SHAREHOLDERS' DEFICIENCY

6 Months Ended

Jun. 30, 2014

SHAREHOLDERS' DEFICIENCY [Abstract]

SHAREHOLDERS' DEFICIENCY

12. SHAREHOLDERS' DEFICIENCY

Stock Option Plan

On May 2, 2011 the Company adopted and executed the Employees' Directors' and Consultants Stock Option Plan (the "Plan"). During the six months ended June 30, 2014, the Company granted 42,500 options to non-employee directors which were fully vested upon issuance. During the six months ended June 30, 2013, the Company granted 50,000 options to non-employee directors which were fully vested upon issuance.

During the six months ended June 30, 2014, the Company granted 320,000 options to employees. 20% of the options vested upon issuance and the remaining options vest ratably over a four (4) year period.

During the six months ended June 30, 2013, the Company granted 1,000,000 stock options to its then CEO of which 200,000 vested immediately. Due to his subsequent resignation in September 2013, all options have since been cancelled. 

During the three months ended March 31, 2013 the Board of Directors extended the expiration dates for all options previously granted to one departing Board member in recognition for service.  The Company considered the extension as a modification to the option agreements recording incremental compensation expense of $16,920 for the three months ended March 31, 2013.

We estimated the fair value of each option on the grant date using a Black-Scholes option-pricing model with the following weighted average assumptions:

	Six-months  Ended			Six -months  Ended
	June 30,  2014			June 30,  2013
Dividend yield (1)		0.00	%		0.00	%
Expected volatility (2)		118.5-122.4	%		99.2 - 100.3	%
Risk-free interest rates (3)		1.19-1.72	%		0.63	%
Expected lives (2)		4.0-5.0 YEARS			2.0-4.0 YEARS

(1)	We have not paid cash dividends on our common stock since 1981, and currently do not have plans to pay or declare cash dividends. Consequently, we used an expected dividend rate of zero for the valuations.
(2)	Estimated based on our historical experience. Volatility was based on historical experience over a period equivalent to the expected life in years.
(3)	Based on the U.S. Treasury constant maturity interest rate with a term consistent with the expected life of the options granted.

During both the three and six months ended June 30, 2014, the Company recognized expense of $11,178 for stock options issued to directors and expense of $26,795 and $29,945, respectively, for stock options issued to employees.

During the three and six months ended June 30, 2013, the Company recognized expense of $0 and $14,250, respectively, for stock options issued to directors and expense of $17,200 and $97,467, respectively, for stock options issued to employees.

Preferred Stock

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

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

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

On December 15, 2010 the Company issued a $400,000 promissory note. The promissory note was scheduled to mature on December 31, 2012 with an annual interest rate of 5%.

On December 15, 2010, the Company's Board of Directors authorized the issuance of 750 shares of Series C Convertible Preferred Stock ($1,000 par value) with a 5% cumulative dividend to William R. Waters, Ltd. of Canada. On December 30, 2010, 750 shares were issued. The Company converted the above $400,000 promissory note into 400 shares and received cash of $350,000 for the remaining 350 shares.

Effective June 16, 2011, William R. Waters, Ltd. of Canada converted one-half (½) of its Series C Convertible Preferred Stock, or 375 shares, to 315,126 shares of common stock.

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

a) Dividend rights - The shares of Series C Convertible Preferred Stock accrue a 5% cumulative dividend on a quarterly basis and is payable on the last day of each fiscal quarter when declared by the Company's Board. As of June 30, 2014, dividends declared were $74,998, of which $4,675 and $9,298, respectively, were declared during the three and six months ended June 30, 2014 and $56,250 have not been paid and are shown in accrued and other liabilities at June 30, 2014.

b) Voting rights - Holders of these shares of Series C Convertible Preferred Stock shall have voting rights equivalent to 1,000 votes per $1,000 par value Series C Convertible Preferred share voted together with the shares of Common Stock

c) Liquidation rights - Upon any liquidation these Series C Convertible Preferred Stock shares shall be treated as equivalent to shares of Common stock to which they are convertible.

d) Redemption rights - The redemption rights were associated with the $750,000 that had been held in escrow by the Company in the event that the funds were released and returned to CTI.  However, the funds were withdrawn from escrow and paid out in accordance with the settlement agreement.  Therefore the redemption rights no longer apply to the remaining Series C Convertible Preferred Stock.

e) Conversion rights - Holder has right to convert each share of Series C Convertible Preferred Stock at any time into shares of the Company's common stock at a conversion price for each share of common stock equal to 85% of the lower of (a) the closing market price at the date of notice of conversion or (b) the mid-point of the last bid price and the last ask price on the date of the notice of conversion. The variable conversion feature creates an embedded derivative that was bifurcated from the Series C Convertible Preferred Stock on the date of issuance and was recorded at fair value. The derivative liability will be recorded at fair value on each reporting date with any change recorded in the Statement of Operations as an unrealized gain (loss) on derivative instrument.

On the date of conversion of the 375 shares of Series C Convertible Preferred Stock the Company calculated the value of the derivative liability to be $81,933. Upon conversion, the $81,933 derivative liability was reclassified to equity.

The Company recorded a convertible preferred stock derivative liability of $92,128 and $80,408, associated with the 375 shares of Series C Convertible Preferred Stock outstanding at June 30, 2014 and December 31, 2013, respectively.

The Company has classified the Series C Convertible Preferred Stock as a liability at June 30, 2014 and December 31, 2013 because the variable conversion feature may require the Company to settle the conversion in a variable number of its common shares.

Common Stock

During the quarter ended March 31, 2014, the Company did a private offering of its common stock and warrants, for consideration of $500,000. 2,500,000 shares of common stock were issued at a per share price of $0.20. The common stock holders were also issued warrants to purchase 1,250,000 shares of common stock. The warrants have an exercise price of $0.60 and a 3-year term. The warrants were recorded to additional paid-in-capital. 

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

During the three months ended March 31, 2014 and 2013, the Company issued 10,625 and 17,500 shares of its common stock to non-employee directors under its Director Compensation Plan. The Company recorded expense of $4,038 and $7,000 for director stock compensation expense in the three months ended March 31, 2014 and 2013. No shares were issued to non-employee directors during the three months ended June 30, 2014 and 2013.