See accompanying notes

PART I. FINANCIAL INFORMATION (Continued)

CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Supplemental disclosure of non-cash transactions:

During the quarter ended March 31, 2015, the Company issued 500,000 shares with a fair value of $80,000 to an advisory firm for consulting services. The Company is amortizingamortized the $80,000 over the service period and recorded $20,000 and $60,000 of expense in the quarter and nine months ended September 30, 2015, respectively.

During the quarter ended March 31, 2015, the Company issued 120,000 shares to an advisory firm for consulting services. The shares vested in two tranches, with 60,000 shares vesting in the quarter ended December 31, 2014 and remaining 60,000 shares vesting in the quarter ended March 31, 2015. The Company recorded consulting expenses of $10,800 in the quarter ended December 31, 2014 and $27,600 of consulting expenses in the quarter ended March 31, 2015. In each instance, the expense was based on the fair value on the vesting date.

During the quarter ended March 31, 2015, the Company issued 333,333 stock warrants for consulting services performed and recorded consulting expense of $75,000 for the fair value of the warrants.

During the nine months ended September 30, 2015, the Company allocated $316,623 of convertible note proceeds for the fair value of warrants and beneficial conversion feature to additional paid-in capital.

During the nine months ended September 2014, the Company issued 1,378,240 shares of common stock upon conversion of notes (see Note 11).

During the quarter ended September 30, 2015, the Company issued 29,410 shares of common stock upon conversion of notes (see Note 11).

InDuring the nine months ended September 201330, 2016, the Company issued 1,618,235 sharesallocated $336,282 of convertible note proceeds for the Company’s common stockfair value of warrants and beneficial conversion feature to ASC Recap. During September and October 2013, ASC Recap sold the Company’s common stock and during the three months ended March 31, 2014 paid creditors approximately $80,000 from the proceeds and retained a service fee of approximately $27,000 (see Note 10). additional paid-in capital.

See accompanying notes

PART I. FINANCIAL INFORMATION (Continued)

CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY

Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

The interim condensed consolidated financial information presented in the accompanying condensed consolidated financial statements and notes hereto is unaudited.

Effective August 20, 2014, Competitive Technologies, Inc. changed its name to Calmare Therapeutics Incorporated.

Calmare Therapeutics Incorporated (“CTI”) and its majority-owned (56.1%) subsidiary, Vector Vision, Inc. (“VVI”), (collectively, the “Company”, “we”“Company,” "we,” “our,” or “us”), is a medical device company developing and commercializing innovative products and technologies. CTI istechnologies for chronic neuropathic pain and wound care affliction patients. The Company’s flagship medical device, the licensed distributor of the non-invasive Calmare^® Pain Therapy Device (the “Calmare Device”), which was developed tois the world’s only non-invasive and non-addictive modality that can successfully treat chronic, neuropathic and cancer-derived pain.

TheseThe consolidated financial statements include the accounts of CTIthe Company and VVI.its majority-owned subsidiary, Vector Vision, Inc. Inter-company accounts and transactions have been eliminated in consolidation.

We believe we have made all adjustments necessary, consisting only of normal recurring adjustments, to present the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. The results for the three and nine months ended September 30, 20152016 are not necessarily indicative of the results that can be expected for the full year ending December 31, 2015.2016.

The interim unaudited condensed consolidated financial statements and notes thereto, should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 20142015 filed with the Securities and Exchange Commission (“SEC”) on June 24, 2015.April 14, 2016.

During the three and nine months ended September 30, 2015,2016, we had a significant concentration of revenues from the Calmare^®Device. The percentages of gross revenue attributed to sales and rentals of Calmare Devices, in the three months ended September 30, 2016 and September 30, 2015, were 94% and 95%, respectively. The percentages of gross revenue attributed to sales and rentals of Calmare Devices, in the nine months ended September 30, 2016 and September 30, 2015, were 95%93% and 94%, respectively; and 94% and 96%, respectively, in the three and nine months ended September 30, 2014.respectively. Additionally, the percentage of gross revenue attributed to other Calmare Device related sales of equipment and training, in the three months ended September 30, 2016 and September 30, 2015, were 5% and 4%, respectively. The percentage of gross revenue attributed to other Calmare Device related sales of equipment and training, in the nine months ended September 30, 2015, was 4% in both periods;2016 and 2% and 1%, respectively, in the three and nine months ended September 30, 2014.2015, were 5% and 4%, respectively. We continue to attempt to expand our sales activities for the Calmare Device and expect the majority of our revenues to come from this technology.

The Company has incurred operating losses since fiscal 2006 and has a working capital deficiency and shareholders’ deficiency at September 30, 2015.2016. The Company has taken steps to reduce its operating expenses as well as increase revenue from sales of Calmare Devices and related sales. However, even at the reduced spending levels, should the anticipated increase in revenue from sales of Calmare Devices and related sales not occur the Company may not have sufficient cash flow to fund operations through 20152016 and into 2016.2017. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include adjustments to reflect the possible future effect of the recoverability and classification of assets or amounts and classifications of liabilities that may result from the outcome of this uncertainty.

The Company's continuation as a going concern is dependent upon its developing recurring revenue streams sufficient to cover operating costs. The Company does not have any significant individual cash or capital requirements in the budget going forward. If necessary, the Company will attempt to meet anticipated operating cash requirements by further reducing costs, issuing debt and/or equity, and/or pursuing sales of certain assets and technologies while we pursue licensing and distribution opportunities for our remaining legacy portfolio of technologies. There can be no assurance that the Company will be successful in such efforts. Failure to develop a recurring revenue stream sufficient to cover operating expenses could negatively affect the Company’s financial position.

Our liquidity requirements arise principally from our working capital needs, including funds needed to sell our current technologies and obtain new technologies or products, and protect and enforce our intellectual property rights, if necessary. We fund our liquidity requirements with a combination of cash on hand, debt and equity financing, sales of common stock and cash flows from operations, if any, including royalty legal awards. At September 30, 2015,2016, the Company had outstanding debt in the form of promissory notes with a total principal amount of $4,177,000$6,059,000 and a carrying value of $3,839,000.

In 2007, the Company secured the exclusive, worldwide rights to the patented, chronic pain reduction technology (the “Technology”) behind the Company’s flagship medical device – the Calmare Device. The Company’s 2007 agreement (the “2007 Agreement”) with Giuseppe Marineo, an inventor of the Technology, and Delta Research and Development (“Delta”), authorized the Company to manufacture and sell worldwide the Calmare Device developed from the patented Technology. The 2007 Agreement was amended in 2011 (the “2011 Amendment”) to provide the Company with exclusive rights to the Technology through March 31, 2016. In July 2012, the Company attempted to negotiate a five-year extension to the agreement with Marineo and Delta (the “2012 Amendment”). However, the Company believes that the 2012 Amendment is neither valid nor enforceable as it was never duly signed or authorized and subsequently deemed null and void. 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. (see Footnote 13.CONTRACTUAL OBLIGATIONS AND CONTINGENCIES,the Company’s Distribution Rights, Marineo and Delta)

The Technology is patented in Italy and in the United States. Applications for patents have been filed internationally as well and are pending approval. The Calmare Device has CE Marking certification under the expressed jurisdiction from the European Commission’s Competitiveness and Innovation Program (“CIP”). The Calmare Device also has a 510(k) clearance from the U.S. Food and Drug Administration (#K081255) for sales in the United States and reciprocity countries. The Company partners with GEOMC Co., Ltd. (“GEOMC”) of Korea to manufacture the Calmare Device commercially.$5,908,000.

The following sets forth the denominator used in the calculations of basic net loss per share and net loss per share assuming dilution:

Due to the net loss incurred for the three and nine months ended September 30, 2015,2016, and 2014,September 30, 2015, the denominator used in the calculation of basic net loss per share was the same as that used for net loss per share, assuming dilution, since the effect of any options, convertible preferred shares, convertible debt or warrants would have been anti-dilutive.

Potentially dilutive securities outstanding are summarized as follows:

PART I. FINANCIAL INFORMATION (Continued)

CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY

In May 2014, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers, as amended by ASU 2015-14, that outlines a single comprehensive model for entities to use in accounting for revenue recognition and supersedes most current revenue recognition guidance, including industry-specific guidance. The amendments in this accounting standard update are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices, and improve disclosure requirements. The amendments in this accounting standard update are effective for interim and annual reporting periods beginning after December 15, 2017;2017, with early adoption permitted after December 15,31, 2016. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15,Presentation of Financial Statements – Going Concern,which provides guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and the related footnote disclosure.  For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financials are issued.  When management identifies conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, the ASU also outlines disclosures that are required in the company’s footnotes based on whether or not there are any plans intended to mitigate the relevant conditions or events to alleviate the substantial doubt.  The ASU becomes effective for annual periods ending after December 15, 2016, and for any annual and interim periods thereafter.  Early application is permitted.  The Company is currently assessing the impact that this standard will have on its consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11,Inventory – Simplifying the Measurement of Inventory,which requires that inventory be measured at the lower of cost and net realizable value. Prior to the issuance of the new guidance, inventory was measured at the lower of cost or market. Replacing the concept of market with the single measurement of net realizable value is intended to create efficiencies for preparers. Inventory measured using the last-in, first-out (LIFO) method and the retail inventory method are not impacted by the new guidance. The ASU becomes effective for fiscal years beginning after December 15, 2016, including interim periods with those fiscal years. Early application is permitted. We do not expect the adoption to have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02,Leases, to increase the transparency and comparability about leases among entities. The new guidance requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional disclosures about leasing arrangements. The ASU is effective for interim and annual periods beginning after December 15, 2018, and requires a modified retrospective approach to adoption. Early adoption is permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09,Compensation - Stock Compensation Improvements to Employee Share-Based Payment Accounting, which is intended to simplify certain aspects of the accounting for share-based payments to employees. The guidance in this standard requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled rather than recording excess tax benefits or deficiencies in additional paid-in capital. The guidance in this standard also allows an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The standard becomes effective for interim and annual periods beginning after December 15, 2016, and requires a modified retrospective approach to adoption. Early adoption is permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.

In May 2016, the FASB issued ASU No. 2016-12,Revenue from Contracts with Customer (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments in ASU 2016-12 address narrow-scope improvements to the guidance on collectability, noncash consideration, and completed contracts at transition. Additionally, the amendments in this update provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. This guidance is effective for annual periods beginning after December 15, 2018, including interim reporting periods therein. The Company is currently evaluating the potential impact the adoption of this standard will have on its consolidated financial statements and related disclosures.

Receivables consist of the following:

The fair value of the equity securities we held were categorized as available-for-sale securities, which were carried at a fair value of zero, consisted of shares in Security Innovation and Xion Pharmaceutical Corporation (“Xion”). We ownThe Company owns 223,317 shares of stock in the privately held Security Innovation, an independent provider of secure software located in Wilmington, MA.

In September 2009 we announced the formation of a joint venture with Xion for the commercialization of our patented melanocortin analogues for treating sexual dysfunction and obesity. CTI currently ownsThe Company received 60 shares of privately held Xion Pharmaceutical Corporation common stock orin June 2010. The Company currently owns 30% of the outstanding stock of privately held Xion.Xion Pharmaceutical Corporation.

The Company measures fair value in accordance with Topic 820 of the FASB Accounting Standards Codification (“ASC”), Fair Value Measurement (“ASC 820”), which provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described as follows:

PART I. FINANCIAL INFORMATION (Continued)

CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY

The asset's or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

The Company values its derivative liability associated with the variable conversion feature on its Series C Convertible Preferred Stock (Note 12) based on the market price of its common stock. For each reporting period the Company calculates the amount of potential common stock that the Series C Preferred Stock could convert into based on the conversion formula (incorporating market value of our common stock) and multiplies those converted shares by the market price of its common stock on that reporting date. The total converted value is subtracted by the consideration paid to determine the fair value of the derivative liability. The Company classified the derivative liability of approximately $108,000$84,000 and $66,000 at September 30, 20152016 and $66,000 at December 31, 2014,2015, respectively, in Level 2 of the fair value hierarchy.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation method is appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value could result in a different fair value measurement at the reporting date.

The carrying amounts reported in our Condensed Consolidated Balance Sheet for cash, accounts receivable, liabilities under the claims purchase agreement, accounts payable, GEOMC, notes payable, deferred revenue, and preferred stock liability approximate fair value due to the short-term maturity of those financial instruments.

Prepaid expenses and other current assets consist of the following:

PART I. FINANCIAL INFORMATION (Continued)

CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY

Property and equipment, net, consist of the following:

Depreciation and amortization expense was $3,904$4,132 and $12,267,$12,395, respectively, during the three and nine months ended September 30, 2015,2016, and $5,630$3,904 and $11,976,$12,267, respectively, for the three and nine months ended September 30, 2014.2015.

Accrued expenses and other liabilities consist of the following:

Excluded above is approximately $217,000 of accrued expenses and other liabilities at September 30, 20152016 and December 31, 2014,2015, that fall under the Liability Purchase Agreement (“LPA”) with ASC Recap, LLC (“ASC Recap”), and are expected to be repaid using the process as described in Note 10.  Because there can be no assurance that the Company will be successful in completing this process, the Company retains ultimate responsibility for these liabilities, until fully paid down.

During the third quarter of 2013, the Company negotiated a LPA with Southridge, Partners II, L.P. (“Southridge”). The LPA takes advantage of a provision in the Securities Act of 1933, Section 3(a)(10), that allows the exchange of claims, securities, or property for stock when the arrangement is approved for fairness by a court proceeding. The process, approved by the court in August 2013, has the potential to eliminate nearly $2.1 million of ourthe Company’s financial obligations to existing creditors who agreed to participate and executed claims purchase agreements with Southridge’s affiliate ASC Recap accounting for $2,093,303 of existing payables, accrued expenses and other current liabilities, and notes payable. The process began with the issuance in September 2013 of 1,618,235 shares of the Company’s common stock to ASC Recap. During September and October 2013, ASC Recap sold the Company’s common stock and during the three months ended March 31, 2014 paid creditors approximately $80,000 from the proceeds and retained a service fee of approximately $27,000. During 2014, the Company also made cash payments of $18,000 for accrued expenses previously included in the LPA amount. As of February 24,December 29, 2016, no further shares of the Company’s common stock had been issued to ASC Recap to settle creditors’ balances.

There can be no assurance that the Company will be successful in completing this process with Southridge, and the Company retains ultimate responsibility for this debt, until fully paid.

PART I. FINANCIAL INFORMATION (Continued)

CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY

Notes payable consist of the following:

Details of notes payable as of September 30, 20152016 are as follows:

PART I. FINANCIAL INFORMATION (Continued)

CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY

90 day Convertible Notes

The Company has issued 90-day notes payable to borrow funds from a director, now the chairman of our Board, as follows:

These notes have been extended several times and all bear 6.00% simple interest. As of September 30, 2016, there is unpaid interest of $546,021 related to these notes. A conversion feature was added to the Notesnotes 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 Notesnotes to include additional interest of 1% simple interest per month on all amounts outstanding for all Notesnotes 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 Notesnotes was not recorded. During 2014, management has been in negotiations to modify the terms of the Notes.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 $108,000 and $99,000 during the three months ended September 30, 2016 and September 30, 2015, respectively, and has recorded approximately $315,000 and $287,000 during the nine months ended September 30, 2016 and September 30, 2015, andrespectively, As of September 30, 2016, the Company has recorded total additional interest in total of $906,000.approximately $1,321,000.

A total of $485,980 of the aforementioned notes issued between December 1, 2012 and March 31, 2013 fall under the LPA with ASC Recap, and are expected to be repaid using the process as described in Note 10.  Because there can be no assurance that the Company will be successful in completing this process, the Company retains ultimate responsibility for this debt, until fully paid down.  As a result, the Company continues to accrue interest on these notes and they remain convertible as described above.

24 month Convertible Notes

In March 2012, the Company issued a 24-month convertible promissory note to borrow $100,000. Additional 24-month convertible promissory notes were issued in April 2012 ($25,000) and in June 2012 ($100,000). All of the notes bear 6.00% simple interest. Conversion of the eligible principal amounts to common stock is allowed at any time at a rate of $1.05 per share.

As of February 24,September 30, 2016, the Company has not repaid the principal due on the March 2012 $100,000 note, the April 2012 $25,000 note or the June 2012 $100,000 note and is in default under the terms of the notes. The Company recorded additional interest of approximately $3,400 during both the three months ended September 30, 2016 and September 30, 2015, and has recorded approximately $10,100 during both the nine months ended September 30, 2016 and September 30, 2015. As of September 30, 2015, there is also unpaid2016, the Company has recorded total additional interest of $28,000approximately $50,000 related to these notes.

10 day Note

In late December 2014, the Company issued a 10 day non-interest bearing note to a Board member in the amount of $42,500. This note was repaid in early January 2015.

PART I. FINANCIAL INFORMATION (Continued)

CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY

Series A-3 15% Original Issue Discount (“OID”) Convertible Notes and Warrants

During the quarter ended March 31, 2014, the Company did a private offering of a third tranche of convertible notes and warrants, under which it issued $64,706 of convertible promissory notes for consideration of $55,000, the difference between the proceeds from the notes and principal amount consists of $9,706 of original issue discount. The notes are convertible at an initial conversion price of $0.25 per share any time after issuance thereby having an embedded beneficial conversion feature.

The note holders were also issued market-related warrants for 129,412 in shares of common stock. The warrants have an exercise price of $0.60 and a term of 2 years. The beneficial conversion feature, if any, and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized over the life of the notes to interest expense.

The beneficial conversion feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion price and the fair value of the common stock multiplied by the number of share into which the note is convertible. We estimated the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions:

The proceeds of the Notes issued during the three months ended March 31, 2014 were allocated to the components as follows:

During the quarter ended June 30, 2014, certain holders of Series A-3 OID convertible notes and warrants delivered to the Company a notice of conversion related to the Series A-3 OID convertible notes. Due to the timing of receipt of the notices by the Company, certain Note holders (“Noteholders”) received their shares during the quarter ended June 30, 2014, while other Noteholders received or are due to receive their shares after June 30, 2014. Additionally, the Company offered certain Noteholders an inducement to convert their notes to shares. The inducement, when offered, provided Noteholders a conversion price of $0.20. All other original terms, including the warrant terms, remained the same. Upon notice of conversion and irrespective of whether the shares were delivered in the quarter ended June 30, 2014 or subsequent to June 30, 2014 to the Company: (i) accelerated and recognized as interest expense in the current period any remaining discount, and (ii) recognized a loss for the fair value of the additional shares offered as the conversion inducement.

Presented below is summary information related to the conversion:

During the quarter ended March 31, 2015, a holder of Series A-3 OID convertible notes and warrants delivered to the Company a notice of conversion related to the Series A-3 OID convertible notes. Additionally, the Company offered the Noteholder an inducement to convert his/her notes to shares. The inducement provided the Noteholder a conversion price of $0.20. All other original terms, including the warrant terms, remained the same. Upon notice of conversion, the Company: (i) accelerated and recognized as interest expense in the current period any remaining discount, and (ii) recognized a loss for the fair value of the additional shares offered as the conversion inducement. As of February 24,September 30, 2016, the Company had not issued the shares due related to the conversion notice.

PART I. FINANCIAL INFORMATION (Continued)

CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY

Presented below is summary information related to the conversion:

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:

The proceeds of the Notes were allocated to the components as follows:

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.

PART I. FINANCIAL INFORMATION (Continued)

CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY

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:

Series B-2 OID Convertible Notes and Warrants

During the quarter ended December 31, 2014, the Company did private offerings of convertible notes and warrants, under which it issued $358,824 of convertible promissory notes for consideration of $305,000, the difference between the proceeds from the notes and principal amount consists of $53,824 of original issue discount. The notes are convertible at an initial conversion price of $0.20 per share any time after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 897,060 in shares of common stock. The warrants have an exercise price of $0.60 and a 1-year term. The beneficial conversion feature and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized over the life of the notes to interest expense.

The beneficial conversion feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion price and the fair value of the common stock multiplied by the number of share into which the note is convertible. We estimated the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions:

The proceeds of the Notes were allocated to the components as follows:

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 September 30, 2016, the remaining notes have passed their maturity date. The Company has not repaid the amounts due on these notes and is in default under the terms of the notes.

During the quarter ended March 31, 2015, the Company did an additional private offering of convertible notes and warrants, under which it issued $302,353 of convertible promissory notes for consideration of $257,000, the difference between the proceeds from the notes and principal amount consists of $45,353 of original issue discount. The notes are convertible at an initial conversion price of $0.20 per share any time after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 755,882 in shares of common stock. The warrants have an exercise price of $0.60 and a 1-year term. The beneficial conversion feature and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized over the life of the notes to interest expense.

The beneficial conversion feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion price and the fair value of the common stock multiplied by the number of shares into which the note is convertible. We estimated the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions:

The proceeds of the Notes were allocated to the components as follows:

DuringAs of September 30, 2016, these notes have passed their maturity date. The Company has not repaid the quarter ended June 30, 2015, a holder of Series B-2 OID convertibleamounts due on these notes and warrants delivered tois in default under the Company a noticeterms 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.

PART I. FINANCIAL INFORMATION (Continued)

CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARYnotes.

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:

The proceeds of the Notes were allocated to the components as follows:

Tonaquint 9% Original Issue Discount Convertible NotesAs of September 30, 2016, these notes have passed their maturity date. The Company has not repaid the amounts due on these notes and Warrantsis in default under the terms of the notes.

During the quarter ended September 30, 2013,December 31, 2015, the Company entered into a securities purchase agreement with Tonaquint, Inc.,did an additional private offering of convertible notes and warrants, under which it was issued a $112,500$470,588 of convertible promissory note innotes for consideration for $100,000,of $400,000, the difference between the proceeds from the Notenotes and the principal amount consistedconsists of a $10,000$70,588 of original issue discount and a carried transaction expense of $2,500.discount. The original issue discount was being amortized over the life of the note. The note wasnotes are convertible at an initial conversion price of $0.30$0.20 per share at any time and contained a “down-round protection” feature that requires the valuation of a derivative liability associated with the note.after issuance thereby having an embedded beneficial conversion feature. The note bore interest at 7% and was due in May 2014. Tonaquint washolders were also issued a market-related warrantwarrants for $112,5001,176,470 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 a “cashless” exercisethe following assumptions:

The proceeds of the Notes were allocated to the components as follows:

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 warrant had a $0.35note 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 5-year term1-year term. The beneficial conversion feature and includedthe 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 “down-round protection”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 that required itwas 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:

The proceeds of the Notes were allocated to be classifiedthe components as a liability rather than as equity.follows:

As of September 30, 2016, 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 first quarter of 2014ended June 30, 2016, the Company executeddid 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 debt settlement agreement with Tonaquint related1-year term. The beneficial conversion feature and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notenotes, the beneficial conversion feature and warrant.the warrants on a relative fair value basis at the time of issuance. The warrant was settled duringtotal debt discount is amortized over the first quarter of 2014 for a cash payment of $98,000, resulting in a loss of $98,000. The note was settled during the second quarter of 2014 for cash payments totaling $144,000 ($20,000 paid in the first quarter of 2014 and $124,000 paid in the second quarter of 2014). Because the executionlife of the debt settlement agreement innotes to interest expense.

The beneficial conversion feature was valued at the first quarter of 2014 resulted in a significant modification ofintrinsic value on the original terms ofissuance date. The intrinsic value represents the note agreement,difference between the Company adjustedconversion price and the carryingfair value of the common stock multiplied by the number of shares into which the note inis convertible. We estimated the first quarterfair value of 2014 and recordedthe warrants on the issue date using a related loss of approximately $34,000.Black-Scholes pricing model with the following assumptions:

Southridge

The proceeds of the Notes were allocated to the components as follows:

During 2013, the Company issued a six-month $12,000 convertible note payable to Southridge to cover legal expenses as part of the LPA. The convertible note was convertible into the Company’s common stock at the greater of $0.25 or 85% of the average closing bid price during the five (5) trading days prior to conversion and was due in June 2014.

During the third quarter of 2014, the Company issued to Southridge 50,000 shares in exchange for and in full satisfaction for the note and recorded a $5,500 loss upon conversion of the note.

PART I. FINANCIAL INFORMATION (Continued)

CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY

12. SHAREHOLDERS’ DEFICIENCY

Stock Option Plan

On May 2, 2011 the Company adopted and executed the Employees’ Directors’ and Consultants Stock Option Plan (the “Plan”). During the three months ended March 31, 2015, the Company granted 50,000 options to non-employee directors which were fully vested upon issuance. During the three months ended March 31, 2014, the Company granted 42,500 options to non-employee directors which were fully vested upon issuance. During the three months ended June 30, 2014, the Company granted 320,000 options to employees. 20% of the options vested upon issuance and the remaining options vest ratable over a four (4) year period. No options were granted during the three months ended September 30, 2014. During the three months ended September 30, 2015, the Company granted 300,000 options to employees. 20% of the options vested upon issuance and the remaining options vest ratable over a four (4) year period.

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:

During the nine months ended September 30, 2016, 440,000 options were cancelled and 46,000 options expired.

During both the three and nine months ended September 30, 2016, there were no stock options issued to directors. During the three and nine months ended September 30, 2016, the Company recognized expense of $7,180 and $8,260, respectively, for stock options issued to employees and consultants. The Company realized a credit of $13,280 during the nine months ended September 30, 2016 for options cancelled as a result of the January 2016 resignation of the Company’s Chief Financial Officer.

During the nine months ended September 30, 2015, the Company recognized expense of $7,963 for stock options issued to directors and recognized expense of $25,006 and $41,218, respectively, for the three and nine months ended September 30, 2015, for stock options issued to employees.

During the nine months ended September 30, 2014, the Company recognized expense of $11,178 for stock options issued to directors and recognized expense of $8,062 and $38,007, respectively, for the three and nine months ended September 30, 2014, for stock options issued to employees.

Preferred Stock

Holders of 5% preferred stock are entitled to receive, if, as, and when declared by the Board of Directors, out of funds legally available therefore, preferential non-cumulative dividends at the rate of $1.25 per share per annum, payable quarterly, before any dividends may be declared or paid upon or other distribution made in respect of any share of common stock. The 5% preferred stock is redeemable, in whole at any time or in part from time to time, on 30 days' notice, at the option of the Company, at a redemption price of $25. In the event of voluntary or involuntary liquidation, the holders of preferred stock are entitled to $25 per share in cash before any distribution of assets can be made to holders of common stock.

Each share of 5% preferred stock is entitled to one vote. Holders of 5% preferred stock have no preemptive or conversion rights. The preferred stock is not registered to be publicly traded.

PART I. FINANCIAL INFORMATION (Continued)

CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY

The rights of the Series C Convertible Preferred Stock are as follows:

The Company recorded a convertible preferred stock derivative liability of $107,871 and $66,177, respectively, associated with the 375 shares of Series C Convertible Preferred Stock outstanding of $83,591 and $66,177 at September 30, 20152016 and December 31, 2014.2015, respectively.

The Company has classified the Series C Convertible Preferred Stock as a liability at September 30, 20152016 and December 31, 20142015 because the variable conversion feature may require the Company to settle the conversion in a variable number of its common shares.

Common Stock

At its December 2, 2010 meeting, the CTI Board of Directors declared a dividend distribution of one right (each, a “Right”) for each outstanding share of common stock, par value $0.01, of the Company (the “Common Shares”). The dividend was payable to holders of record as of the close of business on December 2, 2010 (the “Record Date”). Issuance of the dividend may be triggered by an investor purchasing more than 20% of the outstanding shares of common stock.

On August 14, 2014 the shareholders approved an amendment to the Company’s certification of incorporation to effect up to a one-for-ten reverse stock split (the “reverse Stock Split” of the Company’s issued and authorized outstanding common stock. The Board of Directors, in its sole discretion, has discretion to implement the Reverse Stock Split. As of September 30, 2016, the Board of Directors has not implemented the Reverse Stock Split.

During the quarter ended March 31, 2014,2015, the Company did a private offering of its common stock and warrants, for consideration of $75,000. 375,000 shares of common stock were issued at a per share price of $0.20. The common stock holders were also issued warrants to purchase 187,500 shares of common stock. The warrants have an exercise price of $0.60 and a 3-year term. The warrants were recorded to additional paid-in-capital.

During the quarter ended March 31, 2015, the Company did a private offering of its common stock and warrants, for consideration of $500,000. 2,500,000 shares of common stock were issued at a per share price of $0.20. The common stock holders were also issued warrants to purchase 1,250,000 shares of common stock. The warrants have an exercise price of $0.60 and a 3-year term. The warrants were recorded to additional paid-in-capital.

During the quarter ended June 30, 2014, the Company did an additional private offering of its common stock and warrants, for consideration of $170,000. 850,000 shares of common stock were issued at a per share price of $0.20. The common stock holders were also issued warrants to purchase 425,000 shares of common stock. The warrants have an exercise price of $0.60 and a 3-year term. The warrants were recorded to additional paid-in-capital.

On August 14, 2014 the shareholders approved an amendment to the Company’s certification of incorporation to effect up to a one-for-ten reverse stock split (the “reverse Stock Split” of the Company’s issued and authorized outstanding common stock. The Board of Directors, in its sole discretion, has discretion to implement the Reverse Stock Split. As of February 24, 2016, the Board of Directors has not implemented the Reverse Stock Split.

During the quarter ended September 30, 2014, the Company did an additional private offering of its common stock and warrants, for consideration of $232,000. 1,160,000 shares of common stock were issued at a per share price of $0.20. The common stock holders were also issued warrants to purchase 580,000 shares of common stock. The warrants have an exercise price of $0.60 and a 3-year term. The warrants were recorded to additional paid-in-capital. 

During the quarter ended March 31, 2015, the Company issued 500,000 shares with a fair value of $80,000 to an advisory firm for consulting services. The Company is amortizing the $80,000 over the service period and recorded $20,000 of expense in the quarter ended September 30, 2015 and $60,000 of expense in the nine months ended September 30,March 31, 2015.

During the quarter ended March 31, 2015, the Company issued 120,000 shares to an advisory firm for consulting services. The shares vested in two tranches, with 60,000 shares vesting in the quarter ended December 31, 2014 and remaining 60,000 shares vesting in the quarter ended March 31, 2015. The Company recorded consulting expenses of $10,800 in the quarter ended December 31, 2014 and $27,600 of consulting expenses in the quarter ended March 31, 2015. In each instance, the expense was based on the fair value on the vesting date.

During the quarter ended March 31, 2015, the Company issued 333,333 stock warrants with a five year term for consulting services performed and recorded consulting expense of $75,000 for the fair value of the warrants.

During the quarter ended March 31, 2015,June 30, 2016, the Company didissued 261,943 shares with a private offeringfair value of $49,769 to Conrad Mir, its common stockPresident and warrants,CEO, for considerationthe remainder of $75,000. 375,000 shares of common stock were issued at a per share price of $0.20. The common stock holders were also issued warrants to purchase 187,500 shares of common stock. The warrants have an exercise price of $0.60his 2015 bonus and a 3-year term. The warrants were recorded to additional paid-in-capital. 

During the quarter ended June 30,his 2015 the Company did an additional private offering of its common stock and warrants, for consideration of $290,000. 1,450,000 shares of common stock were issued at a per share price of $0.20. The common stock holders were also issued warrants to purchase 725,000 shares of common stock. The warrants have an exercise price of $0.60 and a 3-year term. The warrants were recorded to additional paid-in-capital.unused accrued vacation.

On October 15, 2015 the shareholders approved an increase in the number of authorized shares of common stock from 40 million to 100 million.

PART I. FINANCIAL INFORMATION (Continued)

CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY

During the three months ended March 31, 2015 and 2014, theThe Company issued 12,50010,000 and 10,62512,500 shares of its common stock to non-employee directors under its Director Compensation Plan.Plan during the three months ended March 31, 2016 and 2015, respectively. The Company recorded expense of $2,125$1,900 and $4,038$2,125 for director stock compensation expense in the three months ended March 31, 2016 and 2015, and 2014.respectively. No shares were issued duringunder the Director Compensation Plan in the three months ended September 30, 20152016 and 2014.September 30, 2015. Additionally, no expense was recorded in the three months ended September 30, 20152016 and 2014.September 30, 2015.

As of September 30, 2015,2016, the Company and its majority owned subsidiary, VVI, have remaining obligations, contingent upon receipt of certain revenues, to repay up to $165,788 and $198,334,$199,334, respectively, in consideration of grant funding received in 1994 and 1995. The Company also is obligated to pay at the rate of 7.5% of its revenues, if any, from transferring rights to certain inventions supported by the grant funds. VVI is obligated to pay at rates of 1.5% of its net sales of supported products or 15% of its revenues from licensing supported products, if any.

Contingencies – Litigation

Tim Conley(case pending) - On August 18, 2014, notice was issued to the Company that on June 23, 2014, Timothy Conley (the “Plaintiff”) filed a complaint against the Company, in the United States District Court for the District of Rhode Island. The complaint alleges that the Company’s former acting interim CEO, Johnnie Johnson, and Plaintiff entered into an agreement whereby the Company agreed to make payments to Plaintiff. Among other allegations, Plaintiff claims that the Company’s nonpayment to Plaintiff constitutes a breach of contract. The Company believes it has meritorious defenses to the allegations and the Company intends to vigorously defend against the litigation.

GEOMC (case pending) -On August 22, 2014, GEOMC filed a complaint against the Company in the United States District Court for the District of Connecticut. The complaint alleges that the Company and GEOMC entered into a security agreement whereby in exchange for GEOMC’s sale and delivery of the Scrambler Therapy devices (the “Devices”), the Company would grant GEOMC a security interest in the Devices. Among other allegations, GEOMC claims that the Company has failed to comply with the terms of the security agreement and seeks an order to the Court to replevy the Devices or collect damages. The Company believes it has meritorious defenses to the allegations and the Company intends to vigorously defend against the litigation. On February 4, 2016, the Company announced that it is discussing a settlement with GEOMC, however, to date, no settlement has been reached.

CME Acuity Rx, LLC(case pending) - On June 6, 2016, notice was issued to the Company that on May 26, 2016, CME Acuity Rx, LLC (the “Plaintiff”) filed a complaint against the Company, in the Superior Court of New Jersey. The complaint alleges the Company and Plaintiff entered into an agreement whereby the Company agreed to make payments to Plaintiff in return for services to the Company. Among other allegations, Plaintiff claims that the Company’s nonpayment to Plaintiff constitutes a breach of contract. The Company believes it has meritorious defenses to the allegations and the Company intends to vigorously defend against the litigation.

Joel Bradus (case pending)– On November 9, 2016, the Company filed a complaint against Joel Bradus, an independent contractor for CME Acuity Rx, LLC, 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 Rx, LLC, 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 is seeking actual, consequential, compensatory and punitive damages.

Summary – We may be a party to other legal actions and proceedings from time to time. We are unable to estimate legal expenses or losses we may incur, if any, or possible damages we may recover, and we have not recorded any potential judgment losses or proceeds in our financial statements to date. We record expenses in connection with these suits as incurred.

An unfavorable resolution of any or all matters, and/or our incurrence of significant legal fees and other costs to defend or prosecute any of these actions and proceedings may, depending on the amount and timing, have a material adverse effect on our consolidated financial position, results of operations or cash flows in a particular period.

PART I. FINANCIAL INFORMATION (Continued)

CALMARE THERAPEUTICS INCORPORATED AND SUBSIDIARY

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 as assuredhas since been purged by the overseeing body of wire service, had the Group’s Press Release purged from the wire services’ foreign desk.services.

This issue between the Company and the Group is over the validity of thea 2012 Amendment to a Sales and Representation Agreement (the “Amendment”) which, if valid and enforceable, may have compromised the Company’sits 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 2012 Amendment is neither valid nor enforceable as it was never duly signed or authorized and subsequently deemed null and void as so disclosed on April 16, 2014 in the Form 10-K filing.void. Therefore, the Company’sparties’ rights are determined by the 2011 Amendment which providesan earlier agreement whereby the Company withstill possesses the authority to sell, distribute and manufacture Calmare Devices as a world-wide exclusive rights to manufacture and sellagent of the Calmare Device worldwide using the Technology.Group.

On April 16, 2014, counsel for the Group (“Group Counsel”) sent a cease and desist letter (“Cease and Desist Letter”) to the Company, requesting a confirmation that the Company would no longer hold itself out as an agent of the Group permitted to sell, distribute and manufacture the Calmare DeviceDevices 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 2012 Amendment. At thisthat time, the Company continues to workinitiated an effort to find a reasonable and amicable resolution to the situation. To date, despite a number of attempts by the Company, the situation remains unresolved. The Company continues to properly sell and distribute Calmare Devices manufactured under the 2007 Agreement and the 2011 Amendment.

Unsigned Agreements14. RELATED PARTY TRANSACTIONS

The Company uses two unrelated firms to provide marketing and investor relations services, CME Acuity (“CMEA”) and Legend Capital Management (“LCM”), respectively. The LCM and CMEA agreements were not signed due to an inability to come to final terms due to certain nuances in either agreement that included but were not limited to assignment of human capital and allowable performance based bonus(es). However, from the start date until September 30, 2015, the respective firms were being compensated for services rendered on a “pay-as-we go” basis (the “Arrangement”). The aforementioned Arrangement is expected to continue for the next few consecutive quarters until such time as their agreements can be consummated.

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 September 30, 2016 and December 31, 2015, the Company has $380,400 and $308,400, respectively, owed in fees to current directors, which are in Accounts Payable.

As of September 30, 2016, $2,598,980 of the outstanding Notes payable were Notes payable to related parties; $2,498,980 to the Chairman of the Board and $100,000 to another director. As of September 30, 2016, unpaid interest related to these notes amounted to approximately $1,867,000 to the Chairman of the Board and $26,000 to another director, which is recorded in Accrued Expenses and Other Liabilities.

On September 15, 2015, the Company announced the appointment ofDr. Stephen J. D’Amato, M.D. asthe Company’s 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 2015 and 2014, Calmar Pain Relief purchased certain supplies from the Company. Dr. D’Amato is also one of the managing members of Calmar Pain Relief, LLC. Calmar Pain Relief purchases from the Company electrodes for use with the Calmare Device. These electrodes are purchased at the same price as those purchased by other customers. In the first nine months of 2016, purchases of electrodes by Calmar Pain Relief totaled $2,500.

OnSince October 15, 2015, the Company entered intohas a consulting agreement with VADM Robert T. Conway, Jr., U.S. Navy, (Ret) (the “Admiral”), a member of the Company’s Board of Directors. The agreement is for one year and includes compensation of a monthly retainer fee of $7,500 and a five year warrant to purchase 167,000 shares of common stock of the Company, fully vested on the date of issuance, at a strike price of $.60 per share with an aggregate estimateestimated fair value of $33,734. As a result of this agreement, the Board of Directors has determined that the Admiral is no longer an independent director of the Company.

From October 1, 2015 to December 18, 2015, the Company obtained additional funding, including $400,000 As of hybrid debt funding. From October 1, 2015 to December 18, 2015, the Company did a 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 a conversion price of $0.20 per share. The note holder was also issued market-related warrants for 470,588 in shares of common stock. The warrants have an exercise price of $0.60 and a 1-year term.

On January 8, 2016, the Board of Directors of the Company determined that it would not be continuing to employ Ian Rhodes as the Company’s Executive Vice President and Chief Financial Officer. Mr. Rhodes’ termination from employment was effective on January 8, 2016. Mr. Rhodes termination did not result from disagreement with the Company on any matter relating to the Company’s operations, policies or practices. On January 11,September 30, 2016, the Company appointed Thomas P. Richtarich as Chief Financial Officer of the Company. Mr. Richtarich served as a consultanthas $22,500 in consulting fees payable to the Company prior to being hired as the Company’s Chief Financial Officer. The Company does not currently have an employment agreement in place with Mr. Richtarich. However, the Company will continue to provide Mr. Richtarich with the compensation he received as a consultant equal to $9,500 per month plus expenses.Admiral.

On January 15, 2016, the Company appointed Dr. Christine Chansky, M.D., J.D., F.C.L.M. as its chief regulatory officer (CRO). As part of her duties, she will spearhead all of the Clinical studies sponsored by the Company and oversee all global regulatory issues related

There are no subsequent events to the Company’s medical device practice.report.

On February 18, 2016, the Company announced it has been issued a general supply order contract from the U.S. Government (GSA contract number #V797P-4300B). The Company estimates this contract will total $15 million over the next 60 months.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Statements about our future expectations are “forward-looking statements” within the meaning of applicable Federal Securities Laws, and are not guarantees of future performance. When used in herein, the words “may,” “will,” “should,” “anticipate,” “believe,” “intend,” “plan,” “expect,” “estimate,” “approximate,” and similar expressions are intended to identify such forward-looking statements. These statements involve risks and uncertainties inherent in our business, including those set forth in Item 1A under the caption "Risk Factors," in our most recent Annual Report on Form 10-K for the year ended December 31, 2014,2015, filed with the Securities and Exchange Commission (“SEC”) on June 24, 2015,April 14, 2016, and other filings with the SEC, and are subject to change at any time. Our actual results could differ materially from these forward-looking statements. We undertake no obligation to update publicly any forward-looking statement.

Overview

Calmare Therapeutics Incorporated (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,“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 patented, chronic pain reduction technologyscience behind Calmare Pain Mitigation Therapy™ (the “Technology”) behind. Today, this science is effectuated by the Company’s flagship medical device – the Calmare Device. TheSales of our Calmare Device continue to be the major source of revenue for the Company. In 2011, the Company’s 2007 agreement (the “2007 Agreement”) with Giuseppe Marineo, an inventor of the Technology, and Delta Research and Development (“Delta”), authorized the Company to manufacture and sell worldwide the Calmare Device developed from the patented Technology. The 2007 Agreement was amended in 2011 (the “2011 Amendment”) to provideextend the exclusivity rights afforded to the Company with exclusive rights toby the Technology2007 Agreement through March 31, 2016. The Company continues to properly sell and distribute Calmare Devices manufactured under the 2007 Agreement and the 2011 Amendment.

In July 2012, the Company attempted to negotiateand the Parties worked on a five-year extension to the agreement with Marineo and Delta2011 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. The Company continues to properly sell and distribute Calmare Devices manufactured under the 2007 Agreement and the 2011 Amendment. (seethe Company’s Distribution Rights, Marineo and Delta in Footnote 13.CONTRACTUAL OBLIGATIONS AND CONTINGENCIES and below)

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 2011,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 theits Calmare^® Device. We are the primary obligor, responsible for delivering devices as well as training our customerscustomer in the proper use of the Calmare Device. We deal directly with customers, setting pricing and providing training, contributetraining; work directly with the inventor of the technology to the development, newdevelop specifications and any changes thereto and to select and contract with manufacturing partners,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 Devicedevice as cost of product sales, with gross profit from product salesbeing 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.

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.

Effective August 20, 2014, the Company changed its name from Competitive Technologies, Inc. to Calmare Therapeutics Incorporated. 

The Company’s Distribution Rights, Marineo and Delta

On April 8, 2014, Mr. Giuseppe Marineo an inventor of the Technology, and Delta Research and Development (“Delta”), Mr. Marineo’s research company, and Delta International Services and Logistics (“DIS&L”), Delta’s commercial arm in which Mr. Marineo is the sole beneficiary of all proceeds as its founder and sole owner (collectively the “Group”), issued a press release (the “Group’s Press Release”) regarding CTI,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. CTIThe 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 thisthat time, the Company continues to workinitiated an effort to find a reasonable and amicable resolution to the situation. To date, despite a number of attempts by the Company, the situation remains unresolved. The Company continues to properly sell and distribute Calmare Devices manufactured under the 2007 Agreement and the 2011 Amendment.

Presentation

All amounts in this Item 2 are rounded to the nearest thousand dollars.

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our financial condition and results of operations. This discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes thereto.

Results of Operations – Three months ended September 30, 20152016 vs. three months ended September 30, 20142015

Summary of Results

Our net loss, for the quarter ended September 30, 2015,2016, decreased to $1,063,000$648,000 or $0.04$0.02 per basic and diluted share as compared with a net loss of $1,229,000$1,063,000 or $0.05$0.04 per basic and diluted share forin the comparable quarter of 2014.three months ended September 30, 2015. This net loss decrease is primarily attributable to an increase in revenue and a $275,000 decrease in operating expenses offset by an increase in interest expense.

Revenue and Gross Profit from Sales

Revenue from the sale and shipment of Calmare Devicesin the three months ended September 30, 2015, decreased $203,0002016, increased $268,000 to $197,000$465,000 as compared with $400,000 for$197,000 in the comparable quarter of 2014.three months ended September 30, 2015.

Cost of product sales,in the three months ended September 30, 2015, decreased $187,0002016, increased $66,000 to $60,000$126,000 as compared with $247,000 for$60,000 in the comparable quarter of 2014.three months ended September 30, 2015. This decreaseincrease in cost of product soldsales is attributable to the decrease in sales as well as an increase in gross margin.Devices sold in the three months ended September 30, 2015 as compared with the three months ended September 30, 2015.

Calmare Device sales,in the three months ended September 30, 2015, decreased with the sale of two (2) Calmare Devices as compared with eight (8) Device sales for the comparable quarter of 2014. Calmare Device sales for the three months ended2016 and September 30, 2015 were comprised of five (5) and two (2) U.S. private sector sales. Calmare Device sales, for the three months ended September 30, 2014 were comprised of three (3) U.S. private sector and five (5) international sales. International sales for the three months ended September 30, 2014 were to distributors, and as such, had a lower sales price as compared to non-international sales.respectively.

Due to the relatively long sales cycle for a Calmare Device, Calmare Device sales and related revenues and expenses can and will vary significantly from quarter to quarter.

Other Revenue

Retained royalties, in the three months ended September 30, 2015 of $2,000, decreased $18,0002016, increased $3,000 to $5,000 compared to $20,000$2,000 in the three months ended September 30, 2014.2015. The decreaseincrease is primarily the result of the timing of certain royalties that occurred in the three months ended December 31, 2015September 30, 2016 as compared to the three months ended September 30, 2014.  2015.

Other income, for the three months ended September 30, 2015, was $14,000, substantially unchanged2016, increased $17,000 to $31,000 as compared with $14,000 in the three months ended September 30, 2014.2015. Other income includes: