NOTES PAYABLE

9 Months Ended

Sep. 30, 2013

Debt Disclosure [Abstract]

NOTES PAYABLE

12.           NOTES PAYABLE

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

2013 (through September 30, 2013)	$	1,188,000
2012		1,210,000
2011		100,000
Total	$	2,498,000

The proceeds from these notes were used for general corporate purposes.  These notes have been extended several times.  A conversion feature was added to the Notes when they were extended, which allows for conversion of the eligible principal amounts to common stock at any time after the six month anniversary of the effective date –the date the funds are received – at  a rate of $1.05 per share.  Additional terms have been added to all Notes to include additional interest payments to all Notes if extended beyond their original maturity dates and to provide the lender with a security interest in unencumbered inventory and intangible assets of the Company other than proceeds relating to the Calmare device and accounts receivable.  The full amount of principal and 6.00% simple interest per annum are now due in the quarter ended December 31, 2013.

A total of $505,000 of the aforementioned notes issued between December 1, 2012 and March 31, 2013 fall under the LPA with ASC Recap, and are expected to be repaid using the process as described in Note 10.  Because there can be no assurance that CTI will be successful in completing this process, the Company retains ultimate responsibility for this debt, until fully paid down.  As a result, CTI continues to accrue interest on these notes and they remain convertible as described above.

In March 2012, the Company issued a 24-month convertible promissory note to borrow $100,000 for general corporate purposes. Additional 24-month convertible promissory notes totaling $25,000 and $100,000 were issued in April 2012 and in June 2012; respectively. Conversion of the eligible principal amounts to common stock is allowed at any time after the six month anniversary of the effective date of each note at a rate of $1.05 per share The full amount of principal was outstanding at September 30, 2013; 6.00% simple interest is payable monthly in advance; and all of these notes are classified as short term, with due dates in March, April, and June of 2014.

At September 30, 2013, $2,598,000 of the outstanding were Notes payable to related parties, $2,498,000 to the chairman of our Board, and $100,000 to another director. Subsequent to September 30, 2013, an additional $20,000 was borrowed from our chairman. The terms and conditions are as noted above.

During the quarter ended September 30, 2013, the Company entered into a securities purchase agreement with Tonaquint, Inc., under which it was issued a $112,500 convertible promissory note in consideration for $100,000, the difference between the proceeds from the Note and the principal amount consists of a $10,000 original issue discount and a carried transaction expense of $2,500. The original issue discounted is amortized over the life of the note.  The note is convertible at an initial conversion price of $0.30 per share at any time, and contains a “down-round protection” feature that requires the valuation of a derivative liability associated with the note. The note bears interest at 7% and is due in May 2014; with five monthly installment payments of principal, accrued interest and any outstanding fees or allowed expenses beginning in January 2014. Tonaquint was also issued a market-related warrant for $112,500 in shares of common stock with a “cashless” exercise feature. The warrant has a $0.35 exercise price, a 5-year term and includes a “down-round protection” feature that requires it to be classified as a liability rather than as equity (see Note 6).

We estimated the fair value of each component on the issue date and the conversion date using a Black-Scholes pricing model with the following assumptions:

	Warrant - July 16, 2013		Warrant – September 30, 2013		Derivative – July 16, 2013		Derivative – September 30, 2013
Expected term	5 years		4.79 years		0.83 years		0.63 years
Volatility		124.51%		131.31%		192.87%		214.09%
Risk Free Rate		1.38%		1.39%		0.10%		0.04%

The proceeds of the Note were allocated to the three components as follows:

	Proceeds allocated at issue date – July 16, 2013		Value at September 30, 2013
Tonaquint Note	$	57,400	$	71,175
Tonaquint Warrant	$	26,076	$	61,286
Embedded conversion option derivative liability	$	19,024	$	47,250
Total	$	102,500	$	179,711

During the nine months ended September 30, 2013 the Company issued a convertible promissory note payable to Southridge as part of its equity purchase agreement (“EPA”) (see Note 13) in the amount of $65,000. The note is due December 31, 2013 and may be converted to shares of CTI’s common stock at any time after August 31, 2013. The conversion price is variable at the greater of $0.25 and 50% of the current market price, which is defined by the note to be the average of the 5 lowest VWAP prices for the 10 trading days immediately preceding the conversion date. The Note was issued to cover the holder’s expenses and fees associated with the EPA and does not have an interest component.  Subsequent to September 30, 2013, the note holder has requested conversion, so this Note is expected to be converted to shares of common stock during the quarter ending December 31, 2013, prior to the due date.

Subsequent to September 30, 2013, the Company issued a six-month convertible note payable to Southridge as part of its LPA (see Note 10) in the amount of $12,500, to cover legal expenses. The convertible note is convertible into the Company’s common stock at 75 % of the lowest closing bid price during the twenty (20) trading days prior to conversion.