13. Shareholders' Interest

9 Months Ended

Sep. 30, 2012

Notes

13. Shareholders' Interest

13.       SHAREHOLDERS’ INTEREST

On May 2, 2011 the Company adopted and executed the Employees’ Directors’ and Consultants Stock Option Plan (the “Plan”).  During the three months and nine months ended September 30, 2012, the Company granted 0 and 70,000 options, respectively, to directors which were fully vested upon granting.  Also, 30,000 and 40,000 previously granted options were forfeited during the three and nine months ended September 30, 2012, respectively.  All outstanding options have been fully expensed.

During the three months ended March 31, 2012, the Board of Directors extended the expiration dates for all options previously granted to two departing Board members in recognition for their service during the period of managerial transition.  Those options will expire per their original term specified in each individual option agreement, typically either 5 or 10 years from the date of granting, rather than expiring within the specified time period, typically 90 days following the Board members’ termination dates.  The Company considered the extension as a modification to the option agreements recording incremental compensation of $0 and $80,000 for the three and nine months ended September 30, 2012, respectively.

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

	Nine Months Ended September 30, 2012
Dividend yield (1)	0.0%
Expected volatility (2)	86.7% - 87.1%
Risk-free interest rates (3)	0.89%
Expected lives (2)	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.

(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 the three and nine months ended September 30, 2012, the Company recognized expense of $0 and $138,630 respectively for stock options issued to directors during the current period.   During the three and nine months ended September 30, 2011, the Company recognized expense of $6,866 and $67,639, respectively, for stock options issued to employees and directors

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 a $400,000 promissory note into 400 shares and received cash of $350,000 for the remaining 350 shares.  These transactions were necessitated to replenish the Company's operating cash which had been drawn down by the $750,000 cash collateral previously posted by CTTC in a prejudgment remedy action styled John B. Nano v. Competitive Technologies, Inc., Docket No. CV10 5029318 (Superior Court, Bridgeport, CT), see Note 14 below for details.  

On June 17, 2011, William R. Waters, Ltd. of Canada, advised the Company of its intent to convert one half of its Series C Convertible Preferred Stock, 375 shares, to common stock, with a conversion date of June 16, 2011.  On July 14, 2011, American Stock Transfer & Trust Company was asked to issue the certificate for 315,126 shares of CTTC common stock.  In accordance with the conversion rights detailed below, the conversion price for these shares was $1.19, which is 85% of the mid-point of the last bid price ($1.35) and the last ask price ($1.45) on June 16, 2011, the agreed upon conversion date.

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

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. 

Dividends declared for the three and nine months ended September 30, 2012 were $4,727 and $14,025, respectively. At September 30, 2012, $23,477 dividends declared have not been paid, including the $4,727 declared in the current quarter, and are shown in other accrued liabilities. 

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

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.

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 the company.  However, the funds were withdrawn from escrow and paid out in accordance with the settlement agreement (see Note 14 for details).  Therefore the redemption rights no longer apply to the remaining Series C Convertible Preferred Stock.

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 (1) the closing market price at the date of notice of conversion or (2) 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 and recorded an unrealized loss of $15,678 and $14,281 for the six and three months ended June 30, 2011 related to the converted shares.  Upon conversion, the $81,933 derivative liability was reclassified to equity. 

The Company recorded a convertible preferred stock derivative liability of $90,493, associated with the 375 shares of Series C Convertible Preferred Stock outstanding at September 30, 2012, and $66,176, associated with the 375 shares of Series C Convertible Preferred Stock outstanding at December 31, 2011. 

The Company has classified the Series C Convertible Preferred Stock as a liability at September 30, 2012 and December 31, 2011 because the variable conversion feature may require the Company to settle the conversion in a variable number of its common shares. 

In July, 2012, the Company issued 47,100 shares of common stock related to an international financing program.