During the six months
ended June 30, 2015, the Company issued 500,000 shares with a fair value of $80,000 to an advisory firm for consulting services.
The Company amortized the $80,000 over the service period and recorded $20,000 and $40,000 of expense in the quarter and six months
ended June 30, 2015, respectively.
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.
During the six months
ended June 30, 2016, the Company allocated $336,282 of convertible note proceeds for the fair value of warrants and beneficial
conversion feature to additional paid-in capital.
Notes to Condensed Consolidated Interim
Financial Statements
(Unaudited)
The interim condensed
consolidated financial information presented in the accompanying condensed consolidated financial statements and notes hereto is
unaudited.
Calmare Therapeutics
Incorporated and its majority-owned (56.1%) subsidiary, Vector Vision, Inc., (collectively, the “Company,” "we,”
“our,” or “us”), is a medical device company developing and commercializing innovative products and technologies
for chronic neuropathic pain and wound care affliction patients. The Company’s flagship medical device, the Calmare
®
Pain Therapy Device (the “Calmare Device”), is the world’s only non-invasive and non-addictive modality that
can successfully treat chronic, neuropathic pain.
The consolidated financial
statements include the accounts of the Company and its majority-owned subsidiary, Vector Vision, Inc. 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 and six
months ended June 30, 2016 are not necessarily indicative of the results that can be expected for the full year ending December
31, 2016.
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, 2015 filed with the Securities and Exchange Commission (“SEC”) on April 14, 2016.
During the three
and six months ended June 30, 2016, we had a significant concentration of revenues from the Calmare
®
Device. The
percentages of gross revenue (excluding retained royalties) attributed to sales and rentals of Calmare Devices, in the three months
ended June 30, 2016 and June 30, 2015, were 98% and 95%, respectively. The percentages of gross revenue (excluding retained royalties)
attributed to sales and rentals of Calmare Devices, in the six months ended June 30, 2016 and June 30, 2015, were 96% and 94%,
respectively. Additionally, the percentage of gross revenue (excluding retained royalties) attributed to other Calmare Device related
sales of equipment and training, in the three months ended June 30, 2016 and June 30, 2015, were 2% and 5%, respectively. The percentage
of gross revenue (excluding retained royalties) attributed to other Calmare Device related sales of equipment and training, in
the six months ended June 30, 2016 and June 30, 2015, were 4% and 6%, respectively. We continue to attempt to expand our sales
activities for the Calmare Device and expect the majority of our revenues to come from this technology.
The Company has incurred
operating losses since fiscal 2006 and has a working capital deficiency and shareholders’ deficiency at June 30, 2016. The
Company has taken steps to reduce 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 2016 and into 2017. 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, the Company 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.
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 June 30, 2016, the Company had outstanding debt in the form of promissory notes with a total principal
amount of $6,059,000 and a carrying value of $5,667,000.
|
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
|
|
|
Six
months
ended
|
|
|
Six
months
ended
|
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Denominator for basic net loss per share, weighted average shares outstanding
|
|
|
28,753,289
|
|
|
|
27,862,908
|
|
|
|
28,639,424
|
|
|
|
27,318,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of common stock options
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of Series C convertible preferred stock, convertible debt and warrants
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Denominator for diluted net loss per share, weighted average shares outstanding
|
|
|
28,753,289
|
|
|
|
27,862,908
|
|
|
|
28,639,424
|
|
|
|
27,318,467
|
|
Due to the net loss
incurred for the three and six months ended June 30, 2016, and June 30, 2015, 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:
|
|
June 30,2016
|
|
|
June 30, 2015
|
|
Exercise of common stock options
|
|
|
1,698,500
|
|
|
|
1,742,500
|
|
Exercise of common stock warrants
|
|
|
12,213,276
|
|
|
|
6,452,248
|
|
Conversion of Series C convertible preferred stock
|
|
|
1,982,816
|
|
|
|
1,329,646
|
|
Conversion of convertible debt
|
|
|
18,500,915
|
|
|
|
6,305,390
|
|
Total
|
|
|
34,395,507
|
|
|
|
15,829,784
|
|
|
3.
|
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
|
In May 2014, the 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 31, 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, 2016, 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.
In February 2016, the
FASB issued ASU No. 2016-02,
Leases
, to increase the transparency and comparability about leases among entities. The new
guidance requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It
also requires additional disclosures about leasing arrangements. The ASU is effective for interim and annual periods beginning
after December 15, 2018, and requires a modified retrospective approach to adoption. Early adoption is permitted. The Company is
currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.
In March 2016, the
FASB issued ASU No. 2016-09,
Compensation - Stock Compensation Improvements to Employee Share-Based Payment Accounting
,
which is intended to simplify certain aspects of the accounting for share-based payments to employees. The guidance in this standard
requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled rather than
recording excess tax benefits or deficiencies in additional paid-in capital. The guidance in this standard also allows an employer
to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting
and to make a policy election to account for forfeitures as they occur. The standard becomes effective for interim and annual periods
beginning after December 15, 2016, and requires a modified retrospective approach to adoption. Early adoption is permitted. The
Company is currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.
Receivables consist
of the following:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Calmare device sales receivable, net of allowance of $210,284 at June 30, 2016 and December 31, 2015
|
|
$
|
1,000
|
|
|
$
|
31,827
|
|
Royalties, net of allowance of $101,154 at June 30, 2016 and December 31, 2015
|
|
|
-
|
|
|
|
-
|
|
Other, net of allowance of $6,221 at June 30, 2016 and December 31, 2015
|
|
|
7,235
|
|
|
|
1,254
|
|
Total
|
|
$
|
8,235
|
|
|
$
|
33,081
|
|
|
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”). The Company owns 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. The Company received 60 shares of privately held Xion Pharmaceutical Corporation common stock in
June 2010. The Company currently owns 30% of the outstanding stock of Xion Pharmaceutical Corporation.
|
6.
|
FAIR VALUE MEASUREMENTS
|
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
|
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 approximately at $89,000 and $66,000 at June 30, 2016 and December 31, 2015, respectively, 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, liabilities under the claims purchase agreement,
accounts payable, GEOMC, 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:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Prepaid insurance
|
|
$
|
5,671
|
|
|
$
|
47,931
|
|
Other
|
|
|
15,675
|
|
|
|
10,103
|
|
Prepaid expenses and other current assets
|
|
$
|
21,346
|
|
|
$
|
58,034
|
|
|
8.
|
PROPERTY AND EQUIPMENT
|
Property and equipment,
net, consist of the following:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Property and equipment, gross
|
|
$
|
220,051
|
|
|
$
|
220,051
|
|
Accumulated depreciation and amortization
|
|
|
(204,588
|
)
|
|
|
(196,325
|
)
|
Property and equipment, net
|
|
$
|
15,463
|
|
|
$
|
23,726
|
|
Depreciation and amortization expense was
$4,131 and $8,263, respectively, during the three and six months ended June 30, 2016, and $3,904 and $8,363, respectively, for
the three and six months ended June 30, 2015.
|
9.
|
ACCRUED EXPENSES AND OTHER LIABILITIES
|
Accrued expenses and
other liabilities consist of the following:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Royalties payable
|
|
$
|
525,823
|
|
|
$
|
487,739
|
|
Accrued compensation
|
|
|
-
|
|
|
|
49,769
|
|
Commissions payable
|
|
|
57,782
|
|
|
|
15,900
|
|
Accrued interest payable
|
|
|
1,862,128
|
|
|
|
1,589,256
|
|
Other
|
|
|
223,077
|
|
|
|
105,360
|
|
Accrued expenses and other liabilities, net
|
|
$
|
2,668,810
|
|
|
$
|
2,248,024
|
|
Excluded above is approximately
$217,000 of accrued expenses and other liabilities at June 30, 2016 and December 31, 2015, that fall under the Liability Purchase
Agreement (“LPA”) with ASC Recap, LLC (“ASC Recap”), and are expected to be repaid using the process as
described in Note 10. Because there can be no assurance that the Company will be successful in completing this process,
the Company retains ultimate responsibility for these liabilities, until fully paid down.
|
10.
|
LIABILITIES ASSIGNED TO LIABILITY PURCHASE AGREEMENT
|
During the third quarter
of 2013, the Company negotiated a LPA with Southridge, Partners II, L.P. (“Southridge”). The LPA takes advantage of
a provision in the Securities Act of 1933, Section 3(a)(10), that allows the exchange of claims, securities, or property for stock
when the arrangement is approved for fairness by a court proceeding. The process, approved by the court in August 2013, has the
potential to eliminate nearly $2.1 million of the Company’s 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 August 22, 2016, 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.
Notes payable consist of the following:
Short
term
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
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
|
|
Series A-3 OID Convertible Notes and Warrants
|
|
|
14,353
|
|
|
|
14,353
|
|
Series B-2 OID Convertible Notes and Warrants
|
|
|
2,928,214
|
|
|
|
1,532,710
|
|
Short term notes payable, gross
|
|
|
5,666,547
|
|
|
|
4,271,043
|
|
Less LPA amount
|
|
|
(485,980
|
)
|
|
|
(485,980
|
)
|
Short term notes payable, net
|
|
$
|
5,180,567
|
|
|
$
|
3,785,063
|
|
Long term
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Series B-1 OID Convertible Notes and Warrants
|
|
$
|
-
|
|
|
$
|
67,919
|
|
Details of notes payable as of June 30,
2016 are as follows:
Short term
|
|
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
|
|
|
|
3/2014
– 6/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A-3 OID Convertible Notes and Warrants
|
|
|
11,765
|
|
|
|
14,353
|
(1)
|
|
|
None
|
|
|
$
|
0.25
|
|
|
|
1/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
B-2 OID Convertible Notes and Warrants
|
|
|
3,323,529
|
|
|
|
2,928,214
|
|
|
|
None
|
|
|
$
|
0.20
– 0.25
|
|
|
|
11/2015
– 03/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term notes payable, gross
|
|
$
|
6,059,274
|
|
|
|
5,666,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
LPA amount
|
|
|
|
|
|
|
(485,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term notes payable, net
|
|
|
|
|
|
$
|
5,180,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 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,
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 $207,000 and $188,000
during the six months ended June 30, 2016 and June 30, 2015, respectively, and has recorded additional interest in total of $1,214,000.
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 June 30, 2016,
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. As of June 30, 2016, there is also unpaid interest of $46,556 related to these
notes.
Series A-3 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 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 June 30, 2014, certain holders of Series A-3 OID convertible notes and warrants delivered to the Company a notice of conversion
related to the Series A-3 OID convertible notes. Due to the timing of receipt of the notices by the Company, certain Note holders
(“Noteholders”) received their shares during the quarter ended June 30, 2014, while other Noteholders received or are
due to receive their shares after June 30, 2014. 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 and irrespective of whether the shares were delivered
in the quarter ended June 30, 2014 or subsequent to June 30, 2014 to 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.
Presented below is
summary information related to the conversion:
Statement of Operations
|
|
|
|
|
Loss on conversion of notes
|
|
$
|
43,288
|
|
Accelerated interest expense
|
|
$
|
35,109
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
Shares issued as of June 30, 2014
|
|
|
798,825
|
|
Shares to be issued subsequent to June 30, 2014
|
|
|
529,415
|
|
Principal amount of notes converted
|
|
$
|
265,648
|
|
During the quarter
ended March 31, 2015, a holder of Series A-3 OID convertible notes and warrants delivered to the Company a notice of conversion
related to the Series A-3 OID convertible notes. Additionally, the Company offered the 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 June 30, 2016, the Company had not issued the shares due related to the conversion notice.
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-1 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
|
|
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-1 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-1 OID noteholder and the Company agreed
that this anti-dilution provision had been triggered and the Series B-1 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
|
|
Total
|
|
$
|
65,000
|
|
Series B-2 OID Convertible Notes and Warrants
During the quarter
ended December 31, 2014, the Company did private offerings of convertible notes and warrants, under which it issued $358,824 of
convertible promissory notes for consideration of $305,000, the difference between the proceeds from the notes and principal amount
consists of $53,824 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 897,060 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 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
|
|
|
1 year
|
|
Volatility
|
|
|
188.31
|
%
|
Risk Free Rate
|
|
|
0.11
|
%
|
The proceeds of the
Notes were allocated to the components as follows:
|
|
Proceeds
allocated
at issue date
|
|
Private Offering Notes
|
|
$
|
224,679
|
|
Private Offering Warrants
|
|
|
57,854
|
|
Beneficial Conversion feature
|
|
|
22,467
|
|
Total
|
|
$
|
305,000
|
|
During the quarter
ended June 30, 2015, a holder of Series B-2 OID convertible notes and warrants delivered to the Company a notice of conversion
related to the Series B-2 OID convertible notes, with a principal amount of $5,882. In the quarter ended September 30, 2015, the
Company issued 29,410 shares due related to the conversion notice.
As of June 30, 2016,
the remaining notes have passed their maturity date. The Company has not repaid the amounts due on these notes and is in default
under the terms of the notes.
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
|
|
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
|
|
As of June 30, 2016,
the remaining notes have passed their maturity date. The Company has not repaid the amounts due on these notes and is in default
under the terms of the notes.
During the quarter
ended September 30, 2015, the Company did an additional private offering of convertible notes and warrants, under which it issued
$705,882 of convertible promissory notes for consideration of $600,000, the difference between the proceeds from the notes and
principal amount consists of $105,882 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 1,411,764 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
|
|
Expected term
|
|
|
1 year
|
|
Volatility
|
|
|
171.36
|
%
|
Risk Free Rate
|
|
|
0.28
|
%
|
The proceeds of the
Notes were allocated to the components as follows:
|
|
Proceeds
allocated
at issue date
|
|
Private Offering Notes
|
|
$
|
342,857
|
|
Private Offering Warrants
|
|
|
120,000
|
|
Beneficial Conversion feature
|
|
|
137,143
|
|
Total
|
|
$
|
600,000
|
|
During the quarter
ended December 31, 2015, the Company did an additional private offering of convertible notes and warrants, under which it issued
$470,588 of convertible promissory notes for consideration of $400,000, the difference between the proceeds from the notes and
principal amount consists of $70,588 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 1,176,470 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
|
|
Expected term
|
|
|
1 year
|
|
Volatility
|
|
|
132.44
|
%
|
Risk Free Rate
|
|
|
0.66
|
%
|
The proceeds of the
Notes were allocated to the components as follows:
|
|
Proceeds
allocated
at issue date
|
|
Private Offering Notes
|
|
$
|
361,991
|
|
Private Offering Warrants
|
|
|
38,009
|
|
Total
|
|
$
|
400,000
|
|
During the quarter
ended March 31, 2016, the Company did an additional private offering of convertible notes and warrants, under which it issued $705,882
of convertible promissory notes for consideration of $600,000, the difference between the proceeds from the notes and principal
amount consists of $105,882 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 3,529,412 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
|
|
Expected term
|
|
|
1 year
|
|
Volatility
|
|
|
136.24
|
%
|
Risk Free Rate
|
|
|
0.62
|
%
|
The proceeds of the
Notes were allocated to the components as follows:
|
|
Proceeds
allocated
at issue date
|
|
Private Offering Notes
|
|
$
|
454,545
|
|
Private Offering Warrants
|
|
|
122,727
|
|
Beneficial Conversion feature
|
|
|
22,728
|
|
Total
|
|
$
|
600,000
|
|
During the quarter
ended June 30, 2016, the Company did an additional private offering of convertible notes and warrants, under which it issued $705,882
of convertible promissory notes for consideration of $600,000, the difference between the proceeds from the notes and principal
amount consists of $105,882 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 3,000,000 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
|
|
Expected term
|
|
|
1 year
|
|
Volatility
|
|
|
128.74-134.16
|
%
|
Risk Free Rate
|
|
|
0.55-0.61
|
%
|
The proceeds of the
Notes were allocated to the components as follows:
|
|
Proceeds
allocated
at issue date
|
|
Private Offering Notes
|
|
$
|
409,174
|
|
Private Offering Warrants
|
|
|
111,243
|
|
Beneficial Conversion feature
|
|
|
79,583
|
|
Total
|
|
$
|
600,000
|
|
|
12.
|
SHAREHOLDERS’ DEFICIENCY
|
Stock Option Plan
On May 2, 2011 the
Company adopted and executed the Employees’ Directors’ and Consultants Stock Option Plan (the “Plan”).
During the six months ended June 30, 2015, the Company granted 50,000 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:
|
|
Six months
ended
|
|
|
|
June 30, 2015
|
|
Dividend yield (1)
|
|
|
0.00
|
%
|
Expected volatility (2)
|
|
|
164.5
|
%
|
Risk-free interest rates (3)
|
|
|
1.61
|
%
|
Expected lives (2)
|
|
|
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.
|
No options were granted
during the six months ended June 30, 2016. During the six months ended June 30, 2016, 300,000 options were cancelled and 40,000
options expired.
During the three and
six months ended June 30, 2016, the Company recognized expense of $7,180 and $14,360, respectively, for stock options issued to
employees and realized a credit of $13,280 during the three months ended June 30, 2016 for options cancelled as a result of the
January 2016 resignation of the Company’s Chief Financial Officer.
During the six months
ended June 30, 2015, the Company recognized expense of $7,963 for stock options issued to directors and recognized expense of $8,106
and $16,212, respectively, for the three and six months ended June 30, 2015, 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.
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 June 30, 2016, dividends declared were $112,548, of which $4,675 and $9,349 were declared during the three and six months ended June 30, 2016, respectively, and $93,802 have not been paid and are shown in accrued and other liabilities at June 30, 2016.
|
|
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 associated with the 375 shares of Series C Convertible Preferred Stock outstanding
of $88,979 and $66,177 at June 30, 2016 and December 31, 2015, respectively.
The Company has classified
the Series C Convertible Preferred Stock as a liability at June 30, 2016 and December 31, 2015 because the variable conversion
feature may require the Company to settle the conversion in a variable number of its common shares.
Common Stock
At its December 2,
2010 meeting, the CTI Board of Directors declared a dividend distribution of one right (each, a “Right”) for each outstanding
share of common stock, par value $0.01, of the Company (the “Common Shares”). The dividend was payable to holders of
record as of the close of business on December 2, 2010 (the “Record Date”). Issuance of the dividend may be triggered
by an investor purchasing more than 20% of the outstanding shares of common stock.
On August 14, 2014
the shareholders approved an amendment to the Company’s certification of incorporation to effect up to a one-for-ten reverse
stock split (the “reverse Stock Split” of the Company’s issued and authorized outstanding common stock. The Board
of Directors, in its sole discretion, has discretion to implement the Reverse Stock Split. As of March 31, 2016, the Board of Directors
has not implemented the Reverse Stock Split.
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, 2015, 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.
During the quarter
ended June 30, 2016, the Company issued 261,943 shares with a fair value of $49,769 to Conrad Mir, its President and CEO, for the
remainder of his 2015 bonus and his 2015 unused accrued vacation.
On October 15, 2015
the shareholders approved an increase in the number of authorized shares of common stock from 40 million to 100 million.
The Company issued
10,000 and 12,500 shares of its common stock to non-employee directors under its Director Compensation Plan during the three months
ended March 31, 2016 and 2015, respectively. The Company recorded expense of $1,900 and $2,125 for director stock compensation
expense in the three months ended March 31, 2016 and 2015, respectively. No shares were issued under the Director Compensation
Plan in the three months ended June 30, 2016 and June 30, 2015. Additionally, no expense was recorded in the three months ended
June 30, 2016 and June 30, 2015.
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13
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CONTRACTUAL OBLIGATIONS AND CONTINGENCIES
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As of June 30, 2016,
the Company and its majority owned subsidiary, VVI, have remaining obligations, contingent upon receipt of certain revenues, to
repay up to $165,788 and $199,334, respectively, in consideration of grant funding received in 1994 and 1995. The Company 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. On February 4, 2016,
the Company announced that it is discussing a settlement with GEOMC, however, to date, no settlement has been reached.
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.
The Company’s
Distribution Rights, Marineo and Delta
On April 8, 2014, Mr.
Giuseppe Marineo, 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 the Company, stating that the Company did not have authority to sell, distribute and manufacture
the Calmare Device as an exclusive agent of the Group. The Company 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 that time, the Company initiated an effort to find a reasonable and amicable resolution to the situation. To
date, despite a number of attempts by the Company, the situation remains unresolved. The Company continues to properly sell and
distribute Calmare Devices manufactured under the 2007 Agreement and the 2011 Amendment.
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 June 30, 2016, the respective firms were being 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.
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14.
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RELATED PARTY TRANSACTIONS
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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.
As of June 30, 2016
and December 31, 2015, the Company has $357,200 and $302,500, respectively, owed in fees to current directors. All of the December
31, 2015 amount is in Accounts Payable while the June 30, 2016 amount is split $312,500 in Accounts Payable and $44,700 in Accrued
Liabilities – Other.
At June 30, 2016, $2,598,980
of the outstanding Notes payable were Notes payable to related parties; $2,498,980 to the Chairman of the Board and $100,000 to
another director.
Dr. Stephen J. D’Amato,
the Company’s chief medical officer is also one of the managing members of Calmar Pain Relief, LLC. Calmar Pain Relief purchases
from the Company electrodes for use with the Calmare Device. These electrodes are purchased at the same price as those purchased
by other customers. In the first six months of 2016, purchases of electrodes by Calmar Pain Relief totaled $1,600.
Since October 15, 2015,
the Company has a consulting agreement with VADM Robert T. Conway, Jr., U.S. Navy, (Ret) (the “Admiral”), a member
of the Company’s Board of Directors. The agreement is for one year and includes compensation of a monthly retainer fee of
$7,500 and a five year warrant to purchase 167,000 shares of common stock of the Company, fully vested on the date of issuance,
at a strike price of $.60 per share with an aggregate estimated fair value of $33,734. As a result of this agreement, the Board
of Directors has determined that the Admiral is no longer an independent director of the Company. As of June 30, 2016, the Company
has $15,000 in consulting fees payable to the Admiral,
On August 8, 2016,
the Board of Directors approved a new series of preferred stock called Series D Convertible Preferred Stock. The Company intends
to use this series of stock to raise new capital and to convert some of its existing debt to this new offering. 500,000 shares
of this stock were authorized at a par value of $25.00 per share. The shares are convertible into Common Stock at 125 shares of
Common Stock for each share of Series D Convertible Preferred Stock. Holders of shares of Series D Convertible Preferred Stock
are entitled to receive, when, as and if declared by the Board, semi-annual dividends in the amount of $0.75 per share. Holders
of shares of Series D Convertible Preferred Stock do not have any voting rights.
On August 8, 2016,
the Board of Directors approved the 2016 Employees,’ Directors’ and Consultants Stock Option Plan. The Board authorized
2,500,000 shares of Common Stock as available to be granted under this Plan.
On August 8, 2016,
the Company granted 60,000 options to non-employee directors which were fully vested upon issuance. On the same day, the Company
also granted 650,000 options to new employees, 75,000 options to current employees and 110,000 options to consultants. 20% of these
options vest immediately and the remainder vest over a four year period. The strike price for all these options is $0.17 per share,
which is the fair market value of the Company’s Common Stock at the close of business on August 8, 2016.