In September 2013 the
Company issued 1,618,235 shares of the Company’s common stock to ASC Recap. During September and October 2013, ASC Recap
sold the Company’s common stock and during the three months ended March 31, 2014 paid creditors approximately $80,000 from
the proceeds and retained a service fee of approximately $27,000 (see Note 10).
During the three months ended March 31,
2013, the Company transferred a rental asset with a net book value (“NBV”) of approximately $8,000 to inventory.
During the three months
ended March 31, 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 100,000
shares of its common stock at $0.43 per share for legal services.
Notes to Condensed Consolidated Interim
Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The interim condensed consolidated financial
information presented in the accompanying condensed consolidated financial statements and notes hereto is unaudited.
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. CTI 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.
These consolidated financial statements
include the accounts of CTI and VVI. Inter-company accounts and transactions have been eliminated in consolidation.
We believe we have
made all adjustments necessary, consisting only of normal recurring adjustments, to present the unaudited condensed consolidated
financial statements in conformity with accounting principles generally accepted in the U.S. The results for the three
months ended March 31, 2014 are not necessarily indicative of the results that can be expected for the full year ending December
31, 2014.
The interim unaudited
condensed consolidated financial statements and notes thereto, should be read in conjunction with our Annual Report on Form 10-K
for the year ended December 31, 2013 filed with the Securities and Exchange Commission (“SEC”) on April 16, 2014.
During the three months
ended March 31, 2014, we had a significant concentration of revenues from our Calmare® pain therapy medical device. The
percentages of gross revenue attributed to sales and rentals of Calmare devices, in the three months ended March 31, 2014,
was 98%; and 13% in the three months ended March 31, 2013. Additionally, the percentage of gross revenue attributed
to other Calmare related sales of equipment and training, in the three months ended March 31, 2014, was 1%; and 66% in the three
months ended March 31, 2013. We continue to attempt to expand our sales activities for the Calmare device and expect
the majority of our revenues to come from this technology.
The Company has incurred operating losses
since fiscal 2006 and has a working capital deficiency at March 31, 2014. The Company has taken steps to reduce its
operating expenses as well as increase revenue from sales of Calmare medical devices. However, even at the reduced
spending levels, should the anticipated increase in revenue from sales of Calmare devices not occur 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 recurring revenue streams sufficient to cover operating costs. The
Company does not have any significant individual cash or capital requirements in the budget going forward. If necessary,
CTI will meet anticipated operating cash requirements by further reducing costs, issuing debt and/or equity, and/or pursuing sales
of certain assets and technologies while we pursue licensing and distribution opportunities for our remaining legacy portfolio
of technologies. 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 could negatively affect the Company’s financial
position.
Our liquidity requirements
arise principally from our working capital needs, including funds needed to sell our current technologies 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, sales of common stock and cash flows from operations, if any, including
royalty legal awards. At March 31, 2014, the Company had outstanding debt in the form of promissory notes with a total principal
amount of $3,277,000 and a carrying value of $3,117,000.
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 with 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 in the U.S. Applications for
patents have been filed internationally as well 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. 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:
|
|
|
Three months
ended
|
|
|
Three months
ended
|
|
|
|
|
March 31,
2014
|
|
|
March 31,
2013
|
|
|
Denominator for basic net income (loss) per share, weighted average shares outstanding
|
|
|
20,036,240
|
|
|
|
15,588,693
|
|
|
Dilutive effect of common stock options
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Dilutive effect of Series C
convertible preferred stock, convertible debt and warrants
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Denominator for diluted net income (loss) per share, weighted average shares outstanding
|
|
|
20,036,240
|
|
|
|
15,588,693
|
|
Due to the net loss
incurred for the three months ended March 31, 2014, and March 31, 2013, 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 1,409,000 and 1,367,000 shares of our
common stock were outstanding at March 31, 2014 and 2013, respectively, 375 shares outstanding of Series C Convertible Preferred
Stock, at March 31, 2014 and 2013, outstanding convertible debt of $3,117,000 and $2,040,000 at March 31, 2014 and 2013, respectively
and the warrants outstanding at March 31, 2014 were not included in the computation of diluted net income (loss) per share because
they were also anti-dilutive.
3. RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
No
new accounting pronouncements issued or effective during the quarter ended March 31, 2014 has had or is expected to have a material
impact on the consolidated financial statements.
4. RECEIVABLES
Receivables consist of the following:
|
|
March 31,
2014
|
|
|
December
31,
2013
|
|
Calmare® sales receivable
|
|
$
|
86,023
|
|
|
$
|
132,850
|
|
Royalties, net of allowance of $101,154 at March 31, 2014 and December 31, 2013
|
|
|
-
|
|
|
|
10,086
|
|
Other
|
|
|
294
|
|
|
|
394
|
|
Total receivables
|
|
$
|
86,317
|
|
|
$
|
143,330
|
|
5. AVAILABLE-FOR-SALE AND EQUITY SECURITIES
The fair value of the equity securities
we held were categorized as available-for-sale securities, which were carried at a fair value of zero, consisted of shares in Security
Innovation and Xion Pharmaceutical Corporation (“Xion”). We own 223,317 shares of stock in the privately
held Security Innovation, an independent provider of secure software located in Wilmington, MA.
In September 2009 we announced the formation
of a joint venture with Xion for the commercialization of our patented melanocortin analogues for treating sexual dysfunction and
obesity. CTI currently owns 60 shares of common stock or 30% of the outstanding stock of privately held Xion.
6. FAIR VALUE MEASUREMEMENTS
The Company measures fair value in accordance
with Topic 820 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 12) 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 $66,000 and $80,000 at
March
31
, 2014 and December 31, 2013, respectively, in Level 2 of the fair value hierarchy.
The warrant issued
in connection with the Tonaquint Note (the “Tonaquint Warrants,”see Note 11) were 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 $26,076
upon issuance July 16, 2013, in Level 3 of the fair value hierarchy. During the first quarter of 2014 the Company executed a debt
settlement agreement with Tonaquint related to the note and warrant (see Note 11).
Similarly, the conversion
feature of the Tonaquint Note (Note 11) also contained “down-round” protection and therefore did not meet the scope
exception under FASB ASC 815. The Company classified the derivative liability of $0 at
December
31
, 2013, and $19,024 upon issuance at July 16, 2013, in Level 3 of the fair value hierarchy. During the first quarter of
2014 the Company executed a debt settlement agreement with Tonaquint related to the note and warrant (see Note 11).
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.
The carrying amounts
reported in our Condensed Consolidated Balance Sheet for cash, accounts receivable, notes payable, deferred revenue, and preferred
stock liability approximate fair value due to the short-term maturity of those financial instruments.
7. PREPAID
EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets
consist of the following:
|
|
March 31,
2014
|
|
|
December
31,
2013
|
|
Prepaid insurance
|
|
$
|
15,230
|
|
|
$
|
16,802
|
|
Other
|
|
|
32,865
|
|
|
|
48,365
|
|
Prepaid expenses and other current assets
|
|
$
|
48,095
|
|
|
$
|
65,167
|
|
8. PROPERTY
AND EQUIPMENT
Property and equipment, net, consist of
the following:
|
|
March 31,
2014
|
|
|
December
31, 2013
|
|
Property and equipment, gross
|
|
$
|
180,615
|
|
|
$
|
177,537
|
|
Accumulated depreciation and amortization
|
|
|
(171,755
|
)
|
|
|
(169,931
|
)
|
Property and equipment, net
|
|
$
|
8,860
|
|
|
$
|
7,606
|
|
Depreciation and amortization expense was
$1,824 and $2,336 during the three months ended
March 31
, 2014 and March 31, 2013,
respectively.
9. ACCRUED
EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist
of the following:
|
|
March 31,
2014
|
|
|
December
31,
2013
|
|
|
|
|
|
|
|
|
Royalties payable
|
|
$
|
155,208
|
|
|
$
|
127,708
|
|
Accrued compensation
|
|
|
135,000
|
|
|
|
-
|
|
Accrued accounting fees
|
|
|
80,000
|
|
|
|
82,141
|
|
Commissions payable
|
|
|
21,975
|
|
|
|
21,975
|
|
Accrued interest payable
|
|
|
241,487
|
|
|
|
216,518
|
|
Other payables
|
|
|
170,008
|
|
|
|
134,645
|
|
Accrued expenses and other liabilities, net
|
|
$
|
803,678
|
|
|
$
|
582,987
|
|
Excluded above is approximately
$235,000 and $244,000 of accrued expenses and other liabilities at March 31, 2014 and December 31, 2013, respectively, that fall
under the Liability Purchase Agreement (“LPA”) with ASC Recap, LLC (“ASC Recap”), and are expected to be
repaid using the process as described in Note 10. 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.
10. LIABILITIES
ASSIGNED TO LIABILITY PURCHASE AGREEMENT
During the third quarter
of 2013, the Company negotiated a LPA with Southridge, Partners II, L.P. (“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” 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. During September and October 2013, ASC Recap sold the Company’s common
stock and during the three months ended March 31, 2014 paid creditors approximately $80,000 from the proceeds and retained a service
fee of approximately $27,000. As of May 14, 2014, no further shares of the Company’s common stock had been issued to ASC
Recap to settle creditors’ balances.
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.
11. NOTES
PAYABLE
Notes payable consist of the following:
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
90 day Convertible Notes (Chairman of the Board)
|
|
$
|
2,498,980
|
|
|
$
|
2,518,000
|
|
24 month Convertible Notes ($100,000 to Board member)
|
|
|
225,000
|
|
|
|
225,000
|
|
Tonaquint 9% OID Convertible Notes and Warrants
|
|
|
118,536
|
|
|
|
87,705
|
|
Southridge Convertible Note
|
|
|
12,000
|
|
|
|
12,000
|
|
Series A1 15% OID Convertible Notes and Warrants
|
|
|
100,076
|
|
|
|
81,415
|
|
Series A2 15% OID Convertible Notes and Warrants
|
|
|
91,127
|
|
|
|
69,571
|
|
Series A3 15% OID Convertible Notes and Warrants
|
|
|
37,007
|
|
|
|
-
|
|
Series B OID Convertible Notes and Warrants
|
|
|
34,272
|
|
|
|
-
|
|
Notes Payable, gross
|
|
|
3,116,998
|
|
|
|
2,933,691
|
|
Less LPA amount
|
|
|
(485,980
|
)
|
|
|
(505,000
|
)
|
Notes Payable, net
|
|
$
|
2,631,018
|
|
|
$
|
2,488,691
|
|
Details of notes payable as of March
31, 2014 are as follows:
|
|
Principal
Amount
|
|
|
Carrying
Value
|
|
|
Cash
Interest
Rate
|
|
|
Common
Stock
Conversion
Price
|
|
|
Maturity
Date
|
90 day Convertible Notes (Chairman of the Board)
|
|
$
|
2,498,980
|
|
|
$
|
2,498,980
|
|
|
|
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 (1)
|
|
|
112,500
|
|
|
|
118,536
|
|
|
|
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
|
|
|
|
100,076
|
|
|
|
None
|
|
|
|
0.20
|
|
|
August 2014
|
Series A2 15% OID Convertible Notes and Warrants
|
|
|
134,236
|
|
|
|
91,127
|
|
|
|
None
|
|
|
|
0.25
|
|
|
September 2014
|
Series A3 15% OID Convertible Notes and Warrants
|
|
|
64,706
|
|
|
|
37,007
|
|
|
|
None
|
|
|
|
0.25
|
|
|
January 2015
|
Series B OID Convertible Notes and Warrants
|
|
|
80,000
|
|
|
|
34,272
|
|
|
|
None
|
|
|
|
0.35
|
|
|
March 2017
|
Notes Payable, gross
|
|
$
|
3,276,834
|
|
|
|
3,116,998
|
|
|
|
|
|
|
|
|
|
|
|
Less LPA amount
|
|
|
|
|
|
|
(485,980
|
)
|
|
|
|
|
|
|
|
|
|
|
Notes Payable, net
|
|
|
|
|
|
$
|
2,631,018
|
|
|
|
|
|
|
|
|
|
|
|
(1) Original terms
noted above. The Company executed a debt settlement agreement with Tonaquint during the first quarter of 2014, cash-settled the
warrant during the first quarter of 2014 and cash-settled the note during the second quarter of 2014. See further discussion below
under “
Tonaquint 9% Original Issue Discount Convertible Notes and Warrants”
.
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
|
|
$
|
1,188,980
|
|
2012
|
|
|
1,210,000
|
|
2011
|
|
|
100,000
|
|
Total
|
|
$
|
2,498,980
|
|
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 $485,980 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 10. 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.
As of May 14, 2014 the Company has not repaid
the principal due on the March 2012 $100,000 note or the April 2012 $25,000 note and as such is in default under the terms of the
notes. There is also unpaid interest related to these notes.
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 consisted of a $10,000 original issue discount and a carried transaction expense of $2,500. The original issue
discount was being amortized over the life of the note. The note was convertible at an initial conversion price of $0.30 per share
at any time, and contained a “down-round protection” feature that requires the valuation of a derivative liability
associated with the note. The note bore interest at 7% and was due in May 2014. Tonaquint was also issued a market-related warrant
for $112,500 in shares of common stock with a “cashless” exercise feature. The warrant had a $0.35 exercise price,
a 5-year term and included a “down-round protection” feature that required it to be classified as a liability rather
than as equity (see Note 6).
During the first quarter
of 2014 the Company executed a debt settlement agreement with Tonaquint related to the note and warrant. The warrant was settled
during the first quarter of 2014 for a cash payment of $98,000, resulting in a loss of $98,000. The note was settled during the
second quarter of 2014 for cash payments totaling $144,000 ($20,000 paid in the first quarter of 2014 and $124,000 paid in the
second quarter of 2014). Because the execution of the debt settlement agreement in the first quarter of 2014 resulted in a significant
modification of the original terms of the note agreement, the Company adjusted the carrying value of the note in the first quarter
of 2014 and recorded a related loss of approximately $34,000.
Southridge
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 10). 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. During the quarter ended March 31, 2014, the Company did a
private offering of a third tranche of convertible notes and warrants, under which it issued $64,706 of convertible promissory
notes for consideration of $55,000, the difference between the proceeds from the notes and principal amount consists of $9,706
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 958,179 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
|
|
|
Warrants
(Tranche 3)-
February 14,
2014
|
|
Expected term
|
|
|
2 years
|
|
|
|
2 years
|
|
|
|
2 years
|
|
Volatility
|
|
|
180.02
|
%
|
|
|
184.38
|
%
|
|
|
184.88
|
%
|
Risk Free Rate
|
|
|
0.31
|
%
|
|
|
0.39
|
%
|
|
|
0.32
|
%
|
The proceeds of the
Notes issued during the three months ended March 31, 2014 were allocated to the components as follows:
|
|
Proceeds allocated
at issue date
|
|
Private Offering Notes
|
|
$
|
32,390
|
|
Private Offering Warrants
|
|
|
14,845
|
|
Beneficial Conversion feature
|
|
|
7,765
|
|
Total
|
|
$
|
55,000
|
|
Series B Original
Issue Discount Convertible Notes and Warrants
During the quarter
ended March 31, 2014, the Company did a private offering of convertible notes and warrants, under which it issued $80,000 of convertible
promissory notes for consideration of $65,000, the difference between the proceeds from the notes and principal amount consists
of $15,000 of original issue discount. The notes are convertible at an initial conversion price of $0.35 per share anytime after
issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for
185,714 in shares of common stock. The warrants have an exercise price of $0.45 and a 4-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
March 20,
2014
|
|
Expected term
|
|
|
4 years
|
|
Volatility
|
|
|
151.52
|
%
|
Risk Free Rate
|
|
|
1.32
|
%
|
The proceeds of the
Notes were allocated to the components as follows:
|
|
Proceeds allocated
at issue date
|
|
Private Offering Notes
|
|
$
|
34,272
|
|
Private Offering Warrants
|
|
|
26,811
|
|
Beneficial Conversion feature
|
|
|
3,917
|
|
Total
|
|
$
|
65,000
|
|
12. SHAREHOLDERS’ DEFICIENCY
Stock Option Plan
On May 2, 2011 the Company adopted and executed
the Employees’ Directors’ and Consultants Stock Option Plan (the “Plan”). During the three months ended
March 31, 2014, the Company granted 42,500 options to non-employee directors which were fully vested upon issuance. During the
three months ended March 31, 2013, the Company granted 50,000 options to non-employee directors which were fully vested upon issuance.
During the three months
ended March 31, 2013, the Company granted 1,000,000 stock options to its then CEO of which 200,000 vested immediately. Due to his
subsequent resignation in September 2013, all options have since been cancelled.
There were no grants
of stock options to employees during the three months ended March 31, 2014.
During the three months ended March
31, 2013 the Board of Directors extended the expiration dates for all options previously granted to one departing Board member
in recognition for service. The Company considered the extension as a modification to the option agreements recording incremental
compensation expense of $16,920 for the three months ended March 31, 2013.
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:
|
|
Three
months
Ended
|
|
|
Three
months
Ended
|
|
|
|
March 31,
2014
|
|
|
March 31,
2013
|
|
Dividend yield (1)
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected volatility (2)
|
|
|
118.5
|
%
|
|
|
99.2% - 100.3
|
%
|
Risk-free interest rates (3)
|
|
|
1.72
|
%
|
|
|
0.63
|
%
|
Expected lives (2)
|
|
|
5.0
YEARS
|
|
|
|
2.0-4.0 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.
|
During the three months ended March 31,
2014, the Company recognized expense of $11,178 for stock options issued to directors and expense of $3,150 for stock options issued
to employees.
During the three months
ended March 31, 2013, the Company recognized expense of $14,250 for stock options issued to directors and expense of $80,267 for
stock options issued to employees.
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 March 31, 2014 dividends declared were $70,323, of which $4,623 were
declared during the three months ended March 31, 2014 and $51,575 have not been paid and are shown in accrued and other liabilities
at March 31, 2014.
|
|
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 $66,176 and $80,408, associated with the 375 shares of Series C Convertible
Preferred Stock outstanding at March 31, 2014 and December 31, 2013, respectively.
The Company has classified the Series C
Convertible Preferred Stock as a liability at March 31, 2014 and December 31, 2013 because the variable conversion feature may
require the Company to settle the conversion in a variable number of its common shares.
Common Stock
During the quarter
ended March 31, 2014, the Company did a private offering of its common stock and warrants, for consideration of $500,000. 2,500,000
shares of common stock were issued at a per share price of $0.20. The common stock holders were also issued warrants to purchase
1,250,000 shares of common stock. The warrants have an exercise price of $0.60 and a 1-year term. The warrants were recorded to
additional paid-in-capital.
During the three
months ended March 31, 2014 and 2013, the Company issued 10,625 and 3,750 shares of its common stock to non-employee
directors under its Director Compensation Plan. The Company recorded expense of $4,038 and $655 for director stock
compensation expense in the three months ended March 31, 2014 and 2013.
13
.
CONTRACTUAL
OBLIGATIONS AND CONTINGENCIES
As of March 31, 2014, CTI and its majority owned subsidiary, VVI, have remaining obligations, contingent
upon receipt of certain revenues, to repay up to $165,701 and $198,365, 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 have engaged R.F.
Lafferty & Co. to seek an acquisition partner from a limited number of companies for our nanoparticle 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.
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. 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.
14. 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 March 31, 2014, $2,598,980 of the outstanding were Notes payable to related parties; $2,498,980 to
the chairman of our Board and $100,000 to another director.
15. SUBSEQUENT
EVENT
On April 8, 2014, Mr.
Giuseppe Marineo, an inventor of the Calmare® pain therapy device, and Delta Research and Development (“Delta”),
Mr. Marineo’s research company, and Delta International Services and Logistics (“DIS&L”), Delta’s commercial
arm in which Mr. Marineo is the sole beneficiary of all proceeds as its founder and sole owner (collectively the “Group”),
issued a press release (the “Group’s Press Release”) regarding Competitive Technologies, Inc. (“CTI”
or the “Company”) stating that the Company did not have authority to sell, distribute and manufacture Calmare as an
exclusive agent of the Group. CTI issued a corporate response in a press release dated April 11, 2014 stating that the Group’s
Press Release was inaccurate and has since been purged by the overseeing body of wire services.
As disclosed in the Company’s Annual
Report on Form 10-K on April 16, 2014, this dispute between the Company and the Group is over the validity of a 2012 Amendment
to a Sales and Representation Agreement (the “Amendment”) which, if valid and enforceable, would have compromised its
rights to sell, distribute and manufacture Calmare as an exclusive agent of the Group in the global marketplace, especially in
the European, Middle Eastern and North African (“EMENA”) territory which was responsible for approximately 70% of gross
Calmare sales in 2011. However, the Company believes that the Amendment is neither valid nor enforceable as it was never duly signed
or authorized and subsequently deemed null and void as disclosed on April 16, 2014 in the Form 10-K filing. Therefore, the parties’
rights are determined by an earlier agreement whereby the Company still possesses the authority to sell, distribute and manufacture
Calmare as a world-wide exclusive agent of the Group.
On April 16, 2014, counsel for the Group
(“Group Counsel”) sent a cease and desist letter (“Cease and Desist Letter”) to the Company, requesting
a confirmation that the Company would no longer hold itself out as an agent of the Group permitted to sell, distribute and manufacture
Calmare world-wide including the EMENA territory.
The Company responded on April 25, 2014
to the Cease and Desist Letter, disputing Group Counsel’s interpretation of the events surrounding the execution of the Amendment.
At this time the Company is pursuing a reasonable and amicable resolution to the situation.