the Securities and Exchange Commission. The offering was available only to “accredited investors” as defined in Rule 501 (a) of Regulation D under the Securities Act of 1933.  

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

The Company allocated $2,551,000 of the proceeds from the 2016 SPA to debt discount based on the computed fair value of the warrants, the beneficial conversion feature and the debt issuance costs on the date of investment. As of March 31, 2018, these notes have a face value of $3,000,000 and are presented net of unamortized debt discount of $1,882,000 related to warrants, beneficial conversion feature and debt issuance costs resulting in a carrying value of $1,118,000. As of December 31, 2017, the Convertible Notes had a face value of $3,000,000 and were presented net of unamortized debt discount of $2,001,000 related to warrants, beneficial conversion feature and debt issuance costs resulting in a carrying value of $999,000.    

During the three months ended March 31, 2018, the Company recorded $163,000 in interest expense including amortization of debt discount of $118,000. During the three months ended March 31, 2017 the Company recorded $156,000 in interest expense including amortization of debt discount of $112,000.

NOTE 5 – SOFTWARE

The Company invested in software for the CURA System during  2015. These assets are amortized over an estimated useful life of 3 years. Amortization expense recognized for the three months ended March 31, 2018 and 2017 was $31,000 in each period. The net value of capitalized software at March 31, 2018 and at December 31, 2017 was $71,000 and $102,000, respectively. Future amortization expense is expected to be $71,000 in 2018.

Depreciation expense for the three months ended March 31, 2018 and 2017 was $13,000 and $15,000 respectively.    

NOTE 7 - BUSINESS SEGMENTS

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

Segment information for the three months  ended March 31, 201 8 for the Company’s business segments follows: 

Segment information for the three months  ended March 31, 201 7 for the Company’s business segments follows: 

NOTE 8 - PREFERRED and COMMON STOCK  

Common Stock  

We have authorized 400,000,000 shares of common stock, with a par value of $0.01 per share. 

During the three months ended March 31, 2018 we issued 80,000 shares of common stock in connection with a conversion notice received from a Series C- 3 convertible preferred stockholder. During the three months ended March 31, 2017, the Company issued 200,000 shares of common stock in connection with conversion notices received from Series C- 3 convertible preferred stockholders.

Preferred Stock  

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

Class A Preferred Stock     

At March 31, 2018 and December 31, 2017,  there were 468,221 outstanding shares of Class A Preferred stock, of which 8,709 shares resulted from the settlement of dividends due to conversion, and those shares no longer accrue dividends. The value of dividends payable upon the conversion of the remaining 459,512 outstanding shares of Class A Preferred stock was $2,392,000 at March 31, 2018 and $2,346,000 at December 31, 2017.  

In the event of a liquidation, dissolution and winding up of the Company, and subject to the liquidation rights and privileges of our Class C Preferred stockholders, Class A Preferred stockholders have a liquidation preference with respect to all accumulated and unsettled dividends. The value of the Class A Preferred stockholders’ liquidation preference was $2,392,000 and $2,346,000 at March 31, 2018 and December 31, 2017, respectively. In the event of liquidation, dissolution or winding up of the Company, unpaid accumulated dividends on the Class A Preferred are payable in Class A Preferred at a rate of 1 share of Class A Preferred for each $4.00 of dividends.  

Class B Preferred Stock  

At March 31, 2018 and December 31, 2017, there were 67,500 outstanding shares of Class B Preferred stock. The value of dividends payable upon the conversion of the outstanding shares of Class B Preferred stock was $429,000 at March 31, 2018 and $420,000 at December 31, 2017.  

In the event of liquidation, dissolution and winding up of the Company, and subject to the liquidation rights and privileges of our Class C Preferred stockholders and our Class A Preferred stockholders, Class B Preferred stockholders have a liquidation preference with respect to all accumulated and unsettled dividends. The value of the Class B Preferred stockholders’ liquidation preference was $429,000 and $420,000 at March 31, 2018 and December 31, 2017, respectively. In the event of a liquidation, dissolution or winding up of the Company, unpaid accumulated dividends on the Class B Preferred are payable in Class B Preferred shares at a rate of 1 share of Class B Preferred for each $5.00 of dividends. 

Series C Preferred Stock  

At March 31, 2018 and December 31, 2017, there were 15,937,500 shares of Series C Preferred stock outstanding. The value of the Series C Preferred stockholders’ liquidation preference was $6,375,000 at March 31, 2018 and at December 31, 2017.

The Series C Preferred shares have a liquidation preference at their stated value per share of $0.40 that is senior to our common stock, and the Company’s Class A Non-Voting Cumulative Convertible Preferred Shares and Class B Non-Voting Cumulative Convertible Preferred Shares. The liquidation preference is payable upon a liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or upon a deemed liquidation of the Company.

The Series C Preferred shares have no right to receive dividends and have no redemption right. The Series C Preferred shares vote with the common stock on an as-converted basis.

Series C- 2 Preferred Stock    

At March 31, 2018 and December 31, 2017, there were 25,000,000 shares of Preferred C- 2 stock outstanding. The value of the Series C- 2 Preferred stockholders’ liquidation preference was $5,000,000 at March 31, 2018 and December 31, 2017.  

The Series C- 2 Preferred Shares are not entitled to receive preferred dividends and have no redemption right, but are entitled to participate, on an as converted basis; with holders of outstanding shares of common stock in dividends and distributions on liquidation after all preferred shares have received payment in full of any preferred dividends or liquidation preferences. The Series C- 2 Preferred Shares vote with the common stock on an as-converted basis. We may not, without approval of the holders of at least two -thirds of the Series C- 2 Preferred Shares, (i) create any class or series of stock that is pari passu or senior to the Series C- 2 Preferred Shares, (ii) create any class or series of stock that would share in the liquidation preference of the Series C- 2 Preferred Shares or that is entitled to dividends payable other than in common stock or Series C- 2 Preferred Shares of its own series, (iii) acquire any equity security or pay any dividend, except dividends on a class or series of stock that is junior to the Series C Preferred Shares, payable in such junior stock, (iv) reissue any Series C- 2 Preferred Shares, (v) declare or pay any dividend that would impair the payment of the liquidation preference of the Series C- 2 Preferred Shares, (vi) authorize or issue any additional Preferred Shares, (vii) change the Certificate of Incorporation to adversely affect the rights of the holders of the Series C- 2 Preferred Shares, or (viii) authorize, commit to or consummate any liquidation, dissolution or winding up in which the liquidation preference of the Series C- 2 Preferred Shares would not be paid in full.   

Series C- 3 Preferred Stock

The Company issued 6,042,000 shares of Series C- 3 Voting Convertible Preferred Stock in a private placement transaction during 2016, generating net proceeds of $1,495,000 after related legal costs.  During the three months ended March 31, 2018 and 2017 we issued 80,000 and 200,000 shares of common stock, respectively, in connection with conversion notices received from Series C- 3 convertible preferred stockholders.  

NOTE 9 - STOCK OPTIONS  

2016 Stock Option Plan    At the 2016 Annual Meeting the shareholders approved the 2016 Stock Option Plan (the “2016 Plan”) which provides for the grant of up to 3,000,000 common stock options to provide equity incentives to directors, officers, employees and consultants. Two types of options may be granted under the 2016 Plan: non-qualified stock options and incentive stock options. As of March 31, 2018, no options have been granted under this plan.

2011 Stock Option Plan     In 2011, shareholders approved the 2011 Stock Option Plan (the “2011 Plan”) which provides for the grant of up to 3,000,000 common stock options to provide equity incentives to directors, officers, employees and consultants. Two types of options may be granted under the 2011 Plan: non-qualified stock options and incentive stock options.

Under the 2016 and 2011 Stock Option Plans, non-qualified stock options may be granted to our officers, directors, employees and outside consultants. Incentive stock options may be granted only to our employees, including officers and directors who are also employees. In the case of non-qualified stock options, the exercise price may be less than the fair market value of our stock on the date of grant. Stock option grants to non-employees are revalued at each reporting date to reflect the expense over the vesting period. In the case of incentive stock options, the exercise price may not be less than such fair market value and in the case of an employee who owns more than 10% of our common stock, the exercise price may not be less than 110% of such market price. Options generally are exercisable for ten years from the date of grant, except that the exercise period for an incentive stock option granted to an employee who owns more than 10% of our stock may not be greater than five years.

During the three months ended March 31, 2018, we granted a total of 150,000 stock options to employees and non-employee consultants. These included stock options granted at exercise prices ranging from $0.31 to $.33 per share, exercisable for 10 years that vest at a rate of 25% on each anniversary of the date of grant.

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

Non-Plan Options    On occasion, we have granted non-qualified stock options to certain officers, directors and employees that have been outside of established Company Stock Option Plans. All such option grants have been authorized by shareholder approval.

Summary    For the three months ended March 31, 2018 and 2017, cost related to stock option awards amounted to $2,000 and $103,000, respectively. During the first quarter of 2018, option expense was reduced by approximately $29,000 as a result of forfeitures resulting from employee turnover during the period. As of March 31, 2018, there was approximately $198,000 of total unrecognized compensation costs related to outstanding stock options, which are expected to be recognized over a weighted average of 1.3 years.

The weighted average grant date fair value of stock options granted during the three months ended March 31, 2018 and 2017 was $0.33 and $0.76, respectively. The total grant date fair value of stock options vested during the three months ended March 31, 2018 and 2017 was approximately $22,000 and $2,000, respectively.  

The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

The average risk-free interest rate is based on the U.S. treasury security rate in effect as of the grant date. We determined expected volatility using the historical closing stock price. The expected life was generally determined using the simplified method as we do not believe we have sufficient historical stock option exercise experience on which to base the expected term. 

The following summarizes the activity of all of our outstanding stock options as of March 31, 2018:

No options were exercised or expired unexercised during the three months ended March 31, 2018. During the three months ended March 31, 2018, the Company cancelled 191,875 options as a result of employee turnover. As of March 31, 2018, there were 2,740,125 stock options outstanding under the 2011 Plan, 1,740,375 of which were vested at that date; leaving 259,875 options available for future grant under the 2011 Plan. As of March 31, 2018, the exercise prices of all outstanding stock options ranged from $.22 per share to $1.58 per share.