During December 2013, the Company issued
66,118 shares of its common stock to directors at $0.40 per share to settle $26,447 of accrued liabilities.
During December 2013, Southridge converted
its $65,000 note for 260,000 shares of the Company’s common stock (see Note 13).
During December 2013, the Company issued
450,000 shares of its common stock valued at $157,500 in connection with the Equity Purchase Agreement and Liability Purchase Agreement
(see Notes 5 and 11).
During December 2013, the Company issued
66,118 shares of its common stock to directors at $0.40 per share to settle $26,447 of accrued liabilities.
During November and December 2013, the Company
allocated $120,787 of convertible note proceeds for the fair value of warrants and beneficial conversion feature to additional
paid-in capital.
During September 2013, the Company issued
1,618,235 shares of its common stock as the first tranche in its Liabilities Purchase Agreement (see Note 11).
During September 2013, the Company issued
1,000,000 shares of its common stock at $0.18 per share for legal services to its former legal team, Cutler Law Group (“CLG”),
for services to be billed in the 2013-2014 fiscal year. As the Company has since changed counsel, management has requested the
return of 950,000 shares, while the remaining 50,000 shares priced at $ 0.18 will cure any outstanding issues. As of April 15,
2014, CLG has neither returned the 1,000,000 shares nor accepted the 50,000 shares.
During July 2013, the Company allocated
$45,100 of proceeds from the Tonaquint, Inc. note payable (see Note 13) to a warrant and conversion feature derivative liability.
During July 2013, the Company issued 200,000
shares of its common stock at $0.20 per share for legal services.
During 2013, the Company transferred a rental
asset with a net book value (“NBV”) of approximately $8,000 to inventory.
During May 2013, the Company issued 500,000
shares of its common stock into escrow, pending the completion of potential financing with a European investment group.
During March 2013, the Company issued 150,000
shares of its common stock into escrow, pending the completion of potential financing with a European investment group.
During March 2013, the Company issued 100,000
shares of its common stock at $0.43 per share for legal services.
During January 2013, the Company issued
350,000 shares of its common stock into escrow, pending the completion of potential financing with a European investment group.
During July 2012, the Company issued 240,000
common shares at $0.8333 per share to settle $200,000 of accrued liabilities.
During June 2012, the Company issued
120,000 common shares at $0.8333 per share to settle $3,178 of accrued liabilities and to prepay $96,822 in legal
expenses.
During March 2012, the Company issued 100,000
common shares at $1.111 per share to settle $111,100 of accrued liabilities.
During February 2012, the Company issued
14,415 shares at $1.19 per share to settle $17,154 of accrued liabilities.
COMPETITIVE TECHNOLOGIES, INC. AND
SUBSIDIARY
Notes to Consolidated Financial Statements
|
1.
|
Business
AND BASIS OF PRESENTATION
|
Competitive
Technologies, Inc. ("CTI") and its majority-owned (56.1%) subsidiary, Vector Vision, Inc. ("VVI"),
(collectively, the "Company", "we" or "us") is a biotechnology company
developing and commercializing innovative products and technologies. The Company is the licensed distributor of the
non-invasive Calmare® pain therapy medical device, which incorporates the biophysical “Scrambler
Therapy”® technology developed to treat neuropathic and cancer-derived pain by Professor Giuseppe Marineo.
The consolidated financial
statements include the accounts of CTI, and VVI. Inter-company accounts and transactions have been eliminated in consolidation.
The Company has incurred operating losses
since fiscal 2006 and has a working capital deficiency at December 31, 2013. During the years ended December 31, 2013 and December
31, 2012, we had a significant concentration of revenues from our pain therapy medical device technology. We continue to seek revenue
from new technologies or products to mitigate the concentration of revenues, and replace revenues from expiring licenses. At current
reduced spending levels, the Company may not have sufficient cash flow to fund operations through 2014. These conditions raise
substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include adjustments
to reflect the possible future effect of the recoverability and classification of assets or amounts and classifications of liabilities
that may result from the outcome of this uncertainty.
The Company's continuation as a going concern
is dependent upon its developing other recurring revenue streams sufficient to cover operating costs. If necessary, we will meet
anticipated operating cash requirements by further reducing costs, issuing debt or equity, and/or pursuing sales of certain assets
and technologies while we pursue licensing and distribution opportunities for our remaining portfolio of technologies. The Company
does not have any significant capital requirements in the budget going forward. There can be no assurance that the Company will
be successful in such efforts. Failure to develop a recurring revenue stream sufficient to cover operating expenses would negatively
affect the Company’s financial position.
Our liquidity requirements arise principally
from our working capital needs, including funds needed to find and obtain new technologies or products, and protect and enforce
our intellectual property rights, if necessary. We fund our liquidity requirements with a combination of cash on hand, debt and
equity financing, and cash flows from operations, if any, including royalty legal awards. At December 31, 2013, we had outstanding
debt, in the form of promissory notes with a total principal amount of $3,151,000 and a carrying value of $2,934,000.
Since October 5, 2010,
the Company’s securities have traded on the OTC market's top tier, the OTCQX.
The
Company acquired the exclusive, worldwide rights to the
Scrambler Therapy
®
technology in 2007.
The Company's original 2007 agreement with Giuseppe Marineo (the “Scrambler Therapy Agreement”), an inventor
of
Scrambler
Therapy
technology, and Delta Research and Development, authorized CTI to manufacture and sell
worldwide the device developed from the patented
Scrambler Therapy
technology. The original agreement was amended in
2011 to provide the Company was exclusive rights to the
Scrambler Therapy
technology through March 31, 2016.
In
July 2012, the Company attempted to negotiate a five-year extension to the agreement with Marineo and Delta (the “2012
Amendment”). However, a valid contract was never formed as the 2012 Amendment was not executed by Marineo and
Delta
. The
Scrambler Therapy
technology is patented in Italy and the U.S.
Additional applications for patents have been filed internationally and are pending approval. The Calmare® device has CE
Mark certification from the European Union as well as U.S. FDA 510(k) clearance. CTI's partner, GEOMC Co., Ltd. of Korea, is
manufacturing the product commercially under a ten (10) year agreement through 2017. Sales of these devices are expected to
provide a significant proportion of the Company’s revenue for the next several years.
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Use of Estimates
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires
that we make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses,
and disclosure of contingent assets and liabilities. Actual results could differ significantly from our estimates.
Revenue Recognition
We earn revenue in two ways: retained royalties
from licensing our clients' and our own technologies to our customer licensees, and sales of finished products. We record revenue
when the terms of the sales arrangement are accepted by all parties including a fee that is fixed and determinable, delivery has
occurred and our customer has taken title, and collectability is reasonably assured, net of sales tax.
Since 2011 the Company has taken greater
control of the sales process. We are the primary obligor, responsible for delivering devices as well as for training our customers
in the proper use of the device. We deal directly with customers, setting pricing and providing training; work directly with the
inventor of the technology to develop specifications and any changes thereto and to select and contract with manufacturing partners;
and retain significant credit risk for amounts billed to customers. Therefore, all product sales are recorded following a gross
revenue methodology.
Revenue from foreign sources was not significant
compared to total revenue in 2013 or 2012.
Retained royalties or distribution fees
earned are of the following types:
Non-refundable, upfront license fee
– We record our share of non-refundable, upfront license fees upon execution of a license, sublicense or distribution agreement.
Once delivery is complete, and the fee is collected, we have no continuing obligation. No upfront fees were received during the
years ended December 31, 2013 or 2012.
Royalty or per unit
fees
– The royalty or per unit rate is fixed in the license or distribution agreement, with the amount earned contingent
upon our customer's usage of our technology or sale of our product. Some agreements may contain stipulated minimum monthly or annual
fee payments to CTI. We determine the amount of revenue to record when we can estimate the amount earned for a period. We receive
payment or royalty reports on a monthly, quarterly or semi-annual basis indicating usage or sales of licensed technologies or products
to determine the revenue earned in the period. Revenue may fluctuate from one quarter to another based on receipt of reports from
customers.
Royalty legal awards
– We earn
non-recurring revenues from royalty legal awards, principally from patent infringement actions filed on behalf of our clients and/or
us. Patent infringement litigation cases generally occur when a customer or another party ignores our patent rights, or challenges
the legal standing of our clients' or our technology rights. These cases, even if settled out of court, may take several years
to complete, and the expenses may be borne by our clients, by us, or shared. We share royalty legal awards in accordance with the
agreement we have with our clients, usually after reimbursing each party for their related legal expenses. We recognize royalty
legal award revenue when our rights to litigation awards are final and unappealable and we have assurance of collecting those awards,
or when we have collected litigation awards in cash from the adverse party, or by sale of our rights to another party without recourse,
and we have no obligation or are very unlikely to be obligated to repay such collected amounts. Proceeds from cases settled out
of court are recorded as retained royalties.
Legal awards in patent infringement cases
usually include accrued interest through the date of payment, as determined by the court. The court awards interest for unpaid
earned income. Interest may also be included in other settlements with customers. Interest included in an award or settlement is
generally recorded as interest income when received.
Unless otherwise specified, we record all
other revenue, as earned.
Concentration of Revenues
Total revenue consists of revenue from product
sales, retained royalties, and other income. During the year ended December 31, 2013, we derived
approximately $653,000 or 85% of total revenue from sales of our Calmare pain therapy medical device technology. An additional
4% of revenue derived indirectly from that technology through sales of supplies and training, rental payments and the sale of rental
assets. Of this amount approximately $160,000 or 25% of total revenue from sales of our Calmare pain therapy medical device technology
came from one customer in 2013.
During the year ended December 31, 2012,
we derived approximately $913,000 or 85% of total revenue from sales of our Calmare pain therapy medical device technology. An
additional 5% of revenue derived indirectly from that technology through sales of supplies and training, rental payments and the
sale of rental assets. Of this amount approximately $120,000 or 13% of total revenue from sales of our Calmare pain therapy medical
device technology came from one customer in 2012, and an additional $100,000 or 11% of total revenue from sales of our Calmare
pain therapy medical device technology came from one other customer in 2012.
Expenses
We recognize expenses related to evaluating,
patenting and licensing inventions, and enforcing intellectual property rights in the period incurred.
Cost of product sales includes contractual
payments to inventor and manufacturer relating to our Calmare pain therapy medical device. Expenses associated with shipping devices
are also included in cost of product sales.
Selling expenses include commission expenses
related to sales of inventory (Calmare devices) technologies, domestic and foreign patent legal filing, prosecution and maintenance
expenses, net of reimbursements, royalty audits, and other direct costs
Personnel and consulting expenses include
employee salaries and benefits, marketing and consulting expenses related to technologies and specific revenue initiatives, and
other direct costs.
General and administrative expenses include
directors' fees and expenses, public company related expenses, professional services, including financing, audit and legal services,
rent and other general business and operating expenses.
Fair Value of Financial Instruments
The Company believes the carrying amounts
of cash, accounts receivable, deferred revenue, preferred stock liability
and note payable approximate fair value due to their short-term maturity.
Inventory
Inventory consists of finished product of
our pain therapy device. Inventory is stated at lower of cost (first in, first out) or market.
Property and Equipment
Property and equipment are carried at cost
net of accumulated depreciation. Expenditures for normal maintenance and repair are charged to expense as incurred. The costs of
depreciable assets are charged to operations on a straight-line basis over their estimated useful lives, three to five years for
equipment, or the terms of the related lease for leasehold improvements. The cost and related accumulated depreciation or amortization
of property and equipment are removed from the accounts upon retirement or other disposition, and any resulting gain or loss is
reflected in earnings.
Impairment of Long-lived Assets
We review our long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the estimated
fair value is less than the carrying amount of the asset, we record an impairment loss. If a quoted market price is available for
the asset or a similar asset, we use it to determine estimated fair value. We re-evaluate the remaining useful life of the asset
and adjust the useful life accordingly. There were no impairment indicators identified during the years ended December 31, 2013
and 2012.
Income Taxes
Income taxes are accounted for under an
asset and a liability approach that requires recognition of deferred income tax assets and liabilities for the expected future
consequences of events that have been recognized in the Company's consolidated financial statements and income tax returns. The
Company provides a valuation allowance for deferred income tax assets when it is considered more likely than not that all or a
portion of such deferred income tax assets will not be realized.
Net Income (Loss) Per Share
We calculate basic net income (loss) per
share based on the weighted average number of common shares outstanding during the period without giving any effect to potentially
dilutive securities. Net income (loss) per share, assuming dilution, is calculated giving effect to all potentially dilutive securities
outstanding during the period.
Share-Based Compensation
The Company accounts for its share-based
compensation in accordance with the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification
("ASC") 718 – "Compensation – Stock Compensation." Accordingly, the Company recognizes compensation
expense equal to the fair value of the stock awards at the time of the grant over the requisite service period.
Our accounting for share-based compensation
has resulted in our recognizing non-cash compensation expense related to stock options granted to employees, which is included
in personnel and consulting expenses, and stock options granted to our directors, which is included in general and administrative
expenses.
Recent Accounting Pronouncements
No
new accounting pronouncements issued or effective during the year ended December 31, 2013 has had or is expected to have a material
impact on the consolidated financial statements.
In current and prior years, we generated
significant federal and state income and alternative minimum tax losses, and these net operating losses ("NOLs") were
carried forward for income tax purposes to be used against future taxable income.
A reconciliation of our effective income
tax rate compared to the U.S. federal statutory rate is as follows:
|
|
Year ended
December 31, 2013
|
|
|
Year ended
December 31, 2012
|
|
Provision (benefit) at U.S. federal statutory rate
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
State provision (benefit), net of U.S. federal tax
|
|
|
(4.9
|
)
|
|
|
(4.8
|
)
|
Permanent differences
|
|
|
(0.3
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
Other items
|
|
|
5.0
|
|
|
|
5.2
|
|
Deferred tax valuation allowance
|
|
|
(35.2
|
)
|
|
|
(34.8
|
)
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Net deferred tax assets consist of the following:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Net federal and state operating loss carryforwards
|
|
$
|
15,748,253
|
|
|
$
|
14,785,650
|
|
Impairment of investments
|
|
|
531,470
|
|
|
|
531,470
|
|
Other, net
|
|
|
687,426
|
|
|
|
680,637
|
|
Deferred tax assets
|
|
|
16,967,149
|
|
|
|
15,997,757
|
|
Valuation allowance
|
|
|
(16,967,149
|
)
|
|
|
(15,997,757
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31, 2013, we had aggregate federal
net operating loss carryforwards of approximately $39,371,000, which expire at various times through 2033. A majority of our federal
NOLs can be used to reduce taxable income used in calculating our alternative minimum tax liability. We also have state net operating
loss carryforwards of approximately $37,812,000 that expire at various times through 2033.
Approximately $4,196,000 of our NOL carryforward
remaining at December 31, 2013 was derived from income tax deductions related to the exercise of stock options. The tax effect
of these deductions will be credited against capital in excess of par value at the time they are utilized for book purposes, and
not credited to income. We will never receive a benefit for these NOLs in our statement of operations.
Changes in the valuation allowance were
as follows:
|
|
Year ended
December 31,
2013
|
|
|
Year ended
December 31,
2012
|
|
Balance, beginning of year
|
|
$
|
15,997,757
|
|
|
$
|
14,651,435
|
|
Change in temporary differences
|
|
|
6,789
|
|
|
|
157,164
|
|
Change in net operating and capital losses
|
|
|
962,603
|
|
|
|
1,189,158
|
|
Balance, end of year
|
|
$
|
16,967,149
|
|
|
$
|
15,997,757
|
|
Our ability to derive future tax benefits
from the net deferred tax assets is uncertain and therefore we continue to provide a full valuation allowance against the assets,
reducing the carrying value to zero. We will reverse the valuation allowance if future financial results are sufficient to support
a carrying value for the deferred tax assets.
At December 31, 2013 and December 31, 2012,
we had no uncertain tax positions.
We include interest and penalties on the
underpayment of income taxes in income tax expense.
We file income tax returns in the United
States and Connecticut. The Internal Revenue Service has completed audits for the periods through the fiscal year ended July 31,
2005. Our open tax years for review are fiscal years ended July 31, 2010 through year ended December 31, 2013. The Company's returns
filed with Connecticut are subject to audit as determined by the statute of limitations.
|
4.
|
NET INCOME (LOSS) PER COMMON SHARE
|
The following sets forth the denominator
used in the calculations of basic net income (loss) per share and net income (loss) per share assuming dilution:
|
|
Year ended
December 31,
2013
|
|
|
Year ended
December 31,
2012
|
|
Denominator for basic net income (loss) per share, weighted average shares outstanding
|
|
|
16,977,027
|
|
|
|
15,007,852
|
|
Dilutive effect of common stock options
|
|
|
N/A
|
|
|
|
N/A
|
|
Dilutive effect of Series C convertible preferred stock and convertible debt
|
|
|
N/A
|
|
|
|
N/A
|
|
Denominator for net income (loss) per share, assuming dilution
|
|
|
16,977,027
|
|
|
|
15,007,852
|
|
Due to the net loss incurred for the years
ended December 31, 2013, and December 31, 2012, the denominator used in the calculation of basic net loss per share was the same
as that used for net loss per share, assuming dilution, since the effect of any options, convertible preferred shares, convertible
debt or warrants would have been anti-dilutive. Options to purchase 1,372,000 and 317,000 shares of our common stock were outstanding
at December 31, 2013 and 2012, respectively, 375 shares outstanding of Series C Convertible Preferred Stock, at December 31, 2013
and 2012, outstanding convertible debt of $2,934,000 and $1,535,000 at December 31, 2013 and 2012, respectively and the warrants
outstanding at December 31, 2013 were not included in the computation of diluted net income (loss) per share because they were
also anti-dilutive.
|
5.
|
SHAREHOLDERS’ INTEREST
|
Common Stock
During 2013, the Company entered into an
Equity Purchase Agreement (“EPA”) with Southridge Partners II, L.P. (“Southridge”). Under the terms of
the EPA, which was filed with the SEC on February 26, 2013, Southridge will purchase, at the Company's election,
up to $10,000,000 of the Company's registered common stock (the "Shares"). During the two year term of the EPA,
the Company may at any time in its sole discretion deliver a "put notice" to Southridge thereby requiring Southridge
to purchase a certain dollar amount of the Shares. Simultaneous with the delivery of such Shares, Southridge shall deliver payment
for the Shares. Subject to certain restrictions, the purchase price for the Shares shall be equal to ninety percent of the lowest
closing bid price for the Company's common stock during the ten-day trading period immediately after the Shares specified in the
Put Notice are delivered to Southridge.
The number of Shares sold to Southridge
shall not exceed the number of such shares that, when aggregated with all other shares of common stock of the Company then beneficially
owned by Southridge, would result in Southridge owning more than 9.99% of all of the Company's common stock then outstanding. Additionally,
Southridge may not execute any short sales of the Company's common stock.
Under the terms of the EPA, the Company
had issued a convertible promissory note in the amount of $65,000 to Southridge which, during 2013 Southridge converted to 260,000 shares of common stock. In addition, during 2013, the Company negotiated a liabilities purchase
agreement (“LPA”) with Southridge (see Note 11).
Under the terms of the LPA, the
Company issued 200,000 shares of its common stock at $0.35, or $70,000, and a convertible note in the amount of $12,000
Southridge as a fee.
Additionally, under the terms of
the EPA and LPA, the Company issued 250,000 shares of its common stock at $0.35,or $87,500, to Southridge for expenses
associated with the EPA and LPA.
During 2013 the Company issued 1,000,000
shares of its common stock into escrow, pending the completion of potential financing with a European investment group.
Preferred Stock
Holders of 5% preferred stock are entitled
to receive, if, as, and when declared by the Board of Directors, out of funds legally available therefore, preferential non-cumulative
dividends at the rate of $1.25 per share per annum, payable quarterly, before any dividends may be declared or paid upon or other
distribution made in respect of any share of common stock. The 5% preferred stock is redeemable, in whole at any time or in part
from time to time, on 30 days' notice, at the option of the Company, at a redemption price of $25. In the event of voluntary or
involuntary liquidation, the holders of preferred stock are entitled to $25 per share in cash before any distribution of assets
can be made to holders of common stock.
Each share of 5% preferred stock is entitled
to one vote. Holders of 5% preferred stock have no preemptive or conversion rights. The preferred stock is not registered to be
publicly traded.
At its December 2, 2010 meeting, the CTI Board of Directors declared a dividend distribution of one right
(each, a “Right”) for each outstanding share of common stock, par value $0.01, of the Company (the “Common Shares”).
The dividend was payable to holders of record as of the close of business on December 2, 2010 (the “Record Date”).
Issuance of the dividend may be triggered by an investor purchasing more than 20% of the outstanding shares of common stock.
On December 15, 2010 the Company issued
a $400,000 promissory note. The promissory note was scheduled to mature on December 31, 2012 with an annual interest rate of 5%.
On December 15, 2010, the Company's Board
of Directors authorized the issuance of 750 shares of Series C Convertible Preferred Stock ($1,000 par value) with a 5% cumulative
dividend to William R. Waters, Ltd. of Canada. On December 30, 2010, 750 shares were issued. The Company converted the above $400,000
promissory note into 400 shares and received cash of $350,000 for the remaining 350 shares.
Effective June 16, 2011, William R. Waters,
Ltd. of Canada converted one half of its Series C Convertible Preferred Stock, or 375 shares, to 315,126 shares of common stock.
The rights of the Series C Convertible Preferred
Stock are as follows:
|
a)
|
Dividend rights
– The shares of Series C Convertible Preferred Stock accrue a 5% cumulative dividend on a quarterly
basis and is payable on the last day of each fiscal quarter when declared by the Company’s Board. As of December 31, 2013
dividends declared were $65,700, of which $18,750 were declared during the year ended December 31, 2013 and $46,952 have not been
paid and are shown in accrued and other liabilities at December 31, 2013.
|
|
b)
|
Voting rights
– Holders of these shares of Series C Convertible Preferred Stock shall have voting rights equivalent
to 1,000 votes per $1,000 par value Series C Convertible Preferred share voted together with the shares of Common Stock
|
|
c)
|
Liquidation rights
– Upon any liquidation these Series C Convertible Preferred Stock shares shall be treated as
equivalent to shares of Common stock to which they are convertible.
|
|
d)
|
Redemption rights
– The redemption rights were associated with the $750,000 that had been held in escrow by the
Company in the event that the funds were released and returned to CTI. However, the funds were withdrawn from escrow
and paid out in accordance with the settlement agreement. Therefore the redemption rights no longer apply to the remaining
Series C Convertible Preferred Stock.
|
|
e)
|
Conversion rights
– Holder has right to convert each share of Series C Convertible Preferred Stock at any time
into shares of the Company's common stock at a conversion price for each share of common stock equal to 85% of the lower of (1)
the closing market price at the date of notice of conversion or (2) the mid-point of the last bid price and the last ask price
on the date of the notice of conversion. The variable conversion feature creates an embedded derivative that was bifurcated from
the Series C Convertible Preferred Stock on the date of issuance and was recorded at fair value. The derivative liability will
be recorded at fair value on each reporting date with any change recorded in the Statement of Operations as an unrealized gain
(loss) on derivative instrument.
|
On the date of conversion of the 375 shares
of Series C Convertible Preferred Stock the Company calculated the value of the derivative liability to be $81,933. Upon conversion,
the $81,933 derivative liability was reclassified to equity.
The Company recorded a convertible preferred
stock derivative liability of $80,408 and $119,922, associated with the 375 shares of Series C Convertible Preferred Stock outstanding
at December 31, 2013 and, 2012, respectively.
The Company has classified the Series C
Convertible Preferred Stock as a liability at December 31, 2013 and, 2012 because the variable conversion feature may require the
Company to settle the conversion in a variable number of its common shares.
Receivables consist of the following:
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Calmare sales receivable
|
|
$
|
132,850
|
|
|
$
|
212,774
|
|
Royalties, net of allowance of $101,154 at December 31, 2013 and 2012
|
|
|
10,086
|
|
|
|
-
|
|
Other
|
|
|
394
|
|
|
|
3,591
|
|
Total
|
|
$
|
143,330
|
|
|
$
|
216,365
|
|
|
7.
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment, net, consist of
the following:
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Property and equipment, gross
|
|
$
|
177,537
|
|
|
$
|
189,633
|
|
Accumulated depreciation and amortization
|
|
|
(169,931
|
)
|
|
|
(162,816
|
)
|
Property and equipment, net
|
|
$
|
7,606
|
|
|
$
|
26,817
|
|
In July 2012, the Company closed its Charlotte,
NC office and disposed of the property and equipment at that location at a loss of $4,818.
Depreciation and amortization expense was
$11,147 and $14,534 for the years ended December 31, 2013 and 2012, respectively.
|
8.
|
AVAILABLE-FOR-SALE AND EQUITY SECURITIES
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
Number of
shares
|
|
|
Type
|
Security Innovation, Inc.
|
|
|
—
|
|
|
|
—
|
|
|
|
223,317
|
|
|
Common stock
|
Xion Pharmaceutical Corporation
|
|
|
—
|
|
|
|
—
|
|
|
|
60
|
|
|
Common stock
|
In prior years, we acquired 3,129,509 shares
of NTRU Cryptosystems, Inc. ("NTRU") common stock, and certain preferred stock that later was redeemed, in exchange for
cash and a reduction in our future royalty rate on sales of NTRU's products. NTRU was a privately held company that sold encryption
software for security purposes, principally in wireless markets. There was no public market for NTRU shares. In 2003, we wrote
down the value of NTRU to $0, but we continued to own the shares. On July 22, 2009, all NTRU assets were acquired by Security Innovation,
an independent provider of secure software located in Wilmington, MA. We received 223,317 shares of stock in the privately held
Security Innovation for our shares of NTRU.
In September 2009 we announced the formation of a joint venture with Xion Corporation for the commercialization
of our patented melanocortin analogues for treating sexual dysfunction and obesity. We received 60 shares of privately held Xion
Pharmaceutical Corporation common stock in June 2010. CTI currently owns 30% of the outstanding stock of Xion Pharmaceutical Corporation.
|
9.
|
FAIR VALUE MEASUREMENTS
|
The Company measures
fair value in accordance with Topic 820 of the FASB ASC, Fair Value Measurement ("ASC 820"), which provides a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. 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 three levels of the fair value hierarchy under ASC 820 are described as follows:
|
Level 1 -
|
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities
in active markets that the Company has the ability to access.
|
|
Level 2 -
|
Inputs to the valuation methodology include:
|
• Quoted
prices for similar assets or liabilities in active markets;
|
•
|
Quoted prices for identical or similar assets or liabilities in inactive markets;
|
|
•
|
Inputs other than quoted prices that are observable for the asset or liability;
|
|
•
|
Inputs that are derived principally from or corroborated by observable market data by correlation
or other means.
|
If the asset or liability has
a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
|
Level 3 -
|
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
The asset's or liability's
fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the
fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable
inputs.
The Company values its derivative liability
associated with the variable conversion feature on its Series C Convertible Preferred Stock (Note 5) based on the market price
of its common stock. For each reporting period the Company calculates the amount of potential common stock that the
Series C Preferred Stock could convert into based on the conversion formula (incorporating market value of our common stock) and
multiplies those converted shares by the market price of its common stock on that reporting date. The total converted
value is subtracted by the consideration paid to determine the fair value of the derivative liability. The Company classified the
derivative liability of $80,000 and $120,000 at
December 31
, 2013 and December 31,
2012, respectively, in Level 2 of the fair value hierarchy.
The warrant issued in connection with the
Tonaquint Note (the “Tonaquint Warrants,” see Note 13) are measured at fair value and liability-classified because
the Tonaquint Warrants contain “down-round” protection and therefore do not meet the scope exception under FASB ASC
815, Derivatives and Hedging (“ASC 815”). Since “down-round” protection is not an input to the fair value
of the warrants, the warrants cannot be considered indexed to the Company’s own stock which is a requirement for the scope
exception as outlined under ASC 815. The Company valued the warrants at $8,000 at December 31, 2013, and $26,000 upon
issuance at July 16, 2013, in Level 3 of the fair value hierarchy.
Similarly, the conversion feature of the
Tonaquint Note (Note 13) also contains “down-round” protection and therefore does not met the scope exception under
FASB ASC 815. The Company classified the derivative liability of $0 at
December
31
, 2013, and $19,000 upon issuance at July 16, 2013, in Level 3 of the fair value hierarchy.
The methods described above may produce
a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while
the Company believes its valuation method is appropriate and consistent with other market participants, the use of different methodologies
or assumptions to determine the fair value could result in a different fair value measurement at the reporting date.
|
10.
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid expenses and other assets consist
of the following:
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Prepaid insurance
|
|
$
|
16,802
|
|
|
$
|
17,473
|
|
Prepaid legal fees
|
|
|
-
|
|
|
|
46,813
|
|
Other
|
|
|
48,365
|
|
|
|
14,441
|
|
Prepaid expenses and other current assets
|
|
$
|
65,167
|
|
|
$
|
78,727
|
|
|
11.
|
LIABILITIES ASSIGNED TO LIABILITY PURCHASE AGREEMENT
|
During third quarter of 2013, the Company
negotiated a LPA with Southridge. The LPA takes advantage of a provision in the Securities Act of 1933, Section 3(a)(10), that
allows the exchange of claims, securities, or property for stock when the arrangement is approved for fairness by a court proceeding.
The process, approved by the court in August 2013, has the potential to eliminate nearly $2.1 million of our financial obligations
to existing creditors who agreed to participate and executed claims purchase agreements with Southridge’s affiliate ASC Recap,
LLC (“ASC Recap”) accounting for $2,093,303 of existing payables, accrued expenses and other current liabilities, and
notes payable. The process began with the issuance in September 2013 of 1,618,235 shares of the Company’s common stock to
ASC Recap, however at December 31, 2013, no creditors had yet been paid from the proceeds.
There can be no assurance that the Company will be successful
in completing this process with Southridge, and the Company retains ultimate responsibility for this debt, until fully paid.
|
12.
|
ACCRUED EXPENSES AND OTHER LIABILITIES
|
Accrued expenses and other liabilities consist
of the following:
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Royalties payable
|
|
$
|
127,708
|
|
|
$
|
182,052
|
|
Accrued audit fee
|
|
|
82,141
|
|
|
|
80,000
|
|
Over advance, fees LSQ Funding
|
|
|
-
|
|
|
|
77,464
|
|
Commissions payable
|
|
|
21,975
|
|
|
|
48,722
|
|
Accrued interest payable
|
|
|
216,518
|
|
|
|
85,184
|
|
Accrued consulting fees
|
|
|
2,000
|
|
|
|
167,726
|
|
Other
|
|
|
132,645
|
|
|
|
132,216
|
|
Accrued expenses and other liabilities, net
|
|
$
|
582,987
|
|
|
$
|
773,364
|
|
Excluded above is approximately
$244,000 of accrued expenses and other liabilities that fall under the LPA with ASC Recap, and are expected to be repaid
using the process as described in Note 11. Because there can be no assurance that the Company will be
successful in completing this process, the Company retains ultimate responsibility for these liabilities, until fully paid
down.
Notes payable as of December 31, 2013 consists
of the following:
|
|
Principal
Amount
|
|
|
Carrying
Value
|
|
|
Cash
Interest
Rate
|
|
|
Common
Stock
Conversion
Price
|
|
|
Maturity
Date
|
90 day Convertible Notes (Chairman of the Board)
|
|
$
|
2,518,000
|
|
|
$
|
2,518,000
|
|
|
|
6
|
%
|
|
$
|
1.05
|
|
|
Various 2014
|
24 month Convertible Notes ($100,000 to Board member)
|
|
|
225,000
|
|
|
|
225,000
|
|
|
|
6
|
%
|
|
|
1.05
|
|
|
March 2014 –
June 2014
|
Tonaquint 9% OID Convertible Notes and Warrants
|
|
|
112,500
|
|
|
|
87,705
|
|
|
|
7
|
%
|
|
|
0.30
|
|
|
May 2014
|
Southridge Convertible Note
|
|
|
12,000
|
|
|
|
12,000
|
|
|
|
None
|
|
|
|
75% of closing bid
|
|
|
June 2014
|
Series A1 15% OID Convertible Notes and Warrants
|
|
|
149,412
|
|
|
|
81,415
|
|
|
|
None
|
|
|
|
0.20
|
|
|
August 2014
|
Series A2 15% OID Convertible Notes and Warrants
|
|
|
134,236
|
|
|
|
69,571
|
|
|
|
None
|
|
|
|
0.25
|
|
|
September 2014
|
Notes Payable, gross
|
|
$
|
3,151,148
|
|
|
|
2,933,691
|
|
|
|
|
|
|
|
|
|
|
|
Less LPA amount
|
|
|
|
|
|
|
(505,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Notes Payable, net
|
|
|
|
|
|
$
|
2,488,691
|
|
|
|
|
|
|
|
|
|
|
|
90
day Convertible Notes
The Company has issued 90-day notes payable
to borrow funds from a director, now the chairman of our Board, as follows:
2013
|
|
$
|
1,208,000
|
|
2012
|
|
|
1,210,000
|
|
2011
|
|
|
100,000
|
|
Total
|
|
$
|
2,518,000
|
|
These notes have been extended several times
and all bear 6.00% simple interest. A conversion feature was added to the Notes when they were extended, which allows
for conversion of the eligible principal amounts to common stock at any time after the six month anniversary of the effective date
–the date the funds are received – at a rate of $1.05 per share. Additional terms have been
added to all Notes to include additional interest payments to all Notes if extended beyond their original maturity dates and to
provide the lender with a security interest in unencumbered inventory and intangible assets of the Company other than proceeds
relating to the Calmare device and accounts receivable.
A total of $505,000 of the aforementioned
notes issued between December 1, 2012 and March 31, 2013 fall under the LPA with ASC Recap, and are expected to be repaid using
the process as described in Note 11. Because there can be no assurance that the Company will be successful in completing
this process, the Company retains ultimate responsibility for this debt, until fully paid down. As a result, the Company
continues to accrue interest on these notes and they remain convertible as described above.
24 month Convertible
Notes
In March 2012, the Company issued a 24-month
convertible promissory note to borrow $100,000. Additional 24-month convertible promissory notes were issued in April 2012 ($25,000)
and in June 2012 ($100,000). All of the notes bear 6.00% simple interest. Conversion of the eligible principal amounts to common
stock is allowed at any time after the six month anniversary of the effective date of each note at a rate of $1.05 per share.
Tonaquint 9% Original
Issue Discount Convertible Notes and Warrants
During the quarter ended September 30, 2013,
the Company entered into a securities purchase agreement with Tonaquint, Inc., under which it was issued a $112,500 convertible
promissory note in consideration for $100,000, the difference between the proceeds from the Note and the principal amount consists
of a $10,000 original issue discount and a carried transaction expense of $2,500. The original issue discount is amortized over
the life of the note. The note is convertible at an initial conversion price of $0.30 per share at any time, and contains a “down-round
protection” feature that requires the valuation of a derivative liability associated with the note. The note bears interest
at 7% and is due in May 2014; with five monthly installment payments of principal, accrued interest and any outstanding fees or
allowed expenses beginning in January 2014. Tonaquint was also issued a market-related warrant for $112,500 in shares of common
stock with a “cashless” exercise feature. The warrant has a $0.35 exercise price, a 5-year term and includes a “down-round
protection” feature that requires it to be classified as a liability rather than as equity (see Note 9).
We estimated the fair value of each component
on the issue date and the conversion date using a Black-Scholes pricing model with the following assumptions:
|
|
Warrant -
July 16, 2013
|
|
|
Warrant –
December 31,
2013
|
|
|
Derivative –
July 16, 2013
|
|
|
Derivative –
December 31,
2013
|
|
Expected term
|
|
|
5 years
|
|
|
|
4.54 years
|
|
|
|
0.83 years
|
|
|
|
0.38 years
|
|
Volatility
|
|
|
124.51
|
%
|
|
|
139.93
|
%
|
|
|
192.87
|
%
|
|
|
230.46
|
%
|
Risk Free Rate
|
|
|
1.38
|
%
|
|
|
1.75
|
%
|
|
|
0.10
|
%
|
|
|
0.70
|
%
|
The proceeds of the Note were allocated
to the three components as follows:
|
|
Proceeds allocated
at issue date – July
16, 2013
|
|
|
Value at December
31, 2013
|
|
Tonaquint Note
|
|
$
|
57,400
|
|
|
$
|
87,705
|
|
Tonaquint Warrant
|
|
$
|
26,076
|
|
|
$
|
8,227
|
|
Embedded conversion option derivative liability
|
|
$
|
19,024
|
|
|
$
|
-
|
|
Total
|
|
$
|
102,500
|
|
|
$
|
95,932
|
|
Subsequent to December 31, 2013, the Company settled the
note and Warrant with Tonaquint ( see Note 18.).
Southridge
During 2013 the Company had issued a
convertible promissory note payable to Southridge as part of its EPA in the amount of $65,000, which during 2013
Southridge converted to 260,000 shares of common stock.
During 2013, the Company issued a
six-month $12,000 convertible note payable to Southridge to cover legal expenses as part of the LPA (see Note 11). The
convertible note is convertible into the Company’s common stock at 75% of the lowest closing bid price during the
twenty (20) trading days prior to conversion and is due in June 2014.
Series A 15% Original Issue Discount
Convertible Notes and Warrants
During the quarter ended December
31, 2013, the Company did a private offering of two tranches of convertible notes and warrants, under which it issued
$283,648 of convertible promissory notes for consideration of $241,100, the difference between the proceeds from the notes
and the principal amount consists of $42,548 of original issue discount. The notes are convertible at initial conversion
prices ranging from $0.20 to $0.25 per share anytime after issuance thereby having an embedded beneficial conversion feature.
The note holders were also issued market-related warrants for 170,354 in shares of common stock. The warrants have
exercise prices that range from $0.40 to $0.60 and a 2-year term. The beneficial conversion feature and the warrants were
recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial conversion
feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized over the life of the notes to interest expense.
The beneficial conversion feature was valued at the intrinsic value on the issuance date. The intrinsic
value represents the difference between the conversion price and the fair value of the common stock multiplied by the number of
share into which the note is convertible. We estimated the fair value of the
warrants on the issue date using a Black-Scholes pricing model with the following assumptions:
|
|
Warrants
(Tranche 1)-
November 15,
2013
|
|
|
Warrants
(Tranche 2)-
December 30,
2013
|
|
Expected term
|
|
|
2 years
|
|
|
|
2 years
|
|
Volatility
|
|
|
180.02
|
%
|
|
|
184.38
|
%
|
Risk Free Rate
|
|
|
0.31
|
%
|
|
|
0.39
|
%
|
The proceeds of the Notes were allocated
to the components as follows:
|
|
Proceeds allocated
at issue date
|
|
Private Offering Notes
|
|
$
|
120,313
|
|
Private Offering Warrants
|
|
|
76,429
|
|
Beneficial Conversion feature
|
|
|
44,358
|
|
Total
|
|
$
|
241,100
|
|
|
14.
|
STOCK-BASED COMPENSATION PLANS
|
2011 Employees', Directors' and Consultants'
Stock Option Plan –
In May 2011, the Board of Directors approved a new option plan for employees, directors and consultants.
Pursuant to this plan which is administered by a Committee appointed by the Board of Directors, we could grant to qualified employees,
directors and consultants either incentive options or nonstatutory options (as defined by the Internal Revenue Service). The stock
options granted per written option agreements approved by the Committee, must have exercise prices not less than 100% of the Fair
Market Value of our common stock on the date of the grant. Up to 1,500,000 common shares are available for grants under this plan.
No options may be granted under this plan after December 31, 2015.
The following information relates to the
2011 Option Plan:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Common shares reserved for issuance on exercise of options
|
|
|
1,165,000
|
|
|
|
110,000
|
|
Shares available for future option grants
|
|
|
335,000
|
|
|
|
890,000
|
|
1997
Employee Stock Option Plan
– Pursuant to our 1997 Employees' Stock Option Plan, as amended (the "1997 Option Plan"), we could grant to
employees either incentive stock options or nonqualified stock options (as defined by the Internal Revenue Service). The stock
options had to be granted at exercise prices not less than 100% of the fair market value of our common stock at the grant date.
The maximum life of stock options granted under this plan is ten years from the grant date. The Compensation Committee or the
Board of Directors determined vesting provisions when stock options were granted, and stock options granted generally vested over
three or four years. No options could be granted under this plan after September 30, 2007.
The following information relates to the
1997 Option Plan:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Common shares reserved for issuance on exercise of options
|
|
|
87,000
|
|
|
|
87,000
|
|
Shares available for future option grants
|
|
|
-
|
|
|
|
-
|
|
2000 Director's Stock Option Plan
– Pursuant to our Directors' Stock Option Plan (the "Directors' Option Plan"), we could grant each non-employee
director 10,000 fully vested, nonqualified common stock options when the director first is elected, and 10,000 common stock options
on the first business day of January thereafter, as long as the individual is a director. All such stock options are granted at
an option price not less than 100% of the fair market value of the common stock at the grant date. The maximum life of options
granted under this plan is ten years from the grant date. No options could be granted after January 4, 2010.
The following information relates to the
2000 Directors' Stock Option Plan:
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Common shares reserved for issuance on exercise of options
|
|
|
120,000
|
|
|
|
120,000
|
|
Shares available for future option grants
|
|
|
-
|
|
|
|
-
|
|
Summary of Common Stock Options
– The total fair value of shares vested in the years ended December 31, 2013 and December 31, 2012 was $116,365 and $138,630,
respectively, of non-cash compensation expense. Of these amounts, $84,550 and $0 was included in personnel and consulting expenses,
from stock options granted to employees, and vesting during the year ended December 31, 2013 and 2012, respectively.
Also $14,895 and $58,630 of noncash compensation
expense was included in general and administrative expenses, from stock options granted to directors pursuant to the Directors
Option Plan in the years ended December 31, 2013 and 2012, respectively. Since these stock options are fully vested upon grant,
the full fair value of the stock options is recorded as expense at the date of grant. During the year ended December 31, 2013,
the Company granted 50,000 options to non-employee directors which were fully vested upon issuance, and 5,000 options which were
fully vested upon issuance to two non-employee directors who had served as chairman, as approved by the Board of Directors. During
the years ended December 31, 2013 and 2012, the Board of Directors extended the expiration dates for all options previously granted
to one and two, respectively, departing Board members in recognition for service. Those options will expire per their original
term specified in each individual option agreement, typically either 5 or 10 years from the date of granting, rather than expiring
within the specified time period, typically 90 or 180 days following the Board members’ termination dates. The Company considered
the extension as a modification to the option agreements recording incremental compensation expense of $16,920 and $80,000 for
the years ended December 31, 2013 and 2012, respectively.
During the quarter ended March 31,
2013, the Company granted 1,000,000 options to the then-CEO. As approved by the Board of Directors, these options granted
were expected to vest over a four (4) year period, with 200,000 options vesting upon issuance. Since his resignation on
September 26, 2013, expense for the quarters ended March 31, 2013 and June 30, 2013 has been reversed. The 200,000 vested
options all expired 90 days from his resignation, per the Option Agreement.
During the quarter ended December 31, 2013, the Company granted 1,000,000 options to the current CEO.
As approved by the Board of Directors, these options vest over a four (4) year period, with 200,000 options vested upon issuance.
No options were granted to employees during the year ended December
31, 2012.
We estimated the fair value of each option
on the grant date using a Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
Year ended
December 31, 2013
|
|
|
Year ended
December 31, 2012
|
|
Dividend yield
(1)
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected volatility
(2)
|
|
|
99.2% - 110.2
|
%
|
|
|
86.7% - 87.1
|
%
|
Risk-free interest rates
(3)
|
|
|
1.02
|
%
|
|
|
0.89
|
%
|
Expected lives
(2)
|
|
|
2-5 years
|
|
|
|
5 years
|
|
|
(1)
|
We have not paid cash dividends on our common stock since 1981, and currently do not have plans to pay or declare cash dividends.
Consequently, we used an expected dividend rate of zero for the valuations.
|
|
(2)
|
Estimated based on our historical experience. Volatility was based on historical experience over a period equivalent to the
expected life in years.
|
|
(3)
|
Based on the U.S. Treasury constant maturity interest rate with a term consistent with the expected life of the options granted.
|
A summary of the status of all our common
stock options as of December 31, 2013 and 2012, and changes during the periods then ended is presented below.
|
|
Year ended December 31, 2013
|
|
|
Year ended December 31, 2012
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Values
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Values
|
|
Outstanding at beginning of period
|
|
|
317,000
|
|
|
$
|
1.85
|
|
|
$
|
|
|
|
|
313,000
|
|
|
$
|
2.11
|
|
|
|
|
|
Granted
|
|
|
2,055,000
|
|
|
|
0.29
|
|
|
|
|
|
|
|
70,000
|
|
|
|
1.24
|
|
|
|
|
|
Forfeited
|
|
|
(1,000,000
|
)
|
|
|
0.50
|
|
|
|
|
|
|
|
(66,000
|
)
|
|
|
2.44
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired or terminated
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
1,372,000
|
|
|
$
|
0.50
|
|
|
$
|
240,750
|
|
|
|
317,000
|
|
|
$
|
1.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at end of year
|
|
|
572,000
|
|
|
$
|
1.10
|
|
|
$
|
48,750
|
|
|
|
317,000
|
|
|
$
|
1.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at end of year
|
|
|
800,000
|
|
|
$
|
0.08
|
|
|
$
|
192,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value per share of options issued during the year
|
|
|
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
$
|
1.18
|
|
|
|
|
|
Generally, we issue new shares of common
stock to satisfy stock option exercises.
We have an employee-defined contribution
plan qualified under section 401(k) of the Internal Revenue Code (the "Plan"), for all employees age 21 or over, and
meeting certain service requirements. The Plan has been in effect since January 1, 1997. Participation in the Plan is voluntary.
Employees may defer compensation up to a specific dollar amount determined by the Internal Revenue Service for each calendar year.
We do not make matching contributions, and employees are not allowed to invest in our stock under the Plan.
Our directors may authorize a discretionary
contribution to the Plan, allocated according to the provisions of the Plan, and payable in shares of our common stock valued as
of the date the shares are contributed. No contributions were accrued or made in the years ended December 31, 2013 and 2012.
|
16.
|
COMMITMENTS AND CONTINGENCIES
|
Operating Leases
–
Future minimum rental payments required
under operating leases with remaining non-cancelable lease terms as of December 31, 2013 are as follows:
More than 5 years
|
|
$
|
-
|
|
3-5 years
|
|
|
13,076
|
|
1-3 years
|
|
|
153,279
|
|
Within 1 year
|
|
|
62,085
|
|
Total
|
|
$
|
228,440
|
|
Total rental expense for all operating leases
was:
|
|
Year ended
December 31,
2013
|
|
|
Year ended
December 31,
2012
|
|
Minimum rental payments
|
|
$
|
60,038
|
|
|
$
|
84,242
|
|
Less: Sublease rentals
|
|
|
3,594
|
|
|
|
7,188
|
|
Net rent expense
|
|
|
56,444
|
|
|
|
77,054
|
|
Deferred rent charge
|
|
|
5,248
|
|
|
|
-
|
|
|
|
$
|
61,692
|
|
|
$
|
77,054
|
|
Contingencies – Revenue based
As of December 31,
2013, CTI and its majority owned subsidiary, VVI, have remaining obligations, contingent upon receipt of certain revenues, to repay
up to $165,788 and $199,334, respectively, in consideration of grant funding received in 1994 and 1995. CTI also is obligated to
pay at the rate of 7.5% of its revenues, if any, from transferring rights to certain inventions supported by the grant funds. VVI
is obligated to pay at rates of 1.5% of its net sales of supported products or 15% of its revenues from licensing supported products,
if any. We recognize these obligations only if we receive revenues related to the grant funds. We recognized approximately $1,577
in the year ended December 31, 2013 and $1,749 in the year ended December 31, 2012.
We have engaged R.F. Lafferty & Co.
to seek an acquisition partner from a limited number of companies for our nano particle bone biomaterial patents, among other assets
and/or securities. The Company would pay Lafferty a 10% finder's fee in the event an acquisition partner is found, which
Management has deemed to be an immaterial and contingent obligation.
Contingencies – Litigation
Carolina Liquid Chemistries Corporation,
et al
. (case pending)
– On August 29, 2005, we filed a complaint against Carolina Liquid Chemistries Corporation
("Carolina Liquid") in the United States District Court for the District of Colorado, alleging patent infringement of
our patent covering homocysteine assays, and seeking monetary damages, punitive damages, attorneys’ fees, court costs and
other remuneration at the option of the court. As we became aware of other infringers, we amended our complaint to add as defendants
Catch, Inc. ("Catch") and the Diazyme Laboratories Division of General Atomics ("Diazyme"). On September 6,
2006, Diazyme filed for declaratory judgment in the Southern District of California for a change in venue and a declaration of
non-infringement and invalidity. On September 12, 2006, the District Court in Colorado ruled that both Catch and Diazyme be added
as defendants to the Carolina Liquid case.
On October 23, 2006, Diazyme requested the
United States Patent and Trademark Office (the "USPTO") to re-evaluate the validity of our patent and this request was
granted by the USPTO on December 14, 2006. On July 30, 2009, the U.S. Patent and Trademark Office’s Board of Patent Appeals
and Interferences (“BPAI”) upheld the homocysteine patent. In September 2008, the examiner had denied the patent, but
that denial was overruled by the BPAI. While the examiner had appealed that BPAI decision, delaying further action, that appeal
was also denied by the BPAI on December 13, 2010. In June 2011, the examiner once again appealed the BPAI decision. In addition
to responding to this new appeal, the Company petitioned the Director of the USPTO to help expedite further action on the case
within the USPTO, which was to have been handled with special dispatch according to USPTO requirements for handling reexamination
proceedings of patents involved in litigation.
On March 13, 2012, the USPTO issued the
Ex Parte Reexamination Certificate confirming the patentability of claims examined. The company has begun collecting unpaid amounts
from various obligated companies.
Employment matters – former
employee (case pending) –
In September 2003, a former employee filed a whistleblower complaint with the Occupational Safety and
Health Administration of the Department of Labor (OSHA) alleging that the employee had been terminated for engaging in conduct
protected under the Sarbanes Oxley Act of 2002 (SOX). In February 2005, OSHA found probable cause to support the employee’s
complaint and the Secretary of Labor ordered reinstatement and back wages since the date of termination and CTCC requested de novo
review and a hearing before an administrative law judge (“ALJ”). In July 2005, after the close of the hearing on CTI’s
appeal, the U.S. district court for Connecticut enforced the Secretary’s preliminary order of reinstatement and back pay
under threat of contempt and the Company rehired the employee with back pay.
On October 5, 2005,
the ALJ who conducted the hearing on CTI’s appeal of the OSHA findings ruled in CTI’s favor and recommended dismissal
of the employee’s complaint. Although the employee abandoned his position upon notice of the ALJ’s decision, he nevertheless
filed a request for review by the DOL Administrative Review Board ("ARB").
In May 2006, the U.S.
Court of Appeals for the Second Circuit vacated the order of the district court enforcing the Secretary’s preliminary order
of reinstatement and back pay. The employee also filed a new SOX retaliation complaint with OSHA based on alleged black listing
action by CTI following his termination. OSHA dismissed the complaint and the employee filed a request for a hearing by an administrative
law judge. Ultimately, the employee voluntarily dismissed the appeal.
In March 2008, the
ARB issued an order of remand in the employee’s appeal of the October 2005 dismissal of his termination complaint, directing
the ALJ to clarify her analysis utilizing the burden-shifting standard articulated by the ARB. In January 2009, the ALJ issued
a revised decision again recommending dismissal and once again the employee appealed the ruling to the ARB. On September 30, 2011,
the ARB issued a final decision and order affirming the ALJ’s decision on remand and dismissing the employee’s complaint.
The employee has appealed the ARB's decision before the U.S. Court of Appeals for the Second Circuit which has ordered the employee
to file his opening brief by May 31, 2012. Response briefs by the Solicitor's Office of the U.S. Department of Labor and CTI were
submitted in August 2012. In March 2013, the U.S Court of Appeals for the Second Circuit upheld the ARB’s decision dismissing
the former employee’s complaint and denied the employee’s appeal from that order. In April 2013, the Second Circuit
terminated proceedings in that court.
John B. Nano
vs. Competitive Technologies, Inc. - Arbitration (case completed
)
– On September 3, 2010, the
Board of Directors of CTI found cause consisting of violation of
fiduciary duties to the Corporation and violation of
the CTI Corporate Code of Conduct and removed John B. Nano as an Officer of the Corporation, in all capacities. On September 13,
2010, the Board of Directors also found cause consisting of violation of
fiduciary duties to the Corporation and violation
of the CTI Corporate Code of Conduct removed John B. Nano as a Director of the Corporation, in all capacities, for cause, consisting
of violation of his fiduciary duties. Details of these actions are outlined in Form 8-K filings with the SEC on September 13, 2010,
and September 17, 2010. Mr. Nano was previously the Chairman of the Board of Directors, President and Chief Executive Officer of
CTI.
On September 13, 2010,
Mr. Nano brought an arbitration claim to the American Arbitration Association against CTI. Mr. Nano's employment contract with
the Company had called for arbitration, which Mr. Nano had demanded to resolve this conflict. Mr. Nano sought $750,000 that he
claimed was owed under his contract and claimed that he had been terminated without cause.
On September 23, 2010
the Company was served notice that John B. Nano, CTI's former Chairman, President and CEO had filed a Notice of Application for
Prejudgment Remedy/Claim of $750,000 and an Application for an Order Pendente Lite claiming we had breached Mr. Nano’s employment
contract with us. The applications were filed in the State of Connecticut Superior Court in Bridgeport, CT. In November 2010, the
Company funded $750,000 as a Prejudgment Remedy held in escrow with the Company's counsel and has included this amount as restricted
cash on the December 31, 2011 and December 31, 2010 balance sheets. The Company did not believe it was liable to the former Chairman,
President and CEO, believing he was terminated for cause. The case proceeded through the arbitration process. The initial arbitration
hearing began in April 2011; additional hearing dates were held in May and June 2011. In July 2011, each party submitted
a summary limited in length stating their positions.
Prior to the conclusion
of the arbitration hearings, the Company filed suit in Federal Court against the American Arbitration Association. The Company
requested a temporary restraining order to halt the arbitration, which was denied by the court. The Company also requested a hearing
before the court to review the arbitration proceedings. In August 2011, the American Arbitration Association's assigned arbitrator
gave award to the Company's former Chairman, President and CEO, despite the Company's strongly held belief that the Board of Directors
properly exercised its reasonable discretion under the employment agreement in finding that the former executive engaged in willful
misconduct and gross negligence and that the executive’s actions were cause for employment termination under the employment
agreement and governing law. The former executive had requested a payment of $750,000, which he believed was due under his employment
agreement. Following the notification of award, the former employee filed a motion with the State of Connecticut Superior Court
in Bridgeport, CT to have the award confirmed. CTI followed with a motion to vacate the award. A hearing on those two motions was
held before a judge in October 2011.
In January 2012, the
judge denied the Company's motion to vacate the arbitration award in favor of its former CEO John B. Nano and granted Mr. Nano's
application to confirm the award. Following the decision, CTI settled all disputes with its former Chairman and CEO John B. Nano.
Pursuant to the settlement, CTI has released to Mr. Nano from escrow the $750,000 deposited by CTI following Mr. Nano's application
for a prejudgment remedy. CTI paid an additional $25,000 as settlement of additional amounts of statutory interest. These amounts
($775,000) had been accrued at December 31, 2011. The settlement includes mutual general releases of any and all claims either
party has or had against the other. The settlement agreement also includes a provision that neither CTI nor Mr. Nano would disparage
the other. Should any such disparagement occur and litigation ensue, they further agreed that the prevailing party would be entitled
to recover its costs and expenses, including reasonable attorney's fees. CTI's payments to Mr. Nano have been completed.
Unfair Trade
Practices; U.S. District Court of Connecticut (Case completed
)
– In September 2011, the Company filed
a complaint against an individual in U.S. District Court of Connecticut for (1) violation of the Connecticut Unfair Trade Practices
Act, (2) tortious interference with business and economic expectancy, (3) libel and (4) injunctive relief. The complaint noted
that the individual named in the civil action has, for more than a year, engaged in a systematic campaign to destroy the Company's
trades and business, interfere with the Company's expectations and contracts and libel the Company by disseminating materially
false and libelous statements about the Company on message boards throughout the Internet and otherwise. The Company sought punitive
damages from the individual for his alleged unfair trade practices and wrongful interference with the Company's business. The case
was concluded in March 2012. By the parties’ stipulation settling the matter, the defendant agreed to cease his posting any
statements on the Internet or publishing any statements elsewhere, orally or in writing, concerning CTI, CTI’s officers,
directors, and employees, the Calmare device, Marineo (the inventor of the Calmare device), or any other person or entity in connection
with their purchase or use of the Calmare device.
Summary
– We may be a party
to other legal actions and proceedings from time to time. We are unable to estimate legal expenses or losses we may incur, if any,
or possible damages we may recover, and we have not recorded any potential judgment losses or proceeds in our financial statements
to date, with the exception of the accrued expenses related to the Nano case, previously disclosed. We record expenses in connection
with these suits as incurred.
We believe that we carry adequate liability
insurance, directors and officers insurance, casualty insurance, for owned or leased tangible assets, and other insurance as needed
to cover us against potential and actual claims and lawsuits that occur in the ordinary course of our business. However, an unfavorable
resolution of any or all matters, and/or our incurrence of significant legal fees and other costs to defend or prosecute any of
these actions and proceedings may, depending on the amount and timing, have a material adverse effect on our consolidated financial
position, results of operations or cash flows in a particular period.
|
17.
|
RELATED PARTY
TRANSACTIONS
|
Our board of directors determined that when
a director's services are outside the normal duties of a director, we compensate the director at the rate of $1,000 per day, plus
expenses, which is the same amount we pay a director for attending a one-day Board meeting. We classify these amounts as consulting
expenses, included in personnel and consulting expenses.
At December 31, 2013, $2,618,000 of the
outstanding Notes were payable to related parties; $2,518,000 to the chairman of our Board, Peter Brennan, and $100,000 to
another director, Stan Yarbro.
Tonaquint
During the first quarter of 2014 the
Company executed a debt settlement agreement with Tonaquint related to the note and warrant described in Note 13. In summary,
the Company and Tonaquint agreed to settle the warrant for $98,000 and the note and all related interest for $144,000 all to
paid by April 18, 2014.
Additional financing
During the first quarter of 2014 the Company
raised additional working capital of approximately $600,000 through the issuance of debt and equity instruments.