10-Q 1 v031254_10q.htm Unassociated Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended October 31, 2005
 
OR

o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-8696


COMPETITIVE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
www.competitivetech.net

Delaware
 
36-2664428

(State or other jurisdiction of incorporation or organization)
 
 

(I.R.S. Employer Identification No.)
 
1960 Bronson Road
 
 
Fairfield, Connecticut
 
06824

(Address of principal executive offices)
 

(Zip code)

(203) 255-6044

(Registrant's telephone number, including area code)

N/A

Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act). Yes x No o

The number of shares of the registrant’s common stock outstanding as of December 5, 2005 was 7,545,521 shares.



COMPETITIVE TECHNOLOGIES, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q



 

PART I. FINANCIAL INFORMATION
Page No.
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
 
     
 
Condensed Consolidated Balance Sheets at October 31, 2005, and July 31, 2005
3
     
 
Condensed Consolidated Statements of Operations for the three months ended October 31, 2005 and 2004
4
     
 
Condensed Consolidated Statement of Comprehensive Loss and Changes in Shareholders’
Interest for the three months ended October 31, 2005
5
     
 
Condensed Consolidated Statements of Cash Flows for the three months ended October 31, 2005 and 2004
6
     
 
Notes to Condensed Consolidated Financial Statements
7 - 16
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
17 - 22
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
22
     
Item 4.
Controls and Procedures
23
 
PART II. OTHER INFORMATION
 
 
Item 1.
Legal Proceedings
23
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
23
     
Item 4.
Submission of Matters to a Vote of Security Holders
23
     
Item 6.
Exhibits
24
     
Signatures
 
25
 

Page 2

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements
 
COMPETITIVE TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
 
     
October 31,
   
July 31,
 
   
 2005
 
2005
 
   
 (Unaudited)
 
*
 
 ASSETS            
 Current assets:            
 Cash and cash equivalents
  $ 13,681,685   $ 14,279,547  
 Receivables
    3,252,395     4,086,241  
 Prepaid expenses and other current assets
    745,709     272,345  
Total current assets
    17,679,789     18,638,133  
               
 Non-current royalty receivable
    1,333,333      
 Equity securities
    502,506     558,299  
 Prepaid royalties
    75,000     75,000  
 Deferred equity financing costs, net
        96,227  
 Intangible assets, net
    33,796     38,571  
 Property and equipment, net
    47,402     34,863  
TOTAL ASSETS
  $ 19,671,826   $ 19,441,093  
               
 LIABILITIES AND SHAREHOLDERS' INTEREST
             
 Current liabilities:
             
 Accounts payable
  $ 430,686   $ 642,868  
 Accrued expenses and other liabilities
    3,850,161     4,690,344  
 Total current liabilities
    4,280,847     5,333,212  
               
 Non-current royalties payable
    800,000      
               
 Commitments and contingencies
             
 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, 7,503,893 and 7,326,749
             
 shares issued, respectively
    75,038     73,267  
 Capital in excess of par value
    32,135,493     31,285,496  
 Accumulated deficit
   
(17,377,179
)
 
(17,044,174
)
 Accumulated other comprehensive loss
   
(303,048
)
 
(267,383
)
 Total shareholders' interest
    14,590,979     14,107,881  
TOTAL LIABILITIES AND SHAREHOLDERS'
             
 INTEREST
  $ 19,671,826   $ 19,441,093  
 
See accompanying notes

* Balances were derived from the July 31, 2005 audited balance sheet.

Page 3

 
PART I. FINANCIAL INFORMATION (Continued)

COMPETITIVE TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
 
   
 Three months ended
 
   
October 31,
 
   
2005
 
2004
 
Revenues
         
Retained royalties
 
$
1,237,480
 
$
755,769
 
Royalty legal awards
   
   
815,492
 
Dividends received
   
   
679,149
 
Interest income
   
126,841
   
148,558
 
Other income
   
2,000
   
32,049
 
     
1,366,321
   
2,431,017
 
Expenses
             
Personnel and other direct expenses
             
 relating to revenues
   
889,182
   
1,023,739
 
General and administrative expenses
   
769,609
   
247,980
 
Patent enforcement expenses, net of
             
 reimbursements
   
40,535
   
170,713
 
     
1,699,326
   
1,442,432
 
Income (loss) before income taxes
   
(333,005
)
 
988,585
 
Provision for income taxes
   
   
20,760
 
Net income (loss)
 
$
(333,005
)
$
967,825
 
Net income (loss) per common share:
             
 Basic
 
$
(0.04
)
$
0.15
 
 Assuming dilution
 
$
(0.04
)
$
0.14
 
Weighted average number of common
             
shares outstanding:
             
 Basic
   
7,410,416
   
6,399,715
 
 Assuming dilution
   
7,410,416
   
6,700,832
 
 
     
 
See accompanying notes
Page 4



PART I. FINANCIAL INFORMATION (Continued)

COMPETITIVE TECHNOLOGIES, INC.
Condensed Consolidated Statement of Comprehensive Loss and Changes in Shareholders' Interest
For the three months ended October 31, 2005
(Unaudited)
 
   
Preferred Stock
 
Common Stock
         
Accumulated
     
   
Shares
             
Capital
     
other
 
Total
 
   
issued and
     
Shares
     
in excess of
 
Accumulated
 
comprehensive
 
Shareholders'
 
   
outstanding
 
Amount
 
issued
 
Amount
 
par value
 
Deficit
 
loss
 
Interest
 
Balance - July 31, 2005
   
2,427
 
$
60,675
   
7,326,749
 
$
73,267
 
$
31,285,496
 
$
(17,044,174
)
$
(267,383
)
$
14,107,881
 
 Comprehensive loss:
                                                 
 Net loss
   
   
   
   
   
   
(333,005
)
 
   
(333,005
)
 Net unrealized holding loss on
                                                 
 securities held
   
   
   
   
   
   
   
(325,420
)
 
(325,420
)
 Unrealized foreign currency
                                                 
translation adjustments
   
   
   
   
   
   
   
83,335
   
83,335
 
 Unrealized gain from reversal
                                                 
of sale restriction discount
   
   
   
   
   
   
   
206,420
   
206,420
 
 Comprehensive loss
   
   
   
   
   
   
(333,005
)
 
(35,665
)
 
(368,670
)
 Compensation expense on issuance
                                                 
of common stock options
   
   
   
   
   
50,287
   
   
   
50,287
 
 Exercise of common stock options
   
   
   
5,750
   
57
   
15,233
   
   
   
15,290
 
 Stock issued under 401(k) Plan
   
   
   
15,943
   
159
   
99,803
   
   
   
99,962
 
 Sales and issuances of stock in
                                                 
 equity financing
   
   
   
155,451
   
1,555
   
780,901
   
   
   
782,456
 
 Amortization of deferred equity
                                                 
 financing costs
   
   
   
   
   
(96,227
)
 
   
   
(96,227
)
Balance - October 31, 2005
   
2,427
 
$
60,675
   
7,503,893
 
$
75,038
 
$
32,135,493
 
$
(17,377,179
)
$
(303,048
)
$
14,590,979
 

See accompanying notes
 
Page 5



PART I. FINANCIAL INFORMATION (Continued)

COMPETITIVE TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
   
Three months ended
 
   
October 31,
 
   
2005
 
2004
 
Cash flows from operating activities:
             
Net income (loss)
 
$
(333,005
)
$
967,825
 
Noncash and other expenses (income)
             
 included in net income (loss):
             
Depreciation and amortization
   
9,896
   
9,014
 
Share-based compensation - stock options
   
50,287
   
 
Stock compensation accrued
   
43,750
   
43,777
 
Stock dividend
   
   
(679,149
)
Other
   
   
(17,701
)
(Increase) decrease in assets:
             
Receivables
   
619,617
   
(199,279
)
Prepaid expenses and other current assets
   
(196,196
)
 
38,441
 
Non-current receivable
   
(1,333,333
)
 
 
Increase (decrease) in liabilities:
             
Accounts payable and accrued expenses
             
and other liabilities
   
(1,038,964
)
 
1,704,590
 
Non-current royalties payable
   
800,000
   
 
Net cash provided by (used in) operating activities
   
(1,377,948
)
 
1,867,518
 
               
Cash flows from investing activities:
             
Purchases of property and equipment
   
(17,660
)
 
(21,370
)
Collection on Unilens receivable, net
   
   
154,619
 
Net cash provided by (used in) investing activities
   
(17,660
)
 
133,249
 
               
Cash flows from financing activities:
             
Proceeds from exercises of stock options
   
15,290
   
2,242
 
Proceeds from sales of common stock
   
782,456
   
350,007
 
Net cash provided by financing activities
   
797,746
   
352,249
 
               
Net increase (decrease) in cash and cash equivalents
   
(597,862
)
 
2,353,016
 
Cash and cash equivalents at beginning of period
   
14,279,547
   
4,309,680
 
Cash and cash equivalents at end of period
 
$
13,681,685
 
$
6,662,696
 
 
See accompanying notes

 
Page 6


PART I. FINANCIAL INFORMATION (Continued)

COMPETITIVE TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
1.  
Basis of Presentation

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

Competitive Technologies, Inc. (“CTT”) and its majority owned subsidiary (collectively, “we” or “us”) provide patent and technology licensing and commercialization services throughout the world (with concentrations in the U.S.A. and Asia) with respect to a broad range of life, electronic, physical, and nano (microscopic particles) science technologies originally invented by various individuals, corporations and universities. We are compensated for our services primarily by sharing in the license and royalty fees generated from the successful licensing of our clients’ technologies. The condensed consolidated financial statements include the accounts of CTT and its subsidiary. Intercompany accounts and transactions have been eliminated in consolidation.
 
We believe that we have made all adjustments, primarily normal and recurring adjustments, which are necessary to present the unaudited condensed consolidated financial statements fairly in conformity with accounting principles generally accepted in the United States of America. The results for the three months ended October 31, 2005, are not necessarily indicative of the results that can be expected for the full year.

You should read the interim unaudited condensed consolidated financial statements and notes thereto, as well as the accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations, in conjunction with our Annual Report on Form 10-K for the year ended July 31, 2005.
 
2.
Retained Royalties

Abbott Laboratories, Inc.

In December 2004, we granted Abbott Laboratories, Inc. (“Abbott”) a license to sell tests used to measure homocysteine levels. The license relieves Abbott’s customers from their obligation to pay us royalties on tests performed using the Abbott homocysteine assay. The term of the license is through July 2007, the expiration date of the patent, with certain limited exceptions.
 
Pursuant to the license, Abbott paid us a non-refundable and non-creditable (against future royalties) upfront license fee, and agreed to pay certain “Milestone Fees” (as defined in the license), and per test royalties on homocysteine assay sales in the U.S. after January 1, 2006. No per test royalties are payable from Abbott in calendar year 2005. In January 2005, upon receipt, we recorded the upfront license fee, and began accruing the Milestone Fees, our share of which aggregates to $1,600,000, and which will be paid to us in two equal installments of $800,000 on January 31, 2006 and 2007, as long as our patent is valid and enforceable. The present value of the Milestone Fees has been accrued in retained royalties during calendar 2005, and the difference between the present value and the amount due us has been recorded in interest income. During the three months ended October 31, 2005, we accrued $377,990, our share of the Milestone Fees, in retained royalties, and $22,010 in interest income, for a total of $400,000. From the inception of the license, we have accrued a gross total of $3,333,333 of Milestone Fees in receivables, $1,333,333 of which has been classified as long term.
 
Page 7

Other
 
Licenses granted in fiscal 2006 and 2005 relating to homocysteine testing generally provide for an upfront license fee and a royalty to be paid to us based on a fixed fee per test. The amount of the fixed fee is determined based on estimated volume.
 
3.  
Stock-Based Compensation

Effective August 1, 2005, we adopted Financial Accounting Standards Board Statement No. 123(R), “Share-Based Payment” (“FAS 123R”). FAS 123R establishes the accounting required for share-based compensation, and requires companies to measure and recognize compensation expense for all share-based payments at the grant date based on the fair value of the award, as defined in FAS 123R, and include such costs as an expense in their statements of operations over the requisite service (vesting) period. We have elected to adopt FAS 123R using a modified prospective application, whereby the provisions of the statement will apply 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 for which the requisite service is rendered after the date of adoption. Thus, we recognize as expense the fair value of stock options issued prior to August 1, 2005, but vesting after August 1, 2005. This expense is recognized over the remaining vesting period. In addition, compensation expense must be recognized for any awards modified, repurchased, or cancelled after the date of adoption. Under the modified prospective application, no restatement of previously issued results is required. We use the Black-Scholes option-pricing model to measure fair value. This is the same method we used in prior years for disclosure purposes.
 
Pursuant to our 1997 Employees’ Stock Option Plan, as amended (the “1997 Plan”), either incentive stock options or non-qualified options awards may be granted to employees. The stock options must be granted at exercise prices not less than 100% of the fair market value of our common stock at the grant date. The Compensation Committee or the Board of Directors determines vesting provisions when stock options are granted. Stock options granted under the 1997 Plan generally vest over three or four years. The maximum life of options granted under this plan is ten years after the grant date. We generally issue new shares of common stock to satisfy stock option exercises. For the three months ended October 31, 2005, we recognized $50,287 of compensation expense from stock options vesting during the quarter, without any associated income tax benefit. No compensation expense related to stock options granted was recognized during the three months ended October 31, 2004.
 

Page 8


The following assumptions were used to estimate the fair value of options granted during the three months ended October 31:
 
Black -Scholes Option Valuation Assumptions
 
2005
 
2004
 
           
Dividend yield (1)
   
0.0
%
 
0.0
%
Expected volatility (2)
   
76.0
%
 
76.0
%
Risk free interest rate (3)
   
3.9
%
 
3.6
%
Expected lives (in years) (2)
   
5.0
   
5.0
 
               

(1)
We have not paid cash dividends on our common stock since 1981, and we currently do not have any plans to pay or declare any cash dividends. Consequently, we used an expected dividend rate of zero for the valuations.
(2)
Estimated based on our historical experience. Volatility was based on historical experience over a period equivalent to the expected life in years.
(3)
Based on the U.S. Treasury constant maturity interest rate with a term consistent with the expected life of the options granted.
 
For options granted during the three months ended October 31, 2005, as required by FAS 123R, we estimated the impact of forfeitures based on our historical experience with previously granted stock options, and considered the impact of the forfeitures when determining the amount of expense to record for the stock options granted. For stock options issued prior to the adoption of FAS 123R, forfeitures are recognized when the stock option is actually forfeited. The weighted average fair values of options granted during the quarters ended October 31, 2005 and 2004, were $3.44 and $2.37 per option, respectively, estimated on the grant date using the Black-Scholes option-pricing model with the assumptions listed above.
 
A summary of option activity under all our plans as of October 31, 2005, and changes during the quarter then ended is presented below:

           
Weighted-
     
       
Weighted
 
Average
     
       
Average
 
Remaining
 
Aggregate
 
       
Exercise
 
Contractual
 
Intrinsic
 
Options
 
Shares
 
Price
 
Term
 
Value
 
                   
Outstanding at August 1, 2005
   
740,223
 
$
5.76
             
Granted
   
192,500
   
5.34
             
Exercised
   
(750
)
 
3.72
             
Outstanding at October 31, 2005
   
931,973
 
$
5.56
   
7.18
 
$
692,077
 
Exercisable at October 31, 2005
   
558,480
 
$
6.45
   
5.30
 
$
359,131
 
                           

The options granted during the three months ended October 31, 2005, were outstanding only a portion of the quarter, and thus the expense recognized for these options was only for the period that they were outstanding. The total intrinsic value of options exercised during the quarters ended October 31, 2005 and 2004, was $1,455 and $4,164, respectively. As of October 31, 2005, there was $725,479 of total unrecognized compensation cost related to non-vested outstanding stock options granted under the 1997 Plan. This cost is expected to be recognized over a weighted-average period of 1.9 years.
 
Page 9

Pursuant to our Directors Stock Option Plan, we grant each non-employee director 10,000 fully vested, non-qualified common stock options when the individual first is elected a director, and 10,000 more common stock options on the first business day of January thereafter, as long as the individual remains 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 the options granted under this plan is ten years from the grant date. Since these options are fully vested upon grant, the fair value of these options will be recorded as expense at the grant date.
 
At October 31, 2005, 1,440,098 shares of common stock were reserved for issuance under all our stock option plans, and 523,575 shares were available for future grants.
 
Prior to the adoption of FAS 123R, we accounted for our share-based employee compensation plans under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. If compensation cost for our stock-based compensation plans had been determined based on the fair value method (estimated using the Black-Scholes option pricing model) at the grant dates in accordance with Financial Accounting Standards Board Statement No. 123, “Accounting for Stock-Based Compensation,” our pro forma net income and earnings per share for the three months ended October 31, 2004, would have been as follows:

   
For the Three months
 
   
Ended October 31,
 
   
2004
 
Net income, as reported
 
$
967,825
 
    Deduct: Pro forma stock option
compensation expense for stock options
granted using a fair value method (1)
   
(96,725
)
Pro forma net income
 
$
871,100
 
         
Basic net income per common share:
       
As reported
 
$
0.15
 
Pro forma
 
$
0.14
 
         
Net income per common share,
assuming dilution:
       
As reported
 
$
0.14
 
Pro forma
 
$
0.13
 

(1)  Compensation expense was reduced for forfeitures as they occurred.


4.
Royalty Legal Awards

On August 5, 2004, the U.S. Court of Appeals for the Federal Circuit (“CAFC”) denied the petition of Laboratory Corporation of America Holdings d/b/a LabCorp (“LabCorp”), for a rehearing or a rehearing en banc (rehearing by the full CAFC) of a June 8, 2004 decision affirming a November 2002 court decision in favor of Metabolite Laboratories, Inc. (“MLI”) and us (collectively, the “Plaintiffs”). As a result of this decision, on August 16, 2004, the Plaintiffs received approximately $6.7 million. Our share of the $6.7 million payment was $920,552, and we recorded $815,492 in royalty legal awards and $105,060 in interest income during the prior year quarter ended October 31, 2004. The payment did not include attorneys’ fees or court costs previously awarded to the Plaintiffs that were under appeal with the court. On January 24, 2005, the CAFC issued a summary dismissal of LabCorp’s appeal of the court’s award of attorneys’ fees and court costs from the original case, and, on April 15, 2005, we announced that we had received payment from LabCorp for the attorneys’ fees and court costs. Our claim for additional attorneys’ fees and court costs related to the appeals process is still pending.
 
Page 10

On November 3, 2004, LabCorp filed a petition for a writ of certiorari with the U.S. Supreme Court (the “Court”) relating to the November 2002 decision. (A writ of certiorari is a petition requesting the Court to hear an appeal.) On February 28, 2005, we announced that the Court had invited the Solicitor General of the United States (the “SGO”) to file a brief in this case expressing its views on the single question of the patentability of method patents of this type. On August 26, 2005, the SGO issued its brief, recommending that the Court deny LabCorp’s petition. However, in November 2005, the Court granted LabCorp’s writ of certiorari and agreed to hear their appeal. A date for a hearing in front of the Court has not yet been set. If the Court ultimately rules against LabCorp’s appeal, then the case will be over. However, if the Court rules in favor of LabCorp’s appeal, and if the Court remands the case back to the District Court, and then if the original judgment is subsequently reversed, then LabCorp may attempt to recover amounts paid to the Plaintiffs, including royalties paid to us as part of a January 2003 stipulated court order (the “Stipulated Order”). (Pursuant to the Stipulated Order, the court had stayed execution of a monetary judgment and a permanent injunction that prevented LabCorp from performing homocysteine assays, and LabCorp had agreed to pay us a percentage of their homocysteine assay sales during their appeals process.) LabCorp’s ability to recover any amounts paid to the Plaintiffs would depend on the extent and reason for the reversal. From January 2003 through April 30, 2005, LabCorp paid us an aggregate of $1,930,355 under the Stipulated Order, including both our retained amounts and amounts paid or payable to our clients. We believe that the probability that LabCorp will recover any amounts paid is remote. The appeals process was considered to have ended in April 2005. The Stipulated Order expired April 30, 2005. Thus, since April 30, 2005, LabCorp has not paid us any royalties directly.


5.
Dividends Received and Comprehensive Loss

In October 2004, our investee, Melanotan Corporation (“MelanoTan”), paid its shareholders a dividend in the form of shares of common stock of EpiTan Limited (Australia) (“EpiTan”), MelanoTan’s investee. As a result, we received 1,252,346 shares of EpiTan common stock. EpiTan common stock is traded on the Australian Stock Exchange (quoted in Australian dollars) under the symbol EPT. As a condition to receiving the dividend, we had agreed not to sell, transfer or otherwise dispose of the shares before October 21, 2005. This restriction has lapsed and we now are free to sell, transfer and dispose of the shares.
 
We estimated the fair value of the EpiTan common stock received in the prior year using the closing price of the shares ($0.93 per share, Australian dollars) and the exchange rate for converting Australian dollars to U.S. dollars ($0.7289 Australian dollars to $1.00 U.S. dollar) on the date that MelanoTan’s board of directors approved the dividend. We then discounted the value of the shares using a 20% discount factor to recognize the estimated impact of the sale restriction and the risk associated with an investment in EpiTan stock, since EpiTan had minimal revenues and had incurred substantial accumulated net losses. We recorded the estimated value of the shares, $679,149, as dividend income during the three months ended October 31, 2004. This asset is included in equity securities and classified as a non-current asset since our current intention is to hold the shares long term. In June 2005 we received an additional dividend of 660,686 shares of EpiTan stock and valued the dividend at $146,533, in the same manner as the October 2004 dividend. In total, we received and now directly own 1,913,032 shares of EpiTan common stock, with a total initial value of $825,682. Our ownership percentage of EpiTan’s common stock is not significant.
 
Page 11

Unrealized market price and foreign exchange gains and losses relating to the EpiTan shares have been aggregated and included in accumulated other comprehensive loss in shareholders’ interest, since we believe that the decline in value of the shares is temporary. For the three months ended October 31, 2005, we recorded an unrealized loss on the decline in the market value of the stock of $345,548, and an unrealized foreign exchange gain of $83,335 on the value of the U.S. dollar compared to the Australian dollar. In addition, as a result of the lapse of the sale restriction, we also recorded an unrealized gain of $206,420 related to the reversal of the 20% discount on the original value of the shares received. In total, we recorded a net unrealized loss of $55,793 related to EpiTan during the three months ended October 31, 2005. For the three months ended October 31, 2004, we recorded an unrealized foreign exchange gain of $16,676.
 
We previously received 170,000 restricted shares of Palatin Technologies, Inc. (“Palatin”) common stock as part of a mediated settlement. Unrealized market price gains related to our retained portion of the shares are included in other comprehensive loss. For the three months ended October 31, 2005, we recorded a $20,128 unrealized gain on the market price of our share of the Palatin stock.
 
Comprehensive income (loss) was ($368,670) and $984,501, respectively, for the three months ended October 31, 2005 and 2004.


6.  
Net Income (Loss) Per Common Share

The following sets forth our computations of basic and diluted net income (loss) per common share.
 
   
For the three months ended October 31,
 
   
2005
 
2004
 
           
Denominator for basic net income (loss) per
common share, weighted average common
shares outstanding
   
7,410,416
   
6,399,715
 
               
Dilutive effect of warrants and employees’
and directors’ common stock options
   
   
301,117
 
 
             
Denominator for net income (loss) per
common share, assuming dilution
   
7,410,416
   
6,700,832
 

At October 31, 2005, all 931,973 outstanding options to purchase shares of common stock were excluded from the computation of net income (loss) per common share, assuming dilution, because they were anti-dilutive. At October 31, 2004, stock options and warrants to purchase 578,278 shares of common stock were outstanding but were not included in the computation of net income (loss) per share because the exercise prices were greater than the weighted average share prices for the quarter, making them anti-dilutive (total options and warrants outstanding were 1,384,182).
 
Page 12


7.  
Common Stock Sales Pursuant to Equity Financing

Pursuant to our February 2004 equity financing agreement with Fusion Capital Fund II (“Fusion Capital”), we sold and issued the following shares to Fusion Capital during the three months ended October 31, 2005:
 
           
Commitment
     
   
Cash
 
Shares
 
Shares
 
Total
 
   
Received
 
Sold
 
Issued
 
Shares
 
                   
Three months ended October 31, 2005
 
$
782,456
   
149,908
   
5,543
   
155,451
 

We are using the proceeds for general working capital needs. The aggregate proceeds received from sales of common stock to Fusion Capital pursuant to the equity financing agreement from the date of inception through October 31, 2005, were $3,499,998. Costs incurred related to the financing were capitalized and amortized against capital in excess of par value on a pro-rata basis based upon the ratio of the proceeds received compared to our estimate of the total proceeds to be received over the life of the equity financing agreement. Previously, we had estimated that we would sell a total of $3.5 million of common stock to Fusion Capital pursuant to the equity financing agreement and, accordingly, we amortized $96,227 of deferred equity financing costs against capital in excess of par value during the three months ended October 31, 2005, which fully amortized the deferred equity financing costs. Subsequently, we began selling more common stock to Fusion Capital, and sold and issued 47,773 shares to them through December 5, 2005, for proceeds of $217,492. No further amortization of the deferred financing costs occurred since the balance of the costs had been fully amortized.
 
8.
Receivables

Receivables consist of the following:
 
   
October 31,
 
July 31,
 
   
2005
 
2005
 
           
Royalties
 
$
2,901,654
 
$
3,836,857
 
Receivables from insurance carrier
   
269,840
   
191,568
 
Other
   
80,901
   
57,816
 
Receivables
 
$
3,252,395
 
$
4,086,241
 
 

Page 13


9.  
Accrued expenses and other liabilities

Accrued expenses and other liabilities consist of the following:
 
   
October 31,
 
July 31,
 
   
2005
 
2005
 
           
Accrued royalties payable
 
$
3,308,439
 
$
2,793,083
 
Accrued compensation
   
198,687
   
1,616,522
 
Accrued professional fees
   
202,485
   
177,605
 
Accrued other
   
140,550
   
103,134
 
Accrued expenses and other liabilities
 
$
3,850,161
 
$
4,690,344
 

The increase in accrued royalties payable since July 31, 2005 is the result of increased royalties from new homocysteine licenses collected on behalf of our clients. The net decrease in accrued compensation is due principally to the payment of fiscal 2005 bonus and commission awards.
 
10.  
Contingencies
 
Employment matters
 
On February 2, 2005, the Occupational Safety and Health Administration ("OSHA") issued a finding that there was probable cause to believe that CTT had violated Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, 18 U.S.C. 1514A (the “Sarbanes-Oxley Act”) by terminating Wil Jacques and Scott Bechtel in June 2003. Based on the finding, OSHA ordered that the complainants be reinstated and that CTT pay damages totaling approximately $827,000. Jacques and Bechtel had contended that they were improperly terminated for raising concerns about financial reporting. CTT contended that Jacques and Bechtel did not raise protected concerns and were terminated for lawful, non-discriminatory reasons, that OSHA failed to fairly investigate and consider all relevant facts, and that the conclusions drawn by OSHA were legally erroneous. CTT denied that it was liable to the complainants in any amount.
 
In accordance with law and regulation, in February 2005, we filed timely objections and requested a de novo hearing before an Administrative Law Judge (“ALJ”) of the U.S. Department of Labor (“DOL”). The hearing was held in May 2005. On May 18, 2005, CTT and plaintiff Jacques entered into a memorandum of understanding, which later was approved by the ALJ, whereby all claims against CTT by Jacques were resolved.
 
On October 6, 2005, the findings of the ALJ of the DOL were issued, in which all of the claims of Mr. Bechtel and OSHA’s decision were dismissed, and further, that the issue of damages was not relevant since the plaintiff had failed to carry his burden of proof. The plaintiff had ten business days in which to file an appeal, and did so with the DOL on October 19, 2005. The motion for appeal was granted. Subsequently, Mr. Bechtel filed a separate complaint with OSHA alleging that CTT violated Section 806 of the Sarbanes-Oxley Act in connection with his reinstatement. We filed a response and a request for dismissal of this complaint on November 16, 2005.
 
On August 10, 2005, we received notice that John B. Nano, our former President and Chief Executive Officer, had filed a complaint in the Superior Court in the Judicial District of Stamford, Connecticut seeking the pre-judgment remedy of attachment. In his complaint Mr. Nano seeks to attach one of our bank accounts in the amount of $1.4 million to preserve his ability to collect should he succeed on his claims that CTT allegedly breached his employment contract because it denied him certain severance benefits when it terminated him on June 14, 2005. Mr. Nano also claims, in the alternative, that CTT violated a proposed but unexecuted and undelivered separation agreement and general release which it sought to negotiate with him at the time of his departure. Mr. Nano claims in his complaint that CTT withdrew the proposed agreement after he communicated his acceptance to the Chairman of our Board of Directors. CTT has opposed Mr. Nano’s application for a prejudgment remedy, and denies and will vigorously defend the allegations in the suit. Hearings on the motion were held in November 2005, and post hearing briefs will be scheduled in January 2006.
 
Page 14

On September 14, 2005, we announced that we had received notice that Mr. Nano also had filed a complaint with OSHA, alleging a violation of Section 806 of the Sarbanes-Oxley Act by CTT in connection with the termination of his employment. We believe that the complaint is totally without merit. We filed an answer to the OSHA inquiry on October 3, 2005. Further action on this matter is pending OSHA’s review of the merits of the claim.
 
On December 7, 2005, we filed a complaint in the Superior Court in the Judicial District of Stamford, Connecticut against Mr. Nano for monetary and punitive damages alleging breach of contract, breach of fiduciary duty, statutory theft of confidential information, and other claims, including a request for an injunction preventing Mr. Nano from competing with CTT with products and business contacts originally coming to Mr. Nano’s attention through his employment with CTT. Further action on this matter is pending.
 
Palatin Technologies, Inc.
 
On September 14, 2005, we filed a complaint alleging breach of contract against Palatin in the Superior Court, Judicial District of Fairfield at Bridgeport, Connecticut, seeking monetary damages, interest, attorneys’ fees, court costs, punitive damages, and other remuneration at the option of the court. On November 22, 2005, Palatin filed a motion for summary judgment seeking a dismissal of our complaint, and monetary damages, including reimbursement of their legal fees, as sanctions against us for filing the original complaint. Further action in this case is pending.
 
The alleged breach of contract relates to a mediated settlement agreement with Palatin signed on June 17, 2005. Pursuant to the settlement, Palatin paid us $1,700,000, and further agreed to issue to us promptly 170,000 shares of its unrestricted common stock. Palatin issued restricted shares to us that were not registered for resale and thus we are restricted from selling, transferring or otherwise disposing of the shares, which was not in accordance with the settlement. As a result of Palatin’s failure to honor all the terms of the June 17, 2005 settlement, we filed the complaint to obtain unrestricted shares, damages, and to recover our enforcement costs.
 
The settlement was the result of a mediation of a prior dispute whereby on October 27, 2004, we had demanded arbitration, as provided for in a license between us and Palatin, due to our belief that Palatin was in material breach of their license agreement with us for their exclusive use of our Technology in developing their experimental therapeutic treatment for male and female sexual dysfunction. Pursuant to the terms of our license, we are entitled to receive 20% of any sublicense fee that Palatin receives. On August 13, 2004, Palatin announced that they had granted a co-exclusive license to King Pharmaceuticals, Inc. (“King”), included in a Collaborative Development and Marketing Agreement between Palatin and King. On August 18, 2004, Palatin announced that they had received an initial $20 million from King, but did not submit any funds to us, which caused us to notify Palatin that they were in breach.
 
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We believe that the mediation settlement entered into by CTT and Palatin referred only to the disposition of this particular $20 million sublicensing fee received by Palatin from King, and did not pertain to any future milestone payments, or to any other future payments to be made by King to Palatin that may be covered under Palatin’s license with us. However, Palatin has made statements in their public filings that this agreement released them from any other obligations to us relating to future payments received from King. We disagree with their statements, and reserve our rights under the original license granted to Palatin.
 
Carolina Liquid Chemistries Corporation
 
On August 29, 2005, we filed a complaint alleging infringement of our patent covering homocysteine assays against Carolina Liquid Chemistries Corporation (“Carolina Liquid”) in the United States District Court for the District of Colorado, 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, and has requested a change of venue to the California federal court system. Further action in this case is pending.
 
Federal Insurance Company
 
Effective October 13, 2004, Federal Insurance Company (“Federal”) agreed to pay us $167,500 to reimburse us for prior costs incurred and acknowledged that the deductible under our insurance policy was deemed satisfied for purposes of a civil suit filed against CTT by the Securities and Exchange Commission (“SEC”). We recorded the payment as a reduction of litigation expenses, which are included in general and administrative expenses, in the prior year quarter ended October 31, 2004. In addition, on September 15, 2004, the Chubb Group of Insurance Companies, on behalf of Federal, agreed to accept coverage for losses, including defense costs, as a result of the SEC’s civil suit, according to the terms of the policy. Accordingly, we have not recorded any significant costs in the current fiscal year relating to the SEC civil suit.
 
Other
 
We also are a party to other legal actions and proceedings for which we cannot predict the final outcomes. Since we are unable to estimate the legal expenses or the loss we may incur or the possible damages we may recover in these actions, if any, we have not recorded any potential judgment proceeds in our financial statements to date. We record expenses in connection with these actions as they are 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 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.
 
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements

Certain statements about our future expectations, including development and regulatory plans, and all other statements in this Quarterly Report on Form 10-Q, other than historical facts, are “forward-looking statements” within the meaning of applicable Federal Securities Laws, and are not guarantees of future performance. If and when used in this Form 10-Q, the words “anticipate,”  “believe,”  “intend,”  “plan,”  “expect,”  “estimate,”  “approximate,” and similar expressions, as they relate to us or our business or management, are intended to identify such forward-looking statements. These statements involve risks and uncertainties related to market acceptance of and competition for our licensed technologies, growth strategies, operating performance, industry trends, and other risks and uncertainties inherent in our business, including those set forth in Item 7 under the caption “Risk Factors,” in our Annual Report on Form 10-K for the year ended July 31, 2005, filed with the Securities and Exchange Commission (“SEC”) on October 13, 2005, and other factors that may be described in our 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

We are a full service technology transfer and licensing provider. We provide technology transfer, selling and licensing services focused on the technology needs of our customers, matching those requirements with commercially viable technology solutions, bridging the gap between market demand and raw innovation. We develop relationships with universities, companies, inventors and patent or intellectual property holders to obtain the rights or a license to their intellectual property rights, principally patents and inventions (collectively, the “Technology”), and they become our clients, for whom we find markets to sell or further develop their Technology. We also develop relationships with those who have a need or use for Technologies, and they become our customers, usually through a license or sublicense. Our goal is to maximize the value of intellectual assets for the benefit of our clients, customers and shareholders.
 
We earn revenues primarily from licensing our clients’ and our own Technologies to our customers (licensees). Our customers pay us royalties based on their use of each Technology, and we share the fees with our clients. We determine the amount of royalty revenue to record when we can estimate the amount of royalties we have earned for a period, which usually occurs when we receive periodic royalty reports from our customers listing their sales of licensed products and the royalties we earned in the period. We receive these reports monthly, quarterly, or semi-annually. Since reports are not received on the same frequency, revenues will fluctuate from one quarter to another. In addition, revenues will fluctuate from quarter to quarter due to normal fluctuations in revenues of our customers, the granting of new licenses and the expiration of existing licenses, as in the normal course of our business, patents expire and revenues generated one year may not recur in the following year.
 
For the three months ended October 31, 2005, we had a concentration of revenues derived from our homocysteine assay Technology, on which the patent expires in July 2007. We believe that we currently have licenses with the most significant distributors and laboratories in the United States that sell and/or perform tests used to measure homocysteine levels.
 
Because we have rounded all amounts in this Item 2 to the nearest thousand dollars, certain amounts may not total precisely. In addition, all periods discussed in this Item 2 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).

Page 17

Results of Operations - Three Months Ended October 31, 2005 (First Quarter 2006) vs. Three Months Ended October 31, 2004 (First Quarter 2005)

Summary of Results

Net loss for the first quarter 2006 was $333,000, or $0.04 per share, compared to net income of $968,000, or $0.14 per diluted share, for the first quarter 2005, a decrease of $1,301,000, or $0.18 per diluted share. As explained below, the decrease in net income principally is due to a decrease in royalty legal awards and dividends received.

Revenues

In the first quarter 2006, total revenues were $1,366,000, compared to $2,431,000 for the first quarter 2005, a decrease of $1,065,000, or 44%.
 
Retained royalties for the first quarter 2006 were $1,237,000, which was $481,000, or 64% higher than the $756,000 of retained royalties reported in the first quarter 2005. The following compares retained royalty revenues by Technology in the first quarter 2006 with the first quarter 2005.

   
For the three months ended October 31,
 
   
 
2005
 
 
2004
 
Increase
(Decrease)
 
% Increase
(Decrease)
 
Homocysteine assay
 
$
1,080,000
 
$
675,000
 
$
405,000
   
 60%
 
All other Technologies
   
157,000
   
81,000
   
76,000
   
 94%
 
 Total retained royalties
 
$
1,237,000
 
$
756,000
 
$
481,000
   
 64%
 

The increase in revenues from the homocysteine assay was due principally to royalties earned on new licenses granted in fiscal 2005 (principally subsequent to the first quarter), including Abbott Laboratories (“Abbott”), Bayer Corporation, Dade Behring, Inc., and Beckman Coulter. As a result, we received royalties in the first quarter 2006 from the new licenses where we did not receive any royalties in 2005. The increase in royalties in the first quarter 2006 compared to the prior year from all other Technologies principally is due to an upfront license fee received in the first quarter 2006 related to our nanotechnology bone biomaterial Technology.
 
Approximately 87% of our retained royalties for the first quarter 2006, was from the homocysteine assay Technology, on which the patent expires in July 2007. We continue to seek licenses to new Technologies to mitigate this concentration of revenues, to replace revenues from expiring licenses and to provide future revenues.
 
Royalty legal awards of $815,000 in the first quarter 2005, were from our share of an award received from Laboratory Corporation of America Holdings d/b/a LabCorp (“LabCorp”) as a result of its unsuccessful appeal of a decision in our favor. In addition to the award, we received $105,000 of interest income. The U.S. Supreme Court has agreed to hear LabCorp’s appeal relating to this case - see Part II, Item 1., “Legal Proceedings.” There were no legal awards in the first quarter 2006.
 
Dividends received of $679,000 in the first quarter 2005, was from our receipt of a dividend from our investee, Melanotan Corporation (“MelanoTan”). There were no dividends received in the first quarter 2006. In October 2004, MelanoTan paid its shareholders a dividend in the form of shares of common stock of EpiTan Limited (Australia) (“EpiTan”), MelanoTan’s investee. As a result, we received 1,252,346 shares of EpiTan common stock. Previously, we had licensed our rights to a sunless tanning Technology to MelanoTan and MelanoTan sublicensed the rights to EpiTan. MelanoTan also had received shares of EpiTan. EpiTan common stock is traded on the Australian Stock Exchange (quoted in Australian dollars) under the symbol EPT.
 
Page 18

Interest income in the first quarter 2006, decreased $22,000 compared to the first quarter 2005, principally due to the fact that the first quarter 2005 includes $105,000 of interest income from the LabCorp litigation award. Excluding this item, interest income is higher than in the prior year due to significantly higher average cash balances as compared with the first quarter 2005, and higher interest rates. In addition, first quarter 2006 includes approximately $22,000 of imputed interest related to a long term receivable due from Abbott that will be paid in January 2007.
 
Expenses
 
For the three months ended October 31,
 
   
 
2005
 
 
2004
 
Increase
(Decrease)
 
% Increase
(Decrease)
 
Personnel and other direct expenses
relating to revenues
 
$
889,000
 
$
1,024,000
 
$
(135,000
)
 
(13
)%
General and administrative expenses
   
770,000
   
248,000
   
522,000
   
211
%
Patent enforcement expenses,
net of reimbursements
   
40,000
   
170,000
   
(130,000
)
 
(77
)%
 Total expenses
 
$
1,699,000
 
$
1,442,000
 
$
257,000
   
18
%

Personnel and other direct expenses relating to revenues decreased due to a combination of several factors. Personnel expense for the first quarter 2006 decreased a net of $44,000. This was due principally to a $97,000 decrease in salaries and incentive compensation expense, resulting from fewer full-time employees in 2006 compared to 2005, partially offset by $50,000 of compensation expense related to stock options vesting in the quarter and recognized as a result of the adoption of Financial Accounting Standards Board Statement No. 123(R), “Share-Based Payment” (“FAS 123R”) effective August 1, 2005. (There was no such charge in the first quarter 2005). Other direct expenses decreased $44,000 due to costs incurred in the prior year in connection with collecting back royalties from a royalty audit, and $32,000 due to a one time charge incurred in the prior year for technical services to support licensing a technology (which costs are recoverable partially from future licensing revenue).
 
General and administrative expenses increased due to several factors. We incurred $181,000 in legal costs in the first quarter 2006 related to our defense of two complaints filed against CTT by our former President and Chief Executive Officer (see Part II, Item 1., “Legal Proceedings”). Directors’ fees and expenses increased $78,000 due to an increase in the annual premium for our directors’ and officers’ liability insurance, an increase in directors fees due to an increase in the number of meetings held, and an increase in the annual stipend paid to the Chairman of our Board of Directors to recognize the additional responsibilities and time demands of the position. In addition, we incurred $54,000 of legal costs associated with a complaint previously filed against us by two former employees (see Part II, Item 1., “Legal Proceedings”). The first quarter 2005 also included a $168,000 cost reduction as a result of a payment received from our directors’ and officers’ liability insurance carrier as settlement of our claim for reimbursement of amounts incurred in connection with an investigation by the Securities and Exchange Commission.
 
Page 19


Patent enforcement expenses, net of reimbursements, decreased in the first quarter 2006 compared to the first quarter 2005, due to less activity in the current year related to patent infringement lawsuits, as most of our cases were settled favorably in the prior year. The level of patent enforcement expenses relates to our legal strategies and varies depending on the stage of the litigation.
 
Provision for income taxes

In 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. Thus, we were able to utilize a portion of our NOLs against our regular federal and state taxable income, effectively eliminating our regular income tax liabilities for fiscal 2005, and we will be able to utilize our NOLs against any liabilities that we may incur for fiscal 2006. However, we still would be subject to the federal alternative minimum tax (“AMT”), where we are limited to using 90% of our NOL against income. We did not record a provision in the first quarter 2006 due to the loss incurred during the period. The prior year provision consisted solely of our estimated AMT liability.
 
Financial Condition and Liquidity

Our liquidity requirements arise principally from our working capital needs, including funds needed to find, obtain and license new Technologies, and to protect and enforce our intellectual property rights, if necessary. We fund our liquidity requirements with a combination of cash flows from operations, including royalty legal awards, and cash on hand. In addition, we have the ability to fund our requirements through sales of common stock pursuant to an equity financing arrangement (see below). At October 31, 2005, we had no outstanding debt or credit facility.
 
Cash and cash equivalents consist of demand deposits and highly liquid, interest earning investments with maturities when purchased of three months or less, including overnight bank deposits and money market funds. We carry cash equivalents at cost, which approximates fair value.
 
At October 31, 2005, cash and cash equivalents were $13,682,000, compared to $14,280,000 at July 31, 2005. Cash used in operating activities during the three months ended October 31, 2005, was $1,378,000, compared to cash provided by operations of $1,868,000 during the same period of the prior year. The decrease in cash from operating activities in the current period compared to the prior year period was due principally to a net loss experienced in the current quarter compared to net income in the same period of the prior year, and the payment of fiscal 2005 annual incentive compensation awards during the current quarter. Cash used in investing activities in the current quarter was $18,000, compared to cash provided by investing activities of $133,000 in the same period of the prior year. In the prior year cash was provided by a partial collection of an outstanding receivable balance. Cash provided by financing activities in the current year was $798,000, compared to $352,000 provided in the prior year. The increase was due principally to an increase in the number of shares sold to Fusion Capital Fund II, LLC (“Fusion Capital”) (see below).
 
In addition to fluctuations in the amounts of royalties and our clients’ shares of royalty settlements and awards, changes in royalties receivable and payable reflect our normal cycle of royalty collections and payments, and fluctuate depending on when royalty receipts and payments are due under our agreements with clients and customers.
 
Page 20


Funding and capital requirements

Equity Financing

In February 2004, we entered into an equity financing agreement with Fusion Capital, pursuant to which we can sell to Fusion Capital up to $5 million of our common stock, at our option. During the three months ended October 31, 2005, we sold $782,000 of common stock to Fusion Capital. We will use the proceeds for general working capital needs. The aggregate proceeds from inception through October 31, 2005,  from sales to Fusion Capital pursuant to the equity financing agreement are approximately $3,500,000.  From November 1, 2005 through December 5, 2005 we sold and issued 47,773 shares of common stock to Fusion Capital for $217,492. We have the ability to sell up to $5 million of our common stock to Fusion Capital, however, we may or may not sell the entire $5 million of our common stock to them. In addition, we have the option of entering into another equity financing agreement with Fusion Capital for an additional $5 million upon termination of the current agreement.

Income taxes

We currently have the benefit of using a portion of our accumulated NOLs to eliminate any regular federal and state income tax liabilities that we may incur for fiscal 2006. If this occurs, we expect that we will be liable to pay only the federal AMT for fiscal 2006. The rate that we would pay for the AMT liability is much less than if we had to pay income taxes at statutory income tax rates. 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 have sufficient income to utilize the benefit of the remainder of our NOLs.

Capital requirements

We are investing funds in exploring new business opportunities, including expanding our marketing capabilities on a more global basis, searching for new sources of Technologies, researching potential acquisition candidates in order to grow our business and increase shareholder value, and adding to our commercialization action team to accomplish our goals. We expect this trend to continue.

General

The amounts and timing of our future cash requirements will depend on many factors, including the results of our operations and marketing efforts, the results and costs of legal proceedings, and our equity financing. To sustain profitability, we must license Technologies with sufficient current and long-term revenue streams, and continually add new licenses. However, obtaining rights to new Technologies, granting rights to licensees, enforcing intellectual property rights, and collecting royalty revenues are subject to many factors beyond our control and/or that we cannot currently anticipate. Although there can be no assurance that we will be successful in our efforts, we believe that the combination of our cash on hand, revenues from executing our strategic plan, and the ability to raise funds from sales of our common stock pursuant to our equity financing agreement will be sufficient to meet our current and anticipated operating cash requirements for at least the next year.

Contingencies

We are a party to several legal actions and proceedings, both as a plaintiff and as a defendant, for which we cannot predict the final outcomes. These matters have been detailed herein and in prior filings with the SEC. Depending upon the amount and timing, an unfavorable resolution of any or all matters where we are a defendant and/or our incurrence of significant legal fees and other costs to defend or prosecute any of these actions and proceedings may have a material adverse effect on our consolidated financial position, results of operations or cash flows in a particular period.

Page 21

Other matters

We believe that we carry adequate liability insurance, directors’ and officers’ insurance, casualty insurance (for owned or leased tangible assets), and other insurance to cover us against potential claims that occur in the normal course of our business.

Critical Accounting Estimates

We account for stock-based compensation in accordance with FAS 123(R). Pursuant to the fair value recognition provisions of this statement, 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. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.
 
There have been no other significant changes in our accounting estimates described under the caption “Critical Accounting Estimates,” included in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended July 31, 2005.
 
Related Party Transactions

Our board of directors has determined that when a director's services are outside the normal duties of a director, we should compensate the director at the rate of $1,000 per day, plus expenses (which is the same amount that we pay a director for attending a one-day board meeting).

During the three months ended October 31, 2005, we incurred $1,147 of costs, including expenses, (principally travel, reported in personnel and other direct expenses relating to revenues) related to consulting services provided by one of our directors.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk

We do not have any significant market risk to the valuation of our assets other than risks related to our common stock holdings of EpiTan and Palatin Technologies, Inc. ("Palatin") common stock. The value of the stock is subject to market fluctuations in the per share price of the stock as well as foreign currency fluctuations relating to the EpiTan shares, since EpiTan common stock is traded on the Australian Stock Exchange and the price per share of the stock is quoted in Australian dollars. During the three months ended October 31, 2005, the market value of the EpiTan shares decreased by $345,000, while the exchange rate changed in our favor by $83,000. In addition, we reversed the discount originally recorded upon receipt of the EpiTan shares due to the lapse of the sales restriction, resulting in an unrealized gain of $206,000. The net aggregate unrealized loss on the EpiTan shares for the three months ended October 31, 2005, was $56,000. Partially offsetting this loss, the market value of the Palatin shares increased $20,000 during the quarter. The total combined net unrealized loss for the three months ended October 31, 2005 was $36,000.
 
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Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”), Rules 13a-15(e) and 15d-15(e)) as of October 31, 2005. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed under the Exchange Act is recorded, processed, summarized, and reported as specified in the SEC’s rules and forms. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 31, 2005.

(b) Changes in Internal Control over Financial Reporting

There were no significant changes in our internal control over financial reporting during the quarter ended October 31, 2005, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
PART II - OTHER INFORMATION

Item 1. Legal Proceedings

See Notes 4 and 10 to the accompanying unaudited condensed consolidated financial statements in Part I of this Quarterly Report on Form 10-Q.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table lists sales and issuances of our common stock to Fusion Capital during the three months ended October 31, 2005, pursuant to the $5 million equity financing arrangement with Fusion Capital as described in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We issued all of these securities without registration in reliance on an exemption under Section 4(2) of the Securities Act of 1933 because we made the offers and sales in private placements.
 
 
Month
 
Number of
shares sold
and issued
 
 
Total cash
received
 
           
August 2005
   
22,284
 
$
104,998
 
September 2005
   
106,245
   
530,001
 
October 2005
   
26,922
   
147,457
 
     
155,451
 
$
782,456
 
 
Item 4. Submission of Matters to a Vote of Security Holders

None

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Item 6. Exhibits
 

3.2
By-laws of the registrant as amended effective October 14, 2005.
   
10.1*
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 25, 2005, and hereby incorporated by reference.
   
10.22*
Amended and Restated Employment Agreement by and between registrant and Donald J. Freed effective October 1, 2005, filed (on October 13, 2005) as Exhibit 10.22 to registrant’s Annual Report on Form 10-K for the year ended July 31, 2005, and hereby incorporated by reference.
   
31.1
Certification by the Principal Executive Officer of Competitive Technologies, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).
   
31.2
Certification by the Principal Financial Officer of Competitive Technologies, Inc. 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 Officer of Competitive Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) (furnished herewith).
   
32.2
Certification by the Principal Financial Officer of Competitive Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) (furnished herewith).
   
 
* Management contract or compensatory plan

[Signature page follows]


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
     
 
COMPETITIVE TECHNOLOGIES, INC.
(the registrant)
 
 
 
 
 
 
  By:   /s/ D.J. Freed, Ph.D.
Date: December 12, 2005
Donald J. Freed
President, Chief Executive
Officer and Authorized Signer
   
 
     
 
COMPETITIVE TECHNOLOGIES, INC.
(the registrant)
 
 
 
 
 
 
  By:   /s/ Michael D. Davidson
Date: December 12, 2005
Michael D. Davidson
Vice President, Chief Financial Officer,
Chief Accounting Officer
and Authorized Signer
   
 
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INDEX TO EXHIBITS
 
Exhibit No. Description
3.2
By-laws of the registrant as amended effective October 14, 2005.
   
10.1*
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 25, 2005, and hereby incorporated by reference.
   
10.22*
Amended and Restated Employment Agreement by and between registrant and Donald J. Freed effective October 1, 2005, filed (on October 13, 2005) as Exhibit 10.22 to registrant’s Annual Report on Form 10-K for the year ended July 31, 2005, and hereby incorporated by reference.
   
31.1
Certification by the Principal Executive Officer of Competitive Technologies, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).
   
31.2
Certification by the Principal Financial Officer of Competitive Technologies, Inc. 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 Officer of Competitive Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) (furnished herewith).
   
32.2
Certification by the Principal Financial Officer of Competitive Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) (furnished herewith).
 
 
Management contract or compensatory plan
 
 

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