UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
☒ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended March 31, 2015 |
or
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from
to
|
Commission
file number 001-08696
www.calmaretherapeutics.com
CALMARE
THERAPEUTICS INCORPORATED |
(Exact
name of registrant as specified in its charter)
|
Delaware |
36-2664428 |
(State or other jurisdiction
of incorporation or
organization) |
(I. R. S. Employer
Identification No.) |
|
|
1375
Kings Highway East, Suite 400 Fairfield,
Connecticut |
06824 |
(Address of principal
executive offices) |
(Zip Code) |
(203)
368-6044 |
(Registrant’s
telephone number, including area code) |
|
|
(Former name, former
address and former fiscal year, if changed since last report) |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒
No ☐
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.
Yes ☒ No
☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definition of “accelerated filer, large accelerated filer and smaller reporting company” as defined
in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ |
Accelerated
filer ☐ |
Non-accelerated filer
☐ (Do not check if a smaller reporting company) |
Smaller reporting company ☒ |
Indicate
by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).
Yes ☐ No
☒
The
number of shares of the registrant’s common stock outstanding as of October 13, 2015
was 28,395,888 shares.
CALMARE
THERAPEUTICS INCORPORATED
INDEX
TO QUARTERLY REPORT ON FORM 10-Q
PART
I. FINANCIAL INFORMATION
Item
1. Condensed Consolidated Interim Financial Statements
CALMARE
THERAPEUTICS INCORPORATED AND SUBSIDIARY
Condensed
Consolidated Balance Sheets
| |
March 31, 2015 | | |
December 31, 2014 | |
| |
(Unaudited) | | |
| |
Assets | |
| | | |
| | |
Current Assets: | |
| | | |
| | |
Cash | |
$ | 501 | | |
$ | 5,745 | |
Receivables, net of allowance of $317,659 at March 31, 2015 and December 31, 2014 | |
| 3,391 | | |
| 2,319 | |
Inventory | |
| 4,118,220 | | |
| 4,118,220 | |
Prepaid expenses and other current assets | |
| 179,636 | | |
| 253,102 | |
Total current assets | |
| 4,301,748 | | |
| 4,379,386 | |
| |
| | | |
| | |
Property and equipment, net | |
| 31,181 | | |
| 35,640 | |
Security deposits | |
| 15,000 | | |
| 15,000 | |
TOTAL ASSETS | |
$ | 4,347,929 | | |
$ | 4,430,026 | |
| |
| | | |
| | |
Liabilities and Shareholders’ Deficit | |
| | | |
| | |
Current Liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 1,545,735 | | |
$ | 1,346,138 | |
Liabilities under claims purchase agreement | |
| 1,995,320 | | |
| 1,995,320 | |
Accounts payable, GEOMC | |
| 4,182,380 | | |
| 4,182,380 | |
Accrued expenses and other liabilities | |
| 1,776,041 | | |
| 1,590,182 | |
Notes payable | |
| 2,741,344 | | |
| 2,536,830 | |
Deferred revenue | |
| 13,781 | | |
| 19,686 | |
Series C convertible preferred stock derivative liability | |
| 66,177 | | |
| 66,177 | |
Series C convertible preferred stock liability | |
| 375,000 | | |
| 375,000 | |
Total current liabilities | |
| 12,695,778 | | |
| 12,111,713 | |
| |
| | | |
| | |
Note payable – long-term | |
| 59,474 | | |
| 56,659 | |
| |
| | | |
| | |
Commitments and Contingencies | |
| | | |
| | |
Shareholders’ deficit: | |
| | | |
| | |
5% preferred stock, $25 par value, 35,920 shares authorized, 2,427 shares issued and outstanding | |
| 60,675 | | |
| 60,675 | |
Series B preferred stock, $0.001 par value, 20,000 shares authorized, no shares issued and outstanding | |
| — | | |
| — | |
Series C convertible preferred stock, $1,000 par value, 750 shares authorized, 375 shares issued and outstanding | |
| — | | |
| — | |
Common stock, $.01 par value, 40,000,000 shares authorized, 26,916,478 shares issued and outstanding at March 31, 2015 and 25,908,978 shares issued and outstanding at December 31, 2014 | |
| 269,164 | | |
| 259,089 | |
Capital in excess of par value | |
| 47,960,056 | | |
| 47,634,857 | |
Accumulated deficit | |
| (56,697,218 | ) | |
| (55,692,967 | ) |
Total shareholders’ deficit | |
| (8,407,323 | ) | |
| (7,738,346 | ) |
| |
| | | |
| | |
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | |
$ | 4,347,929 | | |
$ | 4,430,026 | |
See
accompanying notes
PART
I. FINANCIAL INFORMATION (Continued)
CALMARE
THERAPEUTICS INCORPORATED AND SUBSIDIARY
Condensed
Consolidated Statements of Operations
(Unaudited)
| |
Three months ended | | |
Three months ended | |
| |
March 31,
2015 | | |
March 31,
2014 | |
Revenue | |
| | | |
| | |
Product sales | |
$ | 7,950 | | |
$ | 221,080 | |
Cost of product sales | |
| 2,297 | | |
| 70,218 | |
Gross profit from product sales | |
| 5,653 | | |
| 150,862 | |
| |
| | | |
| | |
Other Revenue | |
| | | |
| | |
Retained royalties | |
| 2,392 | | |
| 2,604 | |
Other income | |
| 8,507 | | |
| 3,821 | |
Total other revenue | |
| 10,899 | | |
| 6,425 | |
| |
| | | |
| | |
Operating expenses | |
| | | |
| | |
Selling expenses | |
| 1,236 | | |
| 71,994 | |
Personnel and consulting expenses | |
| 507,478 | | |
| 395,023 | |
General and administrative expenses | |
| 323,639 | | |
| 193,721 | |
Total operating expenses | |
| 832,353 | | |
| 660,738 | |
| |
| | | |
| | |
Operating loss | |
| (815,801 | ) | |
| (503,451 | ) |
| |
| | | |
| | |
Other expense (income) | |
| | | |
| | |
Interest expense | |
| 185,862 | | |
| 104,786 | |
Loss on settlement of note and warrant | |
| — | | |
| 132,301 | |
Loss on conversion of notes | |
| 2,588 | | |
| — | |
Unrealized gain on derivative instruments | |
| — | | |
| (14,232 | ) |
Total other expense | |
| 188,450 | | |
| 222,855 | |
| |
| | | |
| | |
Loss before income taxes | |
| (1,004,251 | ) | |
| (726,306 | ) |
Provision (benefit) for income taxes | |
| — | | |
| — | |
| |
| | | |
| | |
Net loss | |
$ | (1,004,251 | ) | |
$ | (726,306 | ) |
| |
| | | |
| | |
Basic and diluted loss per share | |
$ | (0.04 | ) | |
$ | (0.04 | ) |
| |
| | | |
| | |
Basic and diluted weighted average number of common shares outstanding: | |
| 26,767,978 | | |
| 20,036,240 | |
| |
| | | |
| | |
See
accompanying notes
|
PART
I. FINANCIAL INFORMATION (Continued)
CALMARE
THERAPEUTICS INCORPORATED AND SUBSIDIARY |
Condensed
Consolidated Statement of Changes in Shareholders’ Deficit
For
the Three Months Ended March 31, 2015
(Unaudited)
| |
Preferred Stock | | |
Common Stock | | |
Capital | | |
| | |
Total | |
| |
Shares outstanding | | |
Amount | | |
Shares outstanding | | |
Amount | | |
in excess of par value | | |
Accumulated deficit | | |
shareholders’ deficit | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance January 1, 2015 | |
| 2,427 | | |
$ | 60,675 | | |
| 25,908,978 | | |
$ | 259,089 | | |
$ | 47,634,857 | | |
$ | (55,692,967 | ) | |
$ | (7,738,346 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,004,251 | ) | |
| (1,004,251 | ) |
Common stock issued to directors | |
| — | | |
| — | | |
| 12,500 | | |
| 125 | | |
| 2,000 | | |
| — | | |
| 2,125 | |
Stock option compensation expense | |
| — | | |
| — | | |
| — | | |
| — | | |
| 16,069 | | |
| — | | |
| 16,069 | |
Common stock issued for consulting services | |
| — | | |
| — | | |
| 620,000 | | |
| 6,200 | | |
| 101,400 | | |
| — | | |
| 107,600 | |
Warrants
issued for consulting services | |
| — | | |
| — | | |
| — | | |
| — | | |
| 75,000 | | |
| — | | |
| 75,000 | |
Private offering of common stock and warrants | |
| — | | |
| — | | |
| 375,000 | | |
| 3,750 | | |
| 71,250 | | |
| — | | |
| 75,000 | |
Warrant and beneficial conversion feature on notes payable | |
| — | | |
| — | | |
| — | | |
| — | | |
| 59,480 | | |
| — | | |
| 59,480 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance March
31, 2015 | |
| 2,427 | | |
$ | 60,675 | | |
| 26,916,478 | | |
$ | 269,164 | | |
$ | 47,960,056 | | |
$ | (56,697,218 | ) | |
$ | (8,407,323 | ) |
See
accompanying notes
|
PART
I. FINANCIAL INFORMATION (Continued)
CALMARE
THERAPEUTICS INCORPORATED AND SUBSIDIARY |
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
| |
Three months
ended | | |
Three months
ended | |
| |
March 31, 2015 | | |
March 31, 2014 | |
Cash flows from operating activities: | |
| | | |
| | |
| |
| | | |
| | |
Net loss | |
$ | (1,004,251 | ) | |
$ | (726,306 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 4,459 | | |
| 1,824 | |
Stock option compensation expense | |
| 16,069 | | |
| 14,328 | |
Share-based compensation – common stock | |
| 2,125 | | |
| 4,038 | |
Common stock and warrants issued to consultants | |
| 182,600 | | |
| — | |
Debt discount amortization | |
| 49,720 | | |
| 61,364 | |
Noncash finance charges | |
| — | | |
| 18,434 | |
Unrealized gain on derivative instruments | |
| — | | |
| (14,232 | ) |
Loss on conversion of notes | |
| 2,588 | | |
| — | |
Loss on settlement of note and warrant | |
| — | | |
| 132,301 | |
Changes in assets and liabilities: | |
| | | |
| | |
Receivables | |
| (1,072 | ) | |
| 57,013 | |
Prepaid expenses and other current assets | |
| 73,466 | | |
| 17,072 | |
Inventory | |
| — | | |
| 30,000 | |
Accounts payable, accrued expenses and other liabilities | |
| 385,457 | | |
| 178,694 | |
Deferred revenue | |
| (5,905 | ) | |
| 13,287 | |
Net cash used in operating activities | |
| (294,744 | ) | |
| (212,183 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchase of property and equipment | |
| — | | |
| (3,078 | ) |
Cash used in investing activities | |
| — | | |
| (3,078 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from notes payable | |
| 257,000 | | |
| 120,000 | |
Repayment of note and warrant settlement | |
| (42,500 | ) | |
| (118,000 | ) |
Proceeds from common stock and warrants | |
| 75,000 | | |
| 500,000 | |
Net cash provided by financing activities | |
| 289,500 | | |
| 502,000 | |
| |
| | | |
| | |
Net increase (decrease) in cash | |
| (5,244 | ) | |
| 286,739 | |
| |
| | | |
| | |
Cash at beginning of period | |
| 5,745 | | |
| 57,009 | |
| |
| | | |
| | |
Cash at end of period | |
$ | 501 | | |
$ | 343,748 | |
Supplemental
disclosure of non-cash transactions:
During
the quarter ended March 31, 2015, the Company issued 500,000 shares with a fair value of $80,000 to an advisory firm for consulting
services. The Company is amortizing the $80,000 over the service period and recorded $20,000 of expense in the quarter ended March
31, 2015.
During
the quarter ended March 31, 2015, the Company issued 120,000 shares to an advisory firm for consulting services. The shares vested
in two tranches, with 60,000 shares vesting in the quarter ended December 31, 2014 and remaining 60,000 shares vesting in the
quarter ended March 31, 2015. The Company recorded consulting expenses of $10,800 in the quarter ended December 31, 2014 and $27,600
of consulting expenses in the quarter ended March 31, 2015. In each instance, the expense was based on the fair value on the vesting
date.
During
the quarter ended March 31, 2015, the Company issued 333,333 stock warrants for consulting services performed and recorded consulting
expense of $75,000 for the fair value of the warrants.
During
the quarter ended March 31, 2015, the Company allocated $59,480 of convertible note proceeds for the fair value of warrants and
beneficial conversion feature to additional paid-in capital.
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).
See
accompanying notes
PART
I. FINANCIAL INFORMATION (Continued)
CALMARE
THERAPEUTICS INCORPORATED AND SUBSIDIARY |
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.
Effective
August 20, 2014, Competitive Technologies, Inc. changed its name to Calmare Therapeutics Incorporated.
Calmare
Therapeutics Incorporated (“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
device (the “Calmare Device”), which was 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, 2015 are not necessarily indicative of the results that can be expected for the full year
ending December 31, 2015.
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, 2014 filed with the Securities and Exchange Commission (“SEC”)
on June 24, 2015.
During
the three months ended March 31, 2015, we had a significant concentration of revenues from the Calmare® Device. The
percentages of gross revenue attributed to sales and rentals of Calmare Devices, in the three months ended March 31, 2015,
were 74%; and 98% in the three months ended March 31, 2014. Additionally, the percentage of gross revenue attributed
to other Calmare Device related sales of equipment and training, in the three months ended March 31, 2015, was 16%; and 1%, in
the three months ended March 31, 2014. 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 and shareholders’ deficiency at March
31, 2015. The Company has taken steps to manage its operating expenses as well as increase revenue from sales of Calmare Devices
and related sales. However, even at the reduced spending levels, should the anticipated increase in revenue from sales of
Calmare Devices and related sales not occur the Company may not have sufficient cash flow to fund operations through 2015
and into 2016. 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 attempt to 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.
PART
I. FINANCIAL INFORMATION (Continued)
CALMARE
THERAPEUTICS INCORPORATED AND SUBSIDIARY |
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, 2015, the Company had outstanding debt in the form of promissory notes with
a total principal amount of $3,477,000 and a carrying value of $3,287,000.
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 (“Delta”), 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,
the Company believes that the 2012 Amendment is neither valid nor enforceable as it was never duly signed or authorized and subsequently
deemed null and void (see Footnote 13. CONTRACTUAL OBLIGATIONS AND CONTINGENCIES, CTI’s Distribution Rights, 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. (“GEOMC”) 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 through the term of the agreement.
2. NET
LOSS PER COMMON SHARE
The
following sets forth the denominator used in the calculations of basic net loss per share and net loss per share assuming dilution:
| |
Three months
ended | | |
Three months
ended | |
| |
March 31,
2015 | | |
March 31,
2014 | |
Denominator for basic net loss per share, weighted average shares outstanding | |
| 26,767,978 | | |
| 20,036,240 | |
| |
| | | |
| | |
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 loss per share, weighted average shares outstanding | |
| 26,767,978 | | |
| 20,036,240 | |
Due
to the net loss incurred for the three months ended March 31, 2015, and 2014, 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.
Potentially
dilutive securities outstanding are summarized as follows:
| |
March 31, 2015 | | |
March 31, 2014 | |
Exercise of common stock options | |
| 1,742,500 | | |
| 1,409,000 | |
Exercise of common stock warrants | |
| 5,727,251 | | |
| 2,393,891 | |
Conversion of Series C convertible preferred stock | |
| 1,470,588 | | |
| 1,176,471 | |
Conversion of convertible debt | |
| 6,306,802 | | |
| 4,808,776 | |
Total | |
| 15,247,141 | | |
| 9,788,138 | |
PART
I. FINANCIAL INFORMATION (Continued)
CALMARE
THERAPEUTICS INCORPORATED AND SUBSIDIARY |
3. RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) No. 2014-09, Revenue From Contracts With Customers, as amended by ASU 2015-14, that
outlines a single comprehensive model for entities to use in accounting for revenue recognition and supersedes most
current revenue recognition guidance, including industry-specific guidance. The amendments in this accounting standard update
are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue
recognition practices, and improve disclosure requirements. The amendments in this accounting standard update are effective
for interim and annual reporting periods beginning after December 15, 2017; with early adoption permitted after December
15, 2016. The Company is currently assessing the impact that this standard will have on its consolidated
financial statements.
In
August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern, which provides
guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability
to continue as a going concern and the related footnote disclosure. For each reporting period, management will be required
to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as
a going concern within one year from the date the financials are issued. When management identifies conditions or events
that raise substantial doubt about the entity’s ability to continue as a going concern, the ASU also outlines disclosures
that are required in the company’s footnotes based on whether or not there are any plans intended to mitigate the relevant
conditions or events to alleviate the substantial doubt. The ASU becomes effective for annual periods ending after December
15, 2017, and for any annual and interim periods thereafter. Early application is permitted. The Company is currently
assessing the impact that this standard will have on its consolidated financial statements.
In
July 2015, the FASB issued ASU No. 2015-11, Inventory – Simplifying the Measurement of Inventory, which requires
that inventory be measured at the lower of cost and net realizable value. Prior to the issuance of the new
guidance, inventory was measured at the lower of cost or market. Replacing the concept of market with the single measurement
of net realizable value is intended to create efficiencies for preparers. Inventory measured using the last-in, first-out
(LIFO) method and the retail inventory method are not impacted by the new guidance. The ASU becomes effective for fiscal
years beginning after December 15, 2016, including interim periods with those fiscal years. Early application is permitted.
We do not expect the adoption to have a material impact on our consolidated financial statements.
4. RECEIVABLES
Receivables
consist of the following:
| |
March 31, 2015 | | |
December 31, 2014 | |
Calmare device sales receivable, net of allowance of $209,533 at March 31, 2015 and December 31, 2014 | |
$ |
— | | |
$ |
— | |
Royalties, net of allowance of $101,154 at March 31, 2015 and December 31, 2014 | |
|
— | | |
— | |
Other, net of allowance of $6,972 at March 31, 2015 and December 31, 2014 | |
| 3,391 | | |
| 2,319 | |
Total | |
$ | 3,391 | | |
$ | 2,319 | |
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. The Company has been notified that Xion Pharmaceutical Corporation will be dissolved in 2015 with
no financial impact to the Company.
6. FAIR
VALUE MEASUREMEMENTS
The
Company measures fair value in accordance with Topic 820 of the 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 |
PART
I. FINANCIAL INFORMATION (Continued)
CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY
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 at March 31, 2015 and December 31, 2014, in Level 2 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.
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, 2015 | | |
December 31, 2014 | |
Prepaid insurance | |
$ | 25,761 | | |
$ | 71,651 | |
Prepaid consulting services | |
| 60,000 | | |
| 37,500 | |
Clinical trial | |
| 68,119 | | |
| 109,119 | |
Other | |
| 25,756 | | |
| 34,832 | |
Prepaid expenses and other current assets | |
$ | 179,636 | | |
$ | 253,102 | |
PART
I. FINANCIAL INFORMATION (Continued)
CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY
8. PROPERTY
AND EQUIPMENT
Property
and equipment, net, consist of the following:
| |
March 31, 2015 | | |
December 31, 2014 | |
Property and equipment, gross | |
$ | 215,491 | | |
$ | 215,491 | |
Accumulated depreciation and amortization | |
| (184,310 | ) | |
| (179,851 | ) |
Property and equipment, net | |
$ | 31,181 | | |
$ | 35,640 | |
Depreciation
and amortization expense was $4,459 during the three months ended March 31, 2015, and $1,824 for the three months ended March
31, 2014.
9. ACCRUED
EXPENSES AND OTHER LIABILITIES
Accrued
expenses and other liabilities consist of the following:
| |
March
31, 2015 | | |
December 31, 2014 | |
Royalties payable | |
$ | 319,417 | | |
$ | 314,787 | |
Accrued compensation | |
| 75,981 | | |
| 23,573 | |
Accrued interest payable | |
| 1,123,401 | | |
| 987,659 | |
Other | |
| 257,242 | | |
| 264,163 | |
Accrued expenses and other liabilities, net | |
$ | 1,776,041 | | |
$ | 1,590,182 | |
Excluded
above is approximately $217,000 of accrued expenses and other liabilities at March 31, 2015 and December 31, 2014, 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 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. During 2014, the Company also made cash payments of $18,000 for accrued expenses
previously included in the LPA amount. As of October 13, 2015, 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.
PART
I. FINANCIAL INFORMATION (Continued)
CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY
11. NOTES
PAYABLE
Notes
payable consist of the following:
| |
March 31, 2015 | | |
December 31, 2014 | |
90 day Convertible Notes (Chairman of the Board) | |
$ | 2,498,980 | | |
$ | 2,498,980 | |
24 month Convertible Notes ($100,000 to Board member) | |
| 225,000 | | |
| 225,000 | |
10 day Note (Board member) | |
| — | | |
| 42,500 | |
Series A3 15% OID Convertible Notes and Warrants | |
| 14,353 | | |
| 11,765 | |
Series B OID Convertible Notes and Warrants | |
| 59,474 | | |
| 56,659 | |
1 Year 15% OID Convertible Notes and Warrants | |
| 488,991 | | |
| 244,565 | |
Notes Payable, gross | |
| 3,286,798 | | |
| 3,079,469 | |
Less LPA amount | |
| (485,980 | ) | |
| (485,980 | ) |
Notes Payable, net | |
$ | 2,800,818 | | |
$ | 2,593,489 | |
Details
of notes payable as of March 31, 2015 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 |
Series A3 15% OID Convertible Notes and Warrants | |
| 11,765 | (1) | |
| 14,353 | (1) | |
| None | | |
| 0.25 | | |
January 2015 |
Series B OID Convertible Notes and Warrants | |
| 80,000 | | |
| 59,474 | | |
| None | | |
| 0.23 | | |
March 2017 |
1 Year 15% OID Convertible Notes and Warrants | |
| 661,177 | | |
| 488,991 | | |
| None | | |
| 0.20 | | |
Aug. 2015 – Feb. 2016 |
Notes Payable, gross | |
$ | 3,476,922 | | |
| 3,286,798 | | |
| | | |
| | | |
|
Less LPA amount | |
| | | |
| (485,980 | ) | |
| | | |
| | | |
|
Notes Payable, net | |
| | | |
$ | 2,800,818 | | |
| | | |
| | | |
|
(1) Includes
$2,588 of accrued loss on conversion of OID note.
PART
I. FINANCIAL INFORMATION (Continued)
CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY
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 of 1% simple interest per month
on all amounts outstanding for 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.
Due
to the Board’s February 10, 2014 decision authorizing management to nullify certain actions taken by prior management, the
additional terms noted above were not approved and therefore, the additional interest for the extension of the Notes was not recorded.
During 2014 and 2015, management has been in negotiations to modify the terms of the Notes. However, until those negotiations
are resolved, the Company has agreed to honor the additional terms and as such, the Company recorded additional interest of approximately
$92,000 during the three months ended March 31, 2015, and has recorded cumulative additional interest in total of $711,000.
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 at a rate of $1.05 per share.
As
of October 13, 2015 the Company has not repaid the principal due on the March 2012
$100,000 note, the April 2012 $25,000 note or the June 2012 $100,000 note and is in default under the terms of the notes. There
is also unpaid interest of $32,000 related to these notes.
10
day Note
In
late December 2014, the Company issued a 10 day non-interest bearing note to a Board member in the amount of $42,500. This note
was repaid in early January 2015.
PART I. FINANCIAL INFORMATION (Continued)
CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY
Series A 15% Original Issue Discount
(“OID”) 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 $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 an initial conversion price of $0.25 per share any time after
issuance thereby having an embedded beneficial conversion feature.
The note holders were also issued market-related warrants for 129,412 in shares of common stock. The warrants
have an exercise price of $0.60 and a term of 2 years. The beneficial conversion feature, if any, 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 | |
Expected term | |
| 2
years | |
Volatility | |
| 184.88 | % |
Risk Free Rate | |
| 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 | |
During
the quarter ended March 31, 2015, a holder of OID convertible notes and warrants delivered to the Company a notice of conversion
related to the OID convertible notes. Additionally, the Company offered Noteholder an inducement to convert his/her notes to shares.
The inducement provided the Noteholder a conversion price of $0.20. All other original terms, including the warrant terms, remained
the same. Upon notice of conversion the Company: (i) accelerated and recognized as interest expense in the current period any
remaining discount, and (ii) recognized a loss for the fair value of the additional shares offered as the conversion inducement.
As of March 31, 2015, the Company had not issued the shares due related to the conversion notice.
PART
I. FINANCIAL INFORMATION (Continued)
CALMARE
THERAPEUTICS INCORPORATED AND SUBSIDIARY |
Presented
below is summary information related to the conversion:
Statement of Operations | |
| | |
Loss on conversion of notes | |
$ | 2,588 | |
Accelerated interest expense | |
$ | — | |
| |
| | |
Balance
Sheet | |
| | |
Shares issued | |
| — | |
| |
| | |
Principal amount of notes converted | |
$ | 11,765 | |
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
any time 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 |
|
The
Series B OID notes included an anti-dilution provision that if the Company issues more than 20 million shares of its common stock,
subject to certain exceptions, the conversion price of the notes and the conversion price of the warrants would be subject to
an automatic pre-determined price adjustment. During the quarter ended December 31, 2014 the Series B OID noteholder and the Company
agreed that this anti-dilution provision had been triggered and the OID note share conversion price was adjusted down to $0.23
per share, which increased the number of shares available upon conversion to 347,826. The anti-dilution provision in the Warrant
changed the share purchase price downward to $0.33 per share but did not change the number of shares available under the Warrant.
As
a result of the triggering of the above noted one time anti-dilution provision, the Company reallocated the proceeds of the Notes
during the quarter ended December 31, 2014 as follows:
| |
Proceeds
allocated
at issue date | |
Private Offering Notes | |
$ | 46,222 | |
Private Offering Warrants | |
| 18,778 | |
Beneficial Conversion feature | |
| — | |
Total | |
$ | 65,000 | |
1
Year 15% OID Convertible Notes and Warrants
During
the quarter ended March 31, 2015, the Company did an additional private offering of convertible notes and warrants, under which
it issued $302,353 of convertible promissory notes for consideration of $257,000, the difference between the proceeds from the
notes and principal amount consists of $45,353 of original issue discount. The notes are convertible at an initial conversion
price of $0.20 per share any time after issuance thereby having an embedded beneficial conversion feature. The note holders were
also issued market-related warrants for 755,882 in shares of common stock. The warrants have an exercise price of $0.60 and a
1-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 shares 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
three months
ended March 31, 2015 |
|
Expected term |
|
|
1 year |
|
Volatility |
|
|
180.15-185.71 |
% |
Risk Free Rate |
|
|
0.18-0.22 |
% |
The
proceeds of the Notes were allocated to the components as follows:
|
|
Proceeds
allocated
at issue date |
|
Private Offering Notes |
|
$ |
197,521 |
|
Private Offering Warrants |
|
|
46,097 |
|
Beneficial Conversion feature |
|
|
13,382 |
|
Total |
|
$ |
257,000 |
|
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.
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.
The convertible note was convertible into the Company’s common stock at the greater of $0.25 or 85% of the average closing
bid price during the five (5) trading days prior to conversion and was due in June 2014.
During
the third quarter of 2014, the Company issued to Southridge 50,000 shares in exchange for and in full satisfaction for the note
and recorded a $5,500 loss upon conversion of the note.
PART
I. FINANCIAL INFORMATION (Continued)
CALMARE
THERAPEUTICS INCORPORATED AND SUBSIDIARY |
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, 2015, the Company granted 50,000 options to non-employee directors which were fully vested
upon issuance. During the three months ended March 31, 2014, the Company granted 42,500 options to non-employee directors which
were fully vested upon issuance.
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,
2015 | | |
March 31,
2014 | |
Dividend yield (1) | |
| 0.00 | % | |
| 0.00 | % |
Expected volatility (2) | |
| 164.5 | % | |
| 118.5 | % |
Risk-free interest rates (3) | |
| 1.61 | % | |
| 1.72 | % |
Expected lives (2) | |
| 5.0
YEARS | | |
| 5.0
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, 2015, the Company recognized expense of $7,963 for stock options issued to directors and expense
of $8,106 for stock options issued to employees.
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.
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.
|
PART I. FINANCIAL INFORMATION (Continued)
CALMARE THERAPEUTICS INCORPORATED
AND SUBSIDIARY |
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, 2015, dividends declared were $89,073, of which $4,623 were declared during the three months ended March 31, 2015 and $70,325 have not been paid and are shown in accrued and other liabilities at March 31, 2015. |
|
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) |
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 (a) the closing market price at the date of notice of conversion or (b) 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. |
The Company recorded a
convertible preferred stock derivative liability of $66,177, associated with the 375 shares of Series C Convertible Preferred Stock
outstanding at March 31, 2015 and December 31, 2014.
The Company has classified
the Series C Convertible Preferred Stock as a liability at March 31, 2015 and December 31, 2014 because the variable conversion
feature may require the Company to settle the conversion in a variable number of its common shares.
Common Stock
On August 14, 2014, the shareholders approved an amendment to the Company’s certificate of incorporation
to effect up to a one-for-ten reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding
common stock. The Board of Directors, in its sole discretion, has discretion to implement the Reverse Stock Split. As of June 23,
2015, the Board of Directors has not implemented the Reverse Stock Split.
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.
During the quarter ended
March 31, 2015, the Company did a private offering of its common stock and warrants, for consideration of $75,000. 375,000 shares
of common stock were issued at a per share price of $0.20. The common stock holders were also issued warrants to purchase 187,500
shares of common stock. The warrants have an exercise price of $0.60 and a 3-year term. The warrants were recorded to additional
paid-in-capital.
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 3-year term. The warrants were recorded to additional
paid-in-capital.
During the quarter ended
March 31, 2015, the Company issued 500,000 shares with a fair value of $80,000 to an advisory firm for consulting services. The
Company is amortizing the $80,000 over the service period and recorded $20,000 of expense in the quarter ended March 31, 2015.
During the quarter ended
March 31, 2015, the Company issued 120,000 shares to an advisory firm for consulting services. The shares vested in two tranches,
with 60,000 shares vesting in the quarter ended December 31, 2014 and remaining 60,000 shares vesting in the quarter ended March
31, 2015. The Company recorded consulting expenses of $10,800 in the quarter ended December 31, 2014 and $27,600 of consulting
expenses in the quarter ended March 31, 2015. In each instance, the expense was based on the fair value on the vesting date.
During the quarter ended
March 31, 2015, the Company issued 333,333 stock warrants with a five year term for consulting services performed and recorded
consulting expense of $75,000 for the fair value of the warrants.
|
PART I. FINANCIAL INFORMATION (Continued)
CALMARE THERAPEUTICS INCORPORATED
AND SUBSIDIARY |
During the three months
ended March 31, 2015 and 2014, the Company issued 12,500 and 10,625 shares of its common stock to non-employee directors under
its Director Compensation Plan. The Company recorded expense of $2,125 and $4,038 for director stock compensation expense in the
three months ended March 31, 2015 and 2014.
13. CONTRACTUAL
OBLIGATIONS AND CONTINGENCIES
As of March 31, 2015, CTI
and its majority owned subsidiary, VVI, have remaining obligations, contingent upon receipt of certain revenues, to repay up to
$165,788 and $198,334, 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.
Contingencies –
Litigation
Tim Conley (case
pending) - On August 18, 2014, notice was issued to the Company that on June 23, 2014, Timothy Conley (the “Plaintiff”)
filed a complaint against the Company, in the United States District Court for the District of Rhode Island. The complaint alleges
that the Company’s former acting interim CEO, Johnnie Johnson, and Plaintiff entered into an agreement whereby the Company
agreed to make payments to Plaintiff. Among other allegations, Plaintiff claims that the Company’s nonpayment to Plaintiff
constitutes a breach of contract. The Company believes it has meritorious defenses to the allegations and the Company intends to
vigorously defend against the litigation.
GEOMC (case pending)
- On August 22, 2014, GEOMC filed a complaint against the Company in the United States District Court for the District
of Connecticut. The complaint alleges that the Company and GEOMC entered into a security agreement whereby in exchange for GEOMC’s
sale and delivery of the Scrambler Therapy devices (the “Devices”), the Company would grant GEOMC a security interest
in the Devices. Among other allegations, GEOMC claims that the Company has failed to comply with the terms of the security agreement
and seeks an order to the Court to replevy the Devices or collect damages. The Company believes it has meritorious defenses to
the allegations and the Company intends to vigorously defend against the litigation.
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.
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.
|
PART I. FINANCIAL INFORMATION (Continued)
CALMARE THERAPEUTICS INCORPORATED
AND SUBSIDIARY |
CTI’s Distribution
Rights, Marineo and Delta
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 CTI stating that the Company did not have authority to
sell, distribute and manufacture the Calmare Device 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.
This issue 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, may have compromised
its rights to sell, distribute and manufacture the Calmare Device 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 Device 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 possesses the authority to sell,
distribute and manufacture the Calmare Device 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 the Calmare Device 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 continues to work to find a reasonable and amicable resolution to the situation.
Authorized shares
Throughout the quarter ended March 31, 2015
and as of October 13, 2015, in the event that all of the outstanding securities issued
by the Company were converted into shares of common stock at one time (the “Fully Diluted Shares”), whether exercisable
or otherwise, the number of Fully Diluted Shares of common stock would exceed the number of currently authorized shares of the
Company. If such an event were to happen, the Company could either (a) immediately effectuate a reverse stock split, which was
approved by the Board of Directors and a majority of stockholders on August 14, 2014 or (b) call for a special general meeting
of shareholders and request shareholder consent to increase the number of authorized shares of the Company. In either case,
such actions would cure the common stock shortfall and return the Company to compliance with the common stock share count threshold
as so delineated in the supporting financing agreements. Notwithstanding the foregoing, the Company currently expects to request
shareholder consent at the next Annual General Meeting of Shareholders, to increase the number of authorized shares of the Company,
and, if received in either of the aforementioned cases, shall file a Certificate of Amendment to the Certificate of Incorporation
to increase the number of authorized shares to a value larger than the number of Fully Diluted Shares.
Unsigned Agreements
The Company uses two unrelated
firms to provide marketing and investor relations services, CME Acuity (“CMEA”) and Legend Capital Management (“LCM”),
respectively. The LCM and CMEA agreements were not signed due to an inability to come to final terms due to certain nuances in
either agreement that included but were not limited to assignment of human capital and allowable performance based bonus(es). However,
from the start date until March 31, 2015, the respective firms were compensated for services rendered on a “pay-as-we go”
basis (the “Arrangement”). The aforementioned Arrangement is expected to continue for the next few consecutive quarters
until such time as their agreements can be consummated.
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, 2015, $2,598,980
of the outstanding Notes payable were Notes payable to related parties; $2,498,980 to the chairman of our Board and $100,000 to
another director.
15. SUBSEQUENT
EVENTS
From April 1, 2015 to October
13, 2015 the Company obtained additional funding, including $290,000 of equity funding and $600,000 of hybrid debt funding.
From April 1, 2015 to October
13, 2015, the Company did a series of private offerings
of its common stock and warrants, for consideration of $290,000. 1,450,000 shares of common stock were issued at a per share price
of $0.20. The common stock holders were also issued warrants to purchase 725,000 shares of common stock. The warrants have an exercise
price of $0.60 and a 3-year term. From April 1, 2015 to October
13, 2015, the Company
did a private offering of convertible notes and warrants, under which it issued $706,000 of convertible promissory notes for consideration
of $600,000, the difference between the proceeds from the notes and principal amount consists of $106,000 of original issue discount.
The notes are convertible at a conversion price of $0.25 per share. The note holder was also issued market-related warrants for
1,412,000 in shares of common stock. The warrants have an exercise price of $0.60 and a 1-year term.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Statements
Statements about our future
expectations are “forward-looking statements” within the meaning of applicable Federal Securities Laws, and are not
guarantees of future performance. When used in herein, the words “may,” “will,” “should,” “anticipate,”
“believe,” “intend,” “plan,” “expect,” “estimate,” “approximate,”
and similar expressions are intended to identify such forward-looking statements. These statements involve risks and uncertainties
inherent in our business, including those set forth in Item 1A under the caption “Risk Factors,” in our most recent Annual
Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission (“SEC”)
on June 24, 2015, and other filings with the SEC, and are subject to change at any time. Our actual results could differ materially
from these forward-looking statements. We undertake no obligation to update publicly any forward-looking statement.
Overview
Calmare Therapeutics Incorporated
(“CTI”) was incorporated in Delaware in 1971, succeeding an Illinois corporation incorporated in 1968. CTI and its
majority-owned subsidiary (collectively, “we,” “our,” 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 was designed and developed to treat neuropathic and cancer-derived pain.
Effective August 20, 2014,
CTI changed its name from Competitive Technologies, Inc. to Calmare Therapeutics Incorporated.
Since 2011, the Company
has controlled the sales process for the Calmare Device. We are the primary obligor, responsible for delivering devices as well
as training our customers in the proper use of the device. We deal directly with customers, setting pricing and providing training;
contribute to the development, new specifications and 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. We record in product sales, the total funds earned from customers and record the costs of the device as cost
of product sales, with gross profit from product sales being the result.
Sales of our Calmare
device continue to be the major source of revenue for the Company. The Company’s original 2007 agreement with Giuseppe Marineo
(the “Scrambler Therapy Agreement”), an inventor of Scrambler Therapy technology (“ST”), and Delta
Research and Development (“Delta”), authorized CTI to manufacture and sell worldwide the device developed from the
patented ST. The original agreement was amended in 2011 to provide the Company with exclusive rights to the ST 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, the Company believes that the 2012 Amendment is neither valid nor enforceable as it was never duly
signed or authorized and subsequently deemed null and void . 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 Distribution
Rights, Marineo and Delta
On April 8, 2014, Mr. Giuseppe
Marineo, an inventor of the Calmare 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 CTI, stating that the Company did not have authority to sell, distribute
and manufacture the Calmare Device 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.
This issue 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, may have compromised its rights to sell, distribute and manufacture the Calmare Device 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 Device 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.
Therefore, the parties’ rights are determined by an earlier agreement whereby the Company still possesses the authority to
sell, distribute and manufacture Calmare Devices 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 Devices 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 continues to work to find a reasonable and amicable resolution to the situation.
Presentation
All amounts in this Item
2 are rounded to the nearest thousand dollars.
The following discussion
and analysis provides information that we believe is relevant to an assessment and understanding of our financial condition and
results of operations. This discussion and analysis should be read in conjunction with our Consolidated Financial Statements
and Notes thereto.
Results of Operations – Three months ended March 31, 2015
vs. three months ended March 31, 2014
Summary of Results
Our net loss, for the quarter
ended March 31, 2015, increased to $1,004,000 or $0.04 per basic and diluted share as compared with a net loss of $726,000 or $0.04
per basic and diluted share for the comparable quarter of 2014. This net loss increase is largely attributable to a
$213,000 decrease in products sales and a $112,000 increase in personnel and consulting expenses.
Revenue and Gross Profit
from Sales
Revenue from the sale
and shipment of Calmare® pain therapy medical devices (the “Devices”), in the three months ended March 31,
2015, decreased $213,000 to $8,000 as compared with $221,000 for the comparable quarter of 2014.
Cost of product sales,
in the three months ended March 31, 2015, decreased $68,000 to $2,000 as compared with $221,000 for the comparable quarter
of 2014. This decrease in cost of product sold is attributable to the decrease in sales.
Device sales, in
the three months ended March 31, 2015, decreased with the sale of zero (0) Devices as compared with three (3) Device sales for
the comparable quarter of 2014. Device sales for the three months ended March 31, 2015 were comprised of the earning of previously
deferred revenue on one (1) U.S. private sector sale that was originally sold in 2014. Device sales for the three months ended
March 31, 2014 were comprised of three (3) U.S. private sector sales.
Due to the relatively long
sales cycle for a Device, Device sales and related revenues and expenses can and will vary significantly from quarter to quarter.
Other Revenue
Retained royalties, in
the three months ended March 31, 2015 of $2,000, were substantially unchanged compared to $2,000 in the three months ended March
31, 2014.
Other income, for the three
months ended March 31, 2015, was $9,000 as compared with $4,000 in the three months ended March 31, 2014. Other income
includes:
| |
Three Months Ended March 31, 2015 | | |
Three Months Ended March 31, 2014 | |
Training payments and the sale of supplies i.e., electrodes and cables for use with our Calmare Devices | |
$ | 3,000 | | |
$ | 2,000 | |
Rental income from customers who
were renting Calmare Devices from CTI | |
$ | 6,000 | | |
$ | 2,000 | |
Expenses
Total expenses increased
$137,000 or 15% to $1,021,000 in the three months ended March 31, 2015 as compared with $884,000 in the three months ended March
31, 2014.
Total operating expenses
increased $171,000 or 26% to $832,000 in the three months ended March 31, 2015 as compared with $661,000 in the three months ended
March 31, 2014.
Selling expenses decreased
99% or $71,000 to $1,000 in the three months ended March 31, 2015 as compared with $72,000 in the three months ended March 31,
2014 and reflects decreased commissions as a result of decreased Devices sales.
Personnel and consulting
expenses, in the three months ended March 31, 2015, increased 28% or $112,000 to $507,000 as compared with $395,000 in the
three months ended March 31, 2014. This increase is primarily related to an increase in consulting costs of $197,000, principally
in the form of equity compensation (stock and warrants) in the areas of sales and investor advisory services, partially offset
by an $87,000 decrease in personnel costs, principally related to incentive compensation.
General and administrative
expenses, in the three months ended March 31, 2015, increased 67% or $130,000 to $324,000 as compared with $194,000 in the
three months ended March 31, 2014. The increase primarily reflects a $136,000 increase in litigation expenses (see Note
13 of the Notes to Condensed Consolidated Interim Financial Statements).
Interest expense, in the three
months ended March 31, 2015, increased $81,000 or 77% to $186,000 as compared with $105,000 in the three months ended March 31,
2014 primarily as a result of the 1% additional monthly interest for the 90 day Convertible Notes (see Note 11 of the Notes to
Condensed Consolidated Interim Financial Statements).
Unrealized gain on derivative
instruments, in the three months ended March 31, 2015, was zero, as compared with a $14,000 gain in the three months ended
March 31, 2014. This reflects the impact of the movement in CTI’s share price on the Class C Preferred Stock at
the end of each period.
Financial Condition
and Liquidity
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. At March
31, 2015, the Company had outstanding debt in the form of promissory notes with a total principal amount of $3,476,000 and a carrying
value of $3,287,000.
Our future cash requirements
depend on many factors, including results of our operations and marketing efforts, results and costs of our legal proceedings,
and our equity financing. To achieve and sustain profitability, we are implementing a corporate reengineering effort,
which commenced on September 26, 2013 under the direction of CTI’s new president & CEO, Mr. Conrad Mir. This plan design
will change the inherent design of the current distributor network and focus on opportunities within the US Departments of Defense
(the “DOD”) and Veterans Affairs (“VA”), and set out to upgrade CTI’s current U.S. Food and Drug
Administration (“FDA”) clearance designation for the Calmare Device to approval. Although we cannot be certain that
we will be successful in these efforts, we believe the combination of our cash on hand and revenue from executing our strategic
plan will be sufficient to meet our obligations of current and anticipated operating cash requirements.
At March 31, 2015, cash
was $500, as compared with $6,000 at December 31, 2014. Net cash used in operating activities was $(295,000) for the three months
ended March 31, 2015 as compared to $(212,000) for the three months ended March 31, 2014, primarily reflecting an increase in net
loss partially offset by an increase in accounts payable, accrued expenses and other liabilities and non-cash equity expenses.
There was minimal investing activity year to date in both 2015 and 2014. Net cash provided by financing activities was $290,000
for the three months ended March 31, 2015 as compared to $502,000 for the three months ended March 31, 2014, primarily as a result
of the Company’s debt and equity financing activities in both periods.
We currently have the benefit
of using a portion of our accumulated net operating losses (“NOLs”) to eliminate any future regular federal and state
income tax liabilities. We will continue to receive this benefit until we have utilized all of our NOLs, federal and
state. However, we cannot determine when and if we will be profitable enough to utilize the benefit of the remaining
NOLs before they expire.
Authorized shares
Throughout the quarter ended March 31, 2015
and as of October
13, 2015, in the event that all of the outstanding securities issued
by the Company were converted into shares of common stock at one time (the “Fully Diluted Shares”), whether exercisable
or otherwise, the number of Fully Diluted Shares of common stock would exceed the number of currently authorized shares of the
Company. If such an event were to happen, the Company could either (a) immediately effectuate a reverse stock split, which was
approved by the Board of Directors and a majority of stockholders on August 14, 2014 or (b) call for a special general meeting
of shareholders and request shareholder consent to increase the number of authorized shares of the Company. In either case,
such actions would cure the common stock shortfall and return the Company to compliance with the common stock share count threshold
as so delineated in the supporting financing agreements. Notwithstanding the foregoing, the Company currently expects to request
shareholder consent at the next Annual General Meeting of Shareholders, to increase the number of authorized shares of the Company,
and, if received in either of the aforementioned cases, shall file a Certificate of Amendment to the Certificate of Incorporation
to increase the number of authorized shares to a value larger than the number of Fully Diluted Shares.
Going Concern
The Company has incurred
operating losses since fiscal 2006 and has a working capital and shareholders’ deficiency at March 31, 2015. During
the three months ended March 31, 2015 and 2014, we had a significant concentration of revenues from our Calmare Device technology. We
continue to seek revenue from new and existing technologies or products to mitigate the concentration of revenues, and replace
revenues from expiring licenses on other technologies.
Although we have taken
steps to significantly reduce operating expenses going forward, even at these reduced spending levels, should the anticipated increase
in revenue from sales of Calmare® medical devices and other technologies not occur, the Company may not have sufficient cash
flow to fund operations through 2015 and into 2016. These conditions raise substantial doubt about the Company’s ability
to continue as a going concern.
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 attempt to
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.
Debt
Financing
Details
of notes payable as of March 31, 2015 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 |
Series
A3 15% OID Convertible Notes and Warrants | |
| 11,765 | | |
| 14,353 | (1) | |
| None | | |
| 0.25 | | |
January
2015 |
Series
B OID Convertible Notes and Warrants | |
| 80,000 | | |
| 59,474 | | |
| None | | |
| 0.23 | | |
March
2017 |
1
Year 15% OID Convertible Notes and Warrants | |
| 661,177 | | |
| 488,991 | | |
| None | | |
| 0.20 | | |
Aug.
2015 – Feb. 2016 |
Notes
Payable, gross | |
$ | 3,476,922 | | |
| 3,286,798 | | |
| | | |
| | | |
|
Less
LPA amount | |
| | | |
| (485,980 | ) | |
| | | |
| | | |
|
Notes
Payable, net | |
| | | |
$ | 2,800,818 | | |
| | | |
| | | |
|
(1) Includes
$2,588 of accrued loss on conversion of OID note.
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 1% simple interest per month on
all amounts outstanding for 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.
Due
to the Board’s February 10, 2014 decision authorizing management to nullify certain actions taken by prior management, the
additional terms noted above were not approved and therefore, the additional interest for the extension of the Notes was not recorded.
During 2014, management has been in negotiations to modify the terms of the Notes. However, until those negotiations are resolved,
the Company has agreed to honor the additional terms and as such, the Company recorded additional interest of approximately $92,000
during the three months ended March 31, 2015, and has recorded additional interest in total of $711,000.
A
total of $485,980 of the aforementioned notes issued between December 1, 2012 and March 31, 2013 fall under the liabilities purchase
agreement 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 at a rate of $1.05 per share.
As
of October 13, 2015 the Company has not repaid the principal due on the March 2012
$100,000 note, the April 2012 $25,000 note or the June 2012 $100,000 note and is in default under the terms of the notes. There
is also unpaid interest of $32,000 related to these notes.
Series
A 15% Original Issue Discount Convertible Notes and Warrants
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 an initial conversion
price of $0.25 per share any time after issuance thereby having an embedded beneficial conversion feature.
The
note holders were also issued market-related warrants for 129,412 (third tranche) and 958,179 (all tranches) in shares of common
stock. The warrants have exercise prices that range from $0.40 to $0.60 and a term of 2 years. The beneficial conversion feature,
if any, and the warrants were recorded to additional paid-in-capital. The total debt discount is amortized over the life of the
notes to interest expense.
During
the quarter ended March 31, 2015, certain holders of OID convertible notes and warrants delivered to the Company a notice of conversion
related to the OID convertible notes. Additionally, the Company offered certain Noteholders an inducement to convert their notes
to shares. The inducement, when offered, provided Noteholders a conversion price of $0.20. All other original terms, including
the warrant terms, remained the same. Upon notice of conversion Company: (i) accelerated and recognized as interest expense in
the current period any remaining discount and (ii) recognized a loss for the fair value of the additional shares offered as the
conversion inducement. AS of March 31, 2015, the Company had not issued the shares due related to the conversion notice.
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
any time 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
Series B OID notes include an anti-dilution provision that if the Company issues more than 20 million shares of its common stock,
subject to certain exceptions, the conversion price of the notes and the conversion price of the warrants would be subject to
an automatic pre-determined price adjustment. During the quarter ended December 31, 2014 the Series B OID noteholder and the Company
agreed that this anti-dilution provision had been triggered and the
OID note share conversion price was adjusted down to $0.23 per share, which increased the number of shares available upon conversion
to 347,826. The anti-dilution provision in the Warrant changed the share purchase price downward to $0.33 per share but did not
change the number of shares available under the Warrant.
1
Year 15% OID Convertible Notes and Warrants
During
the quarter ended March 31, 2015, the Company did an additional private offering of convertible notes and warrants, under which
it issued $302,353 of convertible promissory notes for consideration of $257,000, the difference between the proceeds from the
notes and principal amount consists of $45,353 of original issue discount. The notes are convertible at an initial conversion
price of $0.20 per share any time after issuance thereby having an embedded beneficial conversion feature. The note holders were
also issued market-related warrants for 755,882 in shares of common stock. The warrants have an exercise price of $0.60 and a
1-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.
Capital
requirements
We
continue to seek revenue from new technology licenses to mitigate the concentration of revenue, and replace revenue from expiring
licenses. We have created a new business model for appropriate technologies that allows us to move beyond our usual
royalty arrangement and share in the profits of distribution.
For
2015, we expect our capital expenditures to be less than $100,000.
Contractual
Obligations and Contingencies
Contingencies
Our
directors, officers, employees and agents may claim indemnification in certain circumstances.
Many
of our license and service agreements provide that upfront license fees, license fees and/or royalties we receive are applied
against amounts that our clients or we have incurred for patent application, prosecution, issuance and maintenance costs. If
we incur such costs, we expense them as incurred, and reduce our expense if we are reimbursed from future fees and/or royalties
we receive. If the reimbursement belongs to our client, we record no revenue or expense.
As
of March 31, 2015, CTI and its majority-owned subsidiary, VVI, have remaining obligations, contingent upon receipt of certain
revenue, to repay up to $165,788 and $198,334, 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.
Critical
Accounting Estimates
There
have been no significant changes in our accounting estimates described under the caption “Critical Accounting Estimates”
included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
in our Annual report on Form 10-K for the year ended December 31, 2014.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
We
are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under
this item.
Item
4. Controls and Procedures
(a) Evaluation
of disclosure controls and procedures
Management
evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Securities Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2014. Our disclosure controls and procedures are designed to
ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C.
78a et seq.) is recorded, processed, summarized, and reported, within the time periods specified in the Commission’s rules
and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and
communicated to the issuer’s management, including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this
evaluation, management concluded that our disclosure controls and procedures were effective as of March 31, 2015.
(b) Change
in Internal Controls
During
the period ending March 31, 2015, there were no changes in our internal control over financial reporting during that period that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings
Tim
Conley (case pending) - On August 18, 2014, notice was issued to the Company that on June 23, 2014, Timothy Conley (the
“Plaintiff”) filed a complaint against the Company, in the United States District Court for the District of Rhode
Island. The complaint alleges that the Company’s former acting interim CEO, Johnnie Johnson, and Plaintiff entered into
an agreement whereby the Company agreed to make payments to Plaintiff. Among other allegations, Plaintiff claims that the Company’s
nonpayment to Plaintiff constitutes a breach of contract. The Company believes it has meritorious defenses to the allegations
and the Company intends to vigorously defend against the litigation.
GEOMC
(case pending) - On August 22, 2014, GEOMC filed a complaint against the Company in the United States District
Court for the District of Connecticut. The complaint alleges that the Company and GEOMC entered into a security agreement whereby
in exchange for GEOMC’s sale and delivery of the Scrambler Therapy devices (the “Devices”), the Company would
grant GEOMC a security interest in the Devices. Among other allegations, GEOMC claims that the Company has failed to comply with
the terms of the security agreement and seeks an order to the Court to replevy the Devices or collect damages. The Company believes
it has meritorious defenses to the allegations and the Company intends to vigorously defend against the litigation.
Item
1A. Risk Factors
We are
a smaller reporting company and are not required to provide the information under this item.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
During
the quarter ended March 31, 2015, the Company did a private offering of its common stock and warrants, for consideration of $75,000.
375,000 shares of common stock were issued at a per share price of $0.20. The common stock holders were also issued warrants to
purchase 187,500 shares of common stock. The warrants have an exercise price of $0.60 and a 3-year term.
During
the quarter ended March 31, 2015, the Company did an additional private offering of convertible notes and warrants, under which
it issued $302,353 of convertible promissory notes for consideration of $257,000, the difference between the proceeds from the
notes and principal amount consists of $45,353 of original issue discount. The notes are convertible at an initial conversion
price of $0.20 per share any time after issuance thereby having an embedded beneficial conversion feature. The note holders were
also issued market-related warrants for 755,882 in shares of common stock. The warrants have an exercise price of $0.60 and a
1-year term.
During
the quarter ended March 31, 2015, the Company issued 500,000 shares with a fair value of $80,000 to an advisory firm for consulting
services.
During
the quarter ended March 31, 2015, the Company issued 333,333 stock warrants with a five year term for consulting services performed
and recorded consulting expense of $75,000 for the fair value of the warrants.
The
securities issued in these transactions were not registered under the Securities Act, or the securities laws of any state, and
were offered and sold pursuant to the exemption from registration under the Securities Act provided by Section4(2) and Regulation
D (Rule 506) under the Securities Act.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Mine Safety Disclosures
Not
applicable.
Item
5. Other Information
None.
Item
6. Exhibits
Exhibit No |
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Description |
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Filing
Method |
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31.1 |
|
Certification by the Chief Executive Officer of Calmare Therapeutics
Incorporated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). |
|
Filed herewith |
|
|
|
|
|
31.2 |
|
Certification by the Chief Financial Officer of Calmare Therapeutics
Incorporated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). |
|
Filed herewith |
|
|
|
|
|
32.1 |
|
Certification by the Chief Executive Officer of Calmare Therapeutics
Incorporated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). |
|
Furnished herewith |
|
|
|
|
|
32.2 |
|
Certification by the Chief Financial Officer of Calmare Therapeutics
Incorporated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). |
|
Furnished herewith |
|
|
|
|
|
101.INS |
|
XBRL Instance Document |
|
Filed herewith |
|
|
|
|
|
101.SCH |
|
XBRL Taxonomy Schema |
|
Filed herewith |
|
|
|
|
|
101.CAL |
|
XBRL Taxonomy Calculation Linkbase |
|
Filed herewith |
|
|
|
|
|
101.DEF |
|
XBRL Taxonomy Definition Linkbase |
|
Filed herewith |
|
|
|
|
|
101.LAB |
|
XBRL Taxonomy Label Linkbase |
|
Filed herewith |
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101.PRE |
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XBRL Taxonomy Presentation Linkbase |
|
Filed herewith |
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
CALMARE THERAPEUTICS INCORPORATED |
|
(the registrant) |
|
|
|
|
By |
/s/ Conrad Mir
|
|
|
Conrad Mir |
|
|
President and Chief Executive Officer |
October 13, 2015 |
|
Authorized Signer (Duly Authorized Officer and Principal Executive
Officer) |
Exhibit
31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER,
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Conrad Mir, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Calmare
Therapeutics Incorporated.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
|
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; |
|
d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
5. The registrant’s other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant’s internal controls over financial reporting.
Dated: October 13, 2015 |
By: |
/s/ Conrad Mir |
|
|
Conrad Mir
President and Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER,
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Ian Rhodes, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Calmare
Therapeutics Incorporated;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
|
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; |
|
d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
5. The registrant’s other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant’s internal controls over financial reporting.
Dated: October 13, 2015 |
By: |
/s/ Ian Rhodes |
|
|
Ian Rhodes
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.SC. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Calmare Therapeutics
Incorporated (the “Company”) on Form 10-Q for the period ended March 31, 2015 as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), Conrad Mir, chief executive officer of the Company, certifies, pursuant
to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: October 13, 2015 |
By: |
/s/ Conrad Mir |
|
|
Conrad Mir
President Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer) |
This certification accompanies this Quarterly Report on Form 10-Q
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed
by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended,
or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.SC. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Calmare Therapeutics
Incorporated (the “Company”) on Form 10-Q for the period ended March 31, 2015 as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), Ian Rhodes, chief financial officer of the Company, certifies, pursuant
to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: October 13, 2015 |
By: |
/s/ Ian Rhodes |
|
|
Ian Rhodes
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) |
This certification accompanies this Quarterly Report on Form 10-Q
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed
by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended,
or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.
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