UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED JULY 31, 2009
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Commission file number 1-8696
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*
*****
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**----- COMPETITIVE
****---- TECHNOLOGIES
**===== Unlocking the Potential of Innovation (R)
**=====**
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* (R) Technology Transfer and Licensing Services
COMPETITIVE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
www.competitivetech.net
Registrant's telephone number, including area code: (203) 368-6044
Delaware 36-2664428
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class which Registered
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Common Stock ($.01 par value) NYSE Amex
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[x]Yes [ ]No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of "accelerated filer, large accelerated filer and smaller reporting
company" as defined in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
The aggregate market value of the common equity held by non-affiliates of the
registrant as of January 31, 2009 (the last business day of the registrant's
most recently completed second fiscal quarter) was $9,707,121.
The number of shares of the registrant's common stock outstanding as of October
27, 2009, was 10,121,047 shares.
CTT
LISTED
NYSE Amex
Page 1
COMPETITIVE TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART I
Forward-Looking Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1A. Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 1B. Unresolved Staff Comments. . . . . . . . . . . . . . . . . . . 14
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 16
Item 4A. Executive Officers of the Registrant. . . . . . . . . . . . . . 17
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities. . . . . . . 17
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. . . 27
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . . . 56
Item 9A (T). Controls and Procedures. . . . . . . . . . . . . . . . . . . . 56
Item 9B. Other Information. . . . . . . . . . . . . . . . . . . . . . . 57
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . . 57
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . 61
Item 12. Security Ownership of Certain Beneficial Owners and Management. 66
Item 13. Certain Relationships and Related Transactions. . . . . . . . . 67
Item 14. Principal Accounting Fees and Services. . . . . . . . . . . . . 68
PART IV
Item 15 Exhibits and Financial Statement Schedules. . . . . . . . . . . 68
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
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PART I
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 herein, the words "may," "will," "should,"
"anticipate," "believe," "appear," "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 this Annual Report on Form 10-K for the year ended July 31,
2009, 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.
ITEM 1. BUSINESS
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OVERVIEW:
Competitive Technologies, Inc. ("CTT"), was incorporated in Delaware in
1971, succeeding an Illinois corporation incorporated in 1968. CTT and its
subsidiaries (collectively, "we," "our," or "us"), provide distribution, patent
and technology transfer, sales and licensing services focusing on the needs of
our customers, matching those requirements with commercially viable technology
or product solutions. We develop relationships with universities, companies,
inventors and patent or intellectual property holders to obtain the rights or a
license to their intellectual property (collectively, the "technology" or
"technologies"), or to their product. They become our clients, for whom we find
markets to sell or further develop or distribute their technology or product. We
also develop relationships with those who have a need or use for technologies or
products. They become our customers, usually through a license or sublicense, or
distribution agreement.
We earn revenue in two ways, from licensing our clients' and our own
technologies to our customer licensees, and in a business model that allows us
to share in the profits of distribution of finished products. Our customers pay
us license fees, royalties based on usage of the technology, or per unit fees,
and we share that revenue with our clients. Our revenue fluctuates due to
changes in revenue of our customers, upfront license fees, new licenses granted,
new distribution agreements, expiration of existing licenses or agreements,
and/or the expiration or economic obsolescence of patents underlying licenses or
products.
We acquire rights to commercialize a technology or product on an exclusive
or non-exclusive basis, worldwide or limited to a specific geographic area. When
we license or sublicense those rights to our customers, we may limit rights to a
defined field of use. Technologies can be early, mid, or late stage. Products we
evaluate must be working prototypes or finished products. We establish channel
partners based on forging relationships with mutually aligned goals and matched
competencies to deliver solutions that benefit the ultimate end-user.
The Company incurred an operating loss for fiscal 2009, as well as an
operating loss in fiscal 2008. During fiscal 2007, we had a significant
concentration of revenues from our homocysteine assay technology. The main
patent for this technology expired in July 2007 and we will not receive revenues
for sales made after that date. Revenue in 2008 for the homocysteine technology
reflects previously unreported back royalties. We continue to seek revenue from
new technologies or products to mitigate the concentration of revenues, and
replace revenues from expiring licenses. At current reduced spending levels, the
Company may not have sufficient cash flow to fund operating expenses beyond
second quarter fiscal 2010. 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, and/or pursuing sales of certain assets and technologies while
we pursue licensing and distribution opportunities for our remaining portfolio
of technologies. The company does not have any significant individual cash or
capital requirements in the budget going forward. In addition, we will sell
shares to Fusion Capital Fund II, LLC ("Fusion Capital") per our 2009 Agreement,
on an as-needed basis, when the Company's stock price is at
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or above $1.00 per share. There can be no assurance that the Company will be
successful in such efforts or that we will be able to obtain alternative
financing should our stock price fall below $1.00 per share. Failure to develop
a recurring revenue stream sufficient to cover operating expenses would
negatively affect the Company's financial position.
PRODUCT DISTRIBUTION SERVICES
Our services are beneficial to the inventor, manufacturer and distributor
of the product. We evaluate a working prototype or finished product for
marketability. We find opportunities through industry connections and contacts,
and trade shows. We select products we will represent, negotiate with potential
domestic and international distributors, and sign agreements on a country and/or
area exclusive basis. We earn revenue on a per-unit basis through product
distribution agreements. We share the revenue with the product inventor, and/or
manufacturer.
TECHNOLOGY COMMERCIALIZATION SERVICES
Our services are beneficial to the provider and user of the technology. The
technology client can focus on research and development, rather than selling and
marketing, as we effectively become their marketing department. The technology
customer can focus on selling and marketing, rather than research and
development. We maintain and enforce our clients' and our technology patent
rights, by monitoring and addressing infringement. We maximize the value of
technologies for the benefit of our clients, customers and shareholders.
We identify and commercialize innovative technologies in life and physical
sciences, electronics, and nano science. Life sciences include medical testing,
diagnostics, pharmaceuticals, biotechnologies, medical devices and other medical
or biological applications. Physical sciences include chemical, display, and
environmental applications. Electronics include communications, semiconductors,
Internet related, e-commerce and consumer electronics applications.
Nanotechnologies are the manipulation of microscopic particles into useful
arrangements, and smart or novel materials; a nano particle is one thousand
times smaller than the width of a human hair. We have technologies in each area,
with a concentration in life sciences.
Over the years we have licensed nearly 500 technologies to and from
corporations, and can count as our clients a number of major universities and
inventors. We are a vital part of the technology commercialization community,
and have generated over $100 million in shared technology revenues to
universities.
PORTFOLIO ACQUISITION
We continue to expand relationships with universities and inventors,
increasing the number of clients, products and technologies we represent, and
establishing us as the premier technology commercialization and product
distribution company. The goal is to have a pipeline of technologies and
distribution products that will generate a long-term recurring revenue stream.
We evaluate potential technologies based on the strength of the
intellectual property, our ability to protect it, its life stage, further
development time needed, compatibility with existing technology in our
portfolio, marketability, market size, and potential profitability.
We evaluate potential products for distribution based on their capability
to fulfill an unmet market need and/or social responsibility. We focus on
products that improve quality-of-life. The goal is to acquire products for
distribution that have a competitive advantage, proprietary know-how and/or
regulatory approval. We seek exclusive rights to manufacture, market and
distribute the products.
Numerous technologies and products are reviewed and evaluated in terms of
current, mid- and long-term revenue potential. Both products and technologies
have the potential to produce different levels of revenue throughout the life of
the agreement. We obtain rights to improvements and/or refinements that extend
the life of the product or technology, increasing the potential revenue. We
continuously review the revenue potential of our product and technology
portfolio to generate a long-term recurring revenue stream.
Page 4
A non-disclosure agreement signed with a prospective client allows us
access to confidential information about the product or technology. We require
similar non-disclosure agreements from prospective customers when we
commercialize the product or technology. We include mutual non-disclosure
provisions about the product or technology in agreements granted to protect
value, for CTT, our clients and our customers. As a result of these obligations,
as well as federal regulations for disclosure of confidential information, we
may only be able to disclose limited information about licenses and sublicenses
granted for products or technologies we evaluate, as is necessary for an
understanding of our financial results.
MARKETING TECHNOLOGIES AND PRODUCTS
We commercialize technologies and products through contacts in research and
development, legal firms, major corporations, seminars and trade shows. We
determine the most likely users of the technologies or distributors of products,
and contact prospective customers.
TECHNOLOGY PROTECTION AND LITIGATION
Protecting our technologies from unintentional and willful patent
infringement, domestically and internationally, is an important part of our
business. We sometimes assist in preparation of initial patent applications, and
often are responsible for prosecuting and maintaining patents. Unintentional
infringement, where the infringer usually does not know that a patent exists,
can often be resolved by the granting of a license. In cases of willful
infringement, certain infringers will continue to infringe absent legal action,
or, companies may successfully find work-arounds to avoid paying proper monies
to us and our clients for use of our technologies. We defend our technologies on
behalf of ourselves, our clients and licensees, and pursue patent infringement
cases through litigation, if necessary. Such cases, even if settled out of
court, may take several years to resolve, with expenses borne by our clients,
us, or shared. Proceeds from the case are usually shared in proportion to the
costs. As a result, we may incur significant expenses in some years and be
reimbursed through proceeds of awards or settlements several years later. In
cases of willful infringement, patent law provides for the potential of treble
damages at the discretion of the Court.
REVENUE GENERATION
We license technologies to generate revenue based on usage or sales of the
technologies, or by sharing in the profits of distribution. When our customers
pay us, we share the revenue with our clients.
Product distribution We have established a new business model for
appropriate technologies that allows us to move beyond our usual royalty
arrangement and share in the profits of distribution. Distribution terms are set
in written agreements for products, and are generally signed for exclusive area
parameters.
In late fiscal 2007, we obtained exclusive worldwide distribution rights to
a non-invasive pain therapy device for rapid treatment of high-intensity
oncologic and neuropathic pain, including pain resistant to morphine and other
drugs. Developed in Italy by CTT's client, Prof. Giuseppe Marineo, DSc, MD, the
technology was brought to CTT through the efforts of Prof. Giancarlo Elia Valori
of the Italian business development group, Sviluppo Lazio S.p.A., and assistance
from the Zangani Investor Community(TM). The unit, with a biophysical rather
than a biochemical approach, uses a multi-processor able to simultaneously treat
multiple pain areas by applying surface electrodes to the skin. The device's
European CE mark certification allows it to be distributed and sold throughout
Europe, and makes it eligible for approval for distribution and sales in
multiple global markets. In February 2009, CTT received FDA 510(k) clearance for
U.S. sales of the device. Several thousand patients in various hospitals have
been successfully treated using the technology. CTT's partner, GEOMC Co., Ltd.
of Korea, is manufacturing the product commercially for worldwide distribution.
U.S. and international patents are pending.
In July 2008, we signed a country-exclusive distribution agreement with
Excel Life Sciences, Inc. for India. In the first six months fiscal 2009, we
signed three additional country-exclusive distribution agreements with GEOMC
Co., Ltd. for Korea, Biogene Pharma Limited for Bangladesh, and Able Global
Healthcare Sdn. Bhd. for Malaysia. In February 2009, the Company signed an
agreement with Life Episteme srl granting them exclusive distribution rights in
29 countries throughout Europe, Asia, Africa, the Middle East, South America and
Oceania. Exclusive distribution rights in two additional countries were granted
to Life Episteme in March 2009. Local sales authorization is required in each
country.
Page 5
In April 2009, the Company, acknowledging the current difficult economic
climate, entered into an agreement with Americorp Financial, LLC (AFS), where
AFS will provide financing of sales of the pain therapy medical device for 24 -
60 month lease periods to hospitals, clinics and medical practices in the U.S.
AFS will provide financing services under the name, Competitive Technologies
Financial Services. CTT will receive the full retail sales price of the device
upon execution of each lease, while AFS carries the lease.
Also in April 2009, we signed an agreement with Native Energy & Economic
Development, giving them exclusive sales rights for selected U.S. government
agencies, including the Department of Veteran's Affairs (VA), the Department of
Defense (DOD), and the Indian Health Service (IHS).
In July 2009, we signed an agreement with Innovative Medical Therapies,
Inc. granting them exclusive distribution rights to CTT's pain therapy medical
device in the United States and related territories excluding selected Federal
agencies. The contract provides for minimum monthly cash payments to CTT
totaling over $1 million for the first eight months. These minimum monthly
payments increase each year throughout the term of the agreement with, for
example, the fourth year minimum payments reaching $9 million and eighth year
minimum payments of $21 million dollars. IMT will receive shipments of CTT's
pain therapy medical device in return for these payments
In October 2009, we signed an agreement with Athens, Greece-based Fintrade
Medical granting them the exclusive rights to market and sell CTT's pain therapy
medical device in Greece and Cyprus.
Also in October 2009, we signed an agreement with Calmar Pain Relief, LLC,
a Delaware limited liability company ("Calmar"), with its headquarters in North
Providence, Rhode Island. Calmar was established to provide medical equipment,
office leasing, and other business services to medical doctors looking to offer
CTT's non-invasive pain therapy to patients in a clinical setting. Calmar will
furnish CTT's MC-5A pain therapy medical device to medical doctors who will open
pain therapy treatment centers in selected U.S. cities over the next two years.
The signed distribution agreements for this device, now cover more than 50%
of the world's population.
Another product in our distribution group is a compressed air drying device
that eliminates water condensation, oil residues and solid particles that are
contaminants present in compressed air lines, extending the life of pneumatic
tools;
Technology royalties Client and customer agreements are generally for the
duration of the technology life, which usually is determined by applicable
patent law. When we receive customer reports of sales or payments, whichever
occurs first, we record revenue for our portion, and record our obligation to
our clients for their portion. For early stage technologies that may not be
ready for commercial development without further research, we may receive annual
minimum payments and/or milestone payments based on research progress or
subsequent sublicense or joint venture proceeds. In certain sublicense or
license agreements, we may receive an upfront fee upon execution of the license.
Our fees are generally non-refundable, and, except for annual minimums, are
usually not creditable against future royalties. In certain cases, the first
year or several years' royalties may be waived in consideration for an upfront
fee. We may apply the upfront fee or initial fees to reimburse patent
prosecution and/or maintenance costs incurred by either party. In these cases,
payments are recorded as a reduction of expense, and not as revenue. If the
reimbursement belongs solely to our client, we record no revenue or expense. As
a result, a new technology may not generate significant revenue in its early
years.
Licensing terms are documented in written agreements with customers. We
generally enter into single element agreements with customers, under which we
have no additional obligations other than patent prosecution and maintenance.
We may enter into multiple element agreements under which we have continuing
service obligations. All revenue from multiple element agreements is deferred
until delivery of all verifiable required elements. In milestone billing
agreements we recognize non-refundable, upfront fees ratably over the life of
the agreement, and milestone payments as the specified milestone is achieved.
We evaluate billing agreements on a case-by-case basis, and record revenue as
appropriate. We do not have multiple element or milestone billing agreements at
this time, but have had such agreements in the past, and could have in the
future.
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In fiscal 2007, we had a significant concentration of revenue from our
homocysteine assay technology. The main patent for this technology expired in
July 2007 and we will not receive revenue for sales made after that date.
Homocysteine revenue in 2008 reflects unreported back royalties.
We actively market other technologies, and seek new technologies to
mitigate this concentration of revenue and provide a steady future revenue
stream. 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. Technologies that produced revenue equal to or exceeding 15% of
our total retained royalties revenue, or at least $250,000 in 2009 and 2008
were:
2009 2008
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Homocysteine assay $ 18,000 $276,000
Plant Regeneration $132,000 $ -
Plasma display $ 30,000 $150,000
Sexual dysfunction $ - $320,000
As a percentage of total retained royalties for the same periods, these
technologies represented:
2009 2008
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Homocysteine assay 7% 28%
Plant Regeneration 51% -%
Plasma display 11% 15%
Sexual dysfunction -% 33%
The homocysteine assay is a diagnostic blood test used to determine
homocysteine levels and a corresponding deficiency of folate or vitamin B12.
Studies suggest that high levels of homocysteine may be a primary risk factor
for cardiovascular, vascular and Alzheimer's diseases, and rheumatoid arthritis.
The main patent for this technology expired in July 2007. We expect to receive
revenue from this technology for sales made prior to that date. We will not
receive revenue for sales made after that date. We are in litigation with
Carolina Liquid Chemistries Corporation, and others, to recover funds that we
believe are due us for homocysteine assays kits manufactured, sold or offered
for sale in infringement of our patent. (For further information, see ITEM 3.
LEGAL PROCEEDINGS.) (For further information see ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.)
The plant regeneration technology has been assigned to the University of
Pennsylvania who pays us a royalty on any income earned from exploiting this
technology. The technology is currently exclusively licensed to Syngenta
Biotechnology, Inc.
The plasma display technology is subject to annual minimum license fees.
For fiscal 2009 we were able to record $30,000 in revenue based upon our receipt
of the minimum license fee. This patent expired in August 2009 and we will
receive no more royalties on this technology.
On September 11, 2007, we presented Palatin with a Notice of Termination of
the PT-14 technology license agreement, related to our sexual dysfunction
technology, stating that Palatin committed a material breach of the agreement
originally signed between the two companies on March 31, 1998. On January 22,
2008, we announced an agreement with Palatin terminating the March 31, 1998
agreement. As part of the January agreement, Palatin agreed to pay CTT $800,000.
These funds were received in January 2008. CTT recorded revenue of $320,000 and
reduced patent enforcement expenses by $480,000 in accordance with the agreement
with our client. (For further information, see ITEM 3. LEGAL PROCEEDINGS.) CTT
retains all rights to the technology commonly known as PT-14, and is planning to
develop this technology. We received no revenue from this technology during
fiscal 2009.
We receive revenue from legal awards that result from successful patent
enforcement actions and/or out of court settlements. Such awards or settlements
may be significant, are non-recurring and may include punitive damages,
attorneys' fees, court costs and interest.
Page 7
Other technologies in our life sciences portfolio, many of which are
subject to testing, clinical trials and approvals, include:
- Nanotechnology bone cement biomaterial with a broad range of
potential applications, including dental, spinal and other bone
related applications. Exclusively licensed to Soteira Inc. for human
spinal applications;
- Breast Cancer Test, a non-invasive device that generates an
analysis that detects angiogenesis, using adhesive pads embedded with
hundreds of thermistors, micro-thermometers;
- Sunless tanning agent, a skin-pigment enhancer being researched
as a skin cancer preventative, and therapeutic for vitiligo, albinism
and psoriasis, exclusively licensed to Clinuvel Pharmaceuticals, Ltd.
(Australia);
- Lupus Diagnostic and Monitoring technology, a cost-effective
scalable testing platform used to detect and monitor the autoimmune
disease, Lupus;
Our applied science/electronics portfolio includes:
- Encryption technology that operates at high speeds with low
memory requirements to secure applications used on the Internet,
telecommunications, smart cards and e-commerce;
- Video and audio signal processing technology licensed in the
Motion Picture Electronics Group visual patent portfolio pool (MPEG 4
Visual), and used in streaming video products for personal computers
and wireless devices, including mobile phones;
- Radio Alert Warning System, a low powered dual-mode transmitter
capable of short-range interruption of commercial radio broadcasting
with a message alerting of an emergency situation;
- Structural Steel Fissure Detection Paint contains a built-in,
self-activating, crack-indicating or warning capability effective
coincident with application of the paint to the structure, and
requiring minimum training for its use.
RETAINED ROYALTIES FROM FOREIGN SOURCES
Retained royalties received from foreign licensees totaled approximately
$43,000 and $237,000, in 2009 and 2008, respectively. Of the foreign sourced
royalties received, $32,000 and $176,000, in 2009 and, 2008, respectively, were
from Japanese licenses.
INVESTMENTS
From time to time we provide other forms of assistance and funding to
certain development-stage companies to further develop specific technologies.
EMPLOYEES
As of October 13, 2009, we employed the full-time equivalent of 9 people.
We also had independent consultants under contract to provide business
development services. In addition to the diverse technical, intellectual
property, legal, financial, marketing and business expertise of our professional
team, from time to time we rely on advice from outside specialists to fulfill
unique technology needs.
CORPORATE GOVERNANCE
CTT's Corporate Governance Principles, Corporate Code of Conduct, the
Committee Charters for the Audit and Nominating Committees of the Board of
Directors, the unofficial restated Certificate of Incorporation and the By-Laws
are available on our website at
www.competitivetech.net/investors/governance.html.
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Available Information
We make available without charge copies of our Annual Report, Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,
amendments to those, and other reports filed with the Securities and Exchange
Commission ("SEC") on our website, www.competitivetech.net, as soon as
reasonably practicable after they are filed. Our website's content is not
intended to be incorporated by reference into this report or any other report we
file with the SEC. You may request a paper copy of materials we file with the
SEC by calling us at (203) 368-6044.
You may read and copy materials we file with the SEC on the SEC's website
at www.sec.gov, or at the SEC's Public Reference Room at 100 F Street, NE,
Washington, DC 20549. You may obtain information on the operation of the Public
Reference Room by calling (800) 732-0330.
FISCAL YEAR
Our fiscal year ends July 31, and our first, second, third and fourth
quarters end October 31, January 31, April 30 and July 31, respectively.
ITEM 1A. RISK FACTORS
- ---------------------
RISKS RELATED TO OUR BUSINESS AND THE MARKET ENVIRONMENT
The risk factors described below are not all-inclusive. All risk factors
should be carefully considered when evaluating our business, results of
operations, and financial position. We undertake no obligation to update
forward-looking statements or risk factors. There may be other risks and
uncertainties not highlighted herein that may affect our financial condition and
business operations.
CERTAIN OF OUR LICENSED PATENTS HAVE RECENTLY EXPIRED OR WILL EXPIRE IN THE NEAR
FUTURE AND WE MAY NOT BE ABLE TO REPLACE THEIR ROYALTY REVENUE.
In 2009, we earned retained royalties from licenses for 12 patented
technologies. The patents for six of those patented technologies have or will
expire between 2009 and 2011. Those patented technologies represented
approximately 32% of our retained royalties in 2009. Retained royalties of
approximately $50,000, or 19%, $15,000, or 6%, and $18,000, or 7%, were from
patents expiring in fiscal, 2009, 2010 and 2011, respectively. The loss of this
revenue will materially and adversely affect our operating results if we are
unable to replace it with revenue from other licenses or sources. Since it often
takes two or more years for a technology to produce significant revenue, we
continuously seek new sources of future revenue.
SALES OF OUR COMMON STOCK TO FUSION CAPITAL FUND II, LLC ("FUSION CAPITAL") WILL
CAUSE DILUTION TO CURRENT SHAREHOLDERS AND FUSION'S RESALE OF THOSE SHARES OF
COMMON STOCK COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.
In August 2009, we entered into an agreement with Fusion Capital Fund II,
LLC (the "2009 Agreement") to sell up to $8 million of our common stock to
Fusion Capital over a twenty-five (25) month period, subject to certain
limitations and extensions. This was a new agreement, separate from the July
2008 agreement (the "2008 Agreement") with the same company that was terminated
in August 2009. The purchase price for the common stock to be issued to Fusion
Capital pursuant to the 2009 Agreement fluctuates based on the price of our
common stock. The purchase price per share, not to be below $1 per share, is
equal to the lesser of: (1) the lowest sale price of our common stock on the
purchase date or (2) the average of the three (3) lowest closing sale prices of
our common stock during the twelve (12) consecutive trading days prior to the
date of a purchase by Fusion Capital. Pursuant to a registration statement
filed with the SEC, all shares sold to Fusion Capital are freely tradable.
Fusion Capital may sell none, some or all of the shares of common stock
purchased from us at any time. We expect that Fusion Capital will resell any
shares that they purchase over a period of up to twenty-five (25) months from
the date of the 2009 Agreement. Depending upon market liquidity at the time, a
sale of shares by Fusion Capital
Page 9
at any given time could cause the trading price of our common stock to decline.
The sale of a substantial number of shares of our common stock, or the
anticipation of such sales, could make it more difficult for us to sell equity
or equity-related securities in the future at a time and price at which we might
otherwise wish to effect sales.
There were 1,962,823 shares of our common stock registered for sale to
Fusion Capital, including 86,933 commitment shares that were issued on October
2, 2009 and additional commitment shares issuable under the agreement. The
1,962,823 registered shares equaled 19.9% of our outstanding shares of common
stock at July 31, 2009. In addition to the 86,933 shares which were issued to
Fusion Capital as an initial commitment fee on October 2, 2009 we may issue an
additional 86,933 commitment shares to Fusion Capital as we sell shares to
Fusion Capital.
Since July 31, 2009 through October 27, 2009, we sold 210,197 shares, and
issued 4,890 Commitment Shares of our common stock to Fusion Capital for
approximately $450,000, and amortized approximately $34,089 of deferred charges
against capital in excess of par value.
The sale of shares to Fusion Capital may result in significant dilution to
the ownership interests of other holders of our common stock. The amount of
dilution would be higher if the per share market price of our common stock is
lower at the time we sell shares to Fusion Capital, since a lower market price
would cause more shares of our common stock to be issued to Fusion Capital for
the same proceeds. Subsequent sales of these shares in the open market by
Fusion Capital may also have the effect of lowering our stock price, thereby
increasing the number of shares issuable to them under the common stock purchase
agreement and consequently further diluting our outstanding shares. Although we
have the right to reduce or suspend sales to Fusion Capital at any time, our
financial condition at the time may require us to waive our right to suspend
purchases even if there is a decline in the market price. Furthermore, the
dilution caused by the issuance of shares to Fusion Capital may cause other
shareholders to elect to sell their shares of our common stock, which could
cause the trading price of our common stock to decrease. In addition,
prospective investors anticipating the downward pressure on the price of our
common stock due to the shares available for sale by Fusion Capital could
refrain from purchases or cause sales or short sales in anticipation of a
decline of the market price, which may itself cause the price of our stock to
decline.
IN FOUR OF THE LAST FIVE FISCAL YEARS, WE INCURRED SIGNIFICANT NET LOSSES AND
NEGATIVE CASH FLOWS, AND OUR ABILITY TO FINANCE FUTURE LOSSES IS LIMITED, AND
MAY SIGNIFICANTLY AFFECT EXISTING STOCKHOLDERS.
The table below summarizes our consolidated results of operations and cash
flows for the five years ended July 31, 2009:
2009 2008 2007 2006 2005
------------ ------------ ------------ ------------ ----------
Net income (loss) $(3,479,824) $(5,966,454) $(8,893,946) $(2,377,224) $5,701,787
Net cash flows from:
Operating activities (3,451,630) (4,994,411) (5,437,443) (3,527,318) 5,006,936
Investing activities (1,490) 792,539 (978,217) (141,644) 803,220
Financing activities 1,968,096 (133,109) 78,425 2,298,726 4,159,711
Net increase (decrease)
in cash and cash
equivalents $(1,485,024) $(4,334,981) $(6,337,235) $(1,370,236) $9,969,867
The Company incurred an operating loss for fiscal 2009, as well as
operating losses in fiscal 2008, 2007 and 2006. During fiscal 2007, we had a
significant concentration of revenues from our homocysteine assay technology.
The main patent for this technology expired in July 2007 and we will not receive
revenues for sales made after that date. Revenue in 2008 for the homocysteine
technology reflects previously unreported back royalties. We continue to seek
revenue from new technologies or products to mitigate the concentration of
revenues, and replace revenues from expiring licenses. At current reduced
spending levels, the Company may not have sufficient cash flow to fund operating
expenses beyond second quarter fiscal 2010. 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.
Page 10
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, and/or pursuing sales of certain assets and technologies while
we pursue licensing and distribution opportunities for our remaining portfolio
of technologies. The company does not have any significant individual cash or
capital requirements in the budget going forward. In addition, we will sell
shares to Fusion Capital per our 2009 Agreement, on an as-needed basis, when the
Company's stock price is at or above $1.00 per share. There can be no assurance
that the Company will be successful in such efforts or that we will be able to
obtain alternative financing should our stock price fall below $1.00 per share.
Failure to develop a recurring revenue stream sufficient to cover operating
expenses would negatively affect the Company's financial position.
Our current recurring revenue stream is insufficient for us to be
profitable with our present cost structure. In 2005 we were profitable because
of unusually large, upfront license fees related to our homocysteine technology
that did not recur in 2009, 2008, 2007 or 2006. To return to and sustain
profitability, we must increase recurring revenue by successfully licensing
technologies with current and long-term revenue streams, and continue to build
our portfolio of innovative technologies. We significantly reduced overhead
costs with staff reductions across all company departments, reduced extraneous
litigations, and obtained new technologies to build revenue. We will continue
to monitor our cost structure, and expect to operate within our generated
revenue and cash balances.
In July 2008, to improve our financial condition we entered into an equity
financing arrangement with Fusion ("Fusion 2008") for up to $5.0 million of cash
through sales of our common stock, at our option. We terminated the Fusion 2008
agreement in August 2009, and entered into a new agreement with Fusion ("Fusion
2009") for the sale of up to $8 million of common stock in August 2009.
Future revenue, obtaining rights to new technologies, granting licenses,
and enforcing intellectual property rights are subject to many factors beyond
our control. These include technological changes, economic cycles, and our
licensees' ability to successfully commercialize our technologies.
Consequently, we may not be able to generate sufficient revenue to be
profitable. Although we cannot be certain that we will be successful in these
efforts, we believe the combination of our cash on hand, the ability to raise
funds from sales of our common stock under the Fusion 2009 agreement, and
revenue from successfully executing our strategy will be sufficient to meet our
obligations of current and anticipated operating cash requirements.
WE DEPEND ON RELATIONSHIPS WITH INVENTORS TO GAIN ACCESS TO NEW TECHNOLOGIES AND
INVENTIONS. IF WE FAIL TO MAINTAIN EXISTING RELATIONSHIPS OR TO DEVELOP NEW
RELATIONSHIPS, WE MAY HAVE FEWER TECHNOLOGIES AND INVENTIONS AVAILABLE TO
GENERATE REVENUE. TECHNOLOGY CAN CHANGE RAPIDLY AND INDUSTRY STANDARDS
CONTINUALLY EVOLVE, OFTEN MAKING PRODUCTS OBSOLETE, OR RESULTING IN SHORT
PRODUCT LIFECYCLES. OUR PROFITABILITY DEPENDS ON OUR LICENSEES' ABILITY TO
ADAPT TO SUCH CHANGES.
We do not invent new technologies or products. We depend on relationships
with universities, corporations, government agencies, research institutions,
inventors, and others to provide technology-based opportunities that can develop
into profitable licenses, and/or allow us to share in the profits of
distribution. Failure to maintain or develop relationships could adversely
affect operating results and financial conditions. We are dependent upon our
clients' abilities to develop new technologies, introduce new products, and
adapt to technology and economic changes.
We cannot be certain that current or new relationships will provide the
volume or quality of technologies necessary to sustain our business. In some
cases, universities and other technology sources may compete against us as they
seek to develop and commercialize technologies. Universities may receive
financing for basic research in exchange for the exclusive right to
commercialize resulting inventions. These and other strategies may reduce the
number of technology sources, potential clients, to whom we can market our
services. If we are unable to secure new sources of technology, it could have a
material adverse effect on our operating results and financial condition.
WE RECEIVE MOST OF OUR REVENUE FROM CUSTOMERS OVER WHOM WE HAVE NO CONTROL.
We rely on our customers for revenue. Development of new products utilizing
our technology involves risk. Many technologies do not become commercially
profitable products despite extensive development efforts. Our license
agreements do not require customers to advise us of problems they encounter in
development of commercial
Page 11
products, and usually treat such information as confidential. Their failure to
resolve problems may result in a material adverse effect on our operating
results and financial condition.
STRONG COMPETITION WITHIN OUR INDUSTRY MAY REDUCE OUR CLIENT BASE.
We compete with universities, law firms, venture capital firms and other
technology commercialization firms. Many organizations offer some aspect of
technology transfer services, and are well established with more financial and
human resources than we provide. This market is highly fragmented and
participants frequently focus on a specific technology area.
FROM TIME-TO-TIME WE ARE INVOLVED IN LAWSUITS THAT HISTORICALLY HAVE INVOLVED
SIGNIFICANT LEGAL EXPENSES. IF THE COURTS OR REGULATORY AGENCIES IN THESE SUITS
OR ACTIONS DECIDE AGAINST US, THIS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION. LEGAL FEES AND OTHER
COSTS WE INCURRED IN 2009 RELATING TO THE CURRENT CASES WERE SIGNIFICANT, AND
THE AMOUNT OF COSTS WE INCUR IN THE FUTURE MAY BE SIGNIFICANT.
For a complete description of all lawsuits in which we are currently
involved, see ITEM 3. LEGAL PROCEEDINGS.
OUR REVENUE GROWTH DEPENDS ON OUR ABILITY TO UNDERSTAND THE TECHNOLOGY
REQUIREMENTS OF OUR CUSTOMERS IN THE CONTEXT OF THEIR MARKETS. IF WE FAIL TO
UNDERSTAND THEIR TECHNOLOGY NEEDS OR MARKETS, WE LIMIT OUR ABILITY TO MEET THOSE
NEEDS AND GENERATE REVENUES.
By focusing on the technology needs of our customers, we are better
positioned to generate revenue by providing technology solutions. The market
demands of our customers drive our revenue. The better we understand their
markets, the better we are able to identify and obtain effective technology
solutions for our customers. We rely on our professional staff and contract
business development consultants to understand our customers' technical,
commercial, and market requirements and constraints, to identify and obtain
effective technology solutions for them.
OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL.
Our success depends on the knowledge, efforts and abilities of a small
number of key personnel, including John B. Nano, our Chairman, President, Chief
Executive Officer and Interim Chief Financial Officer. We rely on our
professional staff and contract business development consultants to identify
intellectual property opportunities and technology solutions, and to negotiate
and close license agreements. Competition for personnel with the necessary range
and depth of experience is intense. We cannot be certain that we will be able to
continue to attract and retain qualified personnel. If we are unable to hire and
retain highly qualified professionals and consultants, especially with our small
number of staff, our revenue, financial condition and future activities could be
materially adversely affected.
OUR CUSTOMERS, AND WE, DEPEND ON GOVERNMENT APPROVALS TO COMMERCIALLY DEVELOP
CERTAIN LICENSED PRODUCTS.
Commercial development of some licensed patents may require the approval of
foreign or domestic governmental regulatory agencies, especially in the life
sciences area, and there is no assurance that those agencies will grant such
approvals. In the United States, the principal governmental agency involved is
the U.S. Food and Drug Administration ("FDA"). The FDA's approval process is
rigorous, time consuming and costly. Until a licensee obtains approval for a
product requiring such approval, the licensee may not sell the product in the
U.S., and therefore we will not receive revenue based on U.S. sales.
IF WE, AND OUR CLIENTS, ARE UNABLE TO PROTECT THE INTELLECTUAL PROPERTY
UNDERLYING OUR LICENSES, OR TO ENFORCE OUR PATENTS ADEQUATELY, WE MAY BE UNABLE
TO DEVELOP SUCH LICENSED PATENTS OR TECHNOLOGIES SUCCESSFULLY.
License revenue is subject to the risk that issued patents may be declared
invalid, may not be issued upon application, or that competitors may circumvent
or infringe our licensed patents rendering them commercially inadequate. When
all patents underlying a license expire, our revenue from that license ceases,
and there can be no assurance that we will be able to replace it with revenue
from new or existing licenses.
Page 12
PATENT LITIGATION HAS INCREASED; IT CAN BE EXPENSIVE, AND MAY DELAY OR PREVENT
OUR CUSTOMERS' PRODUCTS FROM ENTERING THE MARKET.
Our clients and/or we may pursue patent infringement litigation or
interference proceedings against holders of conflicting patents or sellers of
competing products that we believe infringe our patent rights. For a description
of proceedings in which we are currently involved, see ITEM 3. LEGAL
PROCEEDINGS.
We cannot be certain that our clients and/or we will be successful in any
litigation or proceeding. The costs and outcome may materially adversely affect
our business, operating results and financial condition.
DEVELOPING NEW PRODUCTS, AND CREATING EFFECTIVE COMMERCIALIZATION STRATEGIES FOR
TECHNOLOGIES ARE SUBJECT TO INHERENT RISKS THAT INCLUDE UNANTICIPATED DELAYS,
UNRECOVERABLE EXPENSES, TECHNICAL PROBLEM, AND THE POSSIBILITY THAT DEVELOPMENT
FUNDS WILL BE INSUFFICIENT. THE OCCURRENCE OF ANY ONE OR MORE OF THESE RISKS
COULD CAUSE US TO ABANDON OR SUBSTANTIALLY CHANGE OUR TECHNOLOGY
COMMERCIALIZATION STRATEGY.
Our success depends upon, among other factors, our clients' ability to
develop new or improved technologies, and our customers' products meeting
targeted cost and performance objectives for large-scale production, adapting
technologies to satisfy industry standards and consumer expectations and needs,
and bringing the product to market before saturation. They may encounter
unanticipated problems that result in increased costs or substantial delays in
the product launch. Products may not be reliable or durable under actual
operating conditions, or commercially viable and competitive. They may not meet
price or other performance objectives when introduced into the marketplace. Any
of these events may adversely affect our realization of revenue from new
products.
WE HAVE NOT PAID DIVIDENDS ON OUR COMMON STOCK.
We have not paid cash dividends on our common stock since 1981, and, our
Board of Directors does not currently have plans to declare or pay cash
dividends in the future. The decision to pay dividends is solely at the
discretion of our Board of Directors based upon factors that they deem relevant,
and may change at any time.
IN DEVELOPING NEW PRODUCTS WE ARE AFFECTED BY PATENT LAWS AND REGULATIONS.
Patent laws and regulations are continuously reviewed for possible
revision. We cannot be certain how we will be affected by revisions.
THE PRICE OF OUR COMMON STOCK MAY FALL BELOW $1.00 AND WE MAY BE UNABLE TO SELL
SHARES TO FUSION OR OBTAIN ALTERNATE EQUITY FINANCING.
In early 2009, the global equity markets collapsed and our common stock
traded at around $1.00. Per our Fusion 2009 equity financing agreement, Fusion
is not required to purchase common stock from us when our stock trades below
$1.00. There is no guarantee that we would be able to obtain alternate
financing.
OUR COMMON STOCK COULD BE DELISTED FROM THE NYSE AMEX MAKING IT DIFFICULT TO
TRADE SHARES OF OUR COMMON STOCK.
On December 2, 2008, we received notice from the NYSE Amex, then known as
NYSE Alternext US LLC (the "Exchange"), notifying us that the staff of the
Exchange Corporate Compliance Department had determined that the Company Form
10-K for the fiscal year ended July 31, 2008 did not meet continued listing
standards as set forth in Part 10 of the Exchange Company Guide, and the Company
has therefore become subject to the procedures and requirements of Section 1009
of the Exchange Company Guide. As noted in Section 1003 of the Exchange Company
Guide, companies with stockholders' equity of less than $2 million, and losses
from continuing operations and net losses in two out of its three most recent
fiscal years, or with stockholders' equity of less than $4 million and losses
from continuing operations and net losses in three out of its four most recent
fiscal years are non-compliant.
Page 13
On December 18, 2008, the company submitted a business plan to the Exchange
detailing actions it will take to bring it into compliance with the above
continued listing standards by June 2, 2010. On January 22, 2009, the Exchange
accepted our business plan.
The Company will continue its listing during the plan period up to June 2,
2010, during which time it will be subject to periodic review to determine
whether it is making progress consistent with the plan. If the Company is not
in compliance with the continued listing standards at the conclusion of the plan
period or does not make progress consistent with the plan during the plan
period, the Exchange staff will initiate delisting procedures as appropriate.
The Company is allowed to appeal a staff determination to initiate delisting
proceedings in accordance with Section 1010 and Part 12 of the Exchange Company
Guide. The company fully expects to be in compliance with continued listing
standards by June 2, 2010, but cannot provide any assurance that it will be.
Per the 2009 Agreement with Fusion Capital, should we be delisted from the
exchange and unable to obtain listing with another exchange, we will be unable
to sell shares to Fusion Capital.
ITEM 1B. UNRESOLVED STAFF COMMENTS
- ----------------------------------
None.
ITEM 2. PROPERTIES
- ------------------
Our executive offices are approximately 11,000 square feet of leased space in a
building in Fairfield, Connecticut. The seven-year lease commenced August 24,
2006, and expires August 31, 2013. We have an option to terminate the lease
after five years, or renew for an additional five years under similar terms and
conditions. The average annual base rent is approximately $265,000 over the
life of the lease, after incentives, exclusive of taxes, climate control, power
and maintenance. Management has sub-leased some excess space and is seeking
additional sub-tenants.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
Carolina Liquid Chemistries Corporation, et al. (Case pending) - On August
29, 2005, we filed a complaint against Carolina Liquid Chemistries Corporation
("Carolina Liquid") in the United States District Court for the District of
Colorado, alleging patent infringement of our patent covering homocysteine
assays, and seeking monetary damages, punitive damages, attorneys' fees, court
costs and other remuneration at the option of the court. Carolina Liquid was
served on September 1, 2005. As we became aware of other infringers, we amended
our complaint to add as defendants Catch, Inc. ("Catch") and the Diazyme
Laboratories Division of General Atomics ("Diazyme"). On September 6, 2006,
Diazyme filed for declaratory judgment in the Southern District of California
for a change in venue and a declaration of non-infringement and invalidity. On
September 12, 2006, the District Court in Colorado ruled that both Catch and
Diazyme be added as defendants to the Carolina Liquid case. On October 23,
2006, Diazyme requested the United States Patent and Trademark Office (the
"USPTO") to re-evaluate the validity of our patent and this request was granted
by the USPTO on December 14, 2006. On July 30, 2009, the homocysteine patent
was upheld by the U.S. Patent and Trademark Office's Board of Patent Appeals and
Interferences (BPAI). In September 2008, the patent had been denied by the
examiner, but that denial was overruled by the BPAI. Further action in this
case is pending as the BPAI result will now be returned to the U.S District
Court for the District of Colorado.
Ben Marcovitch and other co-defendants (Case completed) - On August 8,
2007, we announced that former CTT Director Ben Marcovitch had been removed for
cause from our Board of Directors by unanimous vote of CTT's five Directors for
violating CTT's Code of Conduct. At that time, CTT also withdrew from its
involvement with Agrofrut, E.U., a nutraceutical firm brought to CTT by Mr.
Marcovitch. As announced on April 10, 2007, CTT had paid $750,000 to Agrofrut
for a 5% ownership, and certain marketing and investment options in Agrofrut.
On August 31, 2007, we filed a Federal complaint in the U.S. District Court
for the District of Connecticut against Mr. Marcovitch, Betty Rios Valencia,
President and CEO of Agrofrut and former spouse of Mr. Marcovitch, John Derek
Elwin, III, a former CTT employee, and other defendants. The complaint claims
that false and misleading information had been provided to CTT in a conspiracy
to fraudulently obtain funds from CTT using the Agrofrut transaction. We have
requested, among other relief, punitive damages and attorneys' fees. It is our
opinion and that of
Page 14
our Board of Directors that this lawsuit is required to recover our $750,000 and
to settle outstanding issues regarding the named parties.
On October 22, 2007, at a show cause hearing, the Court stated that all
defendants named in the case, and their associates, were enjoined from any
further use of any remaining part of the $750,000 received from CTT. The Court
ordered a full disclosure of all accounts where remaining funds are held, and a
complete description of the disposition of any portion of the CTT payment must
be made to CTT's counsel. On October 30, 2007, in amended complaint, CTT sought
injunctive relief and damages against Sheldon Strauss for conspiring with Mr.
Marcovitch to unlawfully solicit proxies in violation of Securities Exchange Act
of 1934.
At a December 7, 2007 hearing, the Court requested CTT to specify an
appropriate Prejudgment Remedy for the Court to consider. On December 20, 2007,
a Prejudgment Remedy was issued granting garnishment of the $750,000 CTT is
seeking to recover.
On January 11, 2008, the Court denied the defendants' attempts at
demonstrating that Connecticut was not the proper jurisdiction for these
hearings.
On April 22, 2008, the Court ruled that the defendants must make
arrangements for depositions to be completed by May 2, 2008, a date that was
then extended by the Court. The Court granted permission for the defendants'
depositions to be conducted via video conferencing when the defendants indicated
their inability to travel to the Connecticut court. The depositions were
conducted on June 2, 2008.
On June 23, 2008, the Court ruled that the defendants are compelled to
respond to interrogatories and to produce any supplemental discovery documents
by the deadline of July 7, 2008.
On August 15, 2008, CTT filed a motion for Summary Judgment. A Memorandum
in Opposition was filed by Marcovitch, et al, on September 15, 2008. CTT
responded to the Memorandum on September 24. The judge denied the Summary
Judgment Motion on April 6, 2009. On June 1, 2009, the Judge granted permission
to CTT to enter a Motion for Default Judgment against Agrofrut and Sheldon
Strauss. On June 4, 2009, the Judge granted permission for CTT to enter a Motion
for Default Judgment against Ben Marcovitch and Betty Rios Valencia. These
Default motions were filed on June 15, 2009.
On September 8, 2009, the Judge ruled favorably on CTT's motion for default
judgment. The judgment entered against Marcovitch, Rios Valencia, Agrofrut and
Strauss, jointly and severally, is for $750,000, as well as reasonable
attorneys' fees and costs of $600,788. Additionally, judgments were entered
against Marcovitch, Rios Valencia, and Agrofrut, jointly and severally, for
$2.25 million, treble damages, and for $600,788, punitive damages. A judgment
was also entered against Rios Valencia and Agrofrut, jointly and severally, for
punitive damages of $750,000. The judge confirmed that Marcovitch was properly
removed as a member of CTT's Board of Directors and issued a permanent
injunction prohibiting Marcovitch from holding himself out as a member of CTT's
Board. A judgment was entered against Strauss prohibiting Strauss from
soliciting proxies in contravention of the SEC rules and regulations. Based on
the Court's rulings, CTT will now proceed to collect all funds possible from the
parties.
Employment matters - former employee (Cases pending) - In September 2003, a
former employee filed a whistleblower complaint with OSHA alleging that the
employee had been terminated for engaging in conduct protected under the
Sarbanes Oxley Act of 2002 (SOX). In February 2005, OSHA found probable cause to
support the employee's complaint and ordered reinstatement and payment of
damages. CTT filed objections and requested a de novo hearing before an
Administrative Law Judge ("ALJ"). Based on evidence submitted at the May 2005
hearing, in October 2005 the ALJ issued a written decision recommending
dismissal of the employee's claim without relief. The employee then appealed the
case to the Administrative Review Board ("ARB"). In March 2008, the ARB issued a
decision and order of remand, holding that the ALJ erred in shifting the burden
of proof to CTT based on a mere inference of discrimination and remanding the
case to the ALJ for clarification of the judge's analysis under the appropriate
burden of proof. In January 2009, the ALJ ruled in favor of CTT on the ARB
remand. The employee has now appealed the January 2009 ALJ ruling to the ARB and
we await the ARB's decision. The employee had previously requested
reconsideration of the ARB order of remand based on the Board's failure to
address the employee's appeal issues; that request was denied by the ARB in
October 2008.
Page 15
In August 2007, the same former employee filed a new SOX whistleblower
complaint with OSHA alleging that in April 2007 CTT and its former general
counsel retaliated against the employee for past-protected conduct by refusing
to consider the employee's new employer when awarding a consulting contract. In
March 2008, OSHA dismissed the employee's complaint citing the lack of probable
cause. The employee filed objections and requested de novo review by an ALJ. In
August 2008, the employee gave notice of intent to terminate proceedings before
the ALJ and remove the case to federal district court. In October 2008, the
former employee moved to voluntarily dismiss with prejudice the case before the
ALJ. We anticipate no further action on this matter.
On September 5, 2008, CTT filed a complaint in the U.S. District Court for
the District of Connecticut against the former employee seeking a declaration
that CTT did not violate SOX as alleged in the employee's 2007 OSHA complaint,
and to recover approximately $80,000 that CTT paid to the employee in compliance
with a court order that was subsequently vacated by the U.S. Court of Appeals
for the Second Circuit. On July 1, 2009, the judge ruled in favor of the former
employee's motion to dismiss. The court abstained from ruling on the question of
unjust enrichment due to the unresolved questions before the Department of Labor
Administrative Review Board.
On December 4, 2008, the former employee filed a complaint with the
Department of Labor asking to have the Connecticut case dismissed. On June 1,
2009, the Department dismissed the former employees complaint, finding that
"there is no reasonable cause to believe that the Respondent (CTT) violated
SOX". We anticipate no further action on this matter.
Federal Insurance Co. (Case completed) - On April 2, 2008, CTT filed a
complaint in the U.S. District Court for the District of Connecticut against
Federal Insurance, seeking the coverage to which it is entitled under its policy
with Federal. CTT asserts that Federal is obligated to insure CTT for its legal
fees and $750,000 loss associated with the case involving Ben Marcovitch and
other co-defendants.
In September 2008, we received $400,000 against a claim under our fraud
insurance policy in full settlement of this matter with Federal.
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,
or damages we may recover in these actions, if any, and have not accrued
potential gains or losses in our financial statements. Expenses in connection
with these actions are recorded as they are incurred.
We believe we carry adequate liability insurance, directors' and officers'
insurance, casualty insurance, for owned or leased tangible assets, and other
insurance as needed to cover us against claims and lawsuits that occur in the
ordinary course of our business. However, an unfavorable resolution of any or
all matters, and/or our incurrence of legal fees and other costs to defend or
prosecute any of these actions may have a material adverse effect on our
consolidated financial position, results of operation and cash flows in a
particular period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
At the Annual Meeting of Shareholders held April 17, 2009, shareholders
voted on the following issues:
- - Election of Directors
Election of Directors For Withheld
------------------------ --------- ---------
Joel M. Evans, M.D. 7,312,722 528,381
Richard D. Hornidge, Jr. 7,513,258 327,845
Rustin Howard 7,039,824 801,279
John B. Nano 5,681,714 2,159,389
William L. Reali 7,451,988 389,115
- - Ratification of selection of MHM Mahoney Cohen CPAs as the independent
public accounting firm:
Page 16
Accounting Firm For Against Abstained
---------------------- --------- ------- ---------
MHM Mahoney Cohen CPAs 7,533,421 165,088 143,594
Pursuant to an asset purchase agreement, our former independent public
accounting firm, Mahoney Cohen & Company, CPA, P.C. was acquired by the New York
practice of Mayer Hoffman McCann P.C ("MHM"), and the shareholders of Mahoney
Cohen became shareholders of MHM. Following its acquisition of Mahoney Cohen,
MHM changed its name to MHM Mahoney Cohen CPAs, effective December 31, 2008.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
- ---------------------------------------------
The name of our executive officer, his age and background information is as
follows:
John B. Nano, 64, has served as our President and Chief Executive Officer
and Interim Chief Financial Officer, as well as Chairman of the Board of
Directors, since February 2007. From January 2006 to January 2007 he served as
President and Chief Executive Officer of Articulated Technologies, LLC., a
company involved in creating and commercializing patented light emitting diode
technologies for global solid state lighting applications. He is currently a
member of their Board of Directors. Mr. Nano served as President and Chief
Executive Officer, and a member of the Board of CTT from June 2002 through June
2005. Prior to joining CTT, Mr. Nano served as a Principal reporting to the
Chairman of Stonehenge Networks Holdings, N.V., a global virtual private network
provider, with positions in operating, strategic planning and finance from 2000
to 2001. From 1998 to 1999, Mr. Nano served as Executive Vice President and
Chief Financial Officer of ConAgra Trade Group, a subsidiary of ConAgra, Inc.,
an international food company. From 1983 to 1998, he served as Executive Vice
President, Chief Financial Officer and President of an Internet Startup Division
of Sunkyong America, a subsidiary of the Korean conglomerate, Sunkyong Group.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
- ------- ------------------------------------------------------------------
AND ISSUER PURCHASES OF EQUITY SECURITIES
- -----------------------------------------
Market information. Our common stock has been traded on the American Stock
Exchange ("AMEX") under the ticker symbol CTT since April 25, 1984. Effective
October 1, 2008 the NYSE Euronext completed its acquisition of the AMEX. The
new entity is now known as NYSE Amex. CTT's ticker symbol remains the same on
the new entity. The following table, sets forth for the periods indicated, the
quarterly high and low trading prices for our common stock, as reported by the
NYSE Amex.
YEAR ENDED JULY 31, 2009 Year Ended July 31, 2008
- -------------------------------- --------------------------------
High Low High Low
--------- ----- --------- -----
First Quarter $ 3.00 $1.02 First Quarter $ 3.05 $2.02
Second Quarter $ 1.55 $0.76 Second Quarter $ 2.45 $1.25
Third Quarter $ 1.80 $0.54 Third Quarter $ 1.93 $1.12
Fourth Quarter $ 2.84 $1.41 Fourth Quarter $ 3.42 $1.60
Holders. At October 27, 2009, there were approximately 528 holders of
record of our common stock.
Dividends. No cash dividends were declared on our common or preferred
stocks during the last two fiscal years.
Page 17
COMPETITIVE TECHNOLOGIES, INC.
ITEM 6. SELECTED FINANCIAL DATA(1) (4)
- -------------------------------
2009 2008 2007 2006 2005
------------ ------------ ------------- ------------ -----------
STATEMENT OF OPERATIONS SUMMARY:
Total revenues (2) $ 348,240 $ 1,193,353 $ 4,167,216 $ 5,187,631 $14,174,354
Net income (loss) (2) (3) $(3,479,824) $(5,966,454) $ (8,893,946) $(2,377,224) $ 5,701,787
Net income (loss) per share:
Basic $ (0.40) $ (0.73) $ (1.11) $ (0.31) $ 0.84
Assuming dilution $ (0.40) $ (0.73) $ (1.11) $ (0.31) $ 0.78
Weighted average number of common shares
outstanding:
Basic 8,740,419 8,156,343 8,040,455 7,651,635 6,762,553
Assuming dilution 8,740,419 8,156,343 8,040,455 7,651,635 7,324,701
YEAR-END BALANCE SHEET SUMMARY: At July 31,
--------------------------------------------------------------------
Cash and cash equivalents $ 752,071 $ 2,237,095 $ 6,572,076 $12,909,311 $14,279,547
Total assets 1,401,491 3,110,983 9,712,733 18,416,901 19,441,093
Total long-term obligations 81,418 78,822 62,624 - -
Total shareholders' interest 285,168 1,593,436 7,598,816 14,454,200 14,107,881
<FN>
(1) This summary should be read in conjunction with our Consolidated Financial
Statements and Notes thereto. All amounts in these notes are rounded to
thousands.
(2) 2008 includes $320,000 for the settlement of our dispute with Palatin
regarding their breach of our License Agreement. 2007 includes $806,000 for
the sale of video compression patents. 2006 includes upfront license fees
totaling $460,000. 2005 includes homocysteine upfront license fees totaling
$6,181,000, settlements with JDS Uniphase and Palatin totaling $1,390,000,
$930,000 of dividends, and $1,037,000 from LabCorp awards.
(3) 2009 includes $400,000 insurance recovery in settlement of our legal action
against Federal Insurance. 2008 includes recovery of $480,000 in legal fees
related to the settlement of our dispute with Palatin. 2007 includes
$877,000 of non-cash compensation related to stock options, $1,650,000 for
the settlement of the case, including legal fees, brought against us by
John B. Nano, write-off of $750,000 investment in non-public companies and
related investigative fees of $189,000, and $711,000 of costs related to
the proxy contest, including $125,000 non-cash compensation in the form of
shares of common stock. 2006 includes $398,000 of non-cash compensation
expense related to stock options and $371,000 of legal costs relating to
Mr. Nano. 2005 includes $170,000 of non-cash compensation expense related
to stock options, $782,000 in defense costs relating to an OSHA claim by
two former employees, and $228,000 relating to compliance with Section 404
of the Sarbanes-Oxley Act.
(4) No cash dividends were declared or paid in any year presented.
Page 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATION
- ------------
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 herein, the words "may," "will," "should,"
"anticipate," "believe," "appear," "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 this Annual Report on Form 10-K for the year ended July 31,
2009, 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
Competitive Technologies, Inc. ("CTT"), was incorporated in Delaware in
1971, succeeding an Illinois corporation incorporated in 1968. CTT and its
subsidiaries (collectively, "we," "our," or "us"), provide distribution, patent
and technology transfer, sales and licensing services focusing on the needs of
our customers, matching those requirements with commercially viable technology
or product solutions. We develop relationships with universities, companies,
inventors and patent or intellectual property holders to obtain the rights or a
license to their intellectual property (collectively, the "technology" or
"technologies"), or to their product. They become our clients, for whom we find
markets to sell or further develop or distribute their technology or product. We
also develop relationships with those who have a need or use for technologies or
products. They become our customers, usually through a license or sublicense, or
distribution agreement.
We earn revenues in two ways, from licensing our clients' and our own
technologies to our customer licensees, and in a business model that allows us
to share in the profits of distribution of finished products. Our customers pay
us license fees, royalties based on usage of the technology, or per unit fees,
and we share that revenue with our clients. Our revenue fluctuates due to
changes in revenue of our customers, upfront license fees, new licenses granted,
new distribution agreements, expiration of existing licenses or agreements,
and/or the expiration or economic obsolescence of patents underlying licenses or
products.
We acquire rights to commercialize a technology or product on an exclusive
or non-exclusive basis, worldwide or limited to a specific geographic area. When
we license or sublicense those rights to our customers, we may limit rights to a
defined field of use. Technologies can be early, mid, or late stage. Products we
evaluate must be a working prototype or finished product. We establish channel
partners based on forging relationships with mutually aligned goals and matching
competencies, to deliver solutions that benefit the ultimate end-user.
Reliance on one revenue source. In fiscal 2007, we had a significant
concentration of revenue from our homocysteine assay technology. The main patent
for this technology expired in July 2007 and we will not receive revenue for
sales made after that date. Homocysteine revenue in 2008 reflects unreported
back royalties. 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.
We filed a patent infringement complaint against three suspected
infringers, but believe progress in this case may be subject to delaying tactics
by the defendants, adding to the normal period of time it takes for such cases
to work their way through the court system. In response to the action we filed,
one defendant has requested that the United States Patent and Trademark Office
("USPTO") re-evaluate the validity of our patent. On July 30, 2009, the
homocysteine patent was upheld by the U.S. Patent and Trademark Office's Board
of Patent Appeals and Interferences (BPAI). In September 2008, the patent had
been denied by the examiner, but that denial was overruled by the BPAI. Further
action in this case is pending as the BPAI result will now be returned to the
U.S District Court for the District of Colorado. (For further information, see
ITEM 3. LEGAL PROCEEDINGS.)
Page 19
PRESENTATION All amounts in this Item 7 have been rounded to the nearest
thousand dollars. All periods discussed in this Item 7 relate to our fiscal year
ending July 31; first, second, third and fourth quarters ending October 31,
January 31, April 30 and July 31, respectively.
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.
The Company incurred an operating loss for fiscal 2009, as well as an
operating loss in fiscal 2008. During fiscal 2007, we had a significant
concentration of revenues from our homocysteine assay technology. The patent for
this technology expired in July 2007 and we will not receive revenues for sales
made after that date. Revenue in 2008 for the homocysteine technology reflects
previously unreported back royalties. We continue to seek revenue from new
technologies or products to mitigate the concentration of revenues, and replace
revenues from expiring licenses. At current reduced spending levels, the Company
may not have sufficient cash flow to fund operating expenses beyond second
quarter fiscal 2010. 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, and/or pursuing sales of certain assets and technologies while
we pursue licensing and distribution opportunities for our remaining portfolio
of technologies. The company does not have any significant individual cash or
capital requirements in the budget going forward. In addition, we will sell
shares to Fusion Capital Fund II, LLC ("Fusion Capital") per our 2009 Agreement,
on an as-needed basis, when the Company's stock price is at or above $1.00 per
share. There can be no assurance that the Company will be successful in such
efforts or that we will be able to obtain alternative financing should our stock
price fall below $1.00 per share. Failure to develop a recurring revenue stream
sufficient to cover operating expenses would negatively affect the Company's
financial position.
RESULTS OF OPERATIONS - 2009 VS. 2008
SUMMARY OF RESULTS
We incurred a net loss for 2009 of $3,480,000, or $0.40 per share, compared
to a net loss for 2008 of $5,966,000, or $0.73 per share, a decreased loss of
$2,486,000, or $.33 per share. The reasons for the decrease in net loss are
explained in detail below.
REVENUES
Total revenue for 2009 was $348,000, compared to $1,193,000 for 2008, a
decrease of $845,000, or 71%.
Retained royalties for 2009 were $261,000, which was $712,000, or 73% lower
than the $973,000 reported in 2008. The following compares revenue from
technologies with retained royalties greater than or equal to $130,000 in 2009
or 2008.
Increase % Increase
2009 2008 (Decrease) (Decrease)
-------- -------- ----------- -----------
Homocysteine assay $ 18,000 $276,000 $ (258,000) (93)
Sexual dysfunction - 320,000 (320,000) (100)
Plant regeneration 132,000 - 132,000 -
Plasma display 30,000 150,000 (120,000) (80)
All other technologies 81,000 227,000 (146,000) (64)
-------- -------- -----------
TOTAL RETAINED ROYALTIES $261,000 $973,000 $ (712,000) (73)%
======== ======== ===========
Page 20
The main patent for our homocysteine assay expired in July 2007. Revenue
in 2008 was primarily from unreported back royalties. We will not receive
significant revenue from this technology in the future.
During 2008, we announced an agreement with Palatin terminating the License
Agreement of March 31, 1998 for our sexual dysfunction technology. As part of
the agreement, Palatin agreed to pay CTT $800,000. CTT recorded revenue of
$320,000 and reduced patent enforcement expenses by $480,000 in accordance with
the agreement with our client. We received no revenue from this technology
during 2009.
Plant regeneration technology provided $132,000 royalty income in fiscal
2009. This was primarily unreported back royalties. Going forward we expect this
technology to provide revenue of approximately $17,000 per year.
The patent on our plasma display technology expired in August 2009. We will
not receive any more revenue from this technology.
Investment income includes dividends and interest earned on our invested
cash. Investment income for 2009 was $7,000, compared to $159,000 in 2008 a
decrease of $152,000, or 96%. The decrease is due to lower average monthly cash
balances in the current year compared to the prior year.
Product sales for 2009 represents sales of one pain therapy medical device
and three electronic stress management and memory improvement devices (which we
are no longer actively marketing). For 2008 sales are for our thermal therapy
unit, which we no longer carry, and our electronic stress management and memory
improvement product.
Sales of our pain therapy medical device will be recorded as net of amounts
owed as royalties or revenue sharing with our manufacturing partner.
Other income for 2009 was primarily the proceeds of $71,000 on the sale of
our flip chip patent.
EXPENSES
Increase % Increase
2009 2008 (Decrease) (Decrease)
----------- ---------- ------------ -----------
Cost of product sales $ 1,000 $ 54,000 $ (53,000) (98)
Personnel and other direct
expenses relating to
revenues 2,024,000 3,202,000 (1,178,000) (37)
General and administrative
expenses 2,199,000 3,563,000 (1,364,000) (38)
Patent enforcement expenses,
net of reimbursements 2,000 42,000 (40,000) (95)
Loss on permanent impairment
of available-for-sale
securities - 228,000 (228,000) (100)
Loss on sale of available-
for-sale securities - 71,000 (71,000) (100)
Insurance recovery (400,000) - (400,000) -
Interest expense 3,000 - 3,000 -
----------- ---------- ------------
TOTAL EXPENSES $3,829,000 $7,160,000 $(3,331,000) (47)
=========== ========== ============
Total expenses decreased $3,331,000 or 47% in 2009 compared to 2008.
Cost of product sales in 2008 represents final liquidation of our thermal
therapy inventory. The remaining costs related to our electronic stress
management and memory improvement device. All the costs for 2009 relate to our
stress management and memory improvement device. We are no longer actively
marketing this device.
Personnel and other direct expenses relating to revenues decreased a net
$1,178,000 or 37% in 2009, compared to 2008. Payroll and related benefits
decreased by $445,000 as a result of reducing full-time equivalent
Page 21
headcount from 16 to 9. Severance costs decreased $207,000 as seven people were
terminated in fiscal 2008 versus three in fiscal 2009. Employer 401(k) expenses
were $203,000 less in 2009 because we had initially recorded an accrual for the
employer contribution of $150,000 for fiscal 2008. The actual contribution for
fiscal 2008 was only $40,000 and we have accrued a contribution of $50,000 for
fiscal 2009.The following costs were incurred in fiscal 2008 and did not recur
in fiscal 2009: $20,000 to acquire the rights to our solar panel technology;
$21,000 to obtain the rights to an ultra-low power pulse-oximeter technology;
$106,000 paid to the University of Connecticut for development of an asthma
assay; $45,000 for the US launch of MC Square, our memory improvement device;
$14,000 of legal costs to evaluate a new technology from Virginia Commonwealth
University, and $14,000 of legal expenses to attempt to collect reported but
unpaid homocysteine royalties. We incurred $30,000 less in patent prosecution
costs in fiscal 2009, as the initial prosecution costs on our pain therapy
device were incurred in fiscal 2008. In addition, we reduced consulting costs
by $130,000 as management made a concerted effort to lower costs. These were
offset by $59,000 increase in costs related to the commercialization of our pain
therapy medical device.
General and administrative expenses decreased a net $1,364,000 or 38% in
2009, compared to 2008. The decrease in expenses is primarily due to the
following reductions: legal fees as a result of less active litigation,
$859,000, primarily the Marcovitch case; marketing expenses, $62,000, primarily
due to the attendance at a major IP conference in 2008 not repeated in 2009 and
a smaller presence at the 2009 Biotechnology Industry Conference; investor
relations expenses as a result of negotiation of more favorable terms with
outside consultants, $83,000 auditing expenses due to an overaccrual of fiscal
2008 audit fees of approximately $35,000. In addition, we had to pay BDO, our
former auditor, $15,000 in fiscal 2008 to obtain consents for an S-1. In
addition, we saved $88,000 by reducing travel and entertainment expenses, dues
and subscriptions expenses, supplies and other miscellaneous office expenses as
a result of lower headcount and concerted effort by management to reduce costs,
$112,000; lower workers compensation costs due to lower headcount, $7,000; lower
product liability costs due to elimination of coverage for our electronic stress
relief and memory improvement device, $15,000; and the decision to not repeat
the CTT Innovation Conference, $126,000. Other expenses incurred in 2008 and not
repeated in 2009 include $87,000 to market MC Square, our stress relief and
memory improvement device. In addition, Directors Fees and Expenses decreased
$151,000, primarily due to lower equity compensation costs. We are subletting a
portion of our excess office space, resulting in a $10,000 savings in fiscal
2009. Our depreciation is $10,000 less in fiscal 2009 as most of our office
equipment is fully depreciated but not yet in need of replacement. These savings
were offset by a negative bad debt expense of $129,000 in fiscal 2008. In fiscal
2008 we reversed $129,000 of previously recorded bad debt expense due to the
receipt of previously disputed homocysteine royalties. We recorded no bad debt
expense in fiscal 2009. In addition, our Sarbanes-Oxley compliance costs are
$93,000 higher in fiscal 2009. This is because the consultants we hired to
perform our fiscal 2008 Sarbanes Oxley testing performed most of the work in the
first quarter of fiscal 2009. Most of the work for fiscal 2009 was completed in
the fourth quarter of fiscal 2009.
Patent enforcement expenses, net of reimbursements, decreased a net $40,000
or 95% in 2009, compared to 2008. Patent enforcement expenses vary, depending on
the activity relating to outstanding litigation. The reduction of expenses is
primarily due to settlement of litigation with Palatin in the second quarter of
fiscal 2008, so no expenses for this action were incurred after that time.
Loss on permanent impairment of available for sale securities of $228,000
relates to our investment in Palatin shares. During the first quarter of fiscal
2008, we determined that the decline in market value of the Palatin shares was
other than temporary and wrote the investment down to its fair market value as
of October 31, 2007.
Loss on sale of securities of $71,000 relates to the sale of our available
for sale Palatin and Clinuvel securities.
Insurance recovery in 2009 represents settlement of our action against
Federal Insurance to cover our legal fees and loss associated with the case
involving Ben Marcovitch and other co-defendents (For further information, see
the Marcovitch and Federal cases, ITEM 3. LEGAL PROCEEDINGS.).
Interest expense in 2009 was incurred as a result of our landlord allowing
us to defer certain rent payments while we are in the process of commercializing
our pain therapy device. No interest expense should be incurred after December
31, 2009.
Page 22
PROVISION FOR INCOME TAXES
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 2009 and in 2008, we incurred a loss 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 2009 and in 2008, 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 if we have future taxable income. We have substantial federal and
state NOLs and capital loss carryforwards 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 July 31, 2009, approximately
$4,081,000, 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.
We adopted the provisions of FIN 48 on August 1, 2007. We did not record
any unrecognized income tax benefits as a result of the implementation of FIN
48. At the adoption date, and at July 31, 2009, and July 31, 2008, we had no
unrecognized tax benefits.
FINANCIAL CONDITION AND LIQUIDITY
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 and cash flows
from operations, if any, including royalty legal awards. In addition, we have
the ability to fund our requirements through sales of common stock under the
Fusion Capital agreement. At July 31, 2009, we had no outstanding debt, and no
credit facility.
We believe we will successfully license new technologies and collect due,
but unpaid, royalties on existing licenses to add revenue. Although there can
be no assurance that we will be successful in our efforts, we believe the
combination of our cash on hand, the ability to raise funds from sales of our
common stock under the Fusion Capital agreement, and revenue from executing our
strategy will be sufficient to meet our obligations of current and anticipated
operating cash requirements throughout fiscal 2010. In fiscal 2010, we will
raise cash through sale of stock to Fusion as needed, provided that our stock
price does not drop below $1.00. If necessary, we will meet anticipated
operating cash requirements by further reducing costs, and/or pursuing sales of
certain assets and technologies while we pursue licensing opportunities for our
remaining portfolio of technologies. Our litigation costs, especially for the
lawsuit against Ben Marcovitch, and others, should decline greatly from those
reflected in our Statement of Operations through July 31, 2009.
In late fiscal 2007, the Company obtained exclusive worldwide distribution
rights to a non-invasive pain therapy medical device for rapid treatment of
high-intensity oncologic and neuropathic pain, including pain resistant to
morphine and other drugs. Developed in Italy by CTT's client, Prof. Giuseppe
Marineo, DSc, MD, the technology was brought to CTT through the efforts of Prof.
Giancarlo Elia Valori of the Italian business development group, Sviluppo Lazio
S.p.A., and assistance from the Zangani Investor Community(TM). The unit, with
a biophysical rather than a biochemical approach, uses a multi-processor able to
simultaneously treat multiple pain areas by applying surface electrodes to the
skin. The device's European CE mark certification allows it to be distributed
and sold throughout Europe, and makes it eligible for approval for distribution
and sales in multiple global markets. In February 2009, CTT received FDA 510(k)
clearance for U.S. sales of the device. Several thousand patients in various
hospitals have been successfully treated using the technology. CTT's partner,
GEOMC Co., Ltd. of Korea, is manufacturing the product commercially for
worldwide distribution. U.S. and international patents are pending.
In July 2008, we signed a country-exclusive distribution agreement with
Excel Life Sciences, Inc. for India. In the first six months fiscal 2009, we
signed three additional country-exclusive distribution agreements with GEOMC
Page 23
Co., Ltd. for Korea, Biogene Pharma Limited for Bangladesh, and Able Global
Healthcare Sdn. Bhd. for Malaysia. In February 2009, the Company signed an
agreement with Life Episteme srl granting them exclusive distribution rights in
29 countries throughout Europe, Asia, Africa, the Middle East, South America and
Oceania. Exclusive distribution rights in two additional countries were granted
to Life Episteme in March 2009. Local sales authorization is required in each
country.
In April 2009, the Company, acknowledging the current difficult economic
climate, entered into an agreement with Americorp Financial, LLC (AFS), where
AFS will provide financing of sales of the pain therapy medical device for 24 -
60 month lease periods to hospitals, clinics and medical practices in the U.S.
AFS will provide financing services under the name, Competitive Technologies
Financial Services. CTT will receive the full retail sales price of the device
upon execution of each lease, while AFS carries the lease.
Also in April 2009, we signed an agreement with Native Energy & Economic
Development, giving them exclusive sales rights for selected U.S. government
agencies, including the Department of Veteran's Affairs (VA), the Department of
Defense (DOD), and the Indian Health Service (IHS).
In July 2009, we signed an agreement with Innovative Medical Therapies,
Inc. ("IMT") granting them exclusive distribution rights to CTT's pain therapy
medical device in the United States and related territories excluding selected
Federal agencies. The contract provides for minimum monthly cash payments to CTT
totaling over $1 million for the first eight months. These minimum monthly
payments increase each year throughout the term of the agreement with, for
example, the fourth year minimum payments reaching $9 million and eighth year
minimum payments of $21 million dollars. IMT will receive shipments of CTT's
pain therapy medical device in return for these payments
In October 2009, we signed an agreement with Athens, Greece-based Fintrade
Medical granting them the exclusive rights to market and sell CTT's pain therapy
medical device in Greece and Cyprus.
Also in October 2009, we signed an agreement with Calmar Pain Relief, LLC,
a Delaware limited liability company ("Calmar"), with its headquarters in North
Providence, Rhode Island. Calmar was established to provide medical equipment,
office leasing, and other business services to medical doctors looking to offer
CTT's non-invasive pain therapy to patients in a clinical setting. Calmar will
furnish CTT's MC-5A pain therapy medical device to medical doctors who will open
pain therapy treatment centers in selected U.S. cities over the next two years.
The signed distribution agreements for this device, now cover more than 50%
of the world's population.
Cash and cash equivalents consist of demand deposits and interest earning
investments with maturities of three months or less, including overnight bank
deposits and money market funds. We carry cash equivalents at cost.
At July 31, 2009, cash and cash equivalents were $752,000 compared to
$2,237,000 at July 31, 2008. The fiscal 2009 loss of $3,480,000 contained
non-cash charges of $293,000 and reduction in assets and liabilities of
$305,000, resulting in cash used in operations of $3,492,000. Cash flow provided
by investing activities includes proceeds of $2,008,000 primarily from the sale
of common stock to Fusion. These activities reduced cash by $1,485,000. As of
October 16, 2009, our cash and cash equivalents balance is approximately
$469,000 million.
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 July 31, 2009, we had aggregate federal net operating loss carryforwards
of approximately $26,238,000, which expire at various times through 2029, with
the majority of them expiring after 2011. 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 carryforwards of approximately $19,100,000 that
expire through fiscal year 2013.
A significant portion of the NOLs remaining at July 31, 2009, approximately
$4,081,000, was derived from income tax deductions related to the exercise of
stock options. The tax effect of these deductions will be credited
Page 24
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.
FUNDING AND CAPITAL REQUIREMENTS
EQUITY FINANCING
On August 6, 2009, we entered into an agreement with Fusion Capital Fund
II, LLC ("Fusion Capital") to sell up to $8 million of our common stock to
Fusion Capital over a 25-month period (the "2009 Agreement"). We have the right
to determine the timing and the amount of stock sold, if any, to Fusion Capital.
Under the terms of the 2009 Agreement, we issued 86,933 registered shares
of our common stock to Fusion Capital on October 2, 2009, for its initial
commitment (the "Initial Commitment Shares"), and agreed to issue 86,933
Additional Commitment Shares (the "Additional Commitment Shares") to Fusion
Capital on a pro-rata basis as we sell the $8 million of stock (collectively,
the "Commitment Shares"). Commencement of sales of common stock under the 2009
Agreement was contingent upon certain conditions, principally the Securities and
Exchange Commission ("SEC") declaring effective our registration statement filed
with the SEC to register 1,962,823 shares of common stock potentially to be
issued under the Agreement. On October 1, 2009, the SEC declared our
registration statement effective.
Subject to our right at any time to suspend sales of our common stock or to
terminate the 2009 Agreement, Fusion Capital is obligated to purchase up to
$75,000 of our common stock each two business days (the "Base Purchase Amount").
No sales will be made below a $1.00 per share floor price. The sale price per
share will be the lower of the lowest sales price on the sale date or an average
of the three lowest closing prices during the 12 consecutive trading days prior
to the sale date.
Fusion Capital may not purchase shares of our common stock under the 2009
Agreement if Fusion Capital would beneficially own in excess of 19.99% of our
common stock outstanding at the time of purchase. Fusion Capital has agreed not
to sell the Commitment Shares for 25 months or until termination of the 2009
Agreement.
We incurred total cash costs of $84,172 relating to the completion of the
Agreement, including professional fees, listing fees and due diligence costs, of
which 40,000 had been incurred and accrued as of July 31, 2009, and $44,172 was
incurred subsequent to July 31, 2009. We also incurred noncash costs for the
estimated fair value of the Initial Commitment Shares of $212,117 on October 2,
2009. We will capitalize all of the cash and noncash costs as deferred
financing costs, and will charge them against capital in excess of par value on
a pro-rata basis as we sell shares to Fusion Capital, based upon the ratio of
shares issued compared to the total number of shares available for sale in the
2009 Agreement.
CAPITAL REQUIREMENTS
The Company incurred operating losses for fiscal 2009 and 2008. In fiscal
2007, we had a significant concentration of revenues from our homocysteine assay
technology. The main patent for this technology expired in July 2007 and we will
not receive revenue for sales made after that date. Homocysteine revenue in 2008
reflects unreported back royalties.
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 fiscal 2010, we expect our capital expenditures to be less than
$25,000.
Page 25
GENERAL
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
must increase the number of distributors for our products, broaden the base of
technologies for distribution, license technologies with sufficient current and
long-term revenue streams, and add new licenses. Obtaining rights to new
technologies, granting rights to licensees and distributors, enforcing
intellectual property rights, and collecting revenue are subject to many
factors, some of which are beyond our control. Although we cannot be certain
that we will be successful in these efforts, we believe the combination of our
cash on hand, the ability to raise funds from sales of our common stock under
the 2009 Fusion Capital Agreement, and revenue from executing our strategic plan
will be sufficient to meet our obligations of current and anticipated operating
cash requirements throughout fiscal 2010.
CONTRACTUAL OBLIGATIONS AND CONTINGENCIES
At July 31, 2009, our contractual obligations were:
CONTRACTUAL WITHIN 1 MORE THAN
OBLIGATIONS TOTAL YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
- ---------------- ---------- --------- ---------- ---------- ----------
Operating lease
obligations,
principally rent $1,219,000 $ 303,000 $ 589,000 $ 327,000 $ -
Nano employment
agreement 175,000 175,000 - - -
---------- --------- ---------- ---------- ----------
$1,394,000 $ 478,000 $ 589,000 $ 327,000 $ -
========== ========= ========== ========== ==========
Any other commitments we may have are contingent upon a future event.
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 July 31, 2009, CTT and its majority owned subsidiary, Vector Vision,
Inc. ("VVI"), have remaining obligations, contingent upon receipt of certain
revenues, to repay up to $199,006 and $205,183, respectively, in consideration
of grant funding received in 1994 and 1995. CTT also is obligated to pay at the
rate of 7.5% of its revenues, if any, from transferring rights to certain
inventions supported by the grant funds. VVI is obligated to pay at rates of
1.5% of its net sales of supported products or 15% of its revenues from
licensing supported products, if any. We recognize these obligations only if we
receive revenues related to the grant funds. We recognized approximately $2,135
of these obligations in 2009.
We engage independent consultants who provide us with business development,
consulting and/or evaluation services under contracts that are cancelable on
certain written notice. These contracts include contingencies for potential
incentive compensation earned solely on sales resulting directly from the work
of the consultant. We have neither accrued nor paid significant incentive
compensation under such contracts in fiscal 2009 or 2008. For the year ended
July 31, 2009, we neither accrued nor paid incentive compensation under such
contracts. For the year ended July 31, 2008, we paid $1,500 under such
contracts.
Page 26
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 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.
Deferred equity financing costs. We have incurred cash costs relating to
the completion of the July 2008 Agreement we entered into with Fusion Capital,
including professional fees, listing fees and due diligence costs. We
capitalized all of the cash costs, aggregating $138,779, as deferred financing
costs and charged them against capital in excess of par value on a pro-rata
basis as we sell shares to Fusion Capital, based upon the ratio of the proceeds
received compared to our estimate of the total proceeds to be received over the
life of the Agreement. At July 31, 2009, we charged the remaining balance of
these costs against capital in excess of par value since we terminated the
agreement on August 5, 2009. In August 2009, we entered into a new agreement
with Fusion Capital for the sale of up to $8 million of our common stock. As of
July 31, 2009 we had incurred cash costs relating to the completion of this
transaction totaling $40,000. These costs are reflected as deferred financing
costs, net and accrued expenses on our balance sheet.
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 other direct expenses relating to revenues.
We incurred charges of $54,000, and $70,500 in 2009 and 2008, respectively,
for consulting services provided by a relative of our President and CEO.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable for smaller reporting company.
Page 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DAT
Description Page
- ------------------------------------------------------------ -----
Reports of Independent Registered Public Accounting Firms 29-30
Consolidated Balance Sheets 31
Consolidated Statements of Operations 32
Consolidated Statements of Changes in Shareholders' Interest 33
Consolidated Statements of Cash Flows 34
Notes to Consolidated Financial Statements 35-55
Page 28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Competitive Technologies, Inc.
Fairfield, CT
We have audited the accompanying consolidated balance sheet of Competitive
Technologies, Inc. and Subsidiaries as of July 31, 2009 and the related
consolidated statements of operations, changes in shareholders' interest and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the 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 audit 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 financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Competitive Technologies, Inc. and
Subsidiaries at July 31, 2009, and the results of their operations and their
cash flows for the year 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 Competitive Technologies, Inc. and Subsidiaries will continue as a going
concern. As more fully described in Note 1, at July 31, 2009, the Company has
incurred operating losses since fiscal year 2006. 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/ MHM Mahoney Cohen CPAs
(The New York Practice of Mayer Hoffman McCann P.C.)
New York, New York
October 27, 2009
Page 29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Competitive Technologies, Inc.
Fairfield, CT
We have audited the accompanying consolidated balance sheet of Competitive
Technologies, Inc. and Subsidiaries as of July 31, 2008, and the related
consolidated statements of operations, changes in shareholders' interest and
cash flows for the year the 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 audit to obtain reasonable assurance about whether the 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 audit 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 financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Competitive Technologies, Inc. and
Subsidiaries at July 31, 2008, and the results of their operations and their
cash flows for the year ended July 31, 2008 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that Competitive Technologies, Inc. and Subsidiaries will continue as a going
concern. As more fully described in Note 1, at July 31, 2008, the Company has
incurred operating losses for fiscal years 2006 through 2008. 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/ 25 MAD LIQUIDATION, CPA, P.C.
(formerly known as Mahoney Cohen & Company, CPA, P.C.)
New York, New York
October 28, 2008
Page 30
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
JULY 31, 2009 July 31, 2008
--------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents $ 752,071 $ 2,237,095
Receivables, net of allowance of $101,154
at July 31, 2009 and 2008 199,619 120,077
Prepaid expenses and other current assets 206,789 317,756
--------------- ---------------
Total current assets 1,158,479 2,674,928
Property and equipment, net 203,012 262,863
Other long term assets - 40,083
Deferred financing costs, net 40,000 133,109
--------------- ---------------
TOTAL ASSETS $ 1,401,491 $ 3,110,983
=============== ===============
LIABILITIES AND SHAREHOLDERS' INTEREST
Current Liabilities:
Accounts payable $ 352,543 $ 679,644
Accrued expenses and other liabilities 682,362 759,081
--------------- ---------------
Total current liabilities 1,034,905 1,438,725
Deferred rent 81,418 78,822
Shareholders' interest:
5% preferred stock, $25 par value, 35,920
shares authorized, 2,427 shares issued
and outstanding 60,675 60,675
Common stock, $.01 par value, 20,000,000
shares authorized, 9,819,027 and
8,179,872 shares issued respectively 98,190 81,798
Capital in excess of par value 37,887,925 35,732,761
Accumulated deficit (37,761,622) (34,281,798)
--------------- ---------------
Total shareholders' interest 285,168 1,593,436
--------------- ---------------
TOTAL LIABILITIES AND
SHAREHOLDERS' INTEREST $ 1,401,491 $ 3,110,983
=============== ===============
See accompanying notes
Page 31
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year ended July 31,
2009 2008
------------ ------------
REVENUES
Retained royalties $ 261,410 $ 973,181
Product Sales 8,493 61,463
Investment income 7,346 158,709
Other income 70,991 -
------------ ------------
348,240 1,193,353
EXPENSES
Cost of product sales 668 54,419
Personnel and other direct expenses
relating to revenues 2,024,210 3,201,833
General and administrative expenses 2,198,608 3,562,919
Patent enforcement expenses, net of
reimbursements 1,852 42,231
Impairment of available-for-sale securities - 227,596
Loss on sale of available-for-sale
securities, net of gains - 70,809
Insurance recovery (400,000) -
Interest expense 2,726 -
------------ ------------
3,828,064 7,159,807
------------ ------------
Income (loss) before income taxes (3,479,824) (5,966,454)
Provision (benefit) for income taxes - -
------------ ------------
NET INCOME (LOSS) $(3,479,824) $(5,966,454)
============ ============
Net income (loss) per common share:
Basic earnings (loss) per share $ (0.40) $ (0.73)
Diluted earnings (loss) per share $ (0.40) $ (0.73)
Weighted average number of common
shares outstanding:
Basic 8,740,419 8,156,343
Diluted 8,740,419 8,156,343
See accompanying note
Page 32
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Interest
ACCUM.
PREFERRED STOCK COMMON STOCK OTHER
--------------- ------------------ COMPRE- TOTAL
SHARES SHARES CAPITAL IN - HENSIVE SHARE-
OUTST- OUTST- EXCESS OF ACCUMULATED INCOME/ HOLDERS'
ANDING AMOUNT ANDING AMOUNT PAR VALUE DEFICIT (LOSS) INTEREST
------ ------- --------- ------- ------------ ----------------- ---------- ------------
Balance - July 31, 2007 2,427 $60,675 8,107,380 $81,073 $35,263,453 $ (28,315,344) $ 508,959 $ 7,598,816
Comprehensive loss:
Net loss (5,966,454) (5,966,454)
Reclassification adjustment
for realized loss on
available- for-sale
securities (569,882) (569,882)
Foreign currency translation
adjustments on securities 60,923 60,923
------------
Comprehensive loss (6,475,413)
Compensation expense from
stock option grants 321,825 321,825
Stock issued to 401(k) plan 62,492 625 132,483 133,108
Stock issued to Directors 10,000 100 15,000 15,100
------ ------- --------- ------- ------------ ----------------- ---------- ------------
Balance - July 31, 2008 2,427 $60,675 8,179,872 $81,798 $35,732,761 $(34,281,798) $ - $ 1,593,436
NET LOSS (3,479,824) (3,479,824)
COMPENSATION EXPENSE FROM
STOCK OPTION GRANTS 244,118 244,118
EXERCISE OF COMMON
STOCK OPTIONS 20,000 200 24,907 25,107
ISSUANCE TO FUSION INITIAL
COMMITMENT SHARES 63,280 634 122,763 123,397
SALE OF SHARES TO FUSION 1,516,783 15,167 1,973,492 1,988,659
AMORTIZATION OF DEFERRED
FINANCING COSTS RELATED
TO FUSION SHARES (262,176) (262,176)
STOCK ISSUED TO 401(K) PLAN 26,592 266 39,622 39,888
STOCK ISSUED TO DIRECTORS 12,500 125 12,438 12,563
------ ------- --------- ------- ------------ ----------------- ---------- ------------
BALANCE - JULY 31, 2009 2,427 $60,675 9,819,027 $98,190 $37,887,925 $(37,761,622) $ - $ 285,168
====== ======= ========= ======= ============ ================= ========== ============
See accompanying note
Page 33
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended July 31,
--------------------------
2009 2008
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(3,479,824) $(5,966,454)
Adjustments to reconcile net loss to net
cash used in operating activities:
Security deposit used as rent payment 39,833 -
Depreciation and amortization 61,341 72,034
Deferred rent 2,596 16,198
Share-based compensation - stock options 244,118 321,825
Accrued stock contribution (55,043) 170,644
Loss on available-for-sale securities - 70,809
Loss on permanent impairment of
available-for-sale securities - 227,596
Changes in assets and liabilities:
Receivables (79,542) 619,720
Inventory - 44,781
Prepaid expenses and other long-term
assets 111,217 63,440
Accounts payable, accrued expenses and
other liabilities (336,326) (635,004)
------------ ------------
Net cash used in operating activities (3,491,630) (4,994,411)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,490) (30,334)
Proceeds from sale of available-for-sale
securities - 822,873
------------ ------------
Net cash provided by (used in) investing
activities (1,490) 792,539
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of stock options 25,107 -
Proceeds from sale of stock 1,988,659 -
Deferred finance charges (5,670) (133,109)
------------ ------------
Net cash provided by (used in) financing
activities 2,008,096 (133,109)
Net (decrease) in cash and cash equivalents (1,485,024) (4,334,981)
Cash and cash equivalents at beginning of year 2,237,095 6,572,076
------------ ------------
Cash and cash equivalents at end of year $ 752,071 $ 2,237,095
============ ============
See accompanying notes
Page 34
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. BUSINESS AND BASIS OF PRESENTATION
Competitive Technologies, Inc. ("CTT") and its wholly-owned subsidiary, CTT
Trading Company, LLC ("CTT Trading"), and majority-owned subsidiary, Vector
Vision, Inc. ("VVI"), (collectively, "we" or "us") provide patent and technology
licensing and commercialization services throughout the world, with
concentrations in the U.S. and Asia, with respect to a broad range of life and
physical sciences, electronics, and nanotechnologies originally invented by
individuals, corporations and universities. We are compensated for our services
by sharing in the profits of distribution or the license and royalty fees
generated from successful licensing of clients' technologies.
The consolidated financial statements include the accounts of CTT, CTT
Trading, and VVI. Inter-company accounts and transactions have been eliminated
in consolidation.
The Company has incurred operating losses since fiscal 2006. During fiscal
2007, we had a significant concentration of revenues from our homocysteine assay
technology. The main patent for this technology expired in July 2007 and we will
not receive revenues for sales made after that date. Revenue in 2008 for the
homocysteine technology reflects previously unreported back royalties. We
continue to seek revenue from new technologies or products to mitigate the
concentration of revenues, and replace revenues from expiring licenses. At
current reduced spending levels, the Company may not have sufficient cash flow
to fund operating expenses beyond second quarter fiscal 2010. 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, and/or pursuing sales of certain assets and technologies while
we pursue licensing and distribution opportunities for our remaining portfolio
of technologies. The company does not have any significant individual cash or
capital requirements in the budget going forward. In addition, we will sell
shares to Fusion Capital per our 2009 Agreement, on an as-needed basis, when the
Company's stock price is at or above $1.00 per share. There can be no assurance
that the Company will be successful in such efforts or that we will be able to
obtain alternative financing should our stock price fall below $1.00 per share.
In addition, should the company be delisted by the NYSE Amex ("the exchange")
and be unable to obtain listing with another exchange, the company may not be
able to sell shares to Fusion Capital.(See Note 6) 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 and cash flows
from operations, if any, including royalty legal awards. In addition, we have
the ability to fund our requirements through sales of common stock under the
Fusion Capital agreement. At July 31, 2009, we had no outstanding debt, and no
credit facility.
Our current recurring revenue stream is insufficient for us to be
profitable with our present cost structure. In 2005, we were profitable because
of unusually large, upfront license fees related to our homocysteine technology
that did not recur in 2009, 2008, 2007 or 2006. To return to and sustain
profitability, we must increase recurring revenue by successfully licensing
technologies with current and long-term revenue streams, and continue to build
our portfolio of innovative technologies. We significantly reduced overhead
costs with staff reductions across all company departments, reduced extraneous
litigations, and obtained new technologies to build revenue. We will continue
to monitor our cost structure, and expect to operate within our generated
revenue and cash balances.
In late fiscal 2007, the Company obtained exclusive worldwide distribution
rights to a non-invasive pain therapy medical device for rapid treatment of
high-intensity oncologic and neuropathic pain, including pain resistant to
morphine and other drugs. Developed in Italy by CTT's client, Prof. Giuseppe
Marineo, DSc, MD, the technology was brought to CTT through the efforts of Prof.
Giancarlo Elia Valori of the Italian
Page 35
business development group, Sviluppo Lazio S.p.A., and assistance from the
Zangani Investor Community(TM). The unit, with a biophysical rather than a
biochemical approach, uses a multi-processor able to simultaneously treat
multiple pain areas by applying surface electrodes to the skin. The device's
European CE mark certification allows it to be distributed and sold throughout
Europe, and makes it eligible for approval for distribution and sales in
multiple global markets. In February 2009, CTT received FDA 510(k) clearance
for U.S. sales of the device. Several thousand patients in various hospitals
and medical centers have been successfully treated using the technology. CTT's
partner, GEOMC Co., Ltd. of Korea, is manufacturing the product commercially for
worldwide distribution. U.S. and international patents are pending.
In July 2008, we signed a country-exclusive distribution agreement with
Excel Life Sciences, Inc. for India. In the first six months fiscal 2009, we
signed three additional country-exclusive distribution agreements with GEOMC
Co., Ltd. for Korea, Biogene Pharma Limited for Bangladesh, and Able Global
Healthcare Sdn. Bhd. for Malaysia. In February 2009, the Company signed an
agreement with Life Episteme srl granting them exclusive distribution rights in
29 countries throughout Europe, Asia, Africa, the Middle East, South America and
Oceania. Exclusive distribution rights in two additional countries were granted
to Life Episteme in March 2009. Local sales authorization is required in each
country.
In April 2009, the Company, acknowledging the current difficult economic
climate, entered into an agreement with Americorp Financial, LLC (AFS), where
AFS will provide financing of sales of the pain therapy medical device for 24 -
60 month lease periods to hospitals, clinics and medical practices in the U.S.
AFS will provide financing services under the name, Competitive Technologies
Financial Services. CTT will receive the full retail sales price of the device
upon execution of each lease, while AFS carries the lease.
Also in April 2009, we signed an agreement with Native Energy & Economic
Development, giving them exclusive sales rights for selected U.S. government
agencies, including the Department of Veteran's Affairs (VA), the Department of
Defense (DOD), and the Indian Health Service (IHS).
In July 2009, we signed an agreement with Innovative Medical Therapies,
Inc. ("IMT") granting them exclusive distribution rights to CTT's pain therapy
medical device in the United States and related territories excluding selected
Federal agencies. The contract provides for minimum monthly cash payments to CTT
totaling over $1 million for the first eight months. These minimum monthly
payments increase each year throughout the term of the agreement with, for
example, the fourth year minimum payments reaching $9 million and eighth year
minimum payments of $21 million dollars. IMT will receive shipments of CTT's
pain therapy medical device in return for these payments
In October 2009, we signed an agreement with Athens, Greece-based Fintrade
Medical granting them the exclusive rights to market and sell CTT's pain therapy
medical device in Greece and Cyprus.
Also in October 2009, we signed an agreement with Calmar Pain Relief, LLC,
a Delaware limited liability company ("Calmar"), with its headquarters in North
Providence, Rhode Island. Calmar was established to provide medical equipment,
office leasing, and other business services to medical doctors looking to offer
CTT's non-invasive pain therapy to patients in a clinical setting. Calmar will
furnish CTT's MC-5A pain therapy medical device to medical doctors who will open
pain therapy treatment centers in selected U.S. cities over the next two years.
The signed distribution agreements for this device, now cover more than 50%
of the world's population.
In July 2008, to improve our financial condition we entered into an equity
financing arrangement (the "2008 Agreement") with Fusion Capital for up to $5.0
million of cash through sales of our common stock, at our option. We raised
approximately $2.0 million through this agreement and terminated it on August 5,
2009. On August 6, 2009 we entered into a new agreement (the "2009 Agreement")
with Fusion Capital to raise up to $8.0 million dollars through sales of our
common stock.
Future revenue, obtaining rights to new technologies, granting licenses,
and enforcing intellectual property rights are subject to many factors beyond
our control. These include technological changes, economic cycles, and our
licensees' ability to successfully commercialize our technologies.
Consequently, we may not be able to generate sufficient revenue to be
profitable.
Page 36
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
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 product sales fees in a
business model that allows us to share in the profits of distribution of
finished products.
We develop relationships with universities, companies, inventors and patent
or intellectual property holders to obtain the rights or a license to their
intellectual property, principally patents and inventions, or to their products.
They become our clients, for whom we find markets to sell or further develop or
distribute their technology or product. We also develop relationships with those
who have a need or use for technologies or products. They become our customers,
usually through a license or sublicense, or distribution agreement. We acquire
rights to commercialize a technology or product on an exclusive or non-exclusive
basis, worldwide or limited to a specific geographic area. When we license or
sublicense these rights to our customer, we may limit rights to a defined field
of use. Technologies can be early, mid, or late stage. Products must be a
working prototype or finished product.
Our customers pay us license fees based on usage of the technology, or per
unit fees, and we share the revenue with our clients. When we receive reports of
sales or payments from customers, whichever occurs first, we record revenue for
our portion, and record our obligation to our clients. Revenue we record is
solely our share of the gross revenue, net of our clients' share, which is
usually a fixed percentage.
We may receive annual minimum royalty payments or unit fees, milestone
payments or unit fees, or an upfront payment or fee upon execution of the
license or distribution agreement. These are generally non-refundable, and,
except for annual minimums, are usually not creditable against future payments.
We may apply the upfront fee or initial fees to reimburse patent prosecution
and/or maintenance costs incurred by either party. In these cases, payments are
recorded as a reduction of expense, and not as revenue. If the reimbursement
belongs solely to our client, we record no revenue or expense reduction. As a
result, a new technology may not generate significant revenue in its early
years.
Licensing and distribution terms are set in written agreements with
customers. In licensing technologies, we generally enter into single element
agreements with customers, under which we have no additional obligations other
than patent prosecution and maintenance. We may enter into multiple element
agreements under which we have continuing service obligations. All revenue from
multiple element agreements is deferred until delivery of all verifiable
required elements. In milestone billing agreements we recognize non-refundable,
upfront fees ratably over the life of the agreement, and milestone payments as
the specified milestone is achieved. Retained royalties or distribution fees
earned are of the following types:
Non-refundable, upfront license fee - We record our share of
non-refundable, upfront license fees upon execution of a license, sublicense or
distribution agreement. Once delivery is complete, and the fee is collected, we
have no continuing obligation. In fiscal 2008, we received $50,000 in upfront
fees. No upfront fees were received in fiscal 2009.
Royalty or per unit fees - The royalty or per unit rate is fixed in the
license or distribution agreement, with the amount earned contingent upon our
customer's usage of our technology or sale of our product. Some agreements may
contain stipulated minimum monthly or annual fee payments to CTT. We determine
the amount of revenue to record when we can estimate the amount earned for a
period. We receive payment or royalty reports on a monthly, quarterly
Page 37
or semi-annual basis indicating usage or sales of licensed technologies or
products to determine the revenue earned in the period. Revenue may fluctuate
from one quarter to another based on receipt of reports from customers.
Retained royalties from foreign licensees were $42,628, and $237,262 for
2009 and 2008, respectively. Retained royalties from Japanese licenses were
$32,314, and $176,462, in 2009 and 2008, respectively.
Royalty legal awards - We earn non-recurring revenues from royalty legal
awards, principally from patent infringement actions filed on behalf of our
clients and/or us. Patent infringement litigation cases generally occur when a
customer or another party ignores our patent rights, or challenges the legal
standing of our clients' or our technology rights. These cases, even if settled
out of court, may take several years to complete, and the expenses may be borne
by our clients, by us, or shared. We share royalty legal awards in accordance
with the agreement we have with our clients, usually after reimbursing each
party for their related legal expenses. We recognize royalty legal award revenue
when our rights to litigation awards are final and unappealable and we have
assurance of collecting those awards, or when we have collected litigation
awards in cash from the adverse party, or by sale of our rights to another party
without recourse, and we have no obligation or are very unlikely to be obligated
to repay such collected amounts. Proceeds from cases settled out of court are
recorded as retained royalties. (For further information, see NOTE 3.)
Legal awards in patent infringement cases usually include accrued interest
through the date of payment, as determined by the court. The court awards
interest for unpaid earned income. Interest may also be included in other
settlements with customers. Interest included in an award or settlement is
generally recorded as interest income when received.
Unless otherwise specified, we record all other revenue, as earned.
CONCENTRATION OF REVENUES
Approximately $276,000, or 28%, of 2008 retained royalties was derived from
the homocysteine assay.
The homocysteine assay is a diagnostic blood test used to determine
homocysteine levels and a corresponding deficiency of folate or vitamin B12. The
patent for this technology expired in July 2007 and we will not receive revenue
for sales made after that date. Homocysteine revenue in 2008 reflects unreported
back royalties.
Certain of our other patents have or will soon expire. In 2009, we derived
retained royalties from licenses on 12 patented technologies. Royalties from six
of those patented technologies have or will expire between 2009 and 2011. Those
patented technologies represented approximately 32% of our retained royalties in
2009. Retained royalties of $50,282, or 19%, $15,408, or 6%, and $17,778, or 7%,
were from patents expiring in fiscal 2009, 2010 and 2011, respectively. We
continue to seek revenue from new technology licenses to mitigate the
concentration of revenues, 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.
EXPENSES
We recognize expenses related to evaluating, patenting and licensing
inventions, and enforcing intellectual property rights in the period incurred.
Personnel and other direct expenses relating to revenue include employee
salaries and benefits, marketing and consulting expenses related to technologies
and specific revenue initiatives, domestic and foreign patent legal filing,
prosecution and maintenance expenses, net of reimbursements, amortization and
impairment of intangible assets acquired, royalty audits, and other direct
costs.
General and administrative expenses include directors' fees and expenses,
public company related expenses, professional services, including financing,
audit and legal services, rent and other general business and operating
expenses.
Page 38
Patent enforcement expenses, net of reimbursements, include direct costs
incurred to enforce our patent rights, excluding personnel related costs. In
certain instances we recover amounts previously expensed from future revenue and
record our reimbursement as a reduction of expense. (For further information,
see NOTE 3.)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits and interest earning
investments with maturities of three months or less, including overnight bank
deposits and money market funds. Cash equivalents are carried at cost.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less an allowance for
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 AND INTANGIBLE ASSETS ACQUIRED
We review our long-lived and intangible assets acquired 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.
INCOME TAXES
Income taxes are accounted for on the asset and liability method in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes. The provision for income taxes is the estimated
amount of our income tax liability for the year, combined with the change during
the year in deferred tax assets and liabilities. We recognize deferred income
taxes for the future income tax consequences of differences between the income
tax and financial reporting bases of assets and liabilities at each balance
sheet date. We base the amount of deferred income taxes recorded on enacted
income tax laws and statutory income tax rates applicable to the periods in
which the differences are expected to affect our taxable income. We establish
valuation allowances against deferred income tax assets to reduce their carrying
values to the amount that we estimate we are more likely than not to realize. We
may be subject to the alternative minimum tax ("AMT"). We record any AMT
liability in the year in which it is incurred.
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
Effective August 1, 2005, we adopted Financial Accounting Standards Board
Statement No. 123(R), "Share-Based Payment" ("FAS 123R"), which establishes the
accounting required for share-based compensation, including stock options. FAS
123R requires us to measure the fair value at the grant date, as defined in FAS
123R, of all share-based awards, and recognize such value as compensation
expense in our statements of operations over the requisite service, vesting
period. We elected to adopt FAS 123R using a modified prospective application,
whereby the provisions of the statement were applied going forward only from the
date of adoption to new, issued subsequent to July 31, 2005, stock option
awards, and for the portion of any previously issued and outstanding stock
option awards which vested after the date of adoption. We recognized as expense
the fair value of stock options issued prior to August 1, 2005, but vesting
after August 1, 2005, over the remaining vesting period. In addition,
compensation expense must be recognized for any
Page 39
awards modified, repurchased, or cancelled after the date of adoption. Under
the modified prospective application, no restatement of previously issued
results was required. We use the Black-Scholes option-pricing model to measure
fair value, which is the same method we used in prior years for disclosure
purposes. This model requires the use of subjective input assumptions,
including estimated life and related volatility, and expected forfeitures over
the term of the grant. The estimate of forfeitures was not previously required
for disclosure purposes and is a new variable for us. All of our assumptions
are based upon historical experience; however, actual results could differ
significantly from our current estimates.
The adoption of this pronouncement has resulted in our recognizing non-cash
compensation expense related to stock options granted to employees, which is
included in personnel and other direct expenses related to revenues, and stock
options granted to our directors, which is included in general and
administrative expenses.
SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities are excluded from the
Consolidated Statements of Cash Flows. In 2009, the Company issued 63,280
registered shares of common stock valued at $123,397 to Fusion Capital II, LLC
as initial commitment shares per our equity financing agreement. During fiscal
2009 we amortized $262,176 of deferred financing costs related to this equity
financing agreement against Capital in Excess of Par Value. In 2008, prior to
the sale of our Clinuvel and Palatin common stock, the Company recorded a
non-cash reclassification adjustment for realized losses of $508,959 on these
stocks. Non-cash financing activities included $52,451, and $148,208, in 2009
and 2008 respectively, of stock issued pursuant to our 401(k) plan and a
directors' stock plan.
FISCAL YEAR
Our fiscal year ends July 31, and our first, second, third and fourth
quarters end October 31, January 31, April 30 and July 31, respectively. Fiscal
year 2009 is the year ended July 31, 2009.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standard Board ("FASB") issued
Statement No. 157 "Fair Value Measures" ("SFAS 157"). SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. In February 2008, the FASB issued FASB Staff
Positions ("FSP") 157-1, which amends SFAS 157 to remove leasing transactions
accounted for under SFAS 13, "Accounting for Leases," FSP 157-2, which deferred
the effective date of SFAS 157 for all nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis to fiscal years beginning after November 15,
2008, and FSP 157-3, which clarifies the application of SFAS 157 in a market
that is not active and illustrates considerations in determining the fair value
of a financial asset when the market for the financial asset is not active. The
Company adopted SFAS 157 on August 1, 2008. The adoption of SFAS 157 for
financial assets and liabilities did not have a material impact on the Company's
consolidated financial statements because the Company does not maintain
investments or derivative instruments. The Company does not believe the adoption
of SFAS 157 for nonfinancial assets and liabilities, effective August 1, 2009,
will have a material impact on our consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position (FSP) FAS 157-4,
"Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly." This FSP: (1) affirms that the objective of fair value when the market
for an asset is not active is the price that would be received to sell the asset
in an orderly transaction, (2) clarifies and includes additional factors for
determining whether there has been a significant decrease in market activity for
an asset when the market for that asset is not active, and (3) eliminates the
proposed presumption that all transactions are distressed (not orderly) unless
proven otherwise. The FSP instead (1) requires an entity to base its conclusion
about whether a transaction was not orderly on the weight of the evidence, (2)
includes an example that provides additional explanation on estimating fair
value when the market activity for an asset has declined significantly, (3)
requires an entity to disclose a change in valuation technique (and the related
inputs) resulting from the application of the FSP and to quantify its effects,
if practicable, and (4) applies to all fair value measurements when appropriate.
FSP FAS 157-4 must be applied prospectively and retrospective application is not
permitted. FSP FAS 157-4 is effective for interim and annual periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March
Page 40
15, 2009. An entity early adopting FSP FAS 157-4 must also early adopt FSP FAS
115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary
Impairments," as discussed below.
In April 2009 the FASB issued FSP FAS 115-2 and FAS 124-2, "Recognition and
Presentation of Other-Than-Temporary Impairments." This FSP: (1) changes
existing guidance for determining whether an impairment is other than temporary
to debt securities, (2) replaces the existing requirement that the entity's
management assert it has both the intent and ability to hold an impaired
security until recovery with a requirement that management assert: (a) it does
not have the intent to sell the security; and (b) it is more likely than not it
will not have to sell the security before recovery of its cost basis, (3)
incorporates examples of factors from existing literature that should be
considered in determining whether a debt security is other-than-temporarily
impaired, (4) requires that an entity recognize noncredit losses on
held-to-maturity debt securities in other comprehensive income and amortize that
amount over the remaining life of the security in a prospective manner by
offsetting the recorded value of the asset unless the security is subsequently
sold or there are additional credit losses, (5) requires an entity to present
the total other-than-temporary impairment in the statement of earnings with an
offset for the amount recognized in other comprehensive income, and (6) when
adopting FSP FAS 115-2 and FAS 124-2, an entity is required to record a
cumulative-effect adjustment as of the beginning of the period of adoption to
reclassify the noncredit component of a previously recognized other-temporary
impairment from retained earnings to accumulated other comprehensive income if
the entity does not intend to sell the security and it is not more likely than
not that the entity will be required to sell the security before recovery. FSP
FAS 115-2 and FAS 124-2 are effective for interim and annual periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. The adoption of FSP 157-4, FSP 115-2 and FAS 124-2 did not have
a material impact on the Company's consolidated financial statements.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1 "Interim
Disclosures about Fair Value of Financial Instruments." This FSP amends FASB
Statement No. 107, "Disclosures about Fair Value of Financial Instruments," to
require an entity to provide disclosures about fair value of financial
instruments in interim financial information. This FSP also amends APB Opinion
No. 28, "Interim Financial Reporting," to require those disclosures in
summarized financial information at interim reporting periods. Under this FSP, a
publicly traded company shall include disclosures about the fair value of its
financial instruments whenever it issues summarized financial information for
interim reporting periods. In addition, an entity shall disclose in the body or
in the accompanying notes of its summarized financial information for interim
reporting periods and in its financial statements for annual reporting periods
the fair value of all financial instruments for which it is practicable to
estimate that value, whether recognized or not recognized in the statement of
financial position, as required by Statement 107.
FSP 107-1 and APB 28-1 are effective for interim periods ending after June
15, 2009, with early adoption permitted for periods ending after March 15, 2009.
However, an entity may early adopt these interim fair value disclosure
requirements only if it also elects to early adopt FSP FAS 157-4 and FSP FAS
115-2 and FAS 124-2. The Company is currently evaluating the impact adoption
of FSP 107-1 and APB 28-1 may have on the consolidated financial statements. The
company will adopt SFAS 107-1 effective August 1, 2009, which will require
additional disclosure in its quarterly consolidated financial statements.
In August 2009, the FASB issued Accounting Standards Update No. 2009-05
"Measuring Liabilities at Fair Value" ("AUS 2009-05"). AUS 2009-05 provides
guidance on how to measure the fair value of liabilities in circumstances where
a quoted price in an active market for the identical liability is not available.
The guidance provided in this statement is effective for the first reporting
period (including interim periods) beginning after issuance, quarter ended
January 31, 2010 for the companyThe Company does not believe that the adoption
of AUS 2009-05 will have a material effect on the financial statements.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities-including an amendment of FASB
Statement No. 115" ("SFAS 159"). This statement permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value and establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities. The Company adopted SFAS 159 on August 1, 2008. The
Company has currently chosen not to elect the fair value
Page 41
option for any items that are not already required to be measured at fair value
in accordance with accounting principles generally accepted in the United
States.
In December 2007, the FASB issued SFAS 141 (Revised 2007), "Business
Combinations" ("SFAS 141(R)"). SFAS 141(R) establishes principles and
requirements for the reporting entity in a business combination, including
recognition and measurement in the financial statements of the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquired entity. SFAS 141(R) also establishes disclosure requirements to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008, and
interim periods within those fiscal years. The Company is currently evaluating
the impact of adoption of SFAS 141(R) may have on the financial statements. In
April 2009, the FASB issued FASB Staff Position ("FSP") FAS 141(R)-1,
"Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies" ("FSP FAS 141(R)-1"). FSP FAS
141(R)-1 amends and clarifies Statement No. 141(R), "Business Combinations", to
address application issues on initial recognition and measurement, subsequent
measurement and accounting, and disclosure of assets and liabilities arising
from contingencies in a business combination. Under FSP FAS 141(R)-1, an
acquirer is required to recognize at fair value an asset acquired or liability
assumed in a business combination that arises from a contingency if the
acquisition date fair value can be determined during the measurement period. If
the acquisition date fair value cannot be determined, the acquirer applies the
recognition criteria in Statement No. 5, "Accounting for Contingencies," and
Interpretation No. 14, "Reasonable Estimation of the Amount of a Loss," to
determine whether the contingency should be recognized as of the acquisition
date or after it. FSP FAS 141(R)-1 is effective for business combinations for
which the acquisition date is on or after August 1, 2009.
In December 2007, the FASB issued Statement No. 160 "Noncontrolling
Interests in Consolidated Financial Statements - An Amendment of ARB No. 51"
("SFAS160"). SFAS 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. Earlier adoption is
prohibited. The Company does not have any noncontrolling interests in
subsidiaries and believes that SFAS 160 will not have a material impact on its
financial statements.
In March 2008, the FASB issued SFAS 161, "Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133"
("SFAS 161"). SFAS 161 requires enhanced disclosures about how and why an entity
uses derivative instruments, how derivative instruments and related hedged items
are accounted for, and how they affect an entity's financial position, financial
performance, and cash flows. SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. The Company's adoption of SFAS 161 will not
have a material impact on its financial statements.
In May 2008, the FASB issued Statement No. 162, "The Hierarchy of Generally
Accepted Accounting Principles" ("SFAS 162"). The new standard is intended to
improve financial reporting by identifying a consistent framework, or hierarchy,
for selecting accounting principles to be used in preparing financial statements
that are presented in conformity with U.S. generally accepted accounting
principles (GAAP) for nongovernmental entities. Prior to the issuance of SFAS
162, GAAP hierarchy was defined in the American Institute of Certified Public
Accountants (AICPA) Statement on Auditing Standards (SAS) No. 69, "The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting Principles."
SAS 69 has been criticized because it is directed to the auditor rather than the
entity. SFAS 162 addresses these issues by establishing that the GAAP hierarchy
should be directed to entities because it is the entity, not its auditor that is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. SFAS 162 is effective November 15, 2008.
In May 2008, the FASB issued Statement No. 163, "Accounting for Financial
Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60"
("SFAS 163"). SFAS 163 requires recognition of an insurance claim liability
prior to an event of default when there is evidence that credit deterioration
has occurred in an insured financial obligation. SFAS 163 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and all interim periods within those fiscal years. Early application is not
permitted. The Company's adoption of SFAS 163 will not have a material impact on
its financial statements.
Page 42
In May 2009, the FASB issued Statement No. 165, "Subsequent Events" ("SFAS
165"). SFAS 165 establishes standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. SFAS 165 is effective for interim or
annual financial statement periods ending after June 15, 2009.
In June 2009, the FASB issued Statement No. 166, "Accounting for Transfers
of Financial Assets - an amendment of FASB Statement No. 140 (SFAS 166)." SFAS
166 eliminates the exceptions for qualifying special-purpose entities from
consolidation guidance and the exception that permitted sale accounting for
certain mortgage securitizations when a transferor has not surrendered control
over the transferred financial assets. SFAS 166 is effective as of the beginning
of the first annual reporting period that begins after November 15, 2009. The
Company is currently evaluating the impact the adoption of SFAS 166 will have on
the financial statements.
In June 2009, the FASB issued Statement No. 167, "Amendments to FASB
Interpretation No. 46(R) (SFAS 167)." SFAS 167 amends Interpretation of 46(R) to
require an enterprise to perform an analysis to determine whether the
enterprise's variable interest or interests give it a controlling financial
interest in a variable interest entity. This analysis identifies the primary
beneficiary of a variable interest entity as the enterprise that has both of the
following characteristics: (1) the power to direct the activities of the
variable interest entity that most significantly impact the entities economic
performance, and (2) the obligation to absorb losses of the entity that could
potentially be significant to the variable interest entity or the right to
receive benefits from the entity that could potentially be significant to the
variable interest entity. Additionally, an enterprise is required to assess
whether it has an implicit financial responsibility to ensure that a variable
interest entity operates as designed when determining whether it has the power
to direct the activities of the variable interest entity that most significantly
impact the entity's economic performance. SFAS 167 is effective as of the
beginning of the first annual reporting period that begins after November 15,
2009. Earlier application is prohibited. The Company is currently evaluating the
impact the adoption of SFAS 167 will have on the financial statements.
Effective July 1, 2009, the FASB issued SFAS No. 168, "The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles - a replacement of FASB Statement No. 162" ("ASC"), which became the
single official source of authoritative, nongovernmental GAAP. The historical
GAAP hierarchy was eliminated and the ASC became the only level of authoritative
GAAP, other than guidance issued by the SEC. All other literature became
non-authoritative. ASC is effective for financial statements issued for interim
and annual periods ending after September 15, 2009. The Company does not expect
the adoption of the ASC to have a material impact on its consolidated financial
statements.
No other new accounting pronouncements issued or effective during the
fiscal year has had or is expected to have a material impact on the consolidated
financial statements.
3. RETAINED ROYALTIES: PRIOR YEAR LICENSES GRANTED AND SETTLEMENTS
Palatin Technologies, Inc. - During the second quarter of fiscal 2008, we
agreed to a settlement with Palatin regarding our arbitration proceeding against
them. As part of the agreement Palatin agreed to pay us $800,000. We recorded
$320,000 of revenue, and reduced patent enforcement expenses by $480,000 in
accordance with the agreement with our client.
4. INCOME TAXES
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:
Page 43
Year ended July 31,
----------------------
2009 2008
----------- ---------
Provision (benefit) at U.S. federal
statutory rate (34.0)% (34.0)%
State provision (benefit), net of
U.S. federal tax (5.3) (6.1)
Permanent differences 0.8 .7
Expiration of capital loss
carryforwards 6.8 -
Other items 0.4 (0.2)
Deferred tax valuation allowance 31.3 39.6
----------- ---------
Effective income tax rate 0.0% 0.0%
=========== =========
Net deferred tax assets consist of the following:
JULY 31, 2009 July 31, 2008
--------------- ---------------
Net federal and state operating loss
carryforwards $ 10,292,301 $ 8,856,492
Net capital loss carryforwards 120,002 358,256
Impairment of investments 550,506 733,802
Other, net 432,835 357,410
--------------- ---------------
Deferred tax assets 11,395,644 10,305,960
Valuation allowance (11,395,644) (10,305,960)
--------------- ---------------
Net deferred tax assets $ - $ -
=============== ===============
At July 31, 2009, we had aggregate federal net operating loss carryforwards
of approximately $26,238,000, which expire at various times through 2029, with
the majority of them expiring after 2011. 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 carryforwards of approximately $19,100,000 that
expire through fiscal year 2013.
A significant portion of the NOLs remaining at July 31, 2009, approximately
$4,081,000, 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 July 31,
-------------------------
2009 2008
------------ -----------
Balance, beginning of year $10,308,114 $ 8,492,266
Change in temporary differences (107,871) 7,905
Change in net operating and capital losses 1,195,401 1,807,943
------------ -----------
Balance, end of year $11,395,644 $10,308,114
============ ===========
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.
We adopted the provisions of FIN 48 on August 1, 2007. We did not record
any unrecognized income tax benefits as a result of the implementation of FIN
48. At the adoption date, and at July 31, 2009, we had no unrecognized tax
benefits.
Prior to the adoption of FIN 48, we included interest and penalties on the
underpayment of income taxes in income tax expense. Upon adoption of FIN 48, we
have continued to follow this policy.
We file income tax returns in the United States and Connecticut. The
Internal Revenue Service has completed audits for the periods through the fiscal
year ended July 31, 2005. Our open tax years for review are fiscal
Page 44
years ending July 31, 2006 through 2008. The Company's returns filed with
Connecticut are subject to audit as determined by the statute of limitations.
5. NET INCOME (LOSS) PER COMMON SHARE
The following sets forth the denominator used in the calculations of basic
net income (loss) per share and net income (loss) per share assuming dilution:
Year ended July 31,
---------------------
2009 2008
---------- ---------
Denominator for basic net income (loss) per
share, weighted average shares outstanding 8,740,419 8,156,343
Dilutive effect of common stock options N/A N/A
Denominator for net income (loss) per share,
assuming dilution 8,740,419 8,156,343
========== =========
Options to purchase 770,750 and 806,325 shares of our common stock at July
31, 2009, and 2008, respectively, were outstanding but were not included in the
computation of net income (loss) per share because they were anti-dilutive. Due
to the net loss incurred for the years ended July 31, 2009, and 2008, 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 and warrants would have been anti-dilutive.
6. EQUITY FINANCING
On July 22, 2008, we entered into an agreement with Fusion Capital Fund II,
LLC ("Fusion Capital") to sell up to $5.0 million of our common stock to Fusion
Capital over a 24-month period (the "2008 Agreement"). We had the right to
determine the timing and the amount of stock sold, if any, to Fusion Capital.
Under the terms of the 2008 Agreement, we issued 63,280 registered shares
of our common stock to Fusion Capital for its initial commitment (the "Initial
Commitment Shares"), and agreed to issue 42,187 Additional Commitment Shares
(the "Additional Commitment Shares") to Fusion Capital on a pro-rata basis as we
sold the $5.0 million of stock (collectively, the "Commitment Shares").
Commencement of sales of common stock under the 2008 Agreement was contingent
upon certain conditions, principally the Securities and Exchange Commission
("SEC") declaring effective our registration statement filed with the SEC to
register 1,605,467 shares of common stock potentially to be issued under the
2008 Agreement. On September 26, 2008, the SEC declared our registration
statement effective.
Subject to our right to suspend sales of our common stock at any time and
to terminate the 2008 Agreement at any time, Fusion Capital was obligated to
purchase up to $50,000 of our common stock each three business days (the "Base
Purchase Amount"). No sales were to be made below a $1.00 per share floor
price. The sale price per share was to be the lower of the lowest sales price on
the sale date or an average of the three lowest closing prices during the 12
consecutive trading days prior to the sale date.
Fusion Capital could not purchase shares of our common stock under the 2008
Agreement if Fusion Capital would beneficially own in excess of 19.99% of our
common stock outstanding at the time of purchase. Fusion Capital agreed not to
sell the Commitment Shares for 24 months or termination of the 2008 Agreement,
which occurred on August 5, 2009.
Through July 31, 2009, we sold 1,500,000 shares, and issued 16,783
Commitment Shares, of our common stock to Fusion Capital. The proceeds were
used to fund general working capital needs.
We have incurred cash costs relating to the completion of the 2008
Agreement, including professional fees, listing fees and due diligence costs. We
have capitalized all of the cash costs, aggregating $138,779, as deferred
financing costs. We amortize these cash costs along with the Initial Commitment
Shares, and charge them against
Page 45
capital in excess of par value on a pro-rata basis as we sell shares to Fusion
Capital, based upon the ratio of the proceeds received compared to our estimate
of the total proceeds to be received over the life of the 2008 Agreement. On
August 5, 2009, we terminated the 2008 Agreement with Fusion Capital. As a
result all remaining deferred financing fees at July 31, 2009, were charged
against capital in excess of par value.
On August 6, 2009, we entered into another agreement with Fusion Capital
Fund II, LLC ("Fusion Capital") to sell up to $8.0 million of our common stock
to Fusion Capital over a 25-month period (the "2009 Agreement"). We have the
right to determine the timing and the amount of stock sold, if any, to Fusion
Capital.
Under the terms of the 2009 Agreement, we issued 86,933 registered shares
of our common stock to Fusion Capital on October 2, 2009 for its initial
commitment (the "Initial Commitment Shares"), and agree to issue 86,933
Additional Commitment Shares (the "Additional Commitment Shares") to Fusion
Capital on a pro-rata basis as we sell the $8.0 million of stock (collectively,
the "Commitment Shares"). Commencement of sales of common stock under the 2009
Agreement is contingent upon certain conditions, principally the Securities and
Exchange Commission ("SEC") declaring effective our registration statement filed
with the SEC to register 1,962,823 shares of common stock potentially to be
issued under the 2009 Agreement. On October 1, 2009 the SEC declared our
registration statement effective.
Subject to our right to suspend sales of our common stock at any time and
to terminate the 2009 Agreement at any time, Fusion Capital is obligated to
purchase up to $75,000 of our common stock each two business days (the "Base
Purchase Amount"). No sales will be made below a $1.00 per share floor price.
The sale price per share will be the lower of the lowest sales price on the sale
date or an average of the three lowest closing prices during the 12 consecutive
trading days prior to the sale date.
On December 2, 2008, we received notice from the NYSE Amex, then known as
NYSE Alternext US LLC (the "Exchange"), notifying us that the staff of the
Exchange Corporate Compliance Department had determined that the Company Form
10-K for the fiscal year ended July 31, 2008 did not meet continued listing
standards as set forth in Part 10 of the Exchange Company Guide, and the Company
has therefore become subject to the procedures and requirements of Section 1009
of the Exchange Company Guide. As noted in Section 1003 of the Exchange Company
Guide, companies with stockholders' equity of less than $2 million, and losses
from continuing operations and net losses in two out of its three most recent
fiscal years, or with stockholders' equity of less than $4 million and losses
from continuing operations and net losses in three out of its four most recent
fiscal years are non-compliant.
On December 18, 2008, the company submitted a business plan to the Exchange
detailing actions it will take to bring it into compliance with the above
continued listing standards by June 2, 2010. On January 22, 2009, the Exchange
accepted our business plan.
The Company will continue its listing during the plan period up to June 2,
2010, during which time it will be subject to periodic review to determine
whether it is making progress consistent with the plan. If the Company is not
in compliance with the continued listing standards at the conclusion of the plan
period or does not make progress consistent with the plan during the plan
period, the Exchange staff will initiate delisting procedures as appropriate.
The Company is allowed to appeal a staff determination to initiate delisting
proceedings in accordance with Section 1010 and Part 12 of the Exchange Company
Guide. Per the 2009 Agreement with Fusion Capital, should we be delisted from
the exchange and unable to obtain listing with another exchange, we will be
unable to sell shares to Fusion Capital.
Fusion Capital may not purchase shares of our common stock under the 2009
Agreement if Fusion Capital would beneficially own in excess of 19.99% of our
common stock outstanding at the time of purchase. Fusion Capital has agreed not
to sell the Commitment Shares for 25 months or termination of the 2009
Agreement.
Page 46
Since July 31, 2009 through October 27, 2009, we sold 210,197 shares, and
issued 4,890 Commitment Shares of our common stock to Fusion Capital for
approximately $450,000, and amortized approximately $34,089 of deferred charges
against capital in excess of par value.
7. RECEIVABLES
Receivables consist of the following:
JULY 31, 2009 July 31, 2008
-------------- --------------
Royalties, net of reserve of $101,154
at July 31, 2009 and 2008 $ 88,023 $ 26,524
Advance to GEO MC Co. Ltd. 107,989 17,989
Receivables from insurance carrier - 63,440
Other 3,607 12,124
-------------- --------------
Total $ 199,619 $ 120,077
============== ==============
GEOMC Co. Ltd., as a commercialization partner, has invested in a
production line for the pain management medical device, and is building
inventory for sales expected to occur in fiscal 2010. The Company will receive
repayment of the advance as these machines are shipped to our distributors.
8. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consist of the following:
JULY 31, 2009 July 31, 2008
--------------- ---------------
Equipment and furnishings $ 419,802 $ 418,641
Leasehold improvements 113,838 113,838
--------------- ---------------
Property and equipment, gross 533,640 532,479
Accumulated depreciation and amortization (330,628) (269,616)
--------------- ---------------
Property and equipment, net $ 203,012 $ 262,863
=============== ===============
Depreciation expense was $61,341 and $71,656, in 2009 and 2008, respectively.
9. AVAILABLE-FOR-SALE AND EQUITY SECURITIES
JULY 31, July 31,
2009 2008 Number of shares Type
-------- -------- ---------------- ------------
Melanotan -- -- 378,000 Common stock
Security Innovation, Inc. -- -- 223,317 Common stock
An ownership interest in Melanotan Corporation ("Melanotan") was purchased
in prior years for a nominal amount. In a separate transaction, we licensed to
Melanotan certain rights relating to a sunless tanning technology that we own.
Melanotan sublicensed the rights to Clinuvel Pharmaceuticals. Melanotan had no
operations of its own, and has been dissolved.
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 have been advised that the 3,129,509 shares of NTRU have been
exchanged for 223,317 shares of stock in the privately-held Security Innovation.
Page 47
10. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other assets consist of the following:
JULY 31, 2009 July 31, 2008
-------------- --------------
Prepaid insurance $ 125,198 $ 249,428
Prepaid investor relations service 20,000 20,000
Prepaid employee benefits 18,158 -
Other 43,433 48,328
-------------- --------------
Prepaid expenses and other current assets $ 206,789 $ 317,756
============== ==============
11. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
JULY 31, 2009 July 31, 2008
-------------- --------------
Royalties payable $ 54,093 $ 243,951
Deferred executive payroll 126,538 -
Accrued 401(k) contribution 50,000 150,000
Accrued directors stock compensation 30,000 37,500
Accrued audit fee 100,000 110,000
Accrued legal fees 197,214 7,765
Other accrued professional fees 7,500 21,963
Accrued Directors Fees 59,833 4,667
Accrued purchases - 47,850
Accrued AMEX listing fee - 33,109
Unclaimed property liability 25,431 25,431
Other 31,753 76,845
-------------- --------------
Accrued expenses and other liabilities $ 682,362 $ 759,081
============== ==============
12. SHAREHOLDERS' INTEREST AND STOCK-BASED COMPENSATION PLANS
Preferred Stock - Holders of 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. 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 preferred stock is entitled to one vote. Holders of preferred
stock have no preemptive or conversion rights. The preferred stock is not
registered to be publicly traded.
Employee Stock Option Plans - 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:
JULY 31, 2009 July 31, 2008
------------- -------------
Common shares reserved for issuance on
exercise of options 581,750 646,075
Shares available for future option grants - -
Page 48
Prior to the 1997 Option Plan, we had a stock option plan that
expired on December 31, 2000, after which no option could be granted under the
plan. Pursuant to this plan incentive stock options and nonqualified stock
options were granted to key employees. Incentive stock options could be granted
at an exercise price not less than the fair market value of our common stock on
the grant date. Nonqualified stock options could be granted at an exercise price
not less than 85% of the fair market value of our common stock on the grant
date. Options generally vested over a period of up to three years after the
grant date and expire ten years after the grant date if not terminated earlier.
The number of common shares reserved for issuance on exercise of stock options
as of July 31, 2009 and 2008 is 14,000, and 15,250, respectively.
2000 Director's Stock Option Plan - We also have a Directors' Stock Option
Plan (the "Directors' Option Plan"), under which we 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 may be
granted after January 4, 2010.
The following information relates to the 2000 Directors' Stock Option Plan
JULY 31, 2009 July 31, 2008
------------- -------------
Common shares reserved for issuance on
exercise of options 175,000 145,000
Shares available for future option grants 132,000 182,000
At the Annual Meeting on February 2, 2007, a new Board of Directors was
elected. On August 1, 2007, following a 180-day allowed grace period after the
prior Board's termination, 282,000 options that had been granted to, but not
exercised by the Directors became available for future grant under this plan. In
August 2007, we made an initial grant of 10,000 shares each to Directors Evans,
Hornidge, Reali and Torello. An initial grant of 10,000 shares was made to
Director Howard in October 2007. On January 2, 2008 and 2009 we issued each
Director 10,000 options as prescribed by the plan.
Summary of Common Stock Options - Pursuant to FAS 123R, the total fair
value of shares vested in 2009 and 2008 was $244,118 and $321,825, respectively,
of non-cash compensation expense. Of this amount, $211,768 and $194,135,
respectively, was included in personnel and other direct expenses relating to
revenues, from stock options granted to employees in current and prior years,
and vesting during 2009 and 2008. Stock options granted during the year are
outstanding only a portion of the year, with the compensation expense recognized
for that portion of the year. As of July 31, 2009, there was approximately
$173,113 of total unrecognized compensation cost related to outstanding
non-vested stock options granted under the 1997 Option Plan. This cost is
expected to be recognized over a weighted average period of 0.89 years. Included
in the $244,118 of expense recognized in 2009 is $32,350 of noncash compensation
expense, included in general and administrative expenses, from stock options
granted to directors pursuant to the Directors Option Plan. 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. In 2008, we recognized additional
non-cash expense of $127,690 included in general and administrative expenses.
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 July 31,
2009 2008
----------- ---------
Dividend yield (1) 0.0% 0.0%
Expected volatility (2) 79.0% 74.2%
Risk-free interest rates (3) 1.7% 4.1%
Expected lives (2) 5 YEARS 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.
Page 49
(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 July 31, 2009
and 2008, and changes during the years then ended is presented below.
2009 2008
------------------- --------------------
WEIGHTED Weighted
AVERAGE Average
EXERCISE Exercise
SHARES PRICE Shares Price
-------- --------- --------- ---------
Outstanding at beginning of year 806,325 $ 2.96 960,825 $ 4.19
Granted 50,000 1.01 290,000 2.17
Forfeited (64,325) 2.55 (444,500) 5.11
Exercised (20,000) 1.26 - -
Expired or terminated (1,250) 4.22 - -
-------- --------- --------- ---------
Outstanding at end of year 770,750 $ 2.91 806,325 $ 2.96
======== ========= ========= =========
Exercisable at end of year 603,250 $ 3.05 471,325 $ 3.35
Weighted average fair value per share
of options issued during the year $ 0.65 $ 1.38
The total intrinsic value of stock options exercised during 2009 was
$23,650. Total proceeds from stock option exercises were $25,107 in 2009.
Generally, we issue new shares of common stock to satisfy stock option
exercises.
The following table summarizes information about all common stock options
outstanding at July 31, 2009.
WEIGHTED WEIGHTED
RANGE OF WEIGHTED AVERAGE AVERAGE WEIGHTED AVERAGE AVERAGE
EXERCISE NUMBER REMAINING CONTRACTUAL EXERCISE NUMBER REMAINING CONTRACTUAL EXERCISE
PRICES OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE LIFE IN YEARS PRICE
1.01 - $2.50 211,750 8.03 $ 1.88 144,250 8.01 $ 1.70
2.51 - $3.50 440,000 7.56 $ 2.53 340,000 7.56 $ 2.53
3.51 - $6.50 88,000 3.76 $ 5.20 88,000 3.76 $ 5.20
6.51 - $11.04 31,000 0.78 $ 8.86 31,000 0.78 $ 8.86
A summary of the status of the Company's non-vested shares as of July 31, 2009
and changes during the year ended July 31, 2009 is presented below:
WEIGHTED AVERAGE GRANT
NON VESTED SHARES SHARES DATE FAIR VALUE
- --------------------------- --------- -----------------------
Non vested at July 31, 2008 335,000 $ 1.57
Granted 50,000 0.65
Vested (182,500) 1.34
Forfeited and expired (35,000) 1.43
--------- -----------------------
Non vested at July 31, 2009 167,500 $ 1.57
========= =======================
1996 Directors' Stock Participation Plan - Pursuant to the terms of our
1996 Directors' Stock Participation Plan, on the first business day of January
of each year, we issue to each non-employee director who has served at least one
year as a director, the lesser of 2,500 shares of our common stock or a number
of shares of common stock equal to $15,000 on the date such shares are issued.
If an otherwise eligible director terminates as a director before the first
business day of the year, we issue such director a number of shares equal to the
portion of the year served by that director. This plan expires on January 3,
2011.
Page 50
We issued 12,500 and 10,000 shares of common stock to eligible directors in
2009 and 2008, respectively, and charged to expense $12,563 and $15,100, in 2009
and 2008 respectively, for the shares issued under this plan. The following
information relates to the 1996 Directors' Stock Participation Plan:
JULY 31, 2009 July 31, 2008
------------- -------------
Common shares reserved for future share issuances 36,659 49,159
There was no significant impact on the calculation of net loss per share
for the years ended July 31, 2009 and 2008, as a result of the issuance of
shares to our directors.
During the second quarter of fiscal 2009, the Company granted to its
non-employee directors as their annual award, options to purchase an aggregate
of 50,000 shares of common stock under the Directors' Stock Option Plan at a
weighted average exercise price of $1.01 per share that vested immediately. The
fair value of the options granted for the second quarter fiscal 2009 was
$32,350. This amount was recorded as non-cash compensation expense during the
respective period.
During the first quarter of fiscal 2008, the Company granted to its
non-employee directors as their initial directors award, options to purchase an
aggregate of 50,000 shares of common stock under the Directors' Stock Option
Plan at a weighted average exercise price of $2.52 per share that vested
immediately. The fair value of the options granted for the first quarter fiscal
2008 was $81,440. This amount was recorded as non-cash compensation expense
during the respective period.
During the second quarter of fiscal 2008, the Company granted to its
non-employee directors as their annual award, options to purchase an aggregate
of 50,000 shares of common stock under the Directors' Stock Option Plan at a
weighted average exercise price of $1.51 per share that vested immediately. The
fair value of the options granted for the second quarter fiscal 2008 was
$46,250. This amount was recorded as non-cash compensation expense during the
respective period.
During the first quarter of fiscal 2008, the Company granted to its
employees options to purchase an aggregate of 190,000 shares of common stock
under the 1997 Employees' Stock Option Plan at an exercise price of $2.25 which
vest over four years. The fair value of these options was $272,080, which will
be recognized as non-cash compensation expense over the vesting period. For
fiscal 2009 and 2008, the Company recognized $32,434 and $40,386 respectively,
of non-cash compensation expense for the fair value of options granted to
employees.
13. 401(K) PLAN
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 meet 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. Our Directors
ultimately approved a contribution to the plan of $50,000 for fiscal 2008. This
contribution was made during the third quarter of fiscal 2009. On April 3, 2009,
the Company contributed 33,333 shares of CTT common stock to the 401(k) plan.
The plan's forfeiture account funded 6,741 of these shares and the Company
funded the remainder of 26,592 shares. These shares were valued at $1.50 per
share, which was the closing price on February 25, 2009, the day the Board of
Directors approved the contribution. For fiscal 2009, we have accrued $50,000
for our discretionary 401(k) contribution, subject to final approval by our
directors.
14. COMMITMENTS AND CONTINGENCIES
Operating Leases - We have our offices in Fairfield, Connecticut under a
lease that began August 24, 2006, and will end August 31, 2013, with an option
to renew for an additional five years.
Page 51
At July 31, 2009, future minimum rental payments required under operating
leases with initial or remaining non-cancelable lease terms in excess of one
year, were:
YEAR ENDING JULY 31, RENTAL PAYMENTS
- -------------------------------- ----------------
2010 $ 303,320
2011 289,351
2012 299,973
2013 301,973
2014 25,227
----------------
Total minimum payments required $ 1,219,844
================
Total rental expense for all operating leases was:
YEAR ENDED JULY 31,
----------- ---------
2009 2008
----------- ---------
Minimum rental payments $ 303,156 $ 301,006
Less: Sublease rentals 13,577 4,075
----------- ---------
Net rent expense $ 289,579 $ 296,931
=========== =========
Employment Agreement - On February 2, 2007, we entered into an employment
agreement with John B. Nano, our President and Chief Executive Officer. He was
also appointed Chairman of the Board at no additional compensation. This
agreement expires on February 2, 2010. Pursuant to the terms of the agreement,
Mr. Nano will receive a minimum base compensation of $350,000, subject to change
upon approval of our Board of Directors, eligibility to participate in all
employee benefit plans, and is eligible, in the event of a termination of his
employment for other than cause, to receive the continuation of base
compensation and benefits through the term of the agreement, but not less than
twelve months. In the event of a change in control, as defined, he is eligible
to receive a continuation of the amount of base compensation in effect
immediately prior to such termination or resignation for a period equal to twice
that for a termination without cause or for the remainder of the employment
agreement term, whichever is longer. The agreement automatically renews for
one-year periods, unless notice is given 180 days in advance. Mr. Nano is also
entitled to a car allowance or lease of a car equal to an S-class Mercedes. The
agreement also called for the payment of $1 million to Mr. Nano and $650,000 to
his legal advisors in settlement of his lawsuit against us.
Contingencies - Revenue based - As of July 31, 2008, CTT and VVI have
obligations, contingent upon receipt of certain revenues, to repay up to
$199,006 and $205,183, respectively, from grant funding received in 1994 and
1995. CTT also is obligated to pay at the rate of 7.5% of its revenues, if any,
from transferring rights to certain inventions supported by the grant funds. VVI
is obligated to pay at rates of 1.5% of its net sales of supported products or
15% of its revenues from licensing supported products, if any. We recognize
these obligations only if we receive revenues related to the grant funds. We
recognized $2,135 and $2,805 related to these obligations in 2009 and 2008.
Contingencies - Litigation
Carolina Liquid Chemistries Corporation, et al. (Case pending) - On August
29, 2005, we filed a complaint against Carolina Liquid Chemistries Corporation
("Carolina Liquid") in the United States District Court for the District of
Colorado, alleging patent infringement of our patent covering homocysteine
assays, and seeking monetary damages, punitive damages, attorneys' fees, court
costs and other remuneration at the option of the court. Carolina Liquid was
served on September 1, 2005. As we became aware of other infringers, we amended
our complaint to add as defendants Catch, Inc. ("Catch") and the Diazyme
Laboratories Division of General Atomics ("Diazyme"). On September 6, 2006,
Diazyme filed for declaratory judgment in the Southern District of California
for a change in venue and a declaration of non-infringement and invalidity. On
September 12, 2006, the District Court in Colorado ruled that both Catch and
Diazyme be added as defendants to the Carolina Liquid case. On October 23, 2006,
Diazyme requested the United States Patent and Trademark Office (the "USPTO") to
re-evaluate the validity of our patent and this request was granted by the USPTO
on December 14, 2006. On July 30, 2009, the homocysteine patent was upheld by
the U.S. Patent and Trademark Office's Board of Patent Appeals and Interferences
(BPAI). In September 2008, the patent had been denied by the examiner, but that
denial was overruled by the BPAI. Further action in this case is pending as the
Page 52
BPAI result will now be returned to the U.S District Court for the District of
Colorado.
Ben Marcovitch and other co-defendants (Case completed) - On August 8,
2007, we announced that former CTT Director Ben Marcovitch had been removed for
cause from our Board of Directors by unanimous vote of CTT's five Directors for
violating CTT's Code of Conduct. At that time, CTT also withdrew from its
involvement with Agrofrut, E.U., a nutraceutical firm brought to CTT by Mr.
Marcovitch. As announced on April 10, 2007, CTT had paid $750,000 to Agrofrut
for a 5% ownership, and certain marketing and investment options in Agrofrut.
On August 31, 2007, we filed a Federal complaint in the U.S. District Court
for the District of Connecticut against Mr. Marcovitch, Betty Rios Valencia,
President and CEO of Agrofrut and former spouse of Mr. Marcovitch, John Derek
Elwin, III, a former CTT employee, and other defendants. The complaint claims
that false and misleading information had been provided to CTT in a conspiracy
to fraudulently obtain funds from CTT using the Agrofrut transaction. We have
requested, among other relief, punitive damages and attorneys' fees. It is our
opinion and that of our Board of Directors that this lawsuit is required to
recover our $750,000 and to settle outstanding issues regarding the named
parties.
On October 22, 2007, at a show cause hearing, the Court stated that all
defendants named in the case, and their associates, were enjoined from any
further use of any remaining part of the $750,000 received from CTT. The Court
ordered a full disclosure of all accounts where remaining funds are held, and a
complete description of the disposition of any portion of the CTT payment must
be made to CTT's counsel. On October 30, 2007, in amended complaint, CTT sought
injunctive relief and damages against Sheldon Strauss for conspiring with Mr.
Marcovitch to unlawfully solicit proxies in violation of Securities Exchange Act
of 1934.
At a December 7, 2007 hearing, the Court requested CTT to specify an
appropriate Prejudgment Remedy for the Court to consider. On December 20, 2007,
a Prejudgment Remedy was issued granting garnishment of the $750,000 CTT is
seeking to recover.
On January 11, 2008, the Court denied the defendants' attempts at
demonstrating that Connecticut was not the proper jurisdiction for these
hearings.
On April 22, 2008, the Court ruled that the defendants must make
arrangements for depositions to be completed by May 2, 2008, a date that was
then extended by the Court. The Court granted permission for the defendants'
depositions to be conducted via video conferencing when the defendants indicated
their inability to travel to the Connecticut court. The depositions were
conducted on June 2, 2008.
On June 23, 2008, the Court ruled that the defendants are compelled to
respond to interrogatories and to produce any supplemental discovery documents
by the deadline of July 7, 2008.
On August 15, 2008 CTT filed a motion for Summary Judgment. A Memorandum in
Opposition was filed by Marcovitch et al on September 15, 2008. CTT responded to
the Memorandum on September 24. The judge denied the Summary Judgment Motion on
April 6, 2009. On June 1, 2009, the Judge granted permission to CTT to enter a
Motion for Default Judgment against Agrofrut and Sheldon Strauss. On June 4,
2009, the Judge granted permission for CTT to enter a Motion for Default
Judgment against Ben Marcovitch and Betty Rios Valencia. These Default motions
were filed on June 15, 2009.
On September 8, 2009, the Judge ruled favorably on CTT's motion for default
judgment. The judgment entered against Marcovitch, Rios Valencia, Agrofrut and
Strauss, jointly and severally, is for $750,000, as well as reasonable
attorneys' fees and costs of $600,788. Additionally, judgments were entered
against Marcovitch, Rios Valencia, and Agrofrut, jointly and severally, for
$2.25 million, treble damages, and for $600,788, punitive damages. A judgment
was also entered against Rios Valencia and Agrofrut, jointly and severally, for
punitive damages of $750,000. The judge confirmed that Marcovitch was properly
removed as a member of CTT's Board of Directors and issued a permanent
injunction prohibiting Marcovitch from holding himself out as a member of CTT's
Board. A judgment was entered against Strauss prohibiting Strauss from
soliciting proxies in contravention of the SEC rules and regulations. Based on
the Court's rulings, CTT will now proceed to collect all funds possible from the
parties.
Page 53
Employment matters - former employee (Cases pending) - In September 2003, a
former employee filed a whistleblower complaint with OSHA alleging that the
employee had been terminated for engaging in conduct protected under the
Sarbanes Oxley Act of 2002 (SOX). In February 2005, OSHA found probable cause to
support the employee's complaint and ordered reinstatement and payment of
damages. CTT filed objections and requested a de novo hearing before an
Administrative Law Judge ("ALJ"). Based on evidence submitted at the May 2005
hearing, in October 2005 the ALJ issued a written decision recommending
dismissal of the employee's claim without relief. The employee then appealed the
case to the Administrative Review Board ("ARB"). In March 2008, the ARB issued a
decision and order of remand, holding that the ALJ erred in shifting the burden
of proof to CTT based on a mere inference of discrimination and remanding the
case to the ALJ for clarification of the judge's analysis under the appropriate
burden of proof. In January 2009, the ALJ ruled in favor of CTT on the ARB
remand. The employee has now appealed the January 2009 ALJ ruling to the ARB and
we await the ARB's decision. The employee had previously requested
reconsideration of the ARB order of remand based on the Board's failure to
address the employee's appeal issues; that request was denied by the ARB in
October 2008.
In August 2007, the same former employee filed a new SOX whistleblower
complaint with OSHA alleging that in April 2007 CTT and its former general
counsel retaliated against the employee for past-protected conduct by refusing
to consider the employee's new employer when awarding a consulting contract. In
March 2008, OSHA dismissed the employee's complaint citing the lack of probable
cause. The employee filed objections and requested de novo review by an ALJ. In
August 2008, the employee gave notice of intent to terminate proceedings before
the ALJ and remove the case to federal district court. In October 2008, the
former employee moved to voluntarily dismiss with prejudice the case before the
ALJ. We anticipate no further action on this matter.
On September 5, 2008, CTT filed a complaint in the U.S. District Court for
the District of Connecticut against the former employee seeking a declaration
that CTT did not violate SOX as alleged in the employee's 2007 OSHA complaint,
and to recover approximately $80,000 that CTT paid to the employee in compliance
with a court order that was subsequently vacated by the U.S. Court of Appeals
for the Second Circuit. On July 1, 2009, the judge ruled in favor of the former
employee's motion to dismiss. The court abstained from ruling on the question of
unjust enrichment due to the unresolved questions before the Department of Labor
Administrative Review Board.
On December 4, 2008, the former employee filed a complaint with the
Department of Labor asking to have the Connecticut case dismissed. On June 1,
2009, the Department dismissed the former employees complaint, finding that
"there is no reasonable cause to believe that the Respondent (CTT) violated
SOX". We anticipate no further action on this matter.
Federal Insurance Co. (Case completed) - On April 2, 2008, CTT filed a
complaint in the U.S. District Court for the District of Connecticut against
Federal Insurance, seeking the coverage to which it is entitled under its policy
with Federal. CTT asserts that Federal is obligated to insure CTT for its legal
fees and $750,000 loss associated with the case involving Ben Marcovitch and
other co-defendants.
In September 2008, we received $400,000 against a claim under our fraud
insurance policy in full settlement of this matter with Federal.
Consultants - We engage independent consultants who provide us with
business development and evaluation services under contracts that are cancelable
upon written notice. Certain of these contracts include contingencies for
potential payments to the consultant if we earn revenues as a result of the
efforts of the consultant. For the year ended July 31, 2008, we paid $1,500
under such contract. For the year ended July 31, 2009, we neither accrued nor
paid incentive compensation under such contracts.
Summary - We may be a party to other legal actions and proceedings from
time to time. We are unable to estimate legal expenses or losses we may incur,
if any, or possible damages we may recover, and we have not recorded any
potential judgment losses or proceeds in our financial statements to date. We
record expenses in connection with these suits as incurred.
We believe that we carry adequate liability insurance, directors and
officers insurance, casualty insurance, for owned or leased tangible assets, and
other insurance as needed to cover us against potential and actual claims and
Page 54
lawsuits that occur in the ordinary course of our business. However, an
unfavorable resolution of any or all matters, and/or our incurrence of
significant legal fees and other costs to defend or prosecute any of these
actions and proceedings may, depending on the amount and timing, have a material
adverse effect on our consolidated financial position, results of operations or
cash flows in a particular period.
15. 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 other direct expenses relating to revenues.
We incurred charges of $54,000, and $70,500 in 2009 and 2008, respectively,
for consulting services provided by a relative of our President and CEO.
16. SUBSEQUENT EVENTS
As mentioned in Note 6, on August 6, 2009, the company entered into the
2009 Agreement with Fusion Capital to sell up to $8.0 million of our common
stock to Fusion Capital over a 25 month period.
The company has evaluated subsequent events through October 27, 2009, which
is the date the financial statements were issued, and has concluded that no such
events or transactions took place which would require a disclosure herein,
except as mentioned above relating to the 2009 Agreement with Fusion Capital.
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
YEAR ENDED JULY 31, 2009 Quarter Quarter Quarter Quarter
------------ ------------ ------------ -----------
Total revenues (1) $ 103,801 $ 28,746 $ 167,177 $ 48,516
Operating loss (2) (973,456) (934,005) (757,336) (822,373)
Net loss (968,100) (932,397) (757,096) (822,231)
Net loss per share:
Basic (0.12) (0.11) (0.09) (0.09)
Assuming dilution (0.12) (0.11) (0.09) (0.09)
Weighted average number
ofcommon shares
outstanding
Basic 8,212,461 8,440,698 8,810,314 9,500,482
Assuming dilution 8,212,461 8,440,698 8,810,314 9,500,482
YEAR ENDED JULY 31, 2008
Total revenues (1) $ 210,609 $ 530,493 $ 238,129 $ 224,714
Operating loss (2) (2,639,658) (1,350,085) (1,037,132) (1,108,880)
Net loss (2,559,644) (1,299,320) (1,010,795) (1,096,695)
Net loss per share:
Basic (0.32) (0.16) (0.12) (0.13)
Assuming dilution (0.32) (0.16) (0.12) (0.13)
Weighted average number
of common shares
outstanding
Basic 8,107,380 8,158,760 8,179,872 8,179,872
Assuming dilution 8,107,380 8,158,760 8,179,872 8,179,872
(1) Total revenue in first quarter included $10,592 gain on sale for
available-for-sale securities. This gain was reclassified in the second
quarter.
(2) Operating (loss) is defined herein as revenues less expenses, excluding
investment income, and income taxes.
Page 55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
ENGAGEMENT OF NEW INDEPENDENT ACCOUNTANT
Pursuant to an asset purchase agreement, our former independent public
accounting firm, Mahoney Cohen & Company, CPA, P.C. was acquired by the New York
practice of Mayer Hoffman McCann P.C ("MHM"), and the shareholders of Mahoney
Cohen became shareholders of MHM. Following its acquisition of Mahoney Cohen,
MHM changed its name to MHM Mahoney Cohen CPAs, effective December 31, 2008.
ITEM 9A(T). CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed by the Company in the
reports filed or submitted by it under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, and include controls and procedures designed to ensure that
information required to be disclosed by the Company in such reports is
accumulated and communicated to the Company's management, including the
Company's Chairman, President, Chief Executive Officer ("CEO"), and Interim
Chief Financial Officer ("CFO"), as appropriate to allow timely decisions
regarding required disclosure.
Each fiscal quarter the Company carries out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chairman, President, CEO, and Interim CFO, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. In making this assessment, our management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on
this evaluation, our management, with the participation of the Chairman,
President, CEO, and Interim CFO,, concluded that, as of July 31, 2009, our
disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
During the fiscal year ended July 31, 2009, there was no change in the
Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f). A system of internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation and fair presentation of financial
statements for external purposes in accordance with generally accepted
accounting principles. All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management,
including ourChairman, President, CEO, and Interim CFO, we conducted an
assessment of the effectiveness of our internal control over financialreporting
as of July 31, 2009. Based on this assessment, management concluded that our
internal control over financial reporting was effective as of July 31, 2009.
Page 56
This annual report does not include an attestation report of the Company's
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's independent registered public accounting firm pursuant to rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this annual report.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
All persons named below are directors of CTT on the filing date of this
document. No director or executive officer is related by family to any other
director or executive officer. The following table sets forth information
regarding each director according to information furnished to us by each:
POSITIONS
CURRENTLY HELD COMMITTEE DIRECTOR OF
NAME AGE WITH CTT MEMBERSHIPS CTT SINCE
- ------------------------ --- ------------------- ----------- -------------
Joel M. Evans, M.D. 49 Director A, N February 2007
Richard D. Hornidge, Jr. 63 Director A, C* February 2007
Rustin Howard. 52 Director C, N* October 2007
Chairman of the
Board of Directors,
President and Chief
John B. Nano 64 Executive Officer -- February 2007
William L. Reali 67 Director A*, C, N February 2007
A - Audit Committee
C - Compensation and Stock Option Committee
N - Nominating and Corporate Governance Committee
* - Committee Chair
JOEL M. EVANS, M.D. Dr. Evans founded The Center for Women's Health in
Stamford, Connecticut in June 1996 and since then has been its Director. From
November 1996 to present, Dr. Evans has been a lecturer and senior faculty
member of The Center for Mind Body Medicine in Washington, D.C. Dr. Evans has
been featured in magazines as well as interviewed on television and radio shows
across the country. Dr. Evans is an Assistant Clinical Professor at the Albert
Einstein College of Medicine in New York City and helped create a clinical study
at Columbia University Medical Center for use of the herb, black cohosh, in
breast cancer. From November 2005 to present, Dr. Evans has been a member of
the Scientific Advisory Board for Metagenics Incorporated, a nutritional
supplement manufacturer. Dr. Evans brings key medical experience to the
Company.
Dr. Evans completed his undergraduate and medical studies at the Sophie
Davis School of Biomedical Education of the City College of New York and the Mt.
Sinai School of Medicine. He fulfilled his residency at the Albert Einstein
College of Medicine.
RICHARD D. HORNIDGE, JR. Mr. Hornidge has been a tennis professional since
February 2005, currently at the Newburyport Racquet Club in Newburyport,
Massachusetts, and earlier at Willows Racquet Club in North Andover,
Massachusetts.
Prior to that he was an independent consultant. From June 1984 through
June 1989, Mr. Hornidge was President of Travis Associates, an employment
agency. Mr. Hornidge was a program coordinator for Raytheon from 1973 through
1984, where he was involved in the Patriot Missile test equipment program.
Page 57
He has won numerous tennis tournaments, and was a member of two USTA teams that
competed nationally. He was ranked #1 in New England in paddle-tennis for most
of his 20-year career, in the top 16 on a national level, and was three-time
National Champion in various senior divisions.
Mr. Hornidge received a BA from Boston University after serving in the U.S.
Navy.
RUSTIN HOWARD. Mr. Howard is principal of Whitesand Investments LLC, an angel
investment organization.
In 1990, he founded and served as CEO and Chairman of Phyton, Inc., a world
leader in the use of proprietary plant cell fermentation technology, including
the production of paclitaxel, the active ingredient of Bristol-Myers Squibb's
multi-billion dollar anticancer drug, Taxol(R). Phyton was sold to a private
pharmaceutical company in 2003.
Additionally, Mr. Howard is the Chairman of DeepGulf, Inc., and a co-owner
and officer of Silver Bullet Technology. DeepGulf builds underwater pipelines
and associated facilities in deep and ultra-deep offshore oil and gas production
fields. Silver Bullet Technology, where he has been primarily responsible for
corporate and financial oversight as well as strategic planning, manufactures
and sells software for the banking and payment processing industry. Previously,
he served as president and CEO of BioWorks Inc., a biotechnology company he
founded to develop, produce, and sell products that replace chemical pesticides.
He earned his MBA from Cornell University's Johnson Graduate School of
Management, where he focused his studies on Entrepreneurship, and managing
innovation and technology.
JOHN B. NANO. Mr. Nano is President and Chief Executive Officer of Competitive
Technologies, Inc. and Chairman of the Board of Directors. In January 2006 Mr.
Nano became President and Chief Executive Officer of Articulated Technologies,
LLC., a company involved in creating and commercializing patented light emitting
diode technologies for global solid-state lighting applications. He is
currently a member of their Board of Directors. Mr. Nano served as President
and CEO, and a member of the Board of CTT from June 2002 through June 2005. He
has a broad background in domestic and international operating experience with
technology-based companies focusing on life sciences, physical sciences, digital
technology and electronics. Prior to joining CTT in 2002, Mr. Nano held various
executive leadership positions in operations, strategic planning, business
development, M&A and finance, including at Stonehenge Network Holdings, N.V. as
a Principal, at ConAgra Trade Group, a subsidiary of ConAgra, Inc., as Executive
VP and Chief Financial Officer; at Sunkyong America, a subsidiary of the
Sunkyong Group, a Korean conglomerate, as Executive VP and Chief Financial
Officer, and as President of an Internet Startup Division of Sunkyong America.
Mr. Nano is a graduate of MIT's Sloan School Executive Program, holds an
MBA in Finance from Northeastern University, and a BS in Chemical Engineering
from Worcester Polytechnic Institute.
WILLIAM L. REALI. Mr. Reali is a Certified Public Accountant with the firm of
Reali, Giampetro and Scott in Canfield, Ohio. The firm provides auditing and
other related accounting and tax services to a diverse group of business
clients. Over the past five years, Mr. Reali's primary responsibility with the
firm has been business consulting, working with large and small national and
multinational clients. He has worked with distressed companies, assisting them
with cost reduction, turn-around programs and re-organization.
Serving as Chairman of various community associations, Mr. Reali donates a
great deal of time to local organizations.
Mr. Reali received his BA from Youngstown State University.
EXECUTIVE OFFICERS
The name of our executive officer, his age and background information is as
follows:
Page 58
John B. Nano, 63, has served as our President and Chief Executive Officer
and Interim Chief Financial Officer, as well as Chairman of the Board of
Directors, since February 2007. From January 2006 to January 2007 Mr. Nano
served as President and Chief Executive Officer of Articulated Technologies,
LLC., a company involved in creating and commercializing patented light emitting
diode technologies for global solid-state lighting applications. He is currently
a member of their Board of Directors. Mr. Nano served as President and Chief
Executive Officer, and a member of the Board of CTT from June 2002 through June
2005. Prior to joining CTT, Mr. Nano served as a Principal reporting to the
Chairman of Stonehenge Networks Holdings, N.V., a global virtual private network
provider, with positions in operating, strategic planning and finance from 2000
to 2001. From 1998 to 1999, Mr. Nano served as Executive Vice President and
Chief Financial Officer of ConAgra Trade Group, a subsidiary of ConAgra, Inc.,
an international food company. From 1983 to 1998, he served as Executive Vice
President, Chief Financial Officer and President of an Internet Startup Division
of Sunkyong America, a subsidiary of the Korean conglomerate, Sunkyong Group.
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires our directors and officers, and persons who own more than ten percent
of the Common Stock to file reports of ownership and changes in ownership with
the Securities and Exchange Commission ("SEC") and the American Stock Exchange.
SEC regulations require reporting persons to furnish us with copies of all
Section 16(a) forms they file.
Based solely on our review of the copies of the Forms 3, 4 and 5 and
amendments thereto furnished to us by the persons required to make such filings
during fiscal 2008 and our own records, we believe that all Section 16(a) filing
requirements for our officers and directors were complied with on a timely
basis.
CORPORATE GOVERNANCE
CTT's Corporate Governance Principles, Corporate Code of Conduct (covering
all employees and directors), the Committee Charters for the Audit and
Nominating Committees of the Board of Directors, the unofficial restated
Certificate of Incorporation and the By-Laws are all available on our website at
www.competitivetech.net/investors/governance.html.
AUDIT COMMITTEE
The function of the Audit Committee is to assist the Board in fulfilling
its responsibility to the stockholders relating to our corporate accounting
matters, financial reporting practices, and the quality and integrity of our
financial reports. The Audit Committee's purpose is to assist the Board with
overseeing:
- -- the reliability and integrity of our financial statements, accounting
policies, internal controls and disclosure practices;
- -- our compliance with legal and regulatory requirements, including our
disclosure controls and procedures;
- -- our independent auditor's qualifications, engagement, compensation, and
independence;
- -- the performance of our independent auditor; and
- -- the production of an annual report of the Audit Committee for inclusion in
our annual proxy statement.
The Audit Committee is to be composed of not less than three of our
independent directors. The Board has determined that each member of the Audit
Committee is an independent director in accordance with the applicable rules of
the American Stock Exchange and the Securities Exchange Act of 1934. It has
also determined that each member is financially literate and has identified Mr.
Reali, who is a certified public accountant, as an audit committee financial
expert as defined by the Securities and Exchange Commission. The Audit
Committee operates pursuant to its charter, which was adopted by the Board, a
copy of which was filed as Appendix A to our 2004 Proxy Statement. The Audit
Committee evaluates the adequacy of its charter annually.
Page 59
COMPENSATION AND STOCK OPTION COMMITTEE
The purpose of the Compensation Committee is to:
- -- review and approve corporate goals and objectives relevant to CEO
compensation, evaluate the CEO's performance in light of those goals and
objectives, and determine and approve the CEO's compensation level based on
this evaluation;
- -- review and approve the compensation of our other officers based on
recommendations from the CEO;
- -- review, approve and make recommendations to the Board with respect to
incentive compensation plans or programs, or other equity-based plans or
programs, including but not limited to our Annual Incentive Plan, our 1997
Employees' Stock Option Plan, and our 401(k) Plan; and
- -- produce an annual report of the Compensation Committee on executive
compensation for inclusion in our annual proxy statement.
The Compensation Committee is to be composed of not less than three of our
independent directors. The Board has determined that each member of the
Compensation Committee is (1) an independent director in accordance with the
applicable rules of the NYSE Amex and any other applicable legal or regulatory
requirement, (2) a non-employee director within the meaning of Rule 16-b3(i)
under the Securities Exchange Act of 1934, and (3) an outside director within
the meaning of Section 162(m) of the Internal Revenue Code of 1986 (the
"Internal Revenue Code").
The new Board of Directors is reviewing all compensation plans to assure
effectiveness and fiduciary responsibility.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
The purpose of the Nominating Committee is to:
- -- identify individuals qualified to become members of the Board, consistent
with criteria approved by the Board;
- -- recommend to the Board candidates for all directorships to be filled by the
Board or our stockholders;
- -- in consultation with the Chairman of the Board, recommend to the Board
members of the Board to be appointed to committees of the Board and the
chairpersons thereof, including filling any vacancies;
- -- develop and recommend to the Board a set of corporate governance principles
applicable to us;
- -- oversee, evaluate and monitor the Board and its individual members, and our
corporate governance principles and procedures; and
- -- fulfill such other duties and responsibilities as may be set forth in its
charter or assigned by the Board from time to time.
The Nominating Committee is to be composed of not less than three of our
independent directors. The Board has determined that each member of the
Nominating Committee is an independent director in accordance with the
applicable rules of the NYSE Amex and any other applicable legal or regulatory
requirement. The Nominating Committee operates pursuant to its charter, which
was adopted by the Board, a copy of which was filed as Appendix B to our 2004
Proxy Statement.
The Nominating Committee will consider nominees recommended by stockholders
but it has not identified any special procedures stockholders need to follow in
submitting such recommendations. The Nominating Committee has not identified
any such procedures because as discussed below under the heading "Stockholder
Communications to the Board," stockholders are free to send communications in
writing directly to the Board, committees of the Board, and/or individual
directors, at our corporate address in care of our Secretary.
MEETINGS AND ATTENDANCE
During the fiscal year ended July 31, 2009, the board of directors met 6
times. The audit committee held four meetings during the fiscal year ended July
31, 2009. The compensation committee held two meetings during the fiscal year
ended July 31, 2009. The nominating and corporate governance committee held
three meetings during fiscal year ended July 31, 2009. In 2009, all directors
attended at least 75% of all meetings of the board of directors
Page 60
and the committees on which they served after becoming a member of the board or
committee. We and the board expect all directors to attend the next Annual
Meeting barring unforeseen circumstances or irresolvable conflicts.
EXECUTIVE SESSIONS OF NON-MANAGEMENT DIRECTORS
The non-management directors of our board meet in executive session,
generally at regularly scheduled meetings of the board of directors or at other
times as considered necessary or appropriate. A presiding director is chosen by
the non-management directors to preside at each meeting and does not need to be
the same director at each meeting.
RELATIONSHIPS AMONG DIRECTORS OR EXECUTIVE OFFICERS
There are no family relationships among any of our directors or executive
officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between any member of our board of
directors or compensation committee and any member of the board of directors or
compensation committee of any other company, nor has such interlocking
relationship existed in the past.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table summarizes the total compensation awarded to, earned by
or paid by us for services rendered by the named executive officers that served
during the fiscal years 2009 and 2008.
NAME AND OPTION ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS AWARDS COMPENSATION TOTAL
- -------------------------------- ---- ----------- ------ -------- -------------- --------
Current Executive Officers:
- --------------------------------
John B. Nano (1)
Chairman of the Board
of Directors, President and
Chief Executive Officer, 2009
Interim Chief Financial Officer $350,000(5) $ - $179,333 $ 39,889(3) $569,222
2008
363,702 - 153,749 $ 29,534(2) 546,985
Aris D. Despo
Executive Vice President -
Business Development 2009 209,999(6) - 9,730 $ 7,584(4) 227,313
2008 219,650 - 8,975 - 228,625
John P. Rafferty
Vice President and Controller 2009 115,001 - 4,865 $ 4,151(4) 124,017
Girish Nallur
Executive Vice President -
Chief Scientific Officer 2008 145,385 - 8,975 - 154,360
(1) Mr. Nano's salary does not include any additional compensation for serving
as Chairman of the Board.
(2) Payment of auto lease.
(3) Includes $30,461 for payment of auto lease, $1,167 for auto repairs, and
discretionary contribution of 5,511 shares of CTT common stock (valued at
$8,267) contributed to the Company's 401(k) plan.
(4) Represents discretionary contribution to the Company's 401(k) plan of 5,056
shares of CTT common stock for Mr. Despo and 2,767 shares for Mr. Rafferty.
(5) Beginning in January 2009, Mr. Nano began deferring one half his salary
until the company is in a stronger cash flow position. This amount includes
deferred wages of $94,231.
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(6) Beginning in January 2009, Mr. Despo began deferring a portion of his
salary until the company is in a stronger cash flow position. This amount
includes deferred wages of $32,308.
GRANTS OF PLAN BASED AWARDS
The following table shows equity awards granted to named executive officers
during fiscal 2009 and 2008. Equity awards identified in the table below are
also reported in the Outstanding Equity Awards at 2009 Year End Table.
GRANTS OF PLAN BASED AWARDS
The following table shows equity awards granted to named executive officers
during fiscal 2009 and 2008. Equity awards identified in the table below are
also reported in the Outstanding Equity Awards at 2009 Year End Table.
OPTION AWARDS:
--------------------------------------------------------------
NUMBER OF CLOSING
SECURITIES MARKET GRANT DATE
UNDERLYING EXERCISE PRICE ON FAIR VALUE OF
OPTIONS PRICE GRANT STOCK OPTION
NAME GRANT DATE (#)(1) ($/SHARE) DATE ($) GRANTS ($)(2)
- ------------- ----------- ----------- --------- --------- --------------
Aris D. Despo 9/28/07(3) 30,000 2.25 2.25 42,960
Girish Nallur 9/28/07(3) 30,000 2.25 2.25 42,960
(1) Granted pursuant to our 1997 Employees Stock Option Plan.
(2) These amounts reflect the fair value as of the option grant date as
determined by SFAS 123(R) for accounting purposes. For a description of the
assumptions used to determine the grant date fair value, see Note 14 of
Notes to Consolidated Financial Statements in Part II, Item 8.
(3) These stock options vest 25% on the first anniversary of the grant and 25%
annually thereafter.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
NUMBER OF
NUMBER OF SECURITIES
SECURITIES UNDERLYING
UNDERLYING UNEXERCISED UNEXERCISED OPTION
OPTIONS OPTIONS OPTION EXPIRATION
NAME EXERCISABLE(1) UNEXERCISABLE(1) PRICE DATE
- ---------------- ----------------------- ---------------- ------- ----------
John B. Nano 300,000 100,000(2) $ 2.52 2/02/17
Aris D. Despo 7,500 22,500(3) 2.25 9/28/17
John P. Rafferty 3,750 11,250(3) 2.25 9/28/17
(1) Option awards under our 1997 Employees Stock Option Plan.
(2) Options vest on February 2, 2010.
(3) Vesting schedule: 33% each on September 28, 2009, 2010, and 2011,
respectively.
OPTION EXERCISES DURING FISCAL YEAR 2009
There were no options exercised during fiscal year 2009.
EMPLOYMENT, SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS
John B. Nano signed an employment agreement with the Company in February 2,
2007. The agreement provides for employment for a period of three years from
the effective date, ending at the close of business on February 2, 2010. The
agreement states that the Company employs Mr. Nano as its President and Chief
Executive Officer, and that he reports to the Company's Board of Directors. The
agreement also states that Mr. Nano was appointed to the Board as its Chairman,
without any additional compensation. The agreement established his starting
annual base salary at $350,000, subject to reviews and increases at the sole
discretion of the Board. The complete agreement, including all terms and
definitions, can be found at www.sec.gov with the current report on Form 8-K
dated February 6, 2007.
Mr. Nano's responsibilities and duties are appropriate to the position of
Chief Executive Officer the Company, including, without limitation, developing
and implementing an overall strategic plan and annual business plans, raising
new capital, and supervising day-to-day operations. The agreement entitles Mr.
Nano to receive a yearly bonus of up to 50% of his base compensation, based upon
the Company's performance and his performance of objectives during that time
period as determined by the Compensation Committee of the Board. Mr. Nano's
Page 62
agreement provides for reimbursement of business related expenses, a leased car,
and participation in employee benefit programs and plans.
The company granted Mr. Nano ten year options ("Plan Options") for the
purchase of an aggregate of 400,000 shares of the Company's common stock at the
mean average of the high and low share price on the effective date of the
agreement. The Plan Options vest 25% on each of the following four dates:
immediately upon employment: on each successive one-year anniversary of the date
of employment.
If Mr. Nano resigns his employment for good reason, or the Company
terminates his employment without cause, he will be entitled to receive all
accrued but unpaid salary and benefits through the date of termination plus
severance benefits. In the event Mr. Nano resigns from the Company without good
reason, or if the Company terminates his employment with cause, the Company has
no liability to him except to pay his base compensation and any accrued benefits
through his last day worked, and he will not be entitled to receive severance or
other benefits.
In the event of Mr. Nano's death, or if he is unable to fulfill his
obligations to the Company due to illness, injury, physical or mental incapacity
or other disability, for any 120 days within any 12 month period, all
obligations under the agreement are terminated; except that: the Company will
pay his base compensation and accrued benefits to him or to his estate, and any
unvested Plan Options granted under this agreement will become fully vested and
immediately exercisable for a period of one year by him or his estate. In the
event of his death, any post-retirement benefits shall be paid to Executive's
estate. In the event of his disability, he will be reimbursed for one-time
premium post-retirement health coverage not to exceed $120,000.
If the Company terminates Mr. Nano's employment without cause in
conjunction with a Change in Control, he will be entitled to receive all accrued
but unpaid salary and benefits through the date of termination plus the Change
in Control benefit.
The agreement's severance benefit granted to Mr. Nano provides for no less
than twelve months continuation of his base compensation, his employment
benefits, vesting of Options granted, and reimbursement for post retirement
health coverage.
The agreement's Changes in Control benefit granted to Mr. Nano provides for
continuation of compensation in effect to be paid for a period of either twice
the amount of the severance benefit period, or the remainder of his employment
term, whichever is longer; continuation of his employment benefits and
reimbursement for post-retirement health care benefits; and full and immediate
vesting of any unvested but outstanding Options
The following table summarizes the value of benefits payable to Mr. Nano
pursuant to the arrangements described above. Calculations are based on the
termination, resignation or change of control taking place as of July 31, 2009,
the last day of our most recent fiscal year.
SUMMARY OF POTENTIAL PAYMENTS AT JULY 31, 2009 FOR JOHN B. NANO EMPLOYMENT
CONTRACT
BENEFITS OPTIONS POST RETIREMENT
SEVERANCE ($) SUMMARY ($) VESTING ($) HEALTHCARE ($) TOTAL ($)
------------- ----------- ----------- ---------------- ----------
Resignation - - - - -
Termination - cause - - - - -
Death or disability - - 102,733 (5) 120,000 222,733
Resignation - good reason 350,000 (1) 57,226 (3) 102,733 (5) 120,000 629,959
Termination - w/o cause 350,000 (1) 57,226 (3) 102,733 (5) 120,000 629,959
Change of control 700,000 (2) 114,451 (4) 102,733 (5) 120,000 1,037,184
(1) Reflects minimum severance benefit of one year's base salary.
(2) Reflects minimum change in control benefit of two years base salary.
(3) Reflects continued benefits of auto, medical, dental, vision and life
insurance plan coverage for the severance benefit period (12 months).
Page 63
(4) Reflects continued benefits of auto, medical, dental, vision and life
insurance plan coverage for the change in control benefit period (24
months).
(5) Reflects accelerated vesting of the unamortized cost of the options, as
if the officer continued employment for the remaining term of the
agreement.
COMPENSATION DISCUSSION AND ANALYSIS
The purpose of CTT's Incentive Plan, approved by the Board on November 22,
2005, is to attract and retain personnel of experience and ability by providing
an incentive to those who contribute to the successful operation of CTT. The
Incentive Plan provides for eligible employees to earn an annual bonus incentive
in cash. The targeted annual bonus incentive award is a percentage of the
participant's salary earned during the plan year, as defined in the Incentive
Plan, and is comprised of two parts, 50% of which is dependent upon attainment
of financial performance metrics that serve as our company wide goals and
objectives and are set at the beginning of the year (the "Company Component"),
and 50% of which is dependent upon the individual's performance compared to each
individuals' pre-established goals and objectives (the "Individual Component").
If our financial performance is less than 70% of its goal, there will be no
award for the Company Component. If our financial performance is more than 120%
of its goal, then the Company Component award will increase up to 125% of the
award and may, under certain conditions, as defined, increase up to a maximum of
200% of the award. If a participant meets his or her individual goals, we may
pay the Individual Component regardless of whether the Company Component is met.
The Committee may suspend or amend the Incentive Plan at any time from time to
time, and the Board may terminate the Incentive Plan.
The Committee also determines the number and terms of stock options to
grant to all employees pursuant to the Stock Option Plan. This plan provides
additional long-term incentive for employees to maximize stockholder value and
to attract, retain and motivate our employees to continue employment with us.
To encourage and recognize the cooperative teamwork of all employees that is
required to achieve our goals, we grant stock options to all employees to give
them a proprietary interest in CTT.
REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE
This report of the Compensation and Stock Option Committee (the
"Committee") shall not be deemed incorporated by reference by any general
statement incorporating the Proxy Statement by reference into any filing under
the Securities Act of 1933 or the Securities Exchange Act of 1934 (the "Acts"),
except to the extent that CTT specifically incorporates this information by
reference, and shall not otherwise be deemed filed under such Acts.
CTT's compensation program consists of base salary, bonus, stock options,
other incentive awards and other benefits, which the Committee generally reviews
annually. The Committee's overall philosophy is to align compensation with our
business strategy and to support achievement of our long-term goals. In order
to attract and retain competent executives, we believe it is essential to
maintain an executive compensation program that provides overall compensation
competitive with that paid to executives with comparable qualifications and
experience.
The Board of Directors is reviewing all compensation plans to assure
effectiveness and fiduciary responsibility.
COMPENSATION AND STOCK OPTION COMMITTEE REPORT:
We have reviewed and discussed with management certain Executive
Compensation and Compensation Discussion and Analysis provisions to be included
in the Company's Annual Report on Form 10-K, filed pursuant to the Securities
Exchange Act of 1934, as amended (the "Annual Report"). Based on the reviews
and discussions referred to above, we recommend to the Board of Directors that
the Executive Compensation and Compensation Discussion and Analysis provisions
referred to above be included in the Company's Annual Report.
Submitted by the Compensation and Stock Option Committee of the Board of
Directors
Richard D. Hornidge, Jr. (Chairman)
Rustin Howard William L. Reali
Page 64
This Compensation Committee Report is not deemed incorporated by reference
by any general statement incorporating by reference of this Annual Report into
any filing under the Securities Act of 1933, as Amended, or the Exchange Act,
except to the extent that the Company specifically incorporates this information
by reference, and shall not otherwise be deemed filed under either such Acts.
DIRECTOR COMPENSATION
The following table summarizes the total compensation awarded to, earned by
or paid by us for services rendered during fiscal year 2009 to the non-employee
Board of Director members:
FEES EARNED OR OPTION OTHER EQUITY
NAME PAID IN CASH(3) AWARDS (1) COMPENSATION(2) TOTAL
- ------------------------ ---------------- ---------- --------------- -------
Joel M. Evans, M.D. $ 16,000 $ 6,470 $ 2,513 $24,983
Richard D. Hornidge, Jr. 15,500 6,470 2,513 24,483
Rustin Howard 16,000 6,470 2,513 24,983
William L. Reali 21,500 6,470 2,513 30,483
Former Board Member:
Ralph S. Torello 13,500 6,470 2,513 22,483
(1) Each director serving on January 2, 2009 received a stock option for 10,000
shares of common stock at $1.005 per share under the 2000 Directors Stock
Option Plan. We estimated the fair value of stock awards at $0.647 per
share using the Black-Scholes option valuation model with expected life of
5 years, risk free interest rate of 1.72%, volatility of 79.04% and
dividend yield of 0. See Item 14 in Notes to Consolidated Financial
Statements in Part II, Item 8
(2) Each director serving on January 2, 2009 received 2,500 shares of stock
under the 1996 Directors Stock Participation Plan. The fair market value of
the stock was $1.005 per share.
(3) This amount includes unpaid fees of $13,833, $14,833, $14,333, and $16,833
for Dr. Evans, Mr. Hornidge, Mr. Howard, and Mr. Reali respectively.
OUTSTANDING EQUITY AWARDS AT JULY 31, 2009
NUMBER OF SECURITIES OPTION OPTION
UNDERLYING UNEXERCISED EXERCISE EXPIRATION
NAME OPTIONS (1) PRICE DATE
Joel M. Evans, M.D. 10,000 $ 2.58 8/2/17
10,000 1.51 1/2/18
10,000 1.005 1/2/19
Richard D. Hornidge, Jr. 10,000 2.58 8/2/17
10,000 1.51 1/2/18
10,000 1.005 1/2/19
Rustin Howard 10,000 2.29 10/5/17
10,000 1.51 1/2/18
10,000 1.005 1/2/19
William L. Reali 10,000 2.58 8/2/17
10,000 1.51 1/2/18
10,000 1.005 1/2/19
Former Board Member:
Ralph S. Torello 10,000 2.58 8/2/17
(1) Each stock option was granted pursuant to our 2000 Directors' Stock Option
Plan. The shares were vested immediately on issuance.
Each of our non-employee directors is paid an annual cash retainer of
$10,000, paid quarterly in arrears, for their services to the Company. In
addition, directors are issued shares of common stock pursuant to our 1996
Directors Stock Participation Plan, as amended, and are granted stock options to
purchase common stock pursuant to our 2000 Directors Stock Option Plan, both as
described below. In addition, effective in fiscal year 2005, the
Page 65
Chairman of the Board, if a non-employee, and the Chairman of the Audit
Committee are paid annual stipends for the additional responsibilities and time
commitments required of them. Mr. Nano, as an employee of the Company, has not
been paid any compensation for serving as Chairman of the Board. Mr. Reali has
served as Chairman of the Audit Committee since February 2, 2007, and received a
$6,000 stipend in 2009.
Each non-employee director is also paid $1,000 for each Board meeting
attended and $500 for each committee meeting attended. All directors are
reimbursed for out-of-pocket expenses incurred to attend Board and committee
meetings.
Pursuant to our 1996 Directors Stock Participation Plan, as amended, on the
first business day of January, each non-employee director who has been elected
by the stockholders and has served at least one full year as a director is
issued a number of shares of common stock equal to the lesser of $15,000 divided
by the per share fair market value of such stock on the issuance date, or 2,500
shares. If a non-employee director were to leave the Board after serving at
least one full year, but prior to the January issuance date, we will issue
shares of common stock to the director on a pro-rata basis up to the termination
date. Common stock may not be issued to pursuant to this plan after January 3,
2011.
Pursuant to our 2000 Directors' Stock Option Plan, non-employee directors
are granted 10,000 fully vested, non-qualified stock options to purchase our
common stock on the date the individual is first elected as a director, whether
by the stockholders or by the Board, and is granted 10,000 options on the first
business day of January thereafter, provided the individual is still a director.
The stock options granted are at an exercise price not less than 100% of the
fair market value of the common stock at the grant date and have a term of ten
years from date of grant. If an individual's directorship terminates because of
death or permanent disability, the stock options may be exercised within one
year after termination. If the termination is for any other reason, the stock
options may be exercised within 180 days after termination. However, the Board
has the discretion to amend previously granted stock options to provide that
such stock options may continue to be exercisable for specified additional
periods following termination. In no event may a stock option be exercised
after the expiration of its ten-year term. Stock options may not be granted
under this plan after the first business day of January 2010.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF SHARES:
NAMES OF BENEFICIAL OWNERS AMOUNT
(AND ADDRESS, IF OWNERSHIP IS BENEFICIALLY
MORE THAN 5%) OWNED (1) PERCENT (%)
- --------------------------------- ------------ --- -----------
Directors and executive officers
Joel M. Evans, M.D. 38,800 (2) *
Richard D. Hornidge, Jr. 111,135 (2) 1.1
Rustin Howard 56,000 (2) *
John B. Nano 322,183 (2) 3.2
William L. Reali 43,000 (2) *
All directors and executive
officers as a group 571,118 5.6
* Less than 1%
(1) Designated person or group has sole voting and investment power.
(2) Persons listed below have the right to acquire the listed number of
shares upon the exercise of stock options:
NAME RIGHT TO ACQUIRE
- ----------------------------------------------- ----------------
Joel M. Evans, M.D. 30,000
Richard D. Hornidge, Jr. 30,000
Rustin Howard 30,000
John B. Nano 300,000
William L. Reali 30,000
----------------
All Directors and Executive Officers as a Group 420,000
================
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EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF
SECURITIES TO WEIGHTED- NUMBER OF SECURITIES
BE ISSUED AVERAGE REMAINING AVAILABLE
UPON EXERCISE EXERCISE PRICE FOR FUTURE ISSUANCE
OF OUTSTANDING OF OUTSTANDING (EXCLUDING OPTIONS
PLAN CATEGORY OPTIONS OPTIONS OUTSTANDING)
- ------------------------------------------- -------------- --------------- ---------------------
Equity Compensation plans approved
by security holders
Key Employees Stock Option Plan (1) 14,000 $ 7.08 -
1997 Employees Stock Option Plan (2) 581,750 $ 2.72 -
2000 Directors Stock Option Plan (3) 175,000 3.21 132,000
1996 Directors Stock Participation Plan (4) - 36,659
(1) The Key Employees' Stock Option Plan expired on December 31, 2000, after
which no option could be granted under the plan. Pursuant to this plan
incentive stock options and nonqualified stock options were granted to key
employees. Incentive stock options could be granted at an exercise price
not less than the fair market value of our common stock on the grant date.
Nonqualified stock options could be granted at an exercise price not less
than 85% of the fair market value of our common stock on the grant date.
Options generally vested over a period of up to three years after the grant
date and expire ten years after the grant date if not terminated earlier.
The number of common shares reserved for issuance on exercise of stock
options as of July 31, 2009 and 2008 is 14,000 and 15,250 respectively.
(2) The 1997 Employees' Stock Option Plan provided for the granting of stock
options to purchase our common stock. Stock options granted under the Plan
had to be granted at not less than 100% of the fair market value on the
date of grant. The Compensation Committee determined the vesting period for
the stock options. Stock options expired upon termination of grantee's
employment or ten years after date of grant. At the option of the
Compensation Committee, grants could continue to be exercisable through up
to ten years after the grant date, irrespective of the termination of the
optionee's employment with us. No options could be granted pursuant to this
plan after September 30, 2007.
(3) The 2000 Directors' Stock Option Plan provides for the granting of stock
options to purchase our common stock. Stock options may be granted under
this Plan to non-employee directors at not less than 100% of the fair
market value on the date of grant. Each non-employee director is eligible
to receive a grant of 10,000 fully vested common stock options when first
elected as a director and 10,000 more common stock options on the first
business day of January thereafter, as long as the individual is a
director. The maximum life of options granted under this plan is ten years
from the date of grant. No options may be granted after January 4, 2010,
the first business day in January 2010. On August 1, 2007, following a
180-day allowed grace period after the prior Board's termination, 282,000
options that had been granted to, but not exercised by the Directors,
became available for future grant under this plan. In August 2007, we made
an initial grant of 10,000 shares each to Directors Evans, Hornidge, Reali
and Torello. An initial grant of 10,000 shares was made to Director Howard
in October 2007.
(4) The 1996 Directors' Stock Participation Plan calls for the issuance of
stock to each non-employee who has served at least one year as a director
on the first business day in January. They are entitled to receive the
lesser of 2,500 shares of our common stock or a number of shares of common
stock equal to $15,000 on the date such shares are issued. If an otherwise
eligible director terminates as a director before the first business day of
the year, we issue such director a number of shares equal to the portion of
the year served by that director. This plan expires on January 3, 2011, the
first business day in January 2011.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
We have adopted a written policy for the review and approval of related
party transactions which is defined as a sale or purchase of property, supplies
or services to or from any director or officer of the company, members of a
director's or officer's family, or entities in which any of these persons is a
director, officer or owner of 5% or more that that entity's interests. Our
policy requires prior approval by both a majority of our Board of Directors and
a majority of our disinterested directors who are not employees of the company.
Page 67
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 other direct expenses relating to revenues.
We incurred a charge of $54,000 and $70,500 in 2009 and 2008, respectively,
for consulting services provided by a relative of our President and CEO.
CTT's Board of Directors is composed of five members (refer to Item 10,
Part III). Directors Evans, Hornidge, Howard, and Reali are considered to be
independent directors as defined by the NYSE Amex. Director Nano is not
considered an independent director, as he is an employee of the Company.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
INDEPENDENT PUBLIC ACCOUNTANTS
Mahoney Cohen & Company, CPA, P.C. ("Mahoney Cohen") are the independent
registered public accountants for the company. Pursuant to an asset purchase
agreement, our former independent public accounting firm, Mahoney Cohen &
Company, CPA, P.C. was acquired by the New York practice of Mayer Hoffman McCann
P.C ("MHM"), and the shareholders of Mahoney Cohen became shareholders of MHM.
Following its acquisition of Mahoney Cohen, MHM changed its name to MHM Mahoney
Cohen CPAs ("MHM Mahoney Cohen"), effective December 31, 2008.
Fees Billed by Principal Accountants - The following table presents fees
for professional services rendered by Mahoney Cohen and MHM Mahoney Cohen for
the years ended July 31, 2009 and 2008:
2009 2009 2009 2008
-------- -------- ---------- --------
MHM
Mahoney Mahoney Full Year Mahoney
Cohen Cohen Total Cohen
Audit fees $ 90,304 $ 30,000 $ 120,304 $142,299
Tax fees - 1,483 1,483 4,000
Audit related fees (1) 5,211 2,000 7,211 8,400
-------- -------- ---------- --------
TOTAL $ 95,515 $ 33,483 $ 128,998 $154,699
======== ======== ========== ========
(1) Fees for S-1 and S-8 review.
AUDIT COMMITTEE PRE-APPROVAL OF SERVICES OF PRINCIPAL ACCOUNTANTS
The Audit Committee has the sole authority and responsibility to select,
evaluate, determine the compensation of, and, where appropriate, replace the
independent auditor. After determining that providing the non-audit services is
compatible with maintaining the auditor's independence, the Audit Committee
pre-approves all audits and permitted non-audit services to be performed by the
independent auditor, except for de minimus amounts. If it is not practical for
the Audit Committee to meet to approve fees for permitted non-audit services,
the Audit Committee has authorized its chairman, currently Mr. Reali, to approve
them and to review such pre-approvals with the Audit Committee at its next
meeting.
Page 68
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of financial statements and schedules.
The following consolidated financial statements of Competitive
Technologies, Inc. and Subsidiaries are included herein by reference to the
pages listed in "Item 8. Financial Statements and Supplementary Data":
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of July 31, 2009 and 2008
Consolidated Statements of Operations for the years ended July 31,
2009, and 2008
Consolidated Statements of Changes in Shareholders' Interest for the
years ended July 31, 2009 and 2008
Consolidated Statements of Cash Flows for the years ended July 31, 2009 and
2008
Notes to Consolidated Financial Statements
(b) List of exhibits: See Exhibit Index immediately preceding exhibits.
Page 69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMPETITIVE TECHNOLOGIES, INC.
(the registrant)
By /s/ John B. Nano
-----------------
John B. Nano
Chairman, President and Chief Executive
Officer, Interim Chief Financial Officer, Director and Authorized Signer
Date: October 27, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title ) Date
- ---------------------------- ------------------------ - ----------------
)
/s/ Joel M. Evans, M.D. Director )
- ---------------------------- )
Joel M. Evans, M.D. )
)
)
/s/ Richard D. Hornidge, Jr. Director )
- ---------------------------- )
Richard D. Hornidge, Jr. )
)
)
/s/ Rustin Howard Director )
- ---------------------------- )
Rustin Howard )
)
)
Chairman, President, )
/s/ John B. Nano Chief Executive Officer, ) October 27, 2009
- ---------------------------- Interim Chief Financial )
John B. Nano Officer and Director )
)
)
)
/s/ William L. Reali Director )
- ---------------------------- )
William L. Reali )
)
Page 70
EXHIBIT INDEX
Exhibit
No. Description
- --- -----------
3.1 Unofficial restated certificate of incorporation of the registrant as
amended to date filed (on April 1, 1998) as Exhibit 4.1 to registrant's
Registration Statement on Form S-8, File Number 333-49095 and hereby
incorporated by reference.
3.2 By-laws of the registrant as amended effective October 14, 2005, filed (on
December 12, 2005) as Exhibit 3.2 to registrant's Quarterly Report on Form
10-Q for the quarterly period ended October 31, 2005, and hereby
incorporated by reference.
10.1* Registrant's Restated Key Employees' Stock Option Plan filed (on January
29, 2003) as Exhibit 4.3 to registrant's Registration Statement on Form
S-8, File Number 33-87756, and hereby incorporated by reference.
10.2* Registrant's Annual Incentive Plan filed (on November 25, 2005) as Exhibit
99.1 to registrant's Current Report on Form 8-K dated November 22, 2005,
and hereby incorporated by reference.
10.3* Registrant's 2000 Directors Stock Option Plan as amended January 24, 2003,
filed (on January 29, 2003) as Exhibit 4.4 to registrant's Registration
Statement on Form S-8, File Number 333-102798 and hereby incorporated by
reference.
10.4* Registrant's 1996 Directors' Stock Participation Plan as amended January
14, 2005, filed (on January 21, 2005) as Exhibit 10.2 to registrant's
Current Report on Form 8-K, and hereby incorporated by reference.
10.5* Registrant's 1997 Employees' Stock Option Plan as amended January 14,
2005, filed (on January 21, 2005) as Exhibit 4.3 to registrant's Current
Report on Form 8-K, and hereby incorporated by reference.
10.12 Lease agreement dated April 28, 2006, between 1375 Kings Highway/777
Commerce Drive Associates, LLC, and 14 Mamaroneck Avenue Reinvestment
Associates, LLC, and Competitive Technologies, Inc. filed (on June 9, 2006)
as Exhibit 10.27 to registrant's Quarterly Report on Form 10-Q for the
quarterly period ended April 30, 2006, and hereby incorporated by
reference.
10.13 Amendment to Lease made July 20, 2006 by and between 1375 Kings
Highway/777 Commerce Drive Associates, LLC, and 14 Mamaroneck Avenue
Reinvestment Associates, LLC, and Competitive Technologies, Inc., filed (on
October 30, 2006) as Exhibit 10.17 to registrant's Annual Report on Form
10-K for the year ended July 31, 2006, and hereby incorporated by
reference.
10.14 Employment Agreement dated February 2, 2007 between registrant and John B.
Nano, filed (on February 6, 2007) as Exhibit 10.1 to registrant's Current
Report on Form 8-K dated February 6, 2007, and hereby incorporated by
reference.
10.15 Stock Purchase Agreement dated April 17, 2007 between registrant and Betty
Rios Valencia, and Agrofrut E.U. filed on April 19, 2007 as Exhibit 10.1 to
registrant's Current Report on Form 8-K dated April 19, 2007, and hereby
incorporated by reference.
10.16 Second Amendment to Lease made July 20, 2006 by and between 1375 Kings
Highway/777 Commerce Drive Associates, LLC, and 14 Mamaroneck Avenue
Reinvestment Associates, LLC and Competitive Technologies, Inc. filed (on
October 30, 2007) as Exhibit 10.16 to
Page 71
registrant's Annual Report on Form 10-K for the year ended July 31, 2007,
and hereby incorporated by reference.
10.17 Common Stock Purchase Agreement between the registrant and Fusion Capital
Fund II, LLC dated July 22, 2008 filed (on July 25, 2008) as Exhibit 10.1
to registrant's Current Report on Form 8-K dated July 22, 2008, and hereby
incorporated by reference.
10.18 Registration Rights Agreement between the registrant and Fusion Capital
Fund II, LLC dated July 22, 2008 filed (on July 25, 2008) as Exhibit 10.2
to registrant's Current Report on Form 8-K dated July 22, 2008, and hereby
incorporated by reference.
10.19 Distribution Agreement between the registrant and Excel Life Sciences,
Inc. dated July 29, 2008 filed (on August 1, 2008) as Exhibit 10.1 to
registrant's Current Report on Form 8-K dated July 29, 2008, and hereby
incorporated by reference.
10.20 Distribution Agreement between the registrant and Life Episteme srl, dated
February 24, 2009 filed (on February 26, 2009) as Exhibit 10.1 to
registrant's Current Report on Form 8-K Dated February 26, 2009, and hereby
incorporated by reference.
10.21 Distribution Agreement between the registrant and Innovative Medical
Therapies, Inc. dated July 29, 2009 filed (on July 30, 2009) as Exhibit
10.1 to registrant's Current Report on Form 8-K dated July 30, 2009, and
hereby incorporated by reference.
21^ Subsidiaries of registrant.
31.1^ Certification of the Principal Executive and Interim Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule
13a-14(a) or Rule 15d-14(a)).
32.1+ Certification by the Principal Executive and Interim Chief Financial
Officer of Competitive Technologies, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
* Management Contract or Compensatory Plan
^ Filed herewith
+ Furnished herewith
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