Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
THE
FOLLOWING DISCUSSION OF OUR PLAN OF OPERATION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS
AND RELATED NOTES TO THE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS
THAT RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT
FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS.
THESE RISKS AND OTHER FACTORS INCLUDE, AMONG OTHERS, THOSE LISTED UNDER “FORWARD-LOOKING STATEMENTS” AND “RISK
FACTORS” AND THOSE INCLUDED ELSEWHERE IN THIS REPORT.
Overview
Calmare
Therapeutics Incorporated (the “Company”) was incorporated in Delaware in 1971 as Competitive Technologies, Inc.,
succeeding an Illinois corporation incorporated in 1968. Effective August 20, 2014, the Company changed its name from Competitive
Technologies, Inc. to Calmare Therapeutics Incorporated. The Company and its majority-owned subsidiary, Vector Vision, Inc., (collectively,
“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.
In
2007, the Company entered into an agreement (the “2007 Agreement”) with Giuseppe Marineo (“Marineo”) and
Delta Research and Development (“Delta”), Mr. Marineo’s wholly-owned company, collectively (the “Parties”),
that secured the exclusive, worldwide sales and distribution rights to the science behind Calmare Pain Mitigation Therapy™
(the “Technology”). Today, this science is effectuated by the Company’s flagship medical device – the
Calmare Device. Sales of our Calmare Device continue to be the major source of revenue for the Company. In 2011, the Company’s
2007 agreement was amended (the “2011 Amendment”) to extend the exclusivity rights afforded to the Company by the
2007 Agreement through March 31, 2016.
In
July 2012, the Company and the Parties worked on a five-year extension to the 2011 Agreement (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. Therefore, the Company’s rights are determined by the 2011 Amendment which provides
the Company with the exclusive rights to manufacture and sell the Calmare Device worldwide using the Technology. The Company is
negotiating an extension to the 2007 Agreement. (see
The Company’s Distribution Rights, Marineo and Delta
below and
also in Footnote 16. COMMITMENTS AND CONTINGENCIES)
In
2010, the Company became its own distributor for the Calmare Device in the U.S, contracting with 15 commissioned sales representatives.
During 2011 and 2012, the Company and its representatives developed plans to increase awareness of the Calmare Device among critical
medical specialties and began to implement those plans targeting specific customers and locations in 2012. Since then the Company
has entered into multiple sales agreements for the Calmare Device. Sales to physicians and medical practices and to others with
whom the Company had existing sales agreements continue to generate revenue for the Company. In June 15, 2010, the Company became
a government contractor and was granted its first General Services Administration (“GSA”) contract (V797P-4300B) from
the U.S. Veterans Administration (the “VA”) for Calmare Devices.
Since
2010 the Company has controlled the sales process for its Calmare
®
Device. We are the primary obligor, responsible
for delivering devices as well as training our customer in the proper use of the Calmare Device. We deal directly with customers,
setting pricing and providing training; work directly with the inventor of the technology to develop specifications and any changes
thereto and to select and contract with manufacturing partners; and retain significant credit risk for amounts billed to customers.
Therefore, all product sales are recorded following a gross revenue methodology.
We
record in product sales the total funds earned from customers and record the costs of the Calmare device as cost of product sales,
with gross profit from product sales being the result.
The Technology supporting the Calmare
Device has patent protection in Italy and the United States. 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.
The
Company’s Distribution Rights for the Calmare Device
On
April 8, 2014, Mr. Giuseppe Marineo 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 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 this time, the Company continues to work to find a reasonable and amicable resolution
to the situation.
Reliance
on one revenue source.
In
2016, we had a significant concentration of revenue from our Calmare devices. We continue to seek revenue from increased sales
of devices in the United States as well as expansion into new markets.
Results
of Operations – December 31, 2016 versus December 31, 2015
Summary
of Results
Our
net loss for 2016 increased to $3,759,000 or $0.13 per basic and diluted share as compared with a net loss of $3,678,000 or $0.13
per basic and diluted share for 2015. This net loss increase is primarily attributable to an increase in revenue, a decrease in
operating expenses and an increase in interest expense.
Revenue
and Gross Profit from Sales
Revenue
from the sale and shipment of Calmare® devices (the “Devices”),
for 2016, increased 24% or $214,000 to $1,105,000
as compared with $891,000 for 2015.
Cost
of product sales,
for 2016, increased 13% or $37,000 to $317,000 as compared with $280,000 for 2015. Gross margin increased
29% to $788,000 in 2016 from $612,000 in 2015 due to the higher gross margin associated with U.S. private sector sales. Both cost
of product sales and gross margin were impacted by a one-time credit of $56,000 in 2016. This credit reversed a 2015 accrual for
additional royalties related to the sale of Devices. In 2016, the Company determined that this additional royalty was not required.
Cost of product sales and gross margin were also impacted by an adjustment of $70,000 to inventory as a result of a physical count.
Device
sales,
for 2016, increased with the sale of twelve (12) Devices as compared with nine (9) Device sales for 2015. Device sales
for 2016 were comprised of eleven (11) U.S. private sector sales and one (1) U.S. military sale as compared to nine (9) U.S. private
sector sales for 2015. The primary reason for this increase was the increased focus on domestic and military sales.
Due
to the relatively long sales cycle for a Device, Device sales and related revenues and expenses can and will vary significantly
from period to period.
Other
Revenue
Retained
royalties,
for 2016, decreased by 51% or $18,000 to $17,000 as compared with the $35,000 of retained royalties for 2015. The
decrease in royalties is primarily attributable to a one-time $17,000 royalty payment received in 2015.
Other
income,
for 2016, decreased 32% or $22,000 to $47,000 as compared with $69,000 for 2015, primarily because of a decline in
training revenue. Other income includes
:
|
|
2016
|
|
|
2015
|
|
Training payments and the sale of supplies i.e., electrodes and cables for use with our Calmare® devices
|
|
$
|
23,000
|
|
|
$
|
43,000
|
|
Rental income from customers renting Calmare® devices
|
|
$
|
24,000
|
|
|
$
|
26,000
|
|
Expenses
Total
expenses,
for 2016, increased 7% or $286,000 to $4,680,000 as compared with $4,394,000 for 2015.
Total
operating expenses
, for 2016, decreased 5% or $169,000 to $3,246,000 as compared with $3,415,000 for 2015.
Selling
expenses
, for 2016, decreased 38% or $94,000 to $157,000 compared with $251,000 for 2015. This decrease is due primarily to
a number of devices sold directly to customers in 2016 that did not incur sales commission.
Personnel
and consulting expenses,
for 2016, increased 24% or $407,000 to $2,107,000 as compared with $1,700,000 for 2015. Personnel
expenses, for 2016, increased 61% or $587,000 to $1,542,000, as compared with $955,000 for 2015. Consulting expenses, for 2016,
decreased 24% or $180,000 to $565,000, as compared with $745,000 for 2015. The increase in personnel expenses reflects new hires
in late 2015 and early 2016. The decrease in consulting fees primarily relate to a decrease in external marketing, sales and investment/funding
consultants.
General
and administrative expenses,
for 2016, decreased 33% or $481,000 to $982,000 as compared with $1,463,000 for 2015. The change
reflects a net effect of:
|
a)
|
$30,000
decrease in travel expenses due to a reduction in executive travel;
|
|
b)
|
$44,000
decrease in directors’ expense primarily due to a decrease in the cost of insurance;
|
|
c)
|
$236,000
decrease in legal expenses due to an decrease in litigation expense in 2016 related to
all pending cases;
|
|
d)
|
$30,000
increase in audit and tax services fees related to the deferral of activities from 2015
to 2016;
|
|
e)
|
$30,000
decrease in investor and public relations expenses; and
|
|
f)
|
$171,000
decrease in other expenses, primarily miscellaneous expense, of which $107,000 was a
one-time expense in 2015.
|
Interest
expense,
for 2016, increased $457,000 to $1,434,000 as compared with $977,000 for 2015 primarily as a result of the additional
OID borrowings in 2015 and 2016.
Other
expense items,
for 2016, decreased $3,000 to $0 as compared with $3,000 in 2015 due to various settlements of notes and warrants
in 2015 that did not occur in 2016.
In
current and prior years, we generated significant federal and state income and alternative minimum tax (“AMT”) losses,
and these net operating losses (“NOLs”) were carried forward for income tax purposes to be used against future taxable
income. In the years ended December 31, 2016 and 2015, we incurred additional losses but did not record a benefit since the benefit
was fully reserved (see below).
The
NOLs are an asset to us if we can use them to offset or reduce future taxable income and therefore reduce the amount of both federal
and state income taxes to be paid in future years. Previously, since we were incurring losses and could not be sure that we would
have future taxable income to be able to use the benefit of our NOLs, we recorded a valuation allowance against the asset, reducing
its book value to zero. In 2016 and 2015, the benefit from our net loss was offset completely by a valuation allowance recorded
against the asset. We did not show a benefit for income taxes. We will reverse the valuation allowance or portions thereof when
we determine it is more likely than not that our NOL’s will be utilized. We have substantial federal and state NOLs to use
against future regular taxable income. In addition, we can use our NOLs to reduce our future AMT liability. A significant portion
of the remaining NOLs at December 31, 2016, approximately $4,308,000, was derived from income tax deductions related to the stock
options exercises. The tax effect of these deductions will be credited against capital in excess of par value at the time they
are utilized for book purposes, and not credited to income. We will never receive a benefit for these NOLs in our statement of
operations.
Financial
Condition and Liquidity
Our
liquidity requirements arise principally from our working capital needs, including funds needed to find and market new or existing
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 and cash flows from operations, if any, including royalty legal awards, short term debt, and
sales of common stock. At December 31, 2016, we had outstanding debt, in the form of promissory notes with a total principal amount
of $6,059,000 and a carrying value of $6,028,000.
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 the Company’s 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 the Company’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
December 31, 2016, cash was $13,000, as compared with $50,000 at December 31, 2015. Net cash used in operating activities was
$(1,237,000) for 2016 as compared to $(1,531,000) for 2015, primarily reflecting the decrease in the net loss in 2016 compared
to 2015, as well as decreases in stock option expense, accounts payable, prepaid expenses and accrued expenses partially offset
by an increase in the use of inventory and prepaid expenses. There was minimal investing activity in 2016 and 2015. Net cash provided
by financing activities was $1,200,000 for 2016 as compared to $1,580,000 for 2015 primarily as a result of the Company’s
debt financing activities in both years.
We
currently have the benefit of using a portion of our accumulated 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 and thus able to utilize the benefit of the remaining NOLs before they expire.
At
December 31, 2016, we had aggregate federal net operating loss carryforwards of approximately $50,110,000, which expire at various
times from 2017 through 2036. A majority of our federal NOLs can be used to reduce taxable income used in calculating our AMT
liability. We also have state net operating loss carry forwards of approximately $48,548,000 that expire through 2036.
A
significant portion of the NOLs remaining at December 31, 2016, approximately $4,308,000, was derived from income tax deductions
related to the exercise of stock options.
Going
Concern
The
Company has incurred operating losses since fiscal 2006 and has a working capital and shareholders’ deficiency at December
31, 2016. During 2016 and 2015, we had a significant concentration of revenues from our Calmare® pain therapy medical 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 2018. 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, the Company will meet anticipated operating cash requirements by further reducing costs, issuing debt and /or equity,
and / or pursuing sales of certain assets and technologies while we pursue licensing and distribution opportunities for our remaining
portfolio of technologies. There can be no assurance that the Company will be successful in such efforts. To return to and sustain
profitability, we must increase our revenue through sales of our Calmare Devices and other products and services related to the
Devices. Failure to develop a recurring revenue stream sufficient to cover operating expenses would negatively affect the Company’s
financial position.
Debt
Financing
Notes
payable as of December 31, 2016 consists of the following:
|
|
Principal
Amount
|
|
|
Carrying
Value
|
|
|
Cash
Interest
Rate
|
|
|
Common
Stock
Conversion
Price
|
|
|
Maturity
Date
|
90 day Convertible Notes (Chairman of the Board)
|
|
$
|
2,498,980
|
|
|
$
|
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 A-3 OID Convertible Notes and Warrants
|
|
|
11,765
|
|
|
|
14,353
|
(1)
|
|
|
None
|
|
|
|
0.25
|
|
|
January 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B-1 OID Convertible Notes
and Warrants
|
|
|
80,000
|
|
|
|
77,849
|
|
|
|
None
|
|
|
|
0.23
|
|
|
March 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B-2 OID Convertible Notes and Warrants
|
|
|
3,243,529
|
|
|
|
3,211,648
|
|
|
|
None
|
|
|
|
0.20-0.25
|
|
|
Aug. 2015 – Jan. 2017
|
Notes Payable, gross
|
|
$
|
6,059,274
|
|
|
|
6,027,830
|
|
|
|
|
|
|
|
|
|
|
|
Less LPA amount
|
|
|
|
|
|
|
(485,980
|
)
|
|
|
|
|
|
|
|
|
|
|
Notes Payable, net
|
|
|
|
|
|
$
|
5,541,850
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
$
|
1,188,900
|
|
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. As of December 31, 2016, there is unpaid interest of
$615,000 related to these notes. 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 $425,000
for the year ended December 31, 2016, and has recorded additional interest in total of $1,432,000.
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 11. Because there can be no assurance that the Company will
be successful in completing this process, the Company retains ultimate responsibility for this debt, until fully paid down. As
a result, the Company continues to accrue interest on these notes and they remain convertible as described above.
24
month Convertible Notes
In
March 2012, the Company issued a 24-month convertible promissory note to borrow $100,000. Additional 24-month convertible promissory
notes were issued in April 2012 ($25,000) and in June 2012 ($100,000). All of the notes bear 6.00% simple interest. Conversion
of the eligible principal amounts to common stock is allowed at any time after the six month anniversary of the effective date
of each note at a rate of $1.05 per share.
As
of July 17, 2017, 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 December 31, 2016, there is also $53,000 unpaid
interest related to these notes.
Series
A-3 Original Issue Discount Convertible Notes and Warrants
During
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 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.
As
of July 17, 2017, these 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.
Series
B-1 Original Issue Discount Convertible Notes and Warrants
During
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-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
of July 17, 2017, these 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.
Series
B-2 OID Convertible Notes and Warrants
During
2014, the Company did a private offering 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.
During
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 2015, the Company issued 29,410 shares due related to
the conversion notice.
As
of July 17, 2017, 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.
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.
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.
As
of July 17, 2017, all of the notes from 2015, totaling $1,478,823, 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, 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.
As
of July 17, 2017, these 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 these notes.
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.
As
of July 17, 2017, these 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 these notes.
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
2017, we expect our capital expenditures to be less than $100,000.
Contractual
Obligations and Contingencies
At
December 31, 2016, our contractual obligations were:
Contractual Obligations
|
|
Total
|
|
|
Within
1 year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than
5 years
|
|
Operating lease obligations, principally rent
(1)
|
|
$
|
95,000
|
|
|
$
|
82,000
|
|
|
$
|
14,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(1)
|
The current lease expires February 2018.
|
|
|
|
Contingencies.
Our directors, officers, employees and agents may claim indemnification in certain circumstances. We seek to limit and reduce
potential obligations for indemnification by carrying directors and officers liability insurance, subject to deductibles.
We
also carry liability insurance, casualty insurance, for owned or leased tangible assets, and other insurance as needed to cover
us against potential and actual claims and lawsuits that occur in the ordinary course of business.
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. We expense
such costs as incurred, and reduce expense if reimbursed from future fees and/or royalties. If the reimbursement belongs to our
client, we record no revenue or expense.
As
of December 31, 2016, the Company and its majority owned subsidiary, Vector Vision, Inc. (“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.
Critical
Accounting Estimates
The
preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires
that we make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements, the reported amounts of revenue and expenses for the reporting period, and related disclosures.
We base our estimates on information available at the time, and assumptions we believe are reasonable. By their nature, estimates,
assumptions and judgments are subject to change at any time, and may depend on factors we cannot control. As a result, if future
events differ from our estimates, assumptions and judgments, we may need to adjust or revise them in later periods.
We
believe the following significant estimates, assumptions, and judgments we used in preparing our consolidated financial statements
are critical to understanding our financial condition and operations.
Deferred
tax assets.
In assessing the realization of deferred tax assets, the Company considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. As a result of uncertainty of achieving sufficient taxable
income in the future, a full valuation allowance against its deferred tax asset has been recorded. If these estimates and assumptions
change in the future, the Company may be required to reverse the valuation allowance against deferred tax assets, which could
result in additional income tax income.
Share-based
compensation.
We account for share-based compensation on a fair value basis. Share-based compensation cost is measured at
the grant date based on the value of the award and is recognized as expense over the service (vesting) period. Determining the
fair value of share-based awards at the grant date requires judgment, including, estimating the expected life of the stock option,
volatility, and the amount of share-based awards that can be expected to be forfeited. Our estimates were based on our historical
experience with stock option awards.
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.
As
of December 31, 2016, and December 31, 2015, the Company has $431,300 and $308,400, respectively, owed in fees to current directors,
which are in Accounts Payable.
At
December 31, 2016, and December 31, 2015, $2,598,980 of the outstanding Notes Payable were payable to related parties; $2,498,980
to the Chairman of our Board, Peter Brennan, and $100,000 to another director, Stan Yarbro. Accrued Interest on the Note to Mr.
Brennan, which is in Accrued Liabilities, was $615,000 and $465,000, respectively, as of December 31, 2016 and December 31, 2015.
Accrued Interest on the Note to Mr. Yarbro, which is in Accrued Liabilities, was $28,000 and $22,000, respectively, as of December
31, 2016 and December 31, 2015. In addition, the Company has recorded additional interest on Mr. Brennan’s Notes, pending
negotiations, of $1,432,000 as of December 31, 2016, and $1,007,000 as of December 31, 2015 (see 90 day Convertible Notes above).
On
September 15, 2015, the Company announced the appointment of Stephen J. D’Amato, M.D. as chief medical officer of the Company.
During 2010, Calmar Pain Relief, LLC, purchased 10 Calmare devices from the Company for an aggregate purchase price of $550,000.
Additionally, during 2016 and 2015, Calmar Pain Relief purchased certain supplies from the Company totaling $3,200 and $1,900,
respectively. Dr. D’Amato is one of the managing members of Calmar Pain Relief, LLC.
On
October 15, 2015, the Company entered into 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. As a result of this agreement, the Board of Directors has determined that the Admiral is
no longer an independent director of the Company. On January 19, 2017, the Admiral resigned from the Board of Directors. As of
January 19, 2017, the Company has $30,000 in consulting fees payable to the Admiral.
Off-Balance
Sheet Arrangements
We
have no significant known off balance sheet arrangements.
Item
8. Financial Statements and Supplementary Data
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of
Calmare
Therapeutics Incorporated and Subsidiary
Fairfield,
CT
We
have audited the accompanying consolidated balance sheets of Calmare Therapeutics Incorporated and Subsidiary as of December 31,
2016 and 2015 and the related consolidated statements of operations, changes in shareholders’ deficit and cash flows for
the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Calmare
Therapeutics Incorporated and Subsidiary at December 31, 2016 and 2015, and the results of their operations and their cash flows
for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that Calmare Therapeutics Incorporated and Subsidiary
will continue as a going concern. As more fully described in Note 1, the Company has incurred operating losses since fiscal year
2006 and has a working capital and shareholders’ deficit at December 31, 2016. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
/s/
Mayer Hoffman McCann CPAs
(The
New York Practice of Mayer Hoffman McCann P.C.)
|
New York, New York
|
July
21, 2017
CALMARE
THERAPEUTICS INCORPORATED AND SUBSIDIARY
Consolidated
Balance Sheets
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
12,551
|
|
|
$
|
49,801
|
|
Receivables, net of allowance of $317,659 at December 31, 2016 and 2015
|
|
|
3,366
|
|
|
|
33,081
|
|
Inventory
|
|
|
3,838,220
|
|
|
|
4,028,220
|
|
Prepaid expenses and other current assets
|
|
|
7,878
|
|
|
|
58,034
|
|
Total current assets
|
|
|
3,862,015
|
|
|
|
4,169,136
|
|
Security Deposits
|
|
|
15,000
|
|
|
|
15,000
|
|
Property and equipment, net
|
|
|
7,199
|
|
|
|
23,726
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
3,884,214
|
|
|
$
|
4,207,862
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,086,825
|
|
|
$
|
1,895,382
|
|
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
|
|
|
3,442,308
|
|
|
|
2,248,024
|
|
Deferred revenue
|
|
|
6,400
|
|
|
|
6,400
|
|
Notes payable
|
|
|
5,541,850
|
|
|
|
3,785,063
|
|
Series C convertible preferred stock liability
|
|
|
375,000
|
|
|
|
375,000
|
|
Series C convertible preferred stock derivative liability
|
|
|
66,177
|
|
|
|
66,177
|
|
Total current liabilities
|
|
|
17,696,260
|
|
|
|
14,553,746
|
|
|
|
|
|
|
|
|
|
|
Long term notes payable
|
|
|
—
|
|
|
|
67,919
|
|
|
|
|
|
|
|
|
|
|
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, 100,000,000 shares authorized at December 31, 2016 and at December 31, 2015, 28,966,639 shares issued and outstanding at December 31, 2016 and 28,515,888 shares issued and outstanding at December 31, 2015
|
|
|
289,666
|
|
|
|
285,158
|
|
Capital in excess of par value
|
|
|
49,037,296
|
|
|
|
48,611,413
|
|
Accumulated deficit
|
|
|
(63,199,683
|
)
|
|
|
(59,371,049
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders’ deficit
|
|
|
(13,812,046
|
)
|
|
|
(10,413,803
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
$
|
3,884,214
|
|
|
$
|
4,207,862
|
|
See
accompanying notes
CALMARE
THERAPEUTICS INCORPORATED AND SUBSIDIARY
Consolidated
Statements of Operations
|
|
Year
ended
December 31, 2016
|
|
|
Year ended
December 31, 2015
|
|
Revenue
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
1,105,050
|
|
|
$
|
891,472
|
|
Cost of product sales
|
|
|
317,286
|
|
|
|
279,687
|
|
Gross profit from product sales
|
|
|
787,764
|
|
|
|
611,785
|
|
|
|
|
|
|
|
|
|
|
Other Revenue
|
|
|
|
|
|
|
|
|
Retained royalties
|
|
|
16,712
|
|
|
|
34,748
|
|
Other income
|
|
|
47,114
|
|
|
|
69,304
|
|
Total other revenue
|
|
|
63,826
|
|
|
|
104,052
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
157,298
|
|
|
|
250,995
|
|
Personnel and consulting expenses
|
|
|
2,106,972
|
|
|
|
1,700,166
|
|
General and administrative expenses
|
|
|
981,747
|
|
|
|
1,463,396
|
|
Total operating expenses
|
|
|
3,246,017
|
|
|
|
3,414,557
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(2,394,427
|
)
|
|
|
(2,698,720
|
)
|
|
|
|
|
|
|
|
|
|
Other expense (income)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,434,207
|
|
|
|
976,774
|
|
Loss on conversion of notes
|
|
|
—
|
|
|
|
2,588
|
|
Total other expense
|
|
|
1,434,207
|
|
|
|
979,362
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(3,828,634
|
)
|
|
|
(3,678,082
|
)
|
Provision (benefit) for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,828,634
|
)
|
|
$
|
(3,678,082
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.13
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average number of common shares outstanding:
|
|
|
28,715,010
|
|
|
|
27,885,238
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes
CALMARE
THERAPEUTICS INCORPORATED AND SUBSIDIARY
Consolidated
Statements of Changes in Shareholders’ Deficit
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
outstanding
|
|
|
Amount
|
|
|
Shares
outstanding
|
|
|
Amount
|
|
|
Capital
in excess
of par value
|
|
|
Accumulated
deficit
|
|
|
Total Shareholders’
Deficit
|
|
Balance – January 1, 2015
|
|
|
2,427
|
|
|
$
|
60,675
|
|
|
|
25,908,978
|
|
|
$
|
259,089
|
|
|
$
|
47,634,857
|
|
|
$
|
(55,692,697
|
)
|
|
$
|
(7,738,346
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,678,082
|
)
|
|
|
(3,678,082
|
)
|
Common shares and warrants issued for consulting services
|
|
|
|
|
|
|
|
|
|
|
740,000
|
|
|
|
7,400
|
|
|
|
206,400
|
|
|
|
|
|
|
|
213,800
|
|
Common stock issued to directors
|
|
|
|
|
|
|
|
|
|
|
12,500
|
|
|
|
125
|
|
|
|
2,000
|
|
|
|
|
|
|
|
2,125
|
|
Stock option compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,186
|
|
|
|
|
|
|
|
61,186
|
|
Common stock issued upon conversion of notes
|
|
|
|
|
|
|
|
|
|
|
29,410
|
|
|
|
294
|
|
|
|
5,588
|
|
|
|
|
|
|
|
5,882
|
|
Private offering of common stock and warrants
|
|
|
|
|
|
|
|
|
|
|
1,825,000
|
|
|
|
18,250
|
|
|
|
346,750
|
|
|
|
|
|
|
|
365,000
|
|
Warrant and beneficial conversion feature on notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
354,632
|
|
|
|
|
|
|
|
354,632
|
|
Balance – December 31, 2015
|
|
|
2,427
|
|
|
$
|
60,675
|
|
|
|
28,515,888
|
|
|
$
|
285,158
|
|
|
$
|
48,611,413
|
|
|
$
|
(59,371,049
|
)
|
|
$
|
(10,413,803
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,828,634
|
)
|
|
|
(3,828,634
|
)
|
Common stock issued to directors
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
100
|
|
|
|
1,800
|
|
|
|
—
|
|
|
|
1,900
|
|
Stock option compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,440
|
|
|
|
—
|
|
|
|
15,440
|
|
Stock grants to employees
|
|
|
—
|
|
|
|
—
|
|
|
|
440,751
|
|
|
|
4,408
|
|
|
|
72,361
|
|
|
|
—
|
|
|
|
76,769
|
|
Warrant and beneficial conversion feature on notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
336,282
|
|
|
|
—
|
|
|
|
336,282
|
|
Balance – December 31, 2016
|
|
|
2,427
|
|
|
$
|
60,675
|
|
|
|
28,966,639
|
|
|
$
|
289,666
|
|
|
$
|
49,037,296
|
|
|
$
|
(63,199,683
|
)
|
|
$
|
(13,812,046
|
)
|
See
accompanying notes
CALMARE
THERAPEUTICS INCORPORATED AND SUBSIDIARY
Consolidated
Statements of Cash Flows
|
|
Year ended
December 31, 2016
|
|
|
Year ended
December 31, 2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,828,634
|
)
|
|
$
|
(3,678,082
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
16,527
|
|
|
|
16,475
|
|
Stock option compensation expense
|
|
|
15,440
|
|
|
|
61,186
|
|
Share-based compensation – common stock
|
|
|
78,669
|
|
|
|
2,125
|
|
Common stock and warrants to consultants
|
|
|
—
|
|
|
|
213,800
|
|
Bad debt expense
|
|
|
73
|
|
|
|
41
|
|
Debt discount amortization
|
|
|
825,150
|
|
|
|
402,918
|
|
Loss on conversion of notes
|
|
|
—
|
|
|
|
2,588
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
29,642
|
|
|
|
(30,803
|
)
|
Prepaid expenses and other current assets
|
|
|
50,156
|
|
|
|
195,068
|
|
Inventory
|
|
|
190,000
|
|
|
|
90,000
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
1,385,727
|
|
|
|
1,207,086
|
|
Deferred revenue
|
|
|
—
|
|
|
|
(13,286
|
)
|
Net cash used in operating activities
|
|
|
(1,237,250
|
)
|
|
|
(1,530,883
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
—
|
|
|
|
(4,561
|
)
|
Net cash used in investing activities
|
|
|
—
|
|
|
|
(4,561
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
1,200,000
|
|
|
|
1,257,000
|
|
Repayment of note and warrant settlement
|
|
|
—
|
|
|
|
(42,500
|
)
|
Proceeds from common stock and warrants
|
|
|
—
|
|
|
|
365,000
|
|
Net cash provided by financing activities
|
|
|
1,200,000
|
|
|
|
1,579,500
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(37,250
|
)
|
|
|
44,056
|
|
Cash at beginning of year
|
|
|
49,801
|
|
|
|
5,745
|
|
Cash at end of year
|
|
$
|
12,551
|
|
|
$
|
49,801
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash Paid for interest
|
|
$
|
—
|
|
|
$
|
10,000
|
|
See
accompanying notes
Supplemental
disclosure of non-cash transactions:
During
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.
During
2016, there was an adjustment of $70,000 to inventory as a result of a physical audit.
During
2015, the Company issued 29,410 shares of common stock upon conversion of notes (see Note 11).
During
2015, the Company issued 620,000 shares with a fair value of $111,200 to an advisory firm for consulting services.
During
2015, the Company issued 503,333 stock warrants for consulting services performed valued at $75,000.
During
2015, the Company allocated $354,632 of convertible note proceeds for the fair value of warrants and beneficial conversion feature
to additional paid in capital.
During
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.
CALMARE
THERAPEUTICS INCORPORATED AND SUBSIDIARY
Notes
to Consolidated Financial Statements
|
1.
|
Business
AND BASIS OF PRESENTATION
|
Calmare
Therapeutics Incorporated (the “Company”) was incorporated in Delaware in 1971 as Competitive Technologies, Inc.,
succeeding an Illinois corporation incorporated in 1968. Effective August 20, 2014, the Company changed its name from Competitive
Technologies, Inc. to Calmare Therapeutics Incorporated. The Company and its majority-owned (56.1%) subsidiary, Vector Vision,
Inc., (collectively, “we,” “our,” or “us”), is a medical device company developing and commercializing
innovative products and technologies for chronic neuropathic pain. 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.
In
2007, the Company entered into an agreement (the “2007 Agreement”) with Giuseppe Marineo (“Marineo”) and
Delta Research and Development (“Delta”), Mr. Marineo’s wholly-owned company, collectively (the “Parties”),
that secured the exclusive, worldwide sales and distribution rights to the science behind Calmare Pain Mitigation Therapy™
(the “Technology”). Today, this science is effectuated by the Company’s flagship medical device – the
Calmare Device. Sales of our Calmare Device continue to be the major source of revenue for the Company. In 2011, the Company’s
2007 agreement was amended (the “2011 Amendment”) to extend the exclusivity rights afforded to the Company by the
2007 Agreement through March 31, 2016.
In
July 2012, the Company and the Parties worked on a five-year extension to the 2011 Agreement (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. Therefore, the Company’s rights are determined by the 2011 Amendment which provides
the Company with the exclusive rights to manufacture and sell the Calmare Device worldwide using the Technology. The Company is
negotiating an extension to the 2007 Agreement. (see
The Company’s Distribution Rights, Marineo and Delta
in Footnote
16, COMMITMENTS AND CONTINGENCIES)
Since
then the Company has entered into multiple sales agreements for the Calmare device. Sales to physicians and medical practices
and to others with whom the Company had existing sales agreements continue to generate revenue for the Company. In June 15, 2010,
the Company became a government contractor and was granted its first General Services Administration (“GSA”) contract
(V797P-4300B) from the U.S. Veterans Administration (the “VA”) for Calmare Devices.
The
Company has a device manufacturing agreement, (the “Manufacturing Agreement”), with GEOMC Co., Ltd. (“GEOMC”,
formerly Daeyang E & C Co., Ltd.) of Seoul, South Korea, to manufacture the Calmare Device, as per the specification delineated
in the Company’s Food and Drug Administration’s 510k clearance (#K081255). As per this “clearance,” the
Company has the sole, irrevocable right to sell the Calmare Device in the United States and global reciprocity countries. The
Manufacturing Agreement is in effect for a period of ten (10) years through September 2017, subject to terms and conditions.
The
Calmare Device currently has a 510(k) clearance from the U.S. Food and Drug Administration (“FDA”). Full commercial
introduction in the United States will require an “approval” from the FDA. The FDA’s approval process is rigorous,
time consuming and costly. We may not be successful in obtaining FDA approval for the Calmare Device.
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.
The
Company has incurred operating losses since fiscal 2006 and has a working capital and shareholders’ deficiency at December
31, 2016. We continue to seek revenue from expansion of sales of the Calmare devices into new markets. At current reduced spending
levels, the Company may not have sufficient cash flow to fund operations through 2018. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern. The financial statements do not include adjustments to reflect
the possible future effect of the recoverability and classification of assets or amounts and classifications of liabilities that
may result from the outcome of this uncertainty.
The
Company’s continuation as a going concern is dependent upon its developing other recurring revenue streams sufficient to
cover operating costs. If necessary, we will meet anticipated operating cash requirements by further reducing costs, issuing debt
or equity, and/or pursuing sales of certain assets and technologies while we continue to pursue increased sales of our Calmare
devices. The Company does not have any significant capital requirements in the budget going forward. There can be no assurance
that the Company will be successful in such efforts. To return to and sustain profitability, we must increase our revenue through
sales of our Calmare Devices and other products and services related to the Devices. Failure to develop a recurring revenue stream
sufficient to cover operating expenses would negatively affect the Company’s financial position.
Our
liquidity requirements arise principally from our working capital needs, including funds needed to find and obtain new technologies
or products, and protect and enforce our intellectual property rights, if necessary. We fund our liquidity requirements with a
combination of cash on hand, debt and equity financing, and cash flows from operations, if any, including royalty legal awards.
At December 31, 2016, we had outstanding debt, in the form of promissory notes with a total principal amount of $6,059,000 and
a carrying value of $6,028,000.
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America (“GAAP”) requires that we make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenues, expenses, and disclosure of contingent assets and liabilities. Actual results could differ significantly
from our estimates.
Revenue
Recognition
We
earn revenue in two ways: retained royalties from licensing our clients’ and our own technologies to our customer licensees,
and from sales of finished products, including the Calmare Device. We record revenue when the terms of the sales arrangement are
accepted by all parties including a fee that is fixed and determinable, delivery has occurred and our customer has taken title,
and collectability is reasonably assured, net of sales tax
We
are the primary obligor, responsible for delivering devices as well as for training our customers in the proper use of the device.
We deal directly with customers, setting pricing and providing training; work directly with the inventor of the technology to
develop specifications and any changes thereto and to select and contract with manufacturing partners; and retain significant
credit risk for amounts billed to customers. Therefore, all product sales are recorded following a gross revenue methodology.
The
Company continues to receive retained royalties as a result of the licensing of patents derived from the Company’s prior
business model. We determine the royalty revenue for a given period from the cash we receive in that period. These revenues are
declining as the Company no longer actively licenses patents and existing agreements are reaching the end of their term.
Unless
otherwise specified, we record all other revenue, as earned.
Concentration
of Revenues
Total
revenue consists of revenue from product sales, retained royalties, and other income. During the year ended December 31, 2016,
we derived approximately $1,129,000 or 96.6% of total revenue from sales and rentals of our Calmare devices. An additional 2%
of revenue derived indirectly from those sales through sales of supplies and training. The remaining 1.4% of total revenue is
derived from royalty payments.
During
the year ended December 31, 2015, we derived approximately $917,500 or 92.2% of total revenue from sales and rentals of our Calmare
devices. An additional 4.3% of revenue derived indirectly from those sales through sales of supplies and training. The remaining
3.5% of total revenue is derived from royalty payments.
Expenses
Cost
of product sales includes contractual payments to inventor and manufacturer relating to our Calmare Device. Expenses associated
with shipping Devices are also included in cost of product sales.
Selling
expenses include commission expenses and other direct sales costs related to sales of Calmare Devices.
Personnel
and consulting expenses include salaries and benefits for employees plus consulting expenses related to technologies and specific
revenue initiatives, and other direct costs.
General
and administrative expenses include directors’ fees and expenses, public company related expenses, professional services,
including financing, marketing, audit and legal services, rent and other general business and operating expenses.
Fair
Value of Financial Instruments
The
Company believes the carrying amounts of cash, accounts receivable, deferred revenue, preferred stock liability and notes payable
approximate fair value due to their short-term maturity.
Inventory
Inventory
consists of finished product of our Calmare Device. Inventory is stated at lower of cost (first in, first out) and market.
Property
and Equipment
Property
and equipment are carried at cost net of accumulated depreciation. Expenditures for normal maintenance and repair are charged
to expense as incurred. The costs of depreciable assets are charged to operations on a straight-line basis over their estimated
useful lives, three to five years for equipment, or the terms of the related lease for leasehold improvements. The cost and related
accumulated depreciation or amortization of property and equipment are removed from the accounts upon retirement or other disposition,
and any resulting gain or loss is reflected in earnings.
Impairment
of Long-lived Assets
We
review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. If the estimated fair value is less than the carrying amount of the asset, we record an impairment
loss. If a quoted market price is available for the asset or a similar asset, we use it to determine estimated fair value. We
re-evaluate the remaining useful life of the asset and adjust the useful life accordingly. There were no impairment indicators
identified during the years ended December 31, 2016 and 2015.
Income
Taxes
Income
taxes are accounted for under an asset and a liability approach that requires recognition of deferred income tax assets and liabilities
for the expected future consequences of events that have been recognized in the Company’s consolidated financial statements
and income tax returns. The Company provides a valuation allowance for deferred income tax assets when it is considered more likely
than not that all or a portion of such deferred income tax assets will not be realized.
Net
Income (Loss) Per Share
We
calculate basic net income (loss) per share based on the weighted average number of common shares outstanding during the period
without giving any effect to potentially dilutive securities. Net income (loss) per share, assuming dilution, is calculated giving
effect to all potentially dilutive securities outstanding during the period.
Share-Based
Compensation
The
Company accounts for its share-based compensation in accordance with the Financial Accounting Standards Board’s (“FASB”)
Accounting Standards Codification (“ASC”) 718 – “Compensation – Stock Compensation.” Accordingly,
the Company recognizes compensation expense equal to the fair value of the stock awards at the time of the grant over the requisite
service period.
Our
accounting for share-based compensation has resulted in our recognizing non-cash compensation expense related to stock options
granted to employees, which is included in personnel and consulting expenses, and stock options granted to our directors, which
is included in general and administrative expenses.
Recent
Accounting Pronouncements
In
August 2014, the FASB issued Accounting Standards Update (“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. The Company has adopted this standard and has appropriately
included disclosures relating to its financial position and results of operations.
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
August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers
:
Deferral of the Effective Date.
This ASU deferred the effective date of ASU No. 2014-09,
Revenue from Contracts with Customers
, which had been issued
in May 2014. ASU No. 2014-09 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 now 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
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.
In
May 2016, the FASB issued ASU No. 2016-12,
Narrow-Scope Improvements and Practical Expedients
, which amends certain aspects
of the Board’s new revenue standard, ASU 2014-09,
Revenue From Contracts With Customers.
The amendments address the
following areas: collectability, presentation of sales tax and other similar taxes collected from customers, noncash consideration,
contract modifications and completed contracts at transition, and transition technical correction. 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
May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation,
Scope of Modification Accounting,
which
amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to
the terms and conditions of share-based payment awards to which an entity would be required to apply modification accounting under
ASC 718. For all entities, this accounting standard update is 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
current and prior years, we generated significant federal and state income and alternative minimum tax losses, and these net operating
losses (“NOLs”) were carried forward for income tax purposes to be used against future taxable income.
A
reconciliation of our effective income tax rate compared to the U.S. federal statutory rate is as follows:
|
|
Year ended
December 31, 2016
|
|
|
Year ended
December 31, 2015
|
|
Provision (benefit) at U.S. federal statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State provision (benefit), net of U.S. federal tax
|
|
|
(4.9
|
)
|
|
|
(4.9
|
)
|
Permanent differences
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Other items
|
|
|
0.2
|
|
|
|
1.9
|
|
Deferred tax valuation allowance
|
|
|
38.5
|
|
|
|
36.9
|
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Net
deferred tax assets consist of the following:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Net federal and state operating loss carryforwards
|
|
$
|
20,072,124
|
|
|
$
|
18,513,698
|
|
Impairment of investments
|
|
|
531,470
|
|
|
|
531,470
|
|
Other, net
|
|
|
798,494
|
|
|
|
795,327
|
|
Deferred tax assets
|
|
|
21,402,088
|
|
|
|
19,840,495
|
|
Valuation allowance
|
|
|
(21,402,088
|
)
|
|
|
(19,840,495
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
At
December 31, 2016, we had aggregate federal net operating loss carryforwards of approximately $50,180,000 which expire at various
times from 2017 through 2036. A majority of our federal NOLs can be used to reduce taxable income used in calculating our alternative
minimum tax liability. We also have state net operating loss carryforwards of approximately $48,618,000 that expire at various
times through 2036.
Approximately
$4,308,000 of our NOL carryforward remaining at December 31, 2016 was derived from income tax deductions related to the exercise
of stock options. The tax effect of these deductions will be credited against capital in excess of par value at the time they
are utilized for book purposes, and not credited to income. We will never receive a benefit for these NOLs in our statement of
operations.
Changes
in the valuation allowance were as follows:
|
|
Year ended
December 31,
2016
|
|
|
Year ended
December 31,
2015
|
|
Balance, beginning of year
|
|
$
|
19,840,495
|
|
|
$
|
18,210,959
|
|
Change in temporary differences
|
|
|
3,167
|
|
|
|
28,061
|
|
Change in net operating and capital losses
|
|
|
1,558,426
|
|
|
|
1,601,476
|
|
Balance, end of year
|
|
$
|
21,402,088
|
|
|
$
|
19,840,495
|
|
Our
ability to derive future tax benefits from the net deferred tax assets is uncertain and therefore we continue to provide a full
valuation allowance against the assets, reducing the carrying value to zero. We will reverse the valuation allowance if future
financial results are sufficient to support a carrying value for the deferred tax assets.
At
December 31, 2016 and December 31, 2015, we had no uncertain tax positions.
We
include interest and penalties on the underpayment of income taxes in income tax expense.
We
file income tax returns in the United States and Connecticut. Our open tax years for review are fiscal years ended December 31,
2013 through year ended December 31, 2015. The Company’s returns filed with Connecticut are subject to audit as determined
by the statute of limitations.
|
4.
|
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:
|
|
Year ended
December 31,
2016
|
|
|
Year ended
December 31,
2015
|
|
Denominator for basic net loss per share, weighted average shares outstanding
|
|
|
28,715,010
|
|
|
|
27,855,268
|
|
Dilutive effect of common stock options
|
|
|
N/A
|
|
|
|
N/A
|
|
Dilutive effect of Series C convertible preferred stock and convertible debt
|
|
|
N/A
|
|
|
|
N/A
|
|
Denominator for net loss per share, assuming dilution
|
|
|
28,715,010
|
|
|
|
27,855,268
|
|
Due
to the net loss incurred for the years ended December 31, 2016, and December 31, 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:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Exercise of common stock options
|
|
|
1,502,500
|
|
|
|
2,038,500
|
|
Exercise of common stock warrants
|
|
|
9,625,042
|
|
|
|
9,207,486
|
|
Conversion of Series C convertible preferred stock
|
|
|
2,320,760
|
|
|
|
2,450,980
|
|
Conversion of convertible debt
|
|
|
18,500,915
|
|
|
|
11,442,095
|
|
Total
|
|
|
31,949,217
|
|
|
|
25,139,061
|
|
|
5.
|
SHAREHOLDERS’
DEFICIENCY
|
Common
Stock
During
2013, the Company entered into an Equity Purchase Agreement (“EPA”) with Southridge Partners II, L.P. (“Southridge”).
Under the terms of the EPA, which was filed with the SEC on February 26, 2013, Southridge will purchase, at the Company’s
election, up to $10,000,000 of the Company’s registered common stock (the “Shares”). During the two year term
of the EPA, the Company may at any time in its sole discretion deliver a “put notice” to Southridge thereby requiring
Southridge to purchase a certain dollar amount of the Shares. Simultaneous with the delivery of such Shares, Southridge shall
deliver payment for the Shares. Subject to certain restrictions, the purchase price for the Shares shall be equal to ninety percent
of the lowest closing bid price for the Company’s common stock during the ten-day trading period immediately after the Shares
specified in the Put Notice are delivered to Southridge.
The
number of Shares sold to Southridge shall not exceed the number of such shares that, when aggregated with all other shares of
common stock of the Company then beneficially owned by Southridge, would result in Southridge owning more than 9.99% of all of
the Company’s common stock then outstanding. Additionally, Southridge may not execute any short sales of the Company’s
common stock.
Under
the terms of the EPA, the Company had issued a convertible promissory note in the amount of $65,000 to Southridge which, during
2013 Southridge converted to 260,000 shares of common stock. In addition, during 2013, the Company negotiated a liabilities purchase
agreement (“LPA”) with Southridge (see Note 11).
Under
the terms of the LPA, the Company issued 200,000 shares of its common stock at $0.35, or $70,000, and a convertible note in the
amount of $12,000 Southridge as a fee.
Additionally,
under the terms of the EPA and LPA, the Company issued 250,000 shares of its common stock at $0.35, or $87,500, to Southridge
for expenses associated with the EPA and LPA.
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 July 17, 2017, the
Board of Directors has not implemented the Reverse Stock Split.
During
2015, the Company issued 500,000 shares with a fair value of $80,000 to an advisory firm for consulting services.
During
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 2014 and remaining 60,000 shares vesting in 2015. The Company recorded consulting expenses of $10,800 in 2014
and $27,600 of consulting expenses in 2015. In each instance, the expense was based on the fair value on the vesting date.
During
2015, the Company issued 503,333 stock warrants for consulting services performed and recorded consulting expense of $75,000 for
the fair value of the warrants.
During
2015, the Company issued 120,000 shares to an advisory firm for consulting services. The Company recorded consulting expenses
of $31,200 based on the fair value on the issuance date.
During
2015, the Company did private offerings of its common stock and warrants for a total consideration of $365,000. 1,825,000 shares
of common stock were issued at a per share price of $0.20. The common stock holders were also issued warrants to purchase 912,500
shares of common stock. The warrants have an exercise price of $0.60 and a 1-year term. The warrants were recorded to additional
paid-in-capital.
On
October 15, 2015 the shareholders approved an increase in the number of authorized shares of common stock from 40 million to 100
million.
During
2016, the Company issued 440,751 shares to its President & CEO in lieu of cash bonuses earned from April 1, 2015 through September
30, 2016. The Company recorded a compensation expense of $76,769 related to this transaction in 2016.
The
Company issued 10,000 and 12,500 shares of its common stock to non-employee directors under its Director Compensation Plan in
2016 and 2015, respectively. The Company recorded expense of $1,900 and $2,125 for director stock compensation expense in 2016
and 2015, respectively.
Preferred
Stock
Holders
of 5% preferred stock are entitled to receive, if, as, and when declared by the Board of Directors, out of funds legally available
therefore, preferential non-cumulative dividends at the rate of $1.25 per share per annum, payable quarterly, before any dividends
may be declared or paid upon or other distribution made in respect of any share of common stock. The 5% preferred stock is redeemable,
in whole at any time or in part from time to time, on 30 days’ notice, at the option of the Company, at a redemption price
of $25. In the event of voluntary or involuntary liquidation, the holders of preferred stock are entitled to $25 per share in
cash before any distribution of assets can be made to holders of common stock.
Each
share of 5% preferred stock is entitled to one vote. Holders of 5% preferred stock have no preemptive or conversion rights. The
preferred stock is not registered to be publicly traded.
At
its December 2, 2010 meeting, the Company’s Board of Directors declared a dividend distribution of one right (each, a “Right”)
for each outstanding share of common stock, par value $0.01, of the Company (the “Common Shares”). The dividend was
payable to holders of record as of the close of business on December 2, 2010 (the “Record Date”). Issuance of the
dividend may be triggered by an investor purchasing more than 20% of the outstanding shares of common stock.
On
December 15, 2010, the Company issued a $400,000 promissory note. The promissory note was scheduled to mature on December 31,
2012 with an annual interest rate of 5%.
On
December 15, 2010, the Company’s Board of Directors authorized the issuance of 750 shares of Series C Convertible Preferred
Stock ($1,000 par value) with a 5% cumulative dividend to William R. Waters, Ltd. of Canada. On December 30, 2010, 750 shares
were issued. The Company converted the above $400,000 promissory note into 400 shares and received cash of $350,000 for the remaining
350 shares.
Effective
June 16, 2011, William R. Waters, Ltd. of Canada converted one half of its Series C Convertible Preferred Stock, or 375 shares,
to 315,126 shares of common stock.
The
rights of the Series C Convertible Preferred Stock are as follows:
|
a)
|
Dividend
rights
– The shares of Series C Convertible Preferred Stock accrue a 5% cumulative dividend on a quarterly basis
and is payable on the last day of each fiscal quarter when declared by the Company’s Board. As of December 31, 2016,
dividends declared were $122,000, of which $18,801 were declared during the year ended December 31, 2016 and $103,254 have
not been paid and are shown in accrued and other liabilities at December 31, 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 (1)
the closing market price at the date of notice of conversion or (2) the mid-point of the last bid price and the last ask price
on the date of the notice of conversion. The variable conversion feature creates an embedded derivative that was bifurcated
from the Series C Convertible Preferred Stock on the date of issuance and was recorded at fair value. The derivative liability
will be recorded at fair value on each reporting date with any change recorded in the Statement of Operations as an unrealized
gain (loss) on derivative instrument.
|
On
the date of conversion of the 375 shares of Series C Convertible Preferred Stock the Company calculated the value of the derivative
liability to be $81,933. Upon conversion, the $81,933 derivative liability was reclassified to equity.
The
Company recorded a convertible preferred stock derivative liability of $66,177 associated with the 375 shares of Series C Convertible
Preferred Stock outstanding at both December 31, 2016 and December 31, 2015.
The
Company has classified the Series C Convertible Preferred Stock as a liability at December 31, 2016 and at December 31, 2015 because
the variable conversion feature may require the Company to settle the conversion in a variable number of its common shares.
Receivables
consist of the following:
|
|
December
31,
2016
|
|
|
December
31,
2015
|
|
Calmare
device sales receivable, net of allowance of $210,284 and $210,284 at December 31, 2016 and 2015, respectively
|
|
$
|
—
|
|
|
$
|
31,827
|
|
Royalties,
net of allowance of $101,154 at December 31, 2016 and 2015
|
|
|
—
|
|
|
|
—
|
|
Other,
net of allowance of $6,221 and $6,221 at December 31, 2016 and 2015, respectively
|
|
|
3,366
|
|
|
|
1,254
|
|
Total
|
|
$
|
3,366
|
|
|
$
|
33,081
|
|
|
7.
|
PROPERTY
AND EQUIPMENT, NET
|
Property
and equipment, net, consist of the following:
|
|
December
31,
2016
|
|
|
December
31,
2015
|
|
Property
and equipment, gross
|
|
$
|
220,051
|
|
|
$
|
220,051
|
|
Accumulated
depreciation and amortization
|
|
|
(212,852
|
)
|
|
|
(196,325
|
)
|
Property
and equipment, net
|
|
$
|
7,199
|
|
|
$
|
23,726
|
|
Depreciation
and amortization expense was $16,527 and $16,475 for the years ended December 31, 2016 and 2015, respectively.
|
8.
|
AVAILABLE-FOR-SALE
AND EQUITY SECURITIES
|
|
|
December
31,
2016
|
|
|
December
31,
2015
|
|
|
Number
of
shares
|
|
|
Type
|
Security
Innovation, Inc.
|
|
|
—
|
|
|
|
—
|
|
|
|
223,317
|
|
|
Common
stock
|
Xion
Pharmaceutical Corporation
|
|
|
—
|
|
|
|
—
|
|
|
|
0
|
|
|
Common
stock
|
In
prior years, we acquired 3,129,509 shares of NTRU Cryptosystems, Inc. (“NTRU”) common stock, and certain preferred
stock that later was redeemed, in exchange for cash and a reduction in our future royalty rate on sales of NTRU’s products.
NTRU was a privately held company that sold encryption software for security purposes, principally in wireless markets. There
was no public market for NTRU shares. In 2003, we wrote down the value of NTRU to $0, but we continued to own the shares. On July
22, 2009, all NTRU assets were acquired by Security Innovation, an independent provider of secure software located in Wilmington,
MA. We received 223,317 shares of stock in the privately held Security Innovation for our shares of NTRU.
In
September 2009 we announced the formation of a joint venture with Xion Corporation for the commercialization of our patented melanocortin
analogues for treating sexual dysfunction and obesity. We received 60 shares of privately held Xion Pharmaceutical Corporation
common stock in June 2010. The Company currently owns 30% of the outstanding stock of Xion Pharmaceutical Corporation. On March
23, 2015, the Company received notice that Xion Pharmaceutical Corporation was to be dissolved. The dissolution was effective
October 14, 2015.
|
9.
|
FAIR
VALUE MEASUREMENTS
|
The
Company measures fair value in accordance with Topic 820 of the FASB ASC, Fair Value Measurement (“ASC 820”), which
provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC
820 are described as follows:
|
Level
1 -
|
Inputs
to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company
has the ability to access.
|
|
|
|
|
|
Level
2 -
|
Inputs
to the valuation methodology include:
|
|
|
●
|
Quoted
prices for similar assets or liabilities in active markets;
|
|
|
●
|
Quoted
prices for identical or similar assets or liabilities in inactive markets;
|
|
|
●
|
Inputs
other than quoted prices that are observable for the asset or liability;
|
|
|
●
|
Inputs
that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
|
|
|
|
If
the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full
term of the asset or liability.
|
|
|
|
|
|
Level
3 -
|
Inputs
to the valuation methodology are unobservable and significant to the fair value measurement.
|
The
asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of
any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable
inputs and minimize the use of unobservable inputs.
The
Company values its derivative liability associated with the variable conversion feature on its Series C Convertible Preferred
Stock (Note 5) based on the market price of its common stock. For each reporting period the Company calculates the amount of potential
common stock that the Series C Preferred Stock could convert into based on the conversion formula (incorporating market value
of our common stock) and multiplies those converted shares by the market price of its common stock on that reporting date. The
total converted value is subtracted by the consideration paid to determine the fair value of the derivative liability. The Company
classified the derivative liability of approximately $66,000 at both December 31, 2016 and December 31, 2015 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.
10.
|
PREPAID
EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid
expenses and other current assets consist of the following:
|
|
December
31,
2016
|
|
|
December
31,
2015
|
|
Prepaid
insurance
|
|
$
|
2,151
|
|
|
$
|
47,931
|
|
Other
|
|
|
5,727
|
|
|
|
10,103
|
|
Prepaid
expenses and other current assets
|
|
$
|
7,878
|
|
|
$
|
58,034
|
|
11.
|
LIABILITIES
ASSIGNED TO LIABILITY PURCHASE AGREEMENT
|
During
the third quarter of 2013, the Company negotiated a LPA with Southridge. The LPA takes advantage of a provision in the Securities
Act of 1933, Section 3(a)(10), that allows the exchange of claims, securities, or property for stock when the arrangement is approved
for fairness by a court proceeding. The process, approved by the court in August 2013, has the potential to eliminate nearly $2.1
million of our financial obligations to existing creditors who agreed to participate and executed claims purchase agreements with
Southridge’s affiliate ASC Recap 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 July 17,
2017, 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.
12.
|
ACCRUED
EXPENSES AND OTHER LIABILITIES
|
Accrued
expenses and other liabilities consist of the following:
|
|
December
31,
2016
|
|
|
December
31,
2015
|
|
Royalties
payable
|
|
$
|
583,482
|
|
|
$
|
487,739
|
|
Accrued
compensation
|
|
|
386,559
|
|
|
|
49,769
|
|
Commissions
payable
|
|
|
79,480
|
|
|
|
15,900
|
|
Accrued
interest payable
|
|
|
2,172,124
|
|
|
|
1,589,256
|
|
Other
|
|
|
220,663
|
|
|
|
105,360
|
|
Accrued
expenses and other liabilities, net
|
|
$
|
3,442,308
|
|
|
$
|
2,248,024
|
|
Excluded
above is approximately $217,000 of accrued expenses and other liabilities for both December 31, 2016 and December 31, 2015 that
fall under the LPA with ASC Recap, and are expected to be repaid using the process as described in Note 11. Because there can
be no assurance that the Company will be successful in completing this process, the Company retains ultimate responsibility for
these liabilities, until fully paid down.
Notes
payable consist of the following:
Short
term
|
|
December
31, 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-1 OID Convertible Notes and Warrants
|
|
|
77,849
|
|
|
|
—
|
|
Series
B-2 OID Convertible Notes and Warrants
|
|
|
3,211,648
|
|
|
|
1,532,710
|
|
Short
term notes payable, gross
|
|
|
6,027,830
|
|
|
|
4,271,043
|
|
Less
LPA amount
|
|
|
(485,980
|
)
|
|
|
(485,980
|
)
|
Short
term notes payable, net
|
|
$
|
5,541,850
|
|
|
$
|
3,785,063
|
|
|
|
|
|
|
|
|
|
|
Long
term
|
|
December
31, 2016
|
|
|
December
31,
2015
|
|
Series
B-1 OID Convertible Notes and Warrants
|
|
$
|
—
|
|
|
$
|
67,919
|
|
|
|
|
|
|
|
|
|
|
Details
of notes payable as of December 31, 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-1 OID Convertible Notes
and Warrants
|
|
$
|
80,000
|
|
|
$
|
77,849
|
|
|
|
None
|
|
|
|
$0.23
|
|
|
3/2017
|
Series
B-2 OID Convertible Notes and Warrants
|
|
|
3,243,529
|
|
|
|
3,211,648
|
|
|
|
None
|
|
|
|
$0.20
– 0.25
|
|
|
8/2015
– 1/2017
|
Short
term notes payable, gross
|
|
$
|
6,059,274
|
|
|
|
6,027,830
|
|
|
|
|
|
|
|
|
|
|
|
Less
LPA amount
|
|
|
|
|
|
|
(485,980
|
)
|
|
|
|
|
|
|
|
|
|
|
Short
term notes payable, net
|
|
|
|
|
|
$
|
5,541,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
$
|
1,188,900
|
|
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. As of December 31, 2016, there is unpaid interest of
$584,000 related to these notes. 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 $425,000 and $388,000
during the years ended December 31, 2016 and December 31, 2015, respectively. The Company has recorded total additional interest
of $1,432,000 through December 31, 2016.
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 11. Because there can be no assurance that the Company will
be successful in completing this process, the Company retains ultimate responsibility for this debt, until fully paid down. As
a result, the Company continues to accrue interest on these notes and they remain convertible as described above.
24
month Convertible Notes
In
March 2012, the Company issued a 24-month convertible promissory note to borrow $100,000. Additional 24-month convertible promissory
notes were issued in April 2012 ($25,000) and in June 2012 ($100,000). All of the notes bear 6.00% simple interest. Conversion
of the eligible principal amounts to common stock is allowed at any time at a rate of $1.05 per share.
As
of July 17, 2017, 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 $53,000 related to
these notes at December 31, 2016.
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 shares of common stock. The warrants have an exercise price
$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 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
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 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 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 these 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 July 17, 2017, 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
|
|
Beneficial Conversion feature
|
|
|
—
|
|
Total
|
|
$
|
65,000
|
|
Series
B-2 Original Issue Discount 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 July 17, 2017, 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 July 17, 2017, these 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
|
|
As
of July 17, 2017, these 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 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
|
|
Beneficial Conversion feature
|
|
|
|
|
Total
|
|
$
|
400,000
|
|
As
of July 17, 2017, these 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, 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
|
|
As
of July 17, 2017, these 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 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
|
|
As
of July 17, 2017, these 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.
|
14.
|
STOCK-BASED
COMPENSATION PLANS
|
2011
Employees’, Directors’ and Consultants’ Stock Option Plan –
In May 2011, the Board of Directors approved
a new option plan for employees, directors and consultants. Pursuant to this plan which is administered by a Committee appointed
by the Board of Directors, we could grant to qualified employees, directors and consultants either incentive options or nonstatutory
options (as defined by the Internal Revenue Service). The stock options granted per written option agreements approved by the
Committee, must have exercise prices not less than 100% of the Fair Market Value of our common stock on the date of the grant.
No options could be granted under this plan after December 31, 2015.
The
following information relates to the 2011 Option Plan:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Common shares reserved for issuance on exercise of options
|
|
|
1,447,500
|
|
|
|
1,867,500
|
|
Shares available for future option grants
|
|
|
0
|
|
|
|
0
|
|
1997
Employee Stock Option Plan
– Pursuant to our 1997 Employees’ Stock Option Plan, as amended (the “1997 Option
Plan”), we could grant to employees either incentive stock options or nonqualified stock options (as defined by the Internal
Revenue Service). The stock options had to be granted at exercise prices not less than 100% of the fair market value of our common
stock at the grant date. The maximum life of stock options granted under this plan is ten years from the grant date. The Compensation
Committee or the Board of Directors determined vesting provisions when stock options were granted, and stock options granted generally
vested over three or four years. No options could be granted under this plan after September 30, 2007.
The
following information relates to the 1997 Option Plan:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Common shares reserved for issuance on exercise of options
|
|
|
15,000
|
|
|
|
51,000
|
|
Shares available for future option grants
|
|
|
—
|
|
|
|
—
|
|
2000
Director’s Stock Option Plan
– Pursuant to our Directors’ Stock Option Plan (the “Directors’
Option Plan”), we could grant each non-employee director 10,000 fully vested, nonqualified common stock options when the
director first is elected, and 10,000 common stock options on the first business day of January thereafter, as long as the individual
is a director. All such stock options are granted at an option price not less than 100% of the fair market value of the common
stock at the grant date. The maximum life of options granted under this plan is ten years from the grant date. No options could
be granted after January 4, 2010.
The
following information relates to the 2000 Directors’ Stock Option Plan:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Common shares reserved for issuance on exercise of options
|
|
|
40,000
|
|
|
|
120,000
|
|
Shares available for future option grants
|
|
|
—
|
|
|
|
—
|
|
Summary
of Common Stock Options
– The total fair value of shares vested in the years ended December 31, 2016 and December 31,
2015 was $28,720 and $61,186, respectively, of non-cash compensation expense. Of these amounts, $28,720 and $53,223 was included
in personnel and consulting expenses, from stock options granted to employees, and vesting during the year ended December 31,
2016 and 2015, respectively.
Also
$0 and $7,963 of noncash compensation expense was included in general and administrative expenses, from stock options granted
to directors pursuant to the Directors Option Plan in the years ended December 31, 2016 and 2015, respectively. Since these stock
options are fully vested upon grant, the full fair value of the stock options is recorded as expense at the date of grant.
The
Company realized a credit of $13,280 in 2016 for options cancelled as a result of the January 2016 resignation of the Company’s
Chief Financial Officer.
During
the year ended December 31, 2015, the Company granted 50,000 options to non-employee directors which were fully vested upon issuance,
as approved by the Board of Directors.
During
the year ended December 31, 2015, the Company granted 300,000 options to the Company’s Chief Medical Officer. As approved
by the Board of Directors, these options vest over a four (4) year period, with 60,000 options vested upon issuance.
During
the year ended December 31, 2016, no stock options were granted.
We
estimated the fair value of each option on the grant date using a Black-Scholes option-pricing model with the following weighted
average assumptions:
|
|
Year ended
December 31, 2016
|
|
|
Year ended
December 31, 2015
|
|
Dividend yield
(1)
|
|
|
—
|
%
|
|
|
0.0
|
%
|
Expected volatility
(2)
|
|
|
—
|
%
|
|
|
159.8% - 164.5
|
%
|
Risk-free interest rates
(3)
|
|
|
—
|
%
|
|
|
1.61
|
%
|
Expected lives
(2)
|
|
|
—
|
|
|
|
5 years
|
|
|
(1)
|
We have not paid
cash dividends on our common stock since 1981, and currently do not have plans to pay or declare cash dividends. Consequently,
we used an expected dividend rate of zero for the valuations.
|
|
(2)
|
Estimated based
on our historical experience. Volatility was based on historical experience over a period equivalent to the expected life
in years.
|
|
(3)
|
Based on the U.S.
Treasury constant maturity interest rate with a term consistent with the expected life of the options granted.
|
A
summary of the status of all our common stock options as of December 31, 2016 and 2015, and changes during the periods then ended
is presented below.
|
|
Year
ended December 31, 2016
|
|
|
Year
ended December 31, 2015
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Values
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Values
|
|
Outstanding
at beginning of period
|
|
|
2,038,500
|
|
|
$
|
0.40
|
|
|
$
|
|
|
|
|
1,692,000
|
|
|
$
|
0.44
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
350,000
|
|
|
|
0.26
|
|
|
|
|
|
Expired
or terminated
|
|
|
(46,000
|
)
|
|
|
1.90
|
|
|
|
|
|
|
|
(4,000
|
)
|
|
|
5.34
|
|
|
|
|
|
Forfeited
|
|
|
(490,000
|
)
|
|
|
0.79
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding
at end of year
|
|
|
1,502,500
|
|
|
$
|
0.22
|
|
|
$
|
111,206
|
|
|
|
2,038,500
|
|
|
$
|
0.40
|
|
|
$
|
100,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
at end of year
|
|
|
1,118,500
|
|
|
$
|
0.24
|
|
|
$
|
89,186
|
|
|
|
1,212,500
|
|
|
$
|
0.52
|
|
|
$
|
60,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
at end of year
|
|
|
384,000
|
|
|
$
|
0.18
|
|
|
$
|
22,020
|
|
|
|
826,000
|
|
|
$
|
0.21
|
|
|
$
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value per share of options issued during the year
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
$
|
0.26
|
|
|
|
|
|
Generally,
we issue new shares of common stock to satisfy stock option exercises.
We
have an employee-defined contribution plan qualified under section 401(k) of the Internal Revenue Code (the “Plan”),
for all employees age 21 or over, and meeting certain service requirements. The Plan has been in effect since January 1, 1997.
Participation in the Plan is voluntary. Employees may defer compensation up to a specific dollar amount determined by the Internal
Revenue Service for each calendar year. We do not make matching contributions, and employees are not allowed to invest in our
stock under the Plan.
Our
directors may authorize a discretionary contribution to the Plan, allocated according to the provisions of the Plan, and payable
in shares of our common stock valued as of the date the shares are contributed. No contributions were accrued or made in the years
ended December 31, 2016 and 2015.
16.
|
COMMITMENTS AND
CONTINGENCIES
|
Operating
Leases
–
Future
minimum rental payments required under operating leases with remaining non-cancelable lease terms as of December 31, 2016, are
as follows:
|
|
|
|
More than 5 years
|
|
$
|
—
|
|
3-5 years
|
|
|
—
|
|
1-3 years
|
|
|
13,645
|
|
Within 1 year
|
|
|
81,301
|
|
Total
|
|
$
|
94,946
|
|
Total
rental expense for all operating leases was:
|
|
Year ended
December 31,
2016
|
|
|
Year ended
December 31,
2015
|
|
Minimum rental payments
|
|
$
|
70,597
|
|
|
$
|
68,315
|
|
Deferred rent charge
|
|
|
(7,522
|
)
|
|
|
(4,793
|
)
|
|
|
$
|
63,077
|
|
|
$
|
63,522
|
|
Contingencies
– Revenue based
As
of December 31, 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
- 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 this time, the Company continues to work to find a reasonable and amicable resolution
to the situation.
Contingencies
– Litigation
Cases
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.
On
June 7, 2017, William Austin Lewis (“Lewis”), Lewis Asset Management (“Lewis Asset”), Lewis Opportunity
Fund LP (“Lewis Opportunity Fund”), and William A. Lewis Defined Pension Plan and Trust (“Lewis Defined Pension
Plan and Trust”) filed a complaint in the United States District Court for the Southern District of New York, against the
Company, Conrad F. Mir (“Mir”), Peter Brennan (“Brennan”) Rustin Howard (“Howard”), and Carl
O’Connell (“O’Connell”) (collectively, “Defendants”). The lawsuit alleges that Defendants
violated federal securities laws and disseminated false and misleading statements concerning the financial status and contractual
relations of the Company. Lewis, Lewis Opportunity Fund, and Lewis Defined Pension Plan and Trust are shareholders in the Company.
The complaint seeks to recover unspecified compensatory and punitive damages.
The
Company believes it has meritorious defenses to the allegations and the Company intends to vigorously defend against the litigation.
On
March 13, 2017, Bryan Clark filed a complaint against the Company, in the Circuit Court of the First Judicial Circuit in and for
Escambia County, Florida. The complaint alleges that the Company is in breach of the terms of its promissory note with Mr. Clark.
The Company is negotiating a settlement with Mr. Clark.
Cases
settled:
On
August 18, 2014, notice was issued to the Company that on June 23, 2014, Timothy Conley filed a complaint against the Company,
in the United States District Court for the District of Rhode Island. The complaint alleged that the Company’s former acting
interim chief executive, Johnnie Johnson, and Mr. Conley entered into an agreement whereby the Company agreed to make payments
to Mr. Conley. Among other allegations, Mr. Conley claims that the Company’s nonpayment to Mr. Conley constitutes a breach
of contract. On March 16, 2017, the Company entered into a Settlement, Compromise and Mutual Release Agreement with Mr. Conley.
Under the terms of this agreement, the Company, without acknowledging any liability, agreed to a settlement payment to fully and
completely resolve all claims from the Mr. Conley’s complaint. Each party has also released and discharged the other party
of any liability or claims that the first party ever had, may have had, or in the future have against the other party. The Company
has accrued the amount of the settlement in Accounts Payable and Accrued Liabilities as of December 31, 2016.
On
June 6, 2016, notice was issued to the Company that on May 26, 2016, CME Acuity Rx, LLC (“CME Acuity”) filed a complaint
against the Company, in the Superior Court of New Jersey. The complaint alleged the Company and CME Acuity entered into an agreement
whereby the Company agreed to make payments to CME Acuity.in return for services to the Company. Among other allegations, CME
Acuity claimed that the Company’s nonpayment to CME Acuity constituted a breach of contract. On February 27, 2017, the Company
entered into a Settlement, Compromise and Mutual Release Agreement with CME Acuity. Under the terms of this Agreement, the Company,
without acknowledging any liability, agreed to a settlement payment to fully and completely resolve all claims from the CME Acuity
complaint. Each party has also released and discharged the other party of any liability or claims that the first party ever had,
may have had, or in the future have against the other party. The Company has accrued the amount of the settlement in Accounts
Payable as of December 31, 2016.
On
November 9, 2016, the Company filed a complaint against Joel Bradus, an independent contractor for CME Acuity, in the Supreme
Court of the State of New York, County of New York. The complaint alleges that Mr. Bradus interfered in the business relationship
between the Company and CME Acuity, interfered in the business relationship between the Company and one of its major customers,
and engaged in written and oral defamatory conduct against the Company. The Company was seeking actual, consequential, compensatory
and punitive damages. On February 27, 2017, the Company entered into a Settlement, Compromise and Mutual Release Agreement with
Mr. Bradus. Under the terms of this agreement, Mr. Bradus agrees to take no action which is intended, or would reasonably be expected,
to cause material harm to the Company. Each party has also released and discharged the other party of any liability or claims
that the first party ever had, may have had, or in the future have against the other party.
Other:
On
January 27, 2017, Christine Chansky (the “Plaintiff”) filed a complaint against the Company, in the United States
District Court for the District of New Jersey. The complaint alleged wrongful termination and other claims. On May 25, 2017, the
Court filed a 60-day order administratively terminating the action. The Company is discussing a settlement with Ms. Chansky, however,
to date, no settlement has been reached.
|
17.
|
RELATED
PARTY TRANSACTIONS
|
Our
board of directors determined that when a director’s services are outside the normal duties of a director, we compensate
the director at the rate of $1,000 per day, plus expenses, which is the same amount we pay a director for attending a one-day
Board meeting. We classify these amounts as consulting expenses, included in personnel and consulting expenses.
As
of December 31, 2016, and December 31, 2015, the Company has $433,300 and $308,400, respectively, owed in fees to current directors,
which are in Accounts Payable.
At
December 31, 2016 and at December 31, 2015, $2,598,980 of the outstanding Notes were payable to related parties; $2,498,980 to
the chairman of our Board, Peter Brennan, and $100,000 to another director, Stan Yarbro. Accrued Interest on the Note to Mr. Brennan,
which is in Accrued Liabilities, was $615,000 and $465,000, respectively, as of December 31, 2016 and December 31, 2015. Accrued
Interest on the Note to Mr. Yarbro, which is in Accrued Liabilities, was $28,000 and $22,000, respectively, as of December 31,
2016 and December 31, 2015. In addition, the Company has recorded additional interest on Mr. Brennan’s Notes, pending negotiations,
of $1,432,000 as of December 31, 2016, and $1,007,000 as of December 31, 2015 (see 90 day Convertible Notes above).
On
September 15, 2015, the Company announced the appointment of Stephen J. D’Amato, M.D. as chief medical officer of the Company.
During 2010, Calmar Pain Relief, LLC, purchased 10 Calmare devices from the Company for an aggregate purchase price of $550,000.
Additionally, during 2016 and 2015, Calmar Pain Relief purchased certain supplies from the Company totaling $3,200 and $1,900,
respectively. Dr. D’Amato is one of the managing members of Calmar Pain Relief, LLC.
On
October 15, 2015, the Company entered into 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. As a result of this agreement, the Board of Directors has determined that the Admiral is
no longer an independent director of the Company. On January 19, 2017, the Admiral resigned from the Board of Directors. As of
January 19, 2017, the Company has $30,000 in consulting fees payable to the Admiral.
On
January 19, 2017, Robert T. Conway, Jr. informed Calmare Therapeutics Incorporated (the “Company”) of his decision
to resign, effective immediately, from the Company’s Board of Directors (the “Board”). Mr. Conway was the Chairman
of Nominating and Corporate Governance Committee and a member of Compensation Committee of the Board at the time of his resignation.
The resignation was not the result of any disagreements with the Company.
On
January 19, 2017, Steve Roehrich informed the Company of his decision to resign, effective at the close of business on January
19, 2017, from the Company’s Board. Mr. Roehrich was a member of the Audit Committee and a member of the Nominating and
Corporate Governance Committee of the Board at the time of his resignation. The resignation was not the result of any disagreements
with the Company.
On
January 24, 2017, the Company’s Board of Directors voted unanimously to reduce the number of board members from seven (7)
to five (5).
On
March 15, 2017, the Company entered into an Agreement with a consulting firm to provide marketing and investor relations advice
to the Company. Under the terms of the Agreement, the Company paid the consulting firm one million, four hundred thousand shares
(1,400,000) of Common Stock valued at $170,800.
On
March 18, 2017, Stan Yarbro was removed as a Director of the Company by a majority vote of the Board, effective immediately. Mr.
Yarbro was Chairman of the Audit Committee and a member of the Compensation Committee of the Board at the time of his removal.
During
the quarter ended March 31, 2017, the Company did an additional private offering with Peter Brennan, Chairman of the Board, under
which it issued a convertible promissory Note in the amount of $24,706 for consideration of $21,000, the difference between the
proceeds from the Note and principal amount consisting of $3,706 of original issue discount. The Note is convertible at an initial
conversion price of $0.20 per share any time after issuance thereby having an embedded beneficial conversion feature. The note
holder was also issued market-related warrants for 123,530 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, 2017, the Company did an additional private offering under which it issued a convertible promissory
Note in the amount of $102,000. The Note is convertible any time after issuance at a conversion price equal to 58% of the lowest
trading price in the twenty (20) days prior to conversion. The Note also bears an interest rate of 12% per annum. There is a requirement
that the Company reserve 20 million shares of common stock for future conversion of this Note.
During
the quarter ended June 30, 2017, the Company did an additional private offering with Peter Brennan, Chairman of the Board, under
which it issued a convertible promissory Note in the amount of $82,353 for consideration of $70,000, the difference between the
proceeds from the Note and principal amount consisting of $12,353 of original issue discount. The Note is convertible at an initial
conversion price of $0.20 per share any time after issuance thereby having an embedded beneficial conversion feature. The note
holder was also issued market-related warrants for 411,765 in shares of common stock. The warrants have an exercise price of $0.60
and a 1-year term.