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 June 30,
2014
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________
to _______________.
Commission file number: 000-53125
InterCore,
Inc.
(Exact name of registrant as specified in
its charter)
Delaware
(State or other jurisdiction of
incorporation or organization) |
27-2506234
(I.R.S. Employer
Identification No.) |
|
|
1615 South Congress Avenue - Suite 103
Delray Beach, FL
(Address of principal
executive offices) |
33445
(Zip Code) |
Registrant’s telephone number,
including area code (561) 900-3709
(Former Name, 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
¨ No x.
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨
No x.
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 the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer ¨ |
Accelerated filer ¨ |
|
|
Non-accelerated filer ¨ |
Smaller reporting company x |
(Do not check if a smaller reporting company) |
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.
Applicable only to issuers involved in
bankruptcy proceedings during the preceding five years:
Indicate
by check mark whether the registrant filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨
Applicable only to corporate issuers:
Indicate the number of shares outstanding
of each of the issuer’s classes of common stock, as of the latest practicable date. As of December 29, 2014, there were
41,933,066 shares of common stock, $0.0001 par value, issued and outstanding.
INTERCORE, INC.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
This Quarterly Report includes forward-looking
statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based
on management’s beliefs and assumptions, and on information currently available to management. Forward-looking statements
include the information concerning our possible or assumed future results of operations set forth under the heading “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements also include statements
in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,”
“estimate,” “consider,” or similar expressions are used.
Forward-looking statements are not guarantees
of future performance. They involve risks, uncertainties, and assumptions. Our future results and shareholder values may differ
materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward-looking
statements.
| ITEM 1 | Financial Statements |
InterCore, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
| |
June 30, | | |
December 31, | |
| |
2014 | | |
2013 | |
| |
(Unaudited) | | |
(Audited) | |
| |
| | | |
| | |
Assets |
| |
| | | |
| | |
Current assets: | |
| | | |
| | |
| |
| | | |
| | |
Cash | |
$ | 294,907 | | |
$ | 23,225 | |
Accounts receivable | |
| - | | |
| 49,714 | |
Prepaid expenses and other current assets | |
| 249,210 | | |
| 288,828 | |
| |
| | | |
| | |
Total current assets | |
| 544,117 | | |
| 361,767 | |
| |
| | | |
| | |
Fixed assets | |
| 872,250 | | |
| - | |
| |
| | | |
| | |
Deferred financing costs, net | |
| 1,378,236 | | |
| - | |
| |
| | | |
| | |
Total assets | |
$ | 2,794,603 | | |
$ | 361,767 | |
| |
| | | |
| | |
Liabilities and Stockholders' Deficiency |
| |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
| |
| | | |
| | |
Accounts payable | |
$ | 613,040 | | |
$ | 253,970 | |
Accounts payable due to related parties | |
| 309,598 | | |
| 58,500 | |
Accrued expenses | |
| 344,755 | | |
| 152,663 | |
Credit Facility - $2,024,999 balance net of discount of
$1,887,299 | |
| 137,700
| | |
| - | |
Notes payable
| |
| 849,152
| | |
| 803,343 | |
Note payable due to related party | |
| 480,000 | | |
| 800,000 | |
Derivative financial instrument liability | |
| 4,107,284 | | |
| - | |
| |
| | | |
| | |
Total liabilities | |
| 6,841,529 | | |
| 2,068,476 | |
| |
| | | |
| | |
Commitments and contingencies | |
| - | | |
| - | |
| |
| | | |
| | |
Stockholders' deficiency: | |
| | | |
| | |
| |
| | | |
| | |
Preferred stock, $0.0001 par value, 20,000,000 shares authorized; 302,000 and 142,000 shares of Series D issued and outstanding as of June 30, 2014 and December 31, 2013, respectively; liquidation preferences of $9,751 and $4,275 as of June 30, 2014 and December 31, 2013. | |
| 30 | | |
| 14 | |
| |
| | | |
| | |
Common stock, $0.0001 par value, 275,000,000 shares authorized, 40,595,031 shares issued and outstanding as of June 30, 2014 and December 31, 2013 | |
| 4,059 | | |
| 4,059 | |
| |
| | | |
| | |
Additional paid-in capital | |
| 16,207,150 | | |
| 12,428,791 | |
| |
| | | |
| | |
Accumulated deficit | |
| (20,065,871 | ) | |
| (14,108,050 | ) |
| |
| | | |
| | |
Accumulated other comprehensive gains | |
| (192,294 | ) | |
| (31,523 | ) |
| |
| | | |
| | |
Total stockholders' deficiency | |
| (4,046,926 | ) | |
| (1,706,709 | ) |
| |
| | | |
| | |
Total liabilities and stockholders' deficiency | |
$ | 2,794,603 | | |
$ | 361,767 | |
The accompanying notes are an integral part
of these condensed consolidated financial statements.
InterCore, Inc. and Subsidiary
Condensed Consolidated Statements of
Operations
and Comprehensive Income/(Loss)
(Unaudited)
| |
Three months ended June 30, | | |
For the six months ended June 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Revenues | |
$ | 73,628 | | |
$ | 24,044 | | |
$ | 263,924 | | |
$ | 24,688 | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Research and development | |
| 1,110,821 | | |
| 575,810 | | |
| 2,483,988 | | |
| 859,676 | |
Charge for acquired in-process research and development | |
| - | | |
| - | | |
| - | | |
| 1,467,505 | |
General and administrative | |
| 196,402 | | |
| 98,871 | | |
| 1,025,798 | | |
| 315,080 | |
| |
| | | |
| | | |
| | | |
| | |
Total operating expenses | |
| 1,307,223 | | |
| 674,681 | | |
| 3,509,786 | | |
| 2,642,261 | |
| |
| | | |
| | | |
| | | |
| | |
Operating loss | |
| (1,233,595 | ) | |
| (650,637 | ) | |
| (3,245,862 | ) | |
| (2,617,573 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense): | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Interest expense: | |
| | | |
| | | |
| | | |
| | |
Derivative financial instrument | |
| (2,220,492 | ) | |
| - | | |
| (2,220,492 | ) | |
| - | |
Amortization of deferred financing costs | |
| (183,764 | ) | |
| - | | |
| (183,764 | ) | |
| - | |
Amortization of debt discount | |
| (137,701 | ) | |
| - | | |
| (137,701 | ) | |
| - | |
Note payable to Fandeck (related party) | |
| - | | |
| (40,594 | ) | |
| - | | |
| (182,490 | ) |
Other | |
| (133,096 | ) | |
| (59,548 | ) | |
| (186,710 | ) | |
| (82,914 | ) |
Change in fair value of derivative financial instrument | |
| 16,708 | | |
| - | | |
| 16,708 | | |
| - | |
Charge to expense for: | |
| | | |
| | | |
| | | |
| | |
Loss on settlement with Epec | |
| - | | |
| - | | |
| - | | |
| (187,500 | ) |
Loss on settlement of related party note payable | |
| - | | |
| - | | |
| - | | |
| (883,628 | ) |
Loss on settlement with vendors | |
| - | | |
| - | | |
| - | | |
| (170,650 | ) |
Loss on distribution of assets to HLBCDC (related party) | |
| - | | |
| 3,684 | | |
| - | | |
| (327,000 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense) | |
| (2,658,345 | ) | |
| (96,458 | ) | |
| (2,711,959 | ) | |
| (1,834,182 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
| (3,891,940 | ) | |
| (747,095 | ) | |
| (5,957,821 | ) | |
| (4,451,755 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other comprehensive gain (loss) - Foreign currency transalation | |
| (101,524 | ) | |
| 47,062 | | |
| (160,771 | ) | |
| 82,461 | |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive loss | |
$ | (3,993,464 | ) | |
$ | (700,033 | ) | |
$ | (6,118,592 | ) | |
$ | (4,369,294 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss per common share - Basic and diluted | |
$ | (0.10 | ) | |
$ | (0.10 | ) | |
$ | (0.15 | ) | |
$ | (0.65 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average common shares outstanding -
Basic and diluted | |
| 40,595,031 | | |
| 7,470,459 | | |
| 40,595,031 | | |
| 6,799,727 | |
The accompanying notes are an integral part
of these condensed consolidated financial statements.
InterCore, Inc. and Subsidiary
Condensed Consolidated Statement of Stockholders'
Deficiency
For the Six Months Ended June 30, 2014
(Unaudited)
| |
| | |
| | |
| | |
| | |
Accumulated | | |
| |
| |
| | |
| | |
| | |
| | |
Other | | |
Total | |
| |
Preferred Stock
Series D | | |
Common Stock | | |
Additional | | |
Accumulated | | |
Comprehensive | | |
Stockholders' | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Paid-In Capital | | |
Deficit | | |
Loss | | |
Deficiency | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance, December 31, 2013 | |
| 142,000 | | |
$ | 14 | | |
| 40,595,031 | | |
| 4,059 | | |
$ | 12,428,791 | | |
$ | (14,108,050 | ) | |
$ | (31,523 | ) | |
$ | (1,706,709 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of warrants on January 3, 2014 in
connection with the issuance of a contertible promissory note - Note 5 | |
| - | | |
| - | | |
| - | | |
| - | | |
| 5,914 | | |
| - | | |
| - | | |
| 5,914 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of warrant on March 6, 2014 for services
received - Note 8 | |
| - | | |
| - | | |
| - | | |
| - | | |
| 14,275 | | |
| - | | |
| - | | |
| 14,275 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of warrant on May 2, 2014 in
connection with a debt agreement - Note 5 | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,382,000 | | |
| - | | |
| - | | |
| 1,382,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of shares of Series D Preferred Stock
on various dates between January 3, 2014 and June 26, 2014 at $10 per share net of commissions - Note 6 | |
| 160,000 | | |
| 16 | | |
| - | | |
| - | | |
| 1,522,484 | | |
| - | | |
| - | | |
| 1,522,500 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Share based compensation - Options issued
to management - Note 7 | |
| - | | |
| - | | |
| - | | |
| - | | |
| 853,686 | | |
| - | | |
| - | | |
| 853,686 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (5,957,821 | ) | |
| - | | |
| (5,957,821 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Unrealized loss on foreign
currency transalation | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (160,771 | ) | |
| (160,771 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, June 30, 2014 | |
| 302,000 | | |
$ | 30 | | |
| 40,595,031 | | |
$ | 4,059 | | |
$ | 16,207,150 | | |
$ | (20,065,871 | ) | |
$ | (192,294 | ) | |
$ | (4,046,926 | ) |
The accompanying notes are an integral part
of these condensed consolidated financial statements.
InterCore, Inc. and Subsidiary
Condensed Consolidated Statements of
Cash Flows
(Unaudited)
| |
Six Months Ended June 30, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Cash flows used in operating activities: | |
| | | |
| | |
| |
| | | |
| | |
Net loss | |
$ | (5,957,821 | ) | |
$ | (4,451,755 | ) |
| |
| | | |
| | |
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: | |
| | | |
| | |
Charge for acquired in-process research and development | |
| - | | |
| 1,467,505 | |
Stock-based compensation expense: | |
| | | |
| | |
Options issued for services | |
| 853,686 | | |
| - | |
Warrants issued for services | |
| 14,275 | | |
| 45,811 | |
Charges related to Fandeck note recorded as interest expense: | |
| | | |
| | |
Debt issuance charges | |
| - | | |
| 213,450 | |
Value of warrants expensed upon issuance of note | |
| 5,914 | | |
| - | |
Charges for issuance of common shares in connection with: | |
| | | |
| | |
Settlement with Epec | |
| - | | |
| 137,500 | |
Settlement of note due to Rockland | |
| - | | |
| 883,628 | |
Settlement of trade accounts payable | |
| - | | |
| 170,649 | |
Amortization of deferred financing costs | |
| 183,764 | | |
| - | |
Amortization of debt discount | |
| 137,700 | | |
| - | |
Loss on distribution of assets and liabilities and
issuance of common shares and warrants to HLBCDC | |
| - | | |
| 330,684 | |
Charge to interest expense for derivative financial instrument | |
| 2,220,492 | | |
| - | |
Change in the fair value of derivative financial instrument | |
| (16,708 | ) | |
| - | |
| |
| | | |
| | |
Changes in operating assets and liabilities: | |
| | | |
| | |
(Increase) decrease in accounts receivable | |
| 49,714 | | |
| (16,220 | ) |
(Increase) decrease in prepaid expenses and other current assets | |
| 39,618 | | |
| (303,617 | ) |
Increase in accounts payable | |
| 359,066 | | |
| 178,010 | |
Increase (decrease) in accounts payable due to
related parties | |
| 251,098 | | |
| (6,880 | ) |
Increase in accrued compensation | |
| - | | |
| 22,500 | |
Increase in accrued expenses | |
| 192,092 | | |
| 165,514 | |
Decrease in deferred revenue | |
| - | | |
| (4,328 | ) |
| |
| | | |
| | |
Net cash used in operations | |
| (1,667,110 | ) | |
| (1,167,549 | ) |
| |
| | | |
| | |
Cash flows provided by (used in) investing activities: | |
| | | |
| | |
| |
| | | |
| | |
Investment in fixed assets | |
| (872,250 | ) | |
| - | |
| |
| | | |
| | |
Net cash provided by (used in) investing activities | |
| (872,250 | ) | |
| - | |
| |
| | | |
| | |
Cash flows provided by (used in) financing activities: | |
| | | |
| | |
| |
| | | |
| | |
Proceeds from sale of preferred stock | |
| 1,522,504 | | |
| - | |
Proceeds from issuance of notes payable | |
| 45,809 | | |
| 1,035,585 | |
Proceeds from credit facility | |
| 1,903,500 | | |
| - | |
Cash paid in connection with credit facility | |
| (180,000 | ) | |
| - | |
Proceeds from issuance of notes payable to related party | |
| - | | |
| 50,000 | |
Proceeds from issuance of notes payable - Other | |
| - | | |
| 28,174 | |
Repayment of notes payable - Related party | |
| (320,000 | ) | |
| - | |
Repayment of notes payable - Other | |
| - | | |
| (11,263 | ) |
| |
| | | |
| | |
Net cash flows provided by financing activities | |
| 2,971,813 | | |
| 1,102,496 | |
| |
| | | |
| | |
Net increase (decrease) in cash | |
| 432,453 | | |
| (65,053 | ) |
| |
| | | |
| | |
Effect of foreign exchange rate changes on cash | |
| (160,771 | ) | |
| 82,463 | |
| |
| | | |
| | |
Cash - Beginning of period | |
| 23,225 | | |
| 53,744 | |
| |
| | | |
| | |
Cash - End of period | |
$ | 294,907 | | |
$ | 71,154 | |
| |
| | | |
| | |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
| |
| | | |
| | |
Cash paid for: | |
| | | |
| | |
Interest | |
$ | - | | |
$ | 115 | |
Income taxes | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
Supplemental disclosures of non-cash operating, investing, and financing activities: | |
| | | |
| | |
| |
| | | |
| | |
Issuance of Common and Preferred Stock: | |
| | | |
| | |
Conversion of note payable into Series C Convertible Preferred Stock | |
$ | - | | |
$ | 75,971 | |
Settlement of note payable to New Horizon, Inc. | |
$ | - | | |
$ | 1,509,361 | |
Settlement of note payable to the Rockland Group, Inc. | |
$ | - | | |
$ | 1,463,566 | |
Settlement of accounts payable | |
$ | - | | |
$ | 513,053 | |
Distribution/assumption of assets and liabilities to HLBC Distribution Company, Inc. | |
$ | - | | |
$ | 321,630 | |
| |
| | | |
| | |
Issuance of warrants: | |
| | | |
| | |
Issuance in connection with debt | |
$ | 1,387,914 | | |
$ | - | |
Transfer of assets and liabilities to HLBC Distribution Company, Inc. | |
$ | - | | |
$ | 295,000 | |
| |
| | | |
| | |
Acquisition of SRG International, Inc.: | |
| | | |
| | |
Acquisition of assets other than cash | |
$ | - | | |
$ | 1,722,941 | |
Assumption of liabilities | |
$ | - | | |
$ | 1,596,970 | |
Issuance of Series C Convertible Preferred Stock - Purchase price | |
$ | - | | |
$ | 125,971 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
InterCore, Inc. and Subsidiary
Notes to the Condensed Consolidated Financial
Statements
June 30, 2014
(Unaudited)
InterCore, Inc. (the "Company")
was incorporated under the laws of the State of Delaware on April 29, 2010. Through March 20, 2012, the Company focused upon investments
and acquisition opportunities primarily in products and companies involved in the market segments of clean and renewable energy,
medical technology, nanotechnology, and environmentally-friendly (green) waste management. On March 30, 2012, the Company decided
to intensify its focus in the energy sector and the related opportunities within and, to that end, the Board of Directors elected
to change the name of the Company from Heartland Bridge Capital, Inc., to InterCore Energy, Inc.
On January 23, 2013, the Company:
| a) | Transferred investments to a related party in exchange for the assumption of certain obligations.
The Company then converted the majority of the remaining accounts payable, notes payable, and other commitments into shares of
its common stock; and |
| b) | Closed on a transaction with SRG International, Inc. ("SRG") and its shareholders whereby
the Company acquired 100% of the outstanding common stock of SRG in exchange for ICOR's issuance of 5,000,000 shares of a newly
created Series C Convertible Preferred Stock ("Series C"). Immediately after a reverse split of the Company's common
stock, which occurred on December 31, 2013, all of the then outstanding shares of Series C automatically converted into 80% of
the then outstanding shares of the Company's common stock and the acquisition was accounted for as a purchase of a business. The
SRG shareholders which received the initial block of Series C in January 2013 did not perfect their interest in such securities
due to non-performance of certain provisions of the acquisition agreement. On October 28, 2013, the Company waived such provisions.
Subsequent to January 2013, the Company issued additional shares of Series C to other investors. On December 31, 2013, all outstanding
shares of Series C converted into 80% of the then outstanding common shares of the Company. |
| | During 2013 the operations of SRG consisted primarily of researching, developing, and testing the
Driver Alertness Detection System ("DADS™"). DADS™ is designed around proprietary alertness detection technologies,
which enables individuals to modulate their work activity based on real time assessment of their actual state of alertness. The
DADS™ methodology employs a unique approach for assessing sleepiness and low alertness levels via the observed behavior of
individuals in real work conditions. |
On December 31, 2013, the name of the Company
was changed to InterCore, Inc.
| 2) | Basis of Presentation and Going Concern |
The accompanying unaudited condensed financial
statements of the Company have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in
the United States of America. However, in the opinion of management, the accompanying unaudited condensed financial statements
contain all normal and recurring adjustments necessary to present fairly the financial position of the Company as of June 30, 2014
and the related statements of operations and cash flows for the interim period then ended. The balance sheet amounts as of December
31, 2013 were derived from audited financial statements. For further information, refer to the audited financial statements and
related disclosures that were filed by the Company with the Securities and Exchange Commission on Form 10-K for the fiscal year
ended December 31, 2013 on November 13, 2014. Certain prior year amounts have been reclassified to conform to current year presentation.
| B) | Going Concern
and Liquidity |
The accompanying
financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred
significant losses and negative cash flows from operations since its inception in April 2010 and has an accumulated deficit
of $20,065,871 as of June 30, 2014. Cash used in operating activities during the six months ended June 30, 2014 and 2013
totaled $1,968,609 and $1,167,549, respectively, and the Company has a working capital deficiency of $6,297,412 (or
$2,190,128 excluding the derivative instrument liability) as of June 30, 2014. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. The Company has historically financed its activities through the
private placement of debt and equity securities. Since inception, it has dedicated most of its financial resources to general
and administrative expenses in the pursuit of the business plan described in the preceding paragraphs and, effective January
23, 2013, research, development, testing and commercialization of the DADS™ technology. As of December 29, 2014, the
Company had cash-on-hand of approximately $16,000.
The Company’s ability to continue
those activities is dependent upon its ability to raise additional equity, secure debt financing, and/or generate revenue.
The Company can give no assurance that
such financing will be available on acceptable terms or at all, or that it can generate revenue. Should the Company not be successful
in obtaining the necessary financing or generating revenue to fund its operations, the Company would need to curtail or cease its
operational activities. The accompanying financial statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern.
| 3) | Significant Accounting Policies |
Principles of Consolidation
- The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All other significant
inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates - The preparation
of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses for the reporting period. Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those
estimates.
Revenue Recognition - The
Company recognizes revenue when persuasive evidence that an arrangement exists with a customer or client, the price to the purchaser
is fixed or determinable, the product has been shipped or the service has been performed, the Company has no significant remaining
obligation, and collectability is reasonably assured. Revenue from cloud-based services arrangements that allow for the use of
a hosted software product or service over a contractually determined period of time without taking possession of software are accounted
for as subscriptions and recognized as revenue ratably over the coverage period beginning on the date the service is made available
to customers.
Research and Development - The
Company expenses research and development costs as incurred. The Company incurred research and development expense of $1,110,821
and $575,810 during the three months ended June 30, 2014 and 2013, respectively, and $2,483,988 and $859,676 during the six months
ended June 30, 2014 and 2013, respectively. Additionally, the Company recorded a charge for acquired research and development of
$1,467,505 during the three months ended March 31, 2013.
Stock-Based Compensation - The
Company accounts for options granted to employees by measuring the cost of services received in exchange for the award of equity
instruments based upon the fair value of the award on the date of grant. The fair value of that award is then ratably recognized
as expense over the period during which the recipient is required to provide services in exchange for that award. Options and warrants
granted to consultants and other non-employees are recorded at fair value as of the grant date and subsequently adjusted to fair
value at the end of each reporting period until such options and warrants vest, and the fair value of such instruments, as adjusted,
is expensed over the related vesting period.
Stock-based compensation expense totaled
$164,589 and $18,163 for the three months ended June 30, 2014 and 2013, respectively, and $867,961 and $45,811 for the six months
ended June 30, 2014 and 2013, respectively, and was classified as follows:
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Research and development expense | |
$ | 92,378 | | |
$ | - | | |
$ | 400,888 | | |
$ | - | |
General and administrative expense | |
| 72,211 | | |
| 18,163 | | |
| 467,073 | | |
| 45,811 | |
| |
$ | 164,589 | | |
$ | 18,163 | | |
$ | 867,961 | | |
$ | 45,811 | |
Earnings (Loss) Per Share
- The Company calculates basic and diluted net loss per common share by dividing net loss by the weighted-average number of common
shares outstanding for the period. Basic and diluted net loss per common share were the same since the inclusion of common shares
issuable pursuant to the exercise of warrants and the conversion of preferred stock in the calculation of diluted net loss per
common share would have been anti-dilutive.
The following table summarizes the number
of common shares and common share equivalents excluded from the calculation of diluted net loss per common share for the three
and six months ended June 30, 2014 and 2013:
| |
2014 | | |
2013 | |
| |
| | |
| |
Options | |
| 4,600,000 | | |
| - | |
Warrants | |
| 3,328,304 | | |
| 1,247,804 | |
Credit facility
| |
| 6,661,181
| | |
| - | |
| |
| 14,589,385 | | |
| 1,247,804 | |
Fair Value - The Company
determines the estimated fair value of amounts presented in these financial statements using available market information and appropriate
methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The
estimates presented in the financial statements are not necessarily indicative of the amounts that could be realized in a current
exchange between buyer and seller. The use of different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts. These fair value estimates were based upon pertinent information available as of June30,
2013 and, as of that date, the carrying value of all amounts approximates fair value.
The Company has categorized its assets
and liabilities at fair value based upon the following fair value hierarchy:
| a) | Level 1 inputs which utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities. |
| b) | Level 2 inputs which utilize other-than-quoted prices that are observable, either directly or indirectly.
Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and
other information that are observable at commonly quoted intervals. |
| c) | Level 3 inputs which are unobservable and are typically based on assumptions, including situations
where there is little, if any, market activity. |
In certain cases, the inputs used to measure
fair value may fall into different levels of the fair value hierarchy. In such cases, the related asset or liability was categorized
based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance
of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset
or liability.
Both observable and unobservable inputs
may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized
gains and losses for assets within the Level 3 category presented in the tables below may include changes in fair value that were
attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company
data) inputs.
Financial assets are considered Level 3
when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques, and at least
one significant model assumption or input is unobservable. The Company’s Level 3 liabilities consisted of derivative liabilities
associated with the convertible credit facility that contains an indeterminable conversion share price a as the Company cannot
determine if it will have sufficient authorized common stock to settle such arrangements.
The carrying amounts of the Company’s
cash, accounts receivables, prepaid expenses, accounts payable and accrued expenses, debt and other current liabilities approximate
fair value to the short-term nature of these investments.
The following are the major categories
of assets were measured at fair value as of June 30, 2014 using quoted prices in active markets for identical assets (Level 1),
significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):
| |
Level 1: | | |
| | |
| | |
| |
| |
Quoted Prices | | |
| | |
| | |
| |
| |
In Active | | |
| | |
| | |
| |
| |
Markets For | | |
Level 2: | | |
| | |
| |
| |
Identical | | |
Significant | | |
Level 3: | | |
| |
| |
Assets Or | | |
Other | | |
Significant | | |
| |
| |
Financial | | |
Observable | | |
Unobservable | | |
| |
| |
Instruments | | |
Inputs | | |
Inputs | | |
Total | |
| |
| | |
| | |
| | |
| |
June 30, 2014: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Derivative liability | |
$ | - | | |
$ | - | | |
$ | 4,107,284 | | |
$ | 4,107,284 | |
The following table provides a summary
of the Company’s level 3 changes in fair value, including net transfers in and/or out, of all financial assets measured at
fair value on a recurring basis using significant unobservable inputs during the six months ended June 30, 2014:
Balance - December 31, 2013 | |
$ | - | |
Included in debt discount Note 6
| |
| 1,903,500 | |
Included in interest expense Note 6
| |
| 2,220,492
| |
Change in fair value of derivative liability | |
| (16,708 | ) |
Balance - June 30, 2014 | |
$ | 4,107,284 | |
The following table summarizes significant
unobservable inputs in the fair value measurement of the Company’s embedded conversion feature as of June 30, 2014:
Stock price | |
$ | 0.76 | |
Risk free interest rate | |
| 1.28 | % |
Expected life of the agreement | |
| 3.85 years | |
Expected stock price volatility | |
| 100 | % |
Expected dividend yield | |
| Zero | |
The stock prices are based upon the
Company's closing prices in the open market. The risk free interest rates were United States Treasury rates for the
applicable periods. The expected life of the agreement is the remaining term of the credit facility. The expected stock price
volatility was determined by reference to the historical volatility of the Company's own stock price and the expected
volatility as reported by industry peers. The expected dividend yield is zero because the Company has not paid dividends in
the past and does not expect to pay dividends in the foreseeable future.
Foreign Operations - The
Company operates in the United States and Canada. Revenues and other financial statistics are attributed to the country in which
each legal entity is domiciled. The financial information by geographic area is as follows:
| |
US | | |
Canada | | |
Total | |
| |
| | |
| | |
| |
Three months ended June 30, 2014: | |
| | | |
| | | |
| | |
Revenues by geographic area | |
$ | - | | |
$ | 73,628 | | |
$ | 73,628 | |
Operating loss by geographic area | |
| 738,617 | | |
| 494,974 | | |
| 1,233,591 | |
Net loss by geographic area | |
| 3,396,957 | | |
| 494,974 | | |
| 3,891,931 | |
| |
| | | |
| | | |
| | |
Three months ended June 30, 2013: | |
| | | |
| | | |
| | |
Revenues by geographic area | |
| - | | |
| 24,044 | | |
| 24,044 | |
Operating loss by geographic area | |
| 43,589 | | |
| 607,048 | | |
| 650,637 | |
Net loss by geographic area | |
| 140,047 | | |
| 607,048 | | |
| 747,095 | |
| |
| | | |
| | | |
| | |
Six months ended June 30, 2014: | |
| | | |
| | | |
| | |
Revenues by geographic area | |
| - | | |
| 263,924 | | |
| 263,924 | |
Operating loss by geographic area | |
| 1,525,970 | | |
| 1,719,888 | | |
| 3,245,858 | |
Net loss by geographic area | |
| 4,237,933 | | |
| 1,719,888 | | |
| 5,957,821 | |
| |
| | | |
| | | |
| | |
Six months ended June 30, 2013: | |
| | | |
| | | |
| | |
Revenues by geographic area | |
| 644 | | |
| 24,044 | | |
| 24,688 | |
Operating loss by geographic area | |
| 199,555 | | |
| 2,418,018 | | |
| 2,617,573 | |
Net loss by geographic area | |
| 2,033,737 | | |
| 2,418,018 | | |
| 4,451,755 | |
| |
| | | |
| | | |
| | |
As of June 30, 2014 | |
| | | |
| | | |
| | |
Identifiable assets by geographic area | |
| 1,646,022 | | |
| 1,148,581 | | |
| 2,794,603 | |
Long lived assets by geographic area | |
| - | | |
| 872,250 | | |
| 872,250 | |
| |
| | | |
| | | |
| | |
As of December 31, 2013 | |
| | | |
| | | |
| | |
Identifiable assets by geographic area | |
| 32,370 | | |
| 329,397 | | |
| 361,767 | |
Long lived assets by geographic area | |
| - | | |
| - | | |
| - | |
Concentration of Activities
- During the three and six months ended June 30, 2014, the Company earned 100% of its revenues from one customer. As of June 30,
2014, there were no outstanding accounts receivable recorded from that customer.
Fixed Assets - Fixed assets
are stated at cost, net of accumulated depreciation, and are depreciated on a straight line basis over their estimated useful lives
ranging from three to five years. Leasehold improvements are depreciated on a straight line basis over the term of the related
lease. Expenditures for additions, major renewals, or betterments are capitalized and expenditures for maintenance and repairs
are charged to expense as incurred.
Deferred Financing Costs
- Cost incurred in conjunction with the debt financing has been capitalized and will be amortized to interest expense using the
straight line method, which approximates the interest rate method over the term of the debt and is included as a component of other
assets. The Company incurred amortization expense of $137,701 and zero during the three months ended June 30,
2014 and 2013, respectively, and $137,701 and zero during the six months ended June 30, 2014 and 2013, respectively.
Derivative Liabilities -
In connection with the Company entering into a convertible credit facility, the terms of the agreement included an embedded conversion
feature; which provided for the settlement of the credit facility into shares of common stock at a rate which was determined to
be variable. The Company determined that the conversion feature was an embedded derivative instrument pursuant to ASC 815 “Derivatives
and Hedging”. The accounting treatment of derivative financial instruments requires that the Company record the conversion
option as of the inception date of the agreements and at fair value as of each subsequent balance sheet date. Any change in fair
value was recorded as a change in the fair value of derivative liabilities for each reporting period at each balance sheet date.
The Company reassesses the classification at each balance sheet date. If the classification changes as a result of events during
the period, the contract is reclassified as of the date of the event that caused the reclassification.
The fair value of an embedded conversion
option that is convertible into a variable amount of shares are deemed to be a “down-round protection” and therefore,
do not meet the scope exception for treatment as a derivative under ASC 815. Since, “down-round protection” is not
an input into the calculation of the fair value of the conversion option and cannot be considered “indexed to the Company’s
own stock” which is a requirement for the scope exception as outlined under ASC 815.
The Company uses the Binomial Lattice Model
to determine the fair value of embedded conversion features.
As a result of entering into a convertible credit facility (Note 6) for which such instruments contained
a variable conversion feature with no floor, the Company has adopted a sequencing policy in accordance with ASC 815-40-35-12 whereby
all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation.
Foreign Currency Translation -
The functional currency of the Company's Canadian operations is the Canadian dollar. Assets and liabilities related to that operation
are translated at end-of-period exchange rates while the related revenues and expenses are translated at average exchange rates
prevailing during the period. Unrealized foreign currency translation gains and losses are recorded in Accumulated Other Comprehensive
Gains/Losses on the balance sheet and presented as separate components of activity in the statements of operations. Foreign
currency translation gains (losses) totaled ($101,524) and $47,062 for the three months ended June 30, 2014 and 2013, respectively,
and ($160,771) and $82,461 for the six months ended June 30, 2014 and 2013, respectively,
Comprehensive Income (Loss) -
The Company reports comprehensive income (loss) and components thereof in the condensed consolidated statement of operations. Comprehensive
loss consists of net loss and foreign currency translation adjustments affecting shareholder’s deficiency which, under US
GAAP, are excluded from net loss.
Retroactive Adjustment For Stock
Splits - On December 31, 2013, the Company effected a one hundred-for-one reverse stock split of its Common Stock. Consequently,
all earnings per share and other share related amounts and disclosures have been retroactively adjusted for those actions.
Subsequent Events - The Company
has evaluated subsequent events and transactions through the date these financial statements were issued to determine if such events
and transactions required adjustment to or disclosure in these financial statements.
Fixed assets as of June 30, 2014 and December
31, 2013 consist of the following:
| |
2014 | | |
2013 | |
Computer equipment | |
$ | 668,386 | | |
$ | - | |
Leasehold improvements | |
| 203,864 | | |
| - | |
| |
$ | 872,250 | | |
$ | - | |
No depreciation or amortization has been
recorded during the six months ended June 30, 2014 as those assets have yet to be placed in service.
On January 3, 2014, the Company issued
a note payable in the amount of $40,000 plus a warrant for the purchase of 10,000 shares of the Company's common stock at $2.00
per share until May 1, 2017. This warrant was 100% vested upon issuance. This note matures on May 1, 2014 and accrues interest
at the rate of 12% per annum for the first six months they are outstanding and then 18% per annum thereafter. The warrants were
valued at $6,940. This note was issued to a related party as further described in Note 11. The
Company recorded a debt discount based on the estimated relative fair values of the instruments issued in the transaction. The
Company recorded a debt discount of $5,914 which is amortized over the life of the debt.
The interest expense associated with this
note for the six months ended June 30, 2014 consisted of the following:
Accrued interest of the face amount of the note | |
$ | 2,344 | |
Amortization of debt discount | |
| 5,914 | |
| |
$ | 8,258 | |
The Company is not in compliance with
the terms of this note or others similar to it with principal amounts totaling $664,000. However, those noteholder have not
issued the Company a formal notice of default.
| 6) | Convertible Credit Facility |
On May 5, 2014, the Company entered into
a Loan and Security Agreement and a Secured Promissory Note (collectively the "Credit Facility") with Rhine Partners,
LP ("Rhine"). The Credit Facility permits borrowings up to $4.0 million, bears interest at 18% per annum, is secured
by a lien on the assets of the Company, and matures on November 15, 2015. The credit facility is collateralized by substantially all of the assets of the Company.
In connection with securing
this Credit Facility, the Company paid a 4.5% facility fee of $180,000 and granted to Rhine a warrant for the purchase of up
to 2,000,000 shares of the Company's common stock at an exercise price of $1.00 per share through May 2, 2018. The warrant
had value of $1,382,000. This warrant was fully vested and its fair
value was determined by utilizing the Black Scholes valuation model. The combined amount of $1,562,000 represents costs
incurred to secure this Credit Facility and are being amortized on a straight lines over the term of this agreement.
Additionally, the Company is obligated to pay a 6% origination fee at the time of each withdrawal.
Outstanding principal may be converted
at the election of Rhine at any time into the Company's Series D Preferred Shares at the price of $10.00 per share or into restricted
common stock at a price equal to 40% of the market price based upon the average closing price of the five days preceding such election.
Additionally, Rhine has the right to make such a conversion election up to five days after the Company has tendered repayment of
the principal.
The Company accounted for proceeds from
this Credit Facility in accordance with ASC 815 "Derivatives and Hedging". The fair value of the embedded conversion
option for each individual advance was determined using the Binomial Lattice Model and recorded on the date of such advances as
a derivative liability. They are collectively marked-to-market at the end of each reporting period with a related non-cash charge
or benefit recorded in the Other Income (Expense) section in the Statement of Operations. As a result of entering into a convertible credit facility (Note 6) for which such instruments contained
a variable conversion feature with no floor, the Company has adopted a sequencing policy in accordance with ASC 815-40-35-12 whereby
all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation.
During the six months ended June 30, 2014, the Company received gross advances of $2,024,999 ($1,234,042
and $790,957 in May and June 2014, respectively) and simultaneously recorded a derivative liability of $4,123,992. To account for
the market discounts of the conversion rights, the gross advances were recorded net of debt discounts immediately for $121,499
related to the 6% origination fee and $1,903,500 related to the fair value attributed to the embedded conversion options. To the
extent the derivative liability exceeded the debt discount value attributed to the embedded conversion options, that difference
of $2,220,492 was immediately recorded as interest expense in the Statement of Operations.
The debt discount associated with each
Advance is being charged to interest expense ratably over the remaining term of the Credit Facility.
The Company used the Binomial Lattice Model
to calculate the fair value of the embedded conversion options upon the date of each advance. The significant inputs and assumptions
are summarized in the following table:
Stock price |
$0.76 to $0.90 |
Risk free interest rate |
1.28% |
Expected life of the agreement |
3.85 to 4.00 years |
Expected stock price volatility |
100% |
Expected dividend yield |
Zero |
The stock prices are based upon
the Company's closing prices in the open market. The risk free interest rates were United States Treasury rates for
the applicable periods. The expected life of the agreement is the remaining term of the Credit Facility. The expected
stock price volatility was determined by reference to the historical volatility of the Company's own stock price and the
expected volatility as reported by industry peers. The expected dividend yield is zero because the Company has not paid
dividends in the past and does not expect to pay dividends in the foreseeable future.
The Company is obligated to commence repayment
of the principal when it becomes cash flow positive and may do so without penalty. As of June 30, 2014 the principal balance of
$2,024,999 is presented less a debt discount of $1,887,299 resulting in a net amount of $137,701. The credit facility has been classified as a current liability since it may be terminated by the lender
at any time.
On various dates from July 14, 2014 through November 28, 2014,
the Company borrowed an additional $1,802,074 and received net proceeds of $1,693,950 as well as repaid $518,477. Therefore, the
total principal currently outstanding in connection with this Credit Facility is $3,308,596.
| 7) | Series D Preferred Stock |
Series D Preferred Stock has the following
rights and preferences: (i) For each $200,000 invested in 20,000 shares of Series D Preferred Stock at $10 per share, the holder
of such shares is entitled to royalty payments equal to: a) one percent of the Company's gross revenue until $1,000,000 has been
paid to such holder; and b) one half of one percent of the Company's gross revenue until an additional $1,000,000 has been paid
to such holder. Such payments are due on a quarterly basis and once payments totaling $2,000,000 have been made to such holder,
those shares will cease earning royalty payments and be returned to the Company for no additional consideration; (ii) no dividend
rights; (iii) no liquidation rights other than what is owed in connection with the terms described in "(i)" above; (iv)
no conversion rights; (v) no redemption rights; (v) no call rights by the Company; and (vi) no voting rights.
On various dates from January 3, 2014 to
June 26, 2014, the Company raised $1,600,000 through the sale of 160,000 shares of Series D Preferred Stock and received net proceeds
of $1,522,500. In this connection, a commission of $77,500 was earned by a related party as further described in Note 11.
| 8) | Adoption of Stock Option Plan and Issuance of Options |
On February 3, 2014, the Company's Board
of Directors approved the adoption of the InterCore, Inc. 2014 Non-Qualified Stock Option Plan (the “Plan”). The Plan
is intended to aid the Company in maintaining and developing a management team, attracting qualified officers and employees capable
of assisting in the future success of the Company, and rewarding those individuals who have contributed to the success of the Company.
On that same date, the Board
approved the issuance of options to the Company's management team for the purchase of up to 4,600,000 shares of the Company's
common stock at $1.00 per share for a period of ten years. The fair value of that option award was $1,384,000. Such options
were one-third vested on the date of issuance and the remaining thirds will vest on December 31, 2014 and 2015. During the
three and six months ended June 30, 2014, the Company recorded share-based compensation of $108,941 and $798,038,
respectively, in this connection.
Assumptions made in calculating the fair
value of those options were as follows:
|
Risk free interest rate |
1.5% |
|
|
Dividend yield |
Zero |
|
|
Volatility |
100% |
|
|
Expected term |
4.5 years |
|
A summary of the changes in options outstanding
during the six months ended June 30, 2014 is as follows:
| |
| | |
Weighted | | |
Weighted | | |
| |
| |
| | |
Average | | |
Average | | |
| |
| |
| | |
Exercise | | |
Remaining | | |
Aggregate | |
| |
Number of | | |
Price | | |
Contractual | | |
Intrinsic | |
| |
Shares | | |
Per Share | | |
Term (Years) | | |
Value | |
| |
| | |
| | |
| | |
| |
Outstanding at December 31, 2013 | |
| - | | |
| - | | |
| - | | |
| - | |
Granted | |
| 4,600,000 | | |
$ | 1.00 | | |
| 10.0 | | |
| | |
Exercised | |
| - | | |
| | | |
| | | |
| | |
Forfeited | |
| -
| | |
| | | |
| | | |
| | |
Outstanding at June 30, 2014 | |
| 4,600,000 | | |
$ | 1.00 | | |
| 9.6 | | |
$ | -0- | |
| |
| | | |
| | | |
| | | |
| | |
Options exercisable at June 30, 2014 | |
| 1,533,333 | | |
$ | 1.00 | | |
| 9.6 | | |
$ | -0- | |
The stock price volatility for the Company’s
options was determined by reference to the historical volatility of its own stock price and the historical volatilities for industry
peers. The risk free rate was derived from U.S. Treasury rates for the applicable periods. The Company utilized the “simplified”
method to develop an estimate of the expected term of “plain vanilla” employee options. Dividends were assumed to be
zero as the Company has not historically declared any dividends and has no expectations of doing so in the future. The Company
attributes the value of stock based compensation to operations on the straight-line single option method.
On January 3, 2014 and as more fully described
in Note 4 in connection with the issuance of a note payable, the Company issued a warrant for the purchase of 10,000 shares of
common stock through May 1, 2017 at $2.00 per share. This warrant was 100% vested upon issuance and had a fair value of $6,940.
On March 6, 2014, the Company granted a
warrant to an advisor to the Company for services rendered for the purchase of 25,000 shares of common stock through March 6, 2019
at $1.00 per share. This warrant was 100% vested upon issuance and had a fair value of $14,275. During the three and six months
ended June 30, 2014, the Company recorded share-based compensation of zero and $14,275, respectively, in this connection.
On May 5, 2014 and as more fully
described in Note 6 in connection with entering into a Credit Facility, the Company issued a warrant for the purchase of
2,000,000 shares of common stock through May 2, 2018 at $1.00 per share. This warrant was 100% vested upon issuance and had a
fair value of $1,382,000.
Assumptions made in calculating the fair
value of warrant were as follows:
|
Risk free interest rate |
1.28% |
|
|
Dividend yield |
Zero |
|
|
Volatility |
100% |
|
|
Expected term |
4 years |
|
The stock price volatility for the Company’s
warrants was determined by reference to the historical volatility of its own stock price and the historical volatilities for industry
peers. The risk free rate was derived from U.S. Treasury rates for the applicable periods. The life of the warrant was the contractual
life of the grant. Dividends were assumed to be zero as the Company has not historically declared any dividends and has no expectation
of doing so in the future.
A summary of the changes in warrants outstanding
during the six months ended June 30, 2014 is as follows:
| |
| | |
Weighted | | |
Weighted | | |
| |
| |
| | |
Average | | |
Average | | |
| |
| |
| | |
Exercise | | |
Remaining | | |
Aggregate | |
| |
Number of | | |
Price | | |
Contractual | | |
Intrinsic | |
| |
Shares | | |
Per Share | | |
Term (Years) | | |
Value | |
| |
| | |
| | |
| | |
| |
Outstanding at December 31, 2013 | |
| 1,293,304 | | |
$ | 5.80 | | |
| 3.9 | | |
| - | |
Granted | |
| 2,035,000 | | |
$ | 1.00 | | |
| 3.8 | | |
| | |
Exercised | |
| - . | | |
| | | |
| | | |
| | |
Forfeited | |
| - | | |
| | | |
| | | |
| | |
Outstanding at June 30, 2014 | |
| 3,328,304 | | |
$ | 2.86 | | |
| 3.6 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Warrants exercisable at June 30, 2014 | |
| 3,328,304 | | |
$ | 2.86 | | |
| 3.6 | | |
$ | 100,000 | |
| 10) | Commitments and Contingencies |
The Company is subject to litigation in
the ordinary course of business. Certain conditions may exist as of the date the condensed consolidated financial statements are
issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail
to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result
in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived
merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates
that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s condensed consolidated financial statements. If the assessment indicates that
a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then
the nature of the contingent liability and an estimate of the range of possible losses, if determinable and material, would be
disclosed.
Loss contingencies considered remote are
generally not disclosed, unless they involve guarantees, in which case the guarantees would be disclosed. There can be no assurance
that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations
or cash flows. As of June 30, 2014 and December 31, 2013 the Company has not accrued for any loss contingencies.
| 11) | Related Party Transactions |
On January 3, 2014 and as more fully described in Note 5, the Company issued a note payable in
the amount of $40,000 plus a warrant for the purchase of 10,000 shares of the Company's common stock. This note was purchased by
an entity controlled by Mr. Frederick Voight, the Company's Vice president of Investments and a member of the Company's Board of
Directors.
During the six months
ended June 30, 2014 and as more fully described in Note 7, the Company raised $1,600,000 through the sale of shares of Series D
Preferred Stock. Mr. Frederick Voight, the Company's Vice president of Investments and a member of the Company's Board of
Directors, earned a commission of $77,500 in this connection.
| a) | Additional Borrowings Under The Credit Facility |
On various dates from July 14,
2014 through November 28, 2014, the Company borrowed additional funds and made repayments as further described in Note 6.
| b) | Issuance of Series D Preferred Stock |
| | On various dates from November 5, 2014 through November 26, 2014, the Company raised $1,117,000
through the sale of 111,700 shares of Series D Preferred Stock and received net proceeds of $1,061,150. |
| c) | Issuance of Convertible Note Payable #1 to Topside |
| | On October 15, 2014, the Company entered into a Loan and Security Agreement and Secured Promissory
Note (collectively the "Note") with Topside Partners, LP ("Topside") under which the Company borrowed various
amounts between that date and October 22, 2014 totaling $1,000,000 and received net proceeds of $974,900. The Note bears interest
at 18% per annum, is secured by a lien on all the Company's assets, and matures on April 30, 2015. The Company is obligated to
commence repayment of the principal when it becomes cash flow positive and may do so without penalty. Outstanding principal may
be converted at the election of Topside at any time into the Company's Series D Preferred Shares at the price of $10.00 per share
or into restricted common stock at a price of a 60% discount to market based on the average closing price of the five days preceding
such election except that through April 15, 2015, Topside may convert the outstand principal into common stock at a price equal
to the lesser of: a) $2.00 per share; or b) a 60% discount to market based upon the average closing price five days preceding such
election. Topside has the right to make such a conversion election up to five days after the Company has tendered repayment of
the principal. Additionally on that same day and under the terms of the Note, the Company issued a warrant for Topside to purchase
up to 2,000,000 shares of the Company's common stock at an exercise price of $1.00 per share for a period of four years. The warrant
was 100% vested upon issuance. |
| d) | Issuance of Convertible Note Payable #2 to Topside |
| | On October 29, 2014, the Company entered into a Loan and Security Agreement and Secured Promissory
Note (collectively the "Note") with Topside Partners, LP ("Topside") under which the Company borrowed various
amounts between that date and November 5, 2014 totaling $1,000,000 and received net proceeds of $895,000. The Note bears interest
at 18% per annum, is secured by a lien on all the Company's assets, and matures on May 31, 2015. The Company is obligated to commence
repayment of the principal when it becomes cash flow positive and may do so without penalty. Outstanding principal may be converted
at the election of Topside at any time into the Company's Series D Preferred Shares at the price of $10.00 per share or into restricted
common stock at a price of a 60% discount to market based on the average closing price of the five days preceding such election
except that through April 29, 2015, Topside may convert the outstand principal into common stock at a price equal to the lesser
of: a) $2.00 per share; or b) a 60% discount to market based upon the average closing price five days preceding such election.
Topside has the right to make such a conversion election up to five days after the Company has tendered repayment of the principal.
Additionally on that same day and under the terms of the Note, the Company issued a warrant for Topside to purchase up to 2,000,000
shares of the Company's common stock at an exercise price of $1.00 per share for a period of four years. The warrant was 100% vested
upon issuance. |
| e) | Issuance of Convertible Note Payable #3 to Topside |
| | On November 7, 2014, the Company entered into a Loan and Security Agreement and Secured Promissory
Note (collectively the "Note") with Topside Partners, LP ("Topside") under which the Company borrowed various
amounts between that date and November 19, 2014 totaling $1,000,000 and received net proceeds of $900,000. The Note bears interest
at 18% per annum, is secured by a lien on all the Company's assets, and matures on May 31, 2015. The Company is obligated to commence
repayment of the principal when it becomes cash flow positive and may do so without penalty. Outstanding principal may be converted
at the election of Topside at any time into the Company's Series D Preferred Shares at the price of $10.00 per share or into restricted
common stock at a price of a 60% discount to market based on the average closing price of the five days preceding such election
except that through April 29, 2015, Topside may convert the outstand principal into common stock at a price equal to the lesser
of: a) $2.00 per share; or b) a 60% discount to market based upon the average closing price five days preceding such election.
Topside has the right to make such a conversion election up to five days after the Company has tendered repayment of the principal.
Additionally on that same day and under the terms of the Note, the Company issued a warrant for Topside to purchase up to 2,000,000
shares of the Company's common stock at an exercise price of $1.00 per share for a period of four years. The warrant was 100% vested
upon issuance. |
| f) | Issuance of $300K note to Rhine. |
| | On December 8, 2014, the Company entered into a Loan Agreement ("Note") with Rhine Partners,
LP ("Rhine") under which the Company borrowed $300,000. The Note bears interest at the rate of 1.5% every ten days or
portions thereof and matures on January 30, 2015. Additionally, a one-time facility fee of $25,000 was earned by Rhine upon the
execution of the Note. Outstanding principal may be converted at the election of Rhine at any time into the Company's Series D
Preferred Shares at the price of $10.00 per share or into restricted common stock at a price of a 40% discount to market based
on the average closing price of the five days preceding such election. Rhine has the right to make such a conversion election up
to five days after the Company has tendered repayment of the principal. Additionally on that same day and under the terms of the
Note, the Company issued a warrant for Rhine to purchase up to 500,000 shares of the Company's common stock at an exercise price
of $1.00 per share for a period of four years. The warrant was 100% vested upon issuance. If the Company fails to repay the loan
in full by the maturity date, the Company must pay a penalty of $35,000 and issue a warrant to Rhine for the purchase of 2,000,000
shares of the Company's common stock at an exercise price of $1.00 per share for a period of four years. The warrant would be 100%
vested upon issuance. |
| g) | On December 29, 2013, the Company entered into a lease agreement for 3,250 square feet for offices
in Montreal which expires at the end of December 2016. Effective July 1 and October 1, 2014, the company entered into two additional
lease agreements for 12,036 and 5,486 square feet for additional office space in the same building in Montreal which expires at
the end of November 2018 and December 2016, respectively. |
| | Total annual minimum commitments under these three lease agreements as of June 30, 2014 are as
follows: |
2014 | |
$ | 109,808 | |
2015 | |
| 386,724 | |
2016 | |
| 396,228 | |
2017 | |
| 291,108 | |
2018 | |
| 279,379 | |
| |
$ | 1,463,247 | |
* * * * *
ITEM 2 Management’s
Discussion and Analysis of Financial Condition and Results of Operations
Our Management’s
Discussion and Analysis contains statements that are historical facts and statements that are forward-looking (within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements
are, by their very nature, uncertain and risky. These risks and uncertainties include international, national, and local general
economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully
make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of
significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy
or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology;
and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.
Although the forward-looking statements
in this Quarterly Statement reflect the good faith judgment of our management, such statements can only be based on facts and factors
currently known or believed by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties,
the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements.
You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we
attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations,
and prospects.
The following discussion and analysis of
financial condition and results of operations of the Company is based upon, and should be read in conjunction with, its unaudited
financial statements and related notes elsewhere in this Form 10-Q, which have been prepared in accordance with accounting principles
generally accepted in the United States. All dollar amounts in this section have been rounded to the nearest thousand.
Overview
Corporate History Prior to December
31, 2012
We were incorporated under the laws of
the State of Delaware on April 29, 2010. Through March 20, 2012, we focused on investments and acquisition opportunities primarily
in products and companies involved in the market segments of clean and renewable energy, medical technology, nanotechnology, and
environmentally-friendly (green) waste management.
On March 30, 2012, we decided to further
intensify our focus in the energy sector and the related opportunities within and, to that end, we elected to change the name of
the Company to InterCore Energy, Inc.
Through December 31, 2012 and as more fully
described in our Annual Report on Form 10-K for the year then ended as filed with the Commission on June 25, 2013, we assembled
a portfolio of investments in the life sciences and energy arenas. However, we found this approach to be lacking in appeal to investors,
thereby making it difficult to raise capital to fund investments once we identified them and to fund the operations of the Company.
Corporate History Subsequent to December
31, 2012
a) Acquisition of SRG International,
Inc.
On January 23, 2013, we consummated
a transaction with SRG, and the shareholders of SRG who were the owners of 100% of the outstanding common stock of SRG, pursuant
to which the shareholders of SRG transferred to us all of the common stock of SRG in exchange for 5,000,000 shares of our Series
C Convertible Preferred Stock, which shares were convertible into 80% of our then outstanding common stock immediately after consummation
of a reverse stock split. As a result of this transaction and a transaction with HLBCDC (whereby we sold our assets and operations
in exchange for relief from certain debt obligations, as described earlier and in greater detail below), SRG became our wholly-owned
subsidiary and we became a holding company with all of our current operations conducted through SRG.
Those operations consisted primarily
of researching, developing, and testing the Driver Alertness Detection System ("DADS™"). DADS™ is designed
around proprietary alertness detection technologies, which enables individuals to modulate their work activity based on real time
assessment of their actual state of alertness. The DADS™ methodology employs a unique approach for assessing sleepiness and
low alertness levels via the observed behavior of individuals in real work conditions.
b) Assignment and Assumption Agreement
Simultaneously with consummating
the transaction with SRG, we closed a transaction contemplated by an Assignment and Assumption Agreement between us and HLBCDC
pursuant to which the majority of the assets we owned prior to the acquisition of SRG were transferred to HLBCDC in exchange for
HLBCDC assuming the majority of our liabilities and receiving our common shares and a warrant for the purchase of additional common
shares. The assets we transferred to HLBCDC were the shares we owned in Legends and Epec as well as the intangible rights associated
with the Myself™ pelvic muscle trainer and a novel medical applicator referred to as the “Soft and Smooth Assets.”
In addition to transferring those assets, we issued to HLBDC 402,038 shares of our common stock (the “HLBCDC Shares”)
and warrants to purchase 500,000 shares of our common stock at the exercise price of $0.55 per share (the fair market value of
our common stock as of the date of the Agreement) (the “HLBCDC Warrant”). In exchange for the assets, the HLBCDC Shares,
and the HLBCDC Warrant, HLBCDC agreed to assume liabilities valued at $985,948 consisting of fees owed to management, notes payables,
and trade payables.
c) Asset Purchase Agreement
Immediately prior to consummating
the transaction with SRG, we closed a transaction contemplated by an Asset Purchase Agreement with Rockland, our majority shareholder.
and an entity controlled by one of our Directors. Pursuant to that agreement, we sold the shares we owned in HepatoChem to Rockland
in exchange for Rockland agreeing to forgive $579,938 of debt owed to it by us.
d) MeliaLife Agreement
On March 12, 2013, we entered
into a Distribution Agreement (the “Distribution Agreement”) with MeliaLife International, Inc. (“MeliaLife”),
pursuant to which we were awarded the rights to distribute and sell various natural supplement products produced by MeliaLife.
Under the terms of the Distribution Agreement we would be the exclusive distributor to sell certain products as described therein
(the “Products”). The duration of the Distribution Agreement is the lesser of five (5) years, or when we purchase Products
in an amount by which the MeliaLife has received $30 million, representing 50% of the total product value of the Products purchased
by us, whichever happens first. At the end of this contract, MeliaLife would assign its rights in all the Products to us for 4%
of future net profits (total product value minus direct costs related to the Products), calculated and paid monthly, generated
by the sale by us of those Products worldwide.
Our relationship with MeliaLife
as been inactive since the date of the Distribution Agreement and we expect it to expire of its own accord with the passage of
time.
Going Concern
These financial statements were prepared
under the assumption that we will continue as a going concern. Our ability to do so is dependent upon our ability to obtain additional
equity or debt financing, reduce expenditures, and/or generate revenue, any and all of which is uncertain. These financial statements
do not include any adjustments that might result from the outcome of that uncertainty.
Current cash and working capital resources,
including funds recently received from the sale of equity securities, are not sufficient to support our activities. We plan to
fund our activities through the sale of equity securities as more fully described in the Liquidity and Capital Resources
section in the following paragraphs.
Liquidity and Capital Resources
We had cash of $295,000 as of June 30,
2014 compared to $23,000 as of December 31, 2013. This net increase of $272,000 was attributable:
$ | 3,273,000 | | |
Cash received through financing activities |
| (2,129,000 | ) | |
Cash used in operating activities net of the effect of foreign exchange rate changes |
| (872,000 | ) | |
Cash used in investing activities |
$ | 272,000 | | |
Net increase |
We have incurred significant losses
and negative cash flows from operations since our inception in April 2010. We have an accumulated deficit of $20,066,000 and
a working capital deficiency of $6,297,000 (or $2,190,000 excluding the derivative financial instrument liability) as of June
30, 2014. These conditions raise substantial doubt about our ability to continue as a going concern. We have historically
financed our activities through the sale of debt and the private placement of equity securities. Through December 31, 2012,
we have dedicated our financial resources to investments as well as general and administrative expenses in the pursuit of the
business plan described in the preceding paragraphs. Subsequent to that date, we have dedicated our financial resources to
the researching, developing, and testing of the Driver Alertness Detection System™ (DADS™) as well as general and
administrative expenses.
We plan to fund our development and eventually
commercialization activities beyond June 30, 2014 primarily through the sale of debt and/or equity securities. Subsequent to June
30, 2014 and through the date of this report, we have raised $5,987,000 through the sale of debt and equity securities. As of December 29, 2014, the Company had cash-on-hand of approximately $16,000.
However, we cannot be certain that such
funding will continue to be available on acceptable terms or at all. To the extent that we secure additional debt or raise funds
by issuing equity securities, our stockholders may experience significant dilution. If we are unable to raise funds when required
or on acceptable terms, we may have to: a) Significantly delay, scale back, or discontinue the development and/or commercialization
of DADS™; b) Seek collaborators at an earlier stage than would otherwise be desirable and/or on terms that are less favorable
than might otherwise be available; c) Relinquish or otherwise dispose of rights to technologies, product candidates, products,
or services that we would otherwise seek to develop or commercialize ourselves; or d) Otherwise curtail or cease operational activities.
The accompanying condensed consolidated
financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.
Critical Accounting Policies
The following accounting policies are critical in fully understanding
and evaluating our financial statements:
a) |
Accounting for acquisitions; |
b) |
Accounting for research and development costs; |
c) |
Accounting for derivative financial instruments; and |
d) |
Stock-based compensation. |
Our accounting policies are described in
Note 3 to the condensed consolidated financial statements for the six months ended June 30, 2014 contained elsewhere in this report
and in Note 3 to the audited financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2013.
Results of Operations
For the three months ended June 30,
2014 compared to the three months ended June 30, 2013
Revenues
Revenues for the three months ended
June 30, 2014 were $74,000 compared to $24,000 for the comparable period in the prior year. Such revenues were exclusively
related to DADS™ and this increase of $50,000 was attributable to expanded activities with clients in connection with
the testing and development of that technology.
There were no significant direct costs
of revenues associated with such revenue.
Research and Development Expense
Research and development expense for the
three months ended June 30, 2014 was $1,111,000 compared to $576,000 for the comparable period in the prior year. Such expenses
during were exclusively related to the development of DADS™. This increase of $535,000 was attributable primarily to
expanded activities in that regard and consisted primarily of an increase in salaries and benefits of $422,000, an increase in
the use of subcontractors of $173,000 and an increase in stock-based compensation expense of $92,000 which was offset by a decrease
in hardware and software related costs of $142,000.
General and Administrative Expense
General and administrative expense for
the three months ended June 30, 2014 was $196,000 compared to $99,000 for the comparable period in the prior year. This increase of
$97,000 was attributable to an increase in salaries and benefits of $139,000 and an increase in stock-based compensation expense
of $54,000 which was offset by decreases in professional fees of $61,000 and other operating expenses of $35,000.
Other Expense
Other expense for the three months ended
June, 2014 was $2,658,000 compared to $96,000 for the comparable period in the prior year. This increase of $2,562,000 was attributable
to an increase of $2,220,000 related to the issuance of derivative financial instruments, an increase of $184,000 in amortization
of deferred financing costs, and an increase of $138,000 in amortization of debt discount costs. Those increases were offset by
a $17,000 benefit related to the change in the fair value of derivative financial instruments. Other amounts included in other
expense for the three months ended June, 2014 consisted primarily of interest related to notes payable and such amounts were consistent
with those in the comparable period in the prior year.
Other
Comprehensive Income (Loss)
Other comprehensive income (loss) for the
three months ended June 30, 2014 and 2013 was ($102,000) and $47,000, respectively. Such variations are attributable to changes in the exchange rate between the Canadian
and United States dollars and the effect of those changes upon the translation of SRG's financial statements into United States
dollars.
For the six months ended June 30,
2014 compared to the six months ended June 30, 2013
Revenues
Revenues for the six months ended June
30, 2014 were $264,000 compared to $25,000 for the comparable period in the prior year. Such revenues were exclusively related
to DADS™ and this increase of $239,000 was attributable to expanded activities with clients in connection with the testing
and development of that technology.
There were no significant direct costs
of revenues associated with such revenue.
Research and Development Expense
Research and development expense for the
six months ended June 30, 2014 was $2,484,000 compared to $860,000 for the comparable period in the prior year. Such expenses during
were exclusively related to the development of DADS™. This increase of $1,624,000 was attributable to expanded activities
in that regard and consisted primarily of an increase in salaries and benefits of $1,165,000, an increase in the use of subcontractors
of $454,000, and an increase in stock-based compensation expense of $401,000 which was offset by a decrease in hardware and software
related costs of $304,000 and foreign currency transaction gains of $103,000.
Charge for Acquired Research and Development
Expense
The charge for acquired research and development
expense for the six months ended June 30, 2013 was $1,468,000. We acquired SRG on January 23, 2013 and its operations consist primarily
of research, development, testing, and commercialization of the DADS™ System. We accounted for the acquisition of SRG under
the purchase method of accounting whereby assets acquired and liabilities were recorded at their estimated fair values as of the
date of the acquisition. A total of $1,468,000 was allocated to acquired in-process research and development and, in conformity
with generally accepted accounting practices to expense such costs as incurred, that amount was immediately charged to expense.
There was no similar expense for the six
months ended June 30, 2014.
General and Administrative Expense
General and administrative expense for
the six months ended June 30, 2014 was $1,026,000 compared to $315,000 for the comparable period in the prior year. This increase
of $711,000 was attributable to an increase in salaries and benefits of $359,000 and an increase in stock-based compensation expense
of $421,000 which was offset by a decrease in professional fees of $112,000. Remaining general and administrative expenses were
generally consistent with the comparable period in the prior year.
Other Expense
Other expense for the six months ended
June, 2014 was $2,712,000 compared to $1,834,000 for the comparable period in the prior year. This increase of $878,000 was attributable
to:
| a) | Increases totaling $2,542,000 consisting of an increase of $2,220,000 related to the issuance of
derivative financial instruments, an increase of $184,000 in amortization of deferred financing costs, and an increase of $138,000
in amortization of debt discount costs; |
| b) | Increase in a benefit of $17,000 related to the change in the fair value of derivative financial
instruments; and |
| c) | Decreases totaling $1,569,000 consisting primarily of a number of charges related to transactions
executed in advance of the acquisition of SRG on January 23, 2013. In those transactions we divested ourselves of a number of assets
which were not complimentary to our stated goal of developing DADS™. |
Other amounts included in other expense
for the six months ended June, 2014 consisted primarily of interest related to notes payable and such amounts were consistent with
those in the comparable period in the prior year.
Other
Comprehensive Income (Loss)
Other comprehensive income (loss) for the
six months ended June 30, 2014 was ($161,000) compared to $82,000 for the comparable period in the prior year. Such variations
are attributable to changes in the exchange rate between the Canadian and United States dollars and the effect of those changes
upon the translation of SRG's financial statements into United States dollars.
ITEM 3 Quantitative
and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide
the information required by this Item.
ITEM 4 Controls
and Procedures
a) Disclosure
Controls and Procedures
We conducted an evaluation, with the participation
of our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer),
of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of June 30, 2014 to ensure that information required
to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in the Securities Exchange Commission's rules and forms, including to ensure that information
required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to
our management, including our principal executive and principal financial officer, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that as of June 30, 2014, our disclosure controls and procedures were not effective at the
reasonable assurance level as evidenced by the inability of the Company to file its 10-Q for the quarter ended June 30, 2014 in
a timely manner. This deficiency is attributable to an insufficient number of qualified financial personnel within the Company,
specifically at SRG, and cash flow constraints that limited the Company in obtaining the services of external professionals necessary
to fulfill its reporting obligations in a timely manner.
b) Management Reporting on
Internal Controls Over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules
13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as amended, as a process designed by, or under the supervision of,
our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles in the United States and includes those policies
and procedures that:
|
i) |
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and any disposition of our assets; |
|
|
|
|
ii) |
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
|
|
|
|
iii) |
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
A material weakness is a deficiency, or
a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a
material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Our management
assessed the effectiveness of our internal control over financial reporting as of June 30, 2014. 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 assessment, management has identified the following material weaknesses that have caused
management to conclude that, as of June 30, 2014, our internal control over financial reporting, were not effective at the reasonable
assurance level:
| i) | We do not have a sufficient number of qualified internal accounting personnel, specifically at
SRG, nor an adequate internal reporting structure necessary to meet the reporting requirements of a public company. |
| ii) | We do not have sufficient segregation of duties within accounting functions, which is a basic internal
control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically
feasible. However, to the extent possible, the initiation of transactions, the custody of assets, and the recording of transactions
should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our
assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a
material weakness. |
| iii) | We have not documented our internal controls. We have limited policies and monitoring procedures
that cover the recording and reporting of financial transactions and accounting provisions. As a result we may be delayed in our
ability to calculate certain accounting provisions. While we believe these provisions are accounted for correctly in the attached
unaudited financial statements, our lack of internal controls could lead to a delay in our reporting obligations and possibly the
delays we encountered with the SRG transaction. Reporting companies have been required to provide written documentation of key
internal controls over financial reporting beginning with fiscal years ended on or after December 31, 2009. Management evaluated
the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure
controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. |
To address these material weaknesses, management
performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all
material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe
that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition,
results of operations and cash flows for the periods presented.
c) Remediation of Material
Weaknesses
The material weaknesses described above
and summarized below are expected to be remediated when additional financial resources are made available to us through either
additional fundraising and/or cash flows from operations. Those weaknesses consist of:
|
i) |
The absence of a sufficient number of qualified internal accounting personnel, specifically at SRG, and an adequate internal reporting structure necessary to meet the reporting requirements of a public company; |
|
|
|
|
ii) |
The lack of segregation of duties; and |
|
|
|
|
iii) |
The absence of documented internal controls. |
During 2015, the Company plans to hire
qualified personnel, improve the internal reporting structure, improve segregation of duties, and document internal controls as
financial resources permit.
d) Changes in Internal Control over
Financial Reporting
As previously reported,
effective January 23, 2013 we acquired SRG, a foreign entity based in Canada through which we conduct most of our day-to-day
business activities. Consequently, the material weaknesses discussed above combined with the acquisition of SRG have affected
our internal control over financial reporting as described in the preceding paragraphs.
There were no changes in internal control over financial reporting during the quarter ended June 30, 2014.
PART II – OTHER INFORMATION
ITEM 1 Legal Proceedings
We are not a party to or otherwise involved
in any legal proceedings.
In the ordinary course
of business, we are from time to time involved in various pending or threatened legal actions. The litigation process is inherently
uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition
and/or results of operations. However, in the opinion of our management, other than as set forth herein, matters currently pending
or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.
ITEM 1A Risk Factors
As a smaller reporting company, we are
not required to provide the information required by this Item.
ITEM 2 Unregistered Sales of Equity
Securities and Use of Proceeds
| 2) | Series C Preferred Stock |
| 3) | Series D Preferred Stock |
On various dates from April
16, 2014 to June 26, 2014, we issued 58,000 shares of our Series D Preferred Stock to DayStar Funding, LP in exchange for
$580,000, with us receiving net proceeds of $551,000. That entity is controlled by Frederick A. Voight, one of our officers
and directors. The issuances are exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, due to the
fact the investor is either accredited or sophisticated investors and are familiar with our operations.
| | Series D Preferred Stock has the following rights and preferences: (i) For each $200,000 invested
in 20,000 shares of Series D Preferred Stock at $10 per share, the holders of such shares are entitled to royalty payments equal
to: a) one percent of our gross revenue until $1,000,000 has been paid to such holders; and b) one half of one percent of our gross
revenue until an additional $1,000,000 has been paid to such holders. Such payments are due on a quarterly basis and once payments
totaling $2,000,000 have been made to such holders, those shares will cease earning royalty payments and be returned to us for
no additional consideration; (ii) no dividend rights; (iii) no liquidation rights other than what is owed in connection with the
terms described in "(i)" above; (iv) no conversion rights; (v) no redemption rights; (v) no call rights by us; and (vi)
no voting rights. |
| 4) | Warrants to Purchase Common Stock |
On May 5, 2014 and in connection
with entering into a debt agreement, the Company issued a warrant for the purchase of up to 2,000,000 shares of common stock through
May 2, 2018 at $1.00 per share. The issuance of the warrants are exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933, due to the fact the investors are either accredited or sophisticated investors and are familiar with our operations.
| | On May 5, 2014, we entered into a Loan and Security Agreement and Secured Promissory Note (collectively
the "Note") with Rhine Partners, LP ("Rhine") under which we borrowed various amounts between that date and
September 29, 2014 totaling $4,000,000 and received net proceeds of $3,417,450. The Note bears interest at 18% per annum, is secured
by a lien on all on of our assets, and matures on November 15, 2015. We are obligated to commence repayment of the principal when
we become cash flow positive and may do so without penalty. Outstanding principal may be converted at the election of the Rhine
at any time into shares of our Series D Preferred Stock at the price of $10.00 per share or into restricted shares of our common
stock at a price of a 60% discount to market based on the average closing price of the five days preceding such election. Rhine
has the right to make such a conversion election up to five days after we have tendered repayment of the principal. Additionally
on that same day and under the terms of the Note, we issued a warrant for Rhine to purchase up to 2,000,000 shares of our common
stock at an exercise price of $1.00 per share through May 2, 2018. The warrant was 100% vested upon issuance. The issuance of the
Note and the warrant are exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, due to the fact the investors
are either accredited or sophisticated investors and are familiar with our operations. |
ITEM 3 Defaults Upon Senior Securities
There have been no events which are required
to be reported under this Item.
ITEM 4 Mine Safety Disclosures
There have been no events which are required
to be reported under this Item.
ITEM 5 Other Information
There have been no events which are required
to be reported under this Item.
ITEM 6 Exhibits
(a) Exhibits
2.1 (1) |
Plan of Reorganization of AP Corporate Services, Inc. |
|
|
3.1 (1) |
Articles of Incorporation of I-Web Media, Inc. filed April 29, 2010 |
|
|
3.2 (5) |
Amended Articles of Incorporation of I-Web Media, Inc., filed December 8, 2010 (effective December 29, 2010) |
|
|
3.3 (5) |
Restated Articles of Incorporation of InterCore Energy, Inc., filed December 8, 2010 (effective December 29, 2010) |
|
|
3.4 (13) |
Amendment to Articles of Incorporation of Heartland Bridge Capital, Inc. filed November 26, 2012 (effective May 16, 2012) |
|
|
3.5 (1) |
Bylaws of I-Web Media, Inc. |
|
|
3.5 (5) |
Restated Bylaws of InterCore Energy, Inc. |
|
|
3.7 (14) |
Certificate of Designation for Series C Convertible Preferred Stock |
|
|
10.1 (1) |
Form of “A” Warrant |
|
|
10.2 (1) |
Form of “B” Warrant |
|
|
10.3 (1) |
Form of “C” Warrant |
|
|
10.4 (1) |
Form of “D” Warrant |
|
|
10.5 (1) |
Form of “E” Warrant |
|
|
10.6 (2) |
Agreement to Purchase Common Stock by and between Kenneth S. Barton, Rockland Group, LLC, and I-Web Media, Inc., dated November 3, 2010 |
|
|
10.7 (2) |
Securities Purchase Agreement by and between I-Web Media, Inc. and Rockland Group, LLC, dated November 4, 2010 |
|
|
10.8 (3) |
Asset Purchase Agreement with New Horizon, Inc. dated December 9, 2010 |
10.9 (6) |
Amendment No. 1 to Asset Purchase Agreement with New Horizon, Inc. |
|
|
10.10 (3) |
Convertible Promissory Note Held by New Horizon, Inc. dated December 9, 2010 |
|
|
10.11 (3) |
Assignment of Rights Agreement with New Horizon, Inc. dated December 9, 2010 |
|
|
10.12 (3) |
Asset Purchase Agreement with RWIP, LLC dated December 10, 2010 |
|
|
10.13 (3) |
Convertible Promissory Note Held by RWIP, LLC dated December 10, 2010 |
|
|
10.14 (3) |
Warrant Agreement with RWIP, LLC dated December 10, 2010 |
|
|
10.15 (3) |
Consulting Agreement with RWIP, LLC dated December 13, 2010 |
|
|
10.16 (4) |
Development Services Agreement with NorthStar Partners Consulting, LLC, dated December 22, 2010 |
|
|
10.17 (4) |
Warrant Agreement with NorthStar Partners Consulting, LLC, dated December 22, 2010 |
|
|
10.18 (5) |
Promissory Note Held by Rockland Group, LLC, dated December 16, 2010 |
|
|
10.19 (5) |
Promissory Note Held by Rockland Group, LLC, dated December 27, 2010 |
|
|
10.20 (5) |
Form of Warrant Issued to Officers, Directors and Consultants on December 29, 2010 |
|
|
10.21 (7) |
Common Stock Purchase Warrant issued to Wexford Partners, L.P. dated March 21, 2011 |
|
|
10.22 (7) |
Reorganization and Stock Purchase Agreement with the iSafe Entities and iSafe Holders dated March 21, 2011 |
|
|
10.23 (7) |
Employment Agreement with Joseph W. Tischner dated March 22, 2011 |
|
|
10.24 (8) |
Promissory Note Held by Rockland Group dated December 29, 2010 |
10.25 (9) |
Series A Preferred Stock Purchase Agreement by and between InterCore Energy, Inc. and HepatoChem, Inc. dated September 15, 2011 |
|
|
10.26 (9) |
Purchase Agreement by and between InterCore Energy, Inc. and Digisort, LLC dated November 18, 2011 |
|
|
10.27 (10) |
Letter of Intent with Legends & Heroes, Inc. dated December 1, 2011 |
|
|
10.28 (11) |
Form of Warrant Repricing Agreement |
|
|
10.29 (11) |
Form of Repriced Warrant |
|
|
10.30 (14) |
Amended and Restated Share Exchange Agreement by and between InterCore Energy, Inc., SRG, Inc. and the shareholders of SRG dated January 15, 2013 |
|
|
10.31 (14) |
Assignment and Assumption Agreement by and between InterCore Energy, Inc. and HLBC Distribution Company, Inc. dated January 15, 2013 |
|
|
10.32 (14) |
Asset Purchase Agreement by and between InterCore Energy, Inc. and Rockland Group, LLC dated January 15, 2013 |
|
|
10.33 (15) |
Promissory Note issued to Fandeck Associates, Inc., a Texas corporation, dated March 15, 2013 |
|
|
10.34 (15) |
Letter Agreement with Fandeck Associates, Inc. dated April 17, 2013 |
|
|
99.1 (16)* |
InterCore, Inc. 2014 Non-Qualified Stock Option Plan |
|
|
31.1* |
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|
|
31.2* |
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
32.1* |
Chief Executive Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
32.2* |
Chief Financial Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
101.INS** |
XBRL Instance Document |
|
|
101.SCH** |
XBRL Taxonomy Extension Schema Document |
|
|
101.CAL** |
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
101.DEF** |
XBRL Extension Definition Linkbase Document |
|
|
101.LAB** |
XBRL Taxonomy Extension Label Linkbase Document |
|
|
101.PRE** |
XBRL Taxonomy Extension Presentation Linkbase Document |
* |
Filed herewith. |
|
|
** |
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability. |
|
|
|
|
(1) |
Incorporated by reference from our Registration Statement on Form 10-12G/A filed with the Commission on August 12, 2010. |
|
(2) |
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on November 8, 2010. |
|
(3) |
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 15, 2010. |
|
(4) |
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 23, 2010. |
|
(5) |
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 30, 2010. |
|
(6) |
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on January 14, 2011. |
|
(7) |
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on March 24, 2011. |
|
(8) |
Incorporated by reference from our Annual Report on Form 10-K filed with the Commission on April 15, 2011. |
|
(9) |
Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on November 21, 2011. |
|
(10) |
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 8, 2011 |
|
(11) |
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on May 29, 2012 |
|
(12) |
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on May 29, 2012 |
|
(13) |
Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on November 26, 2012 |
|
(14) |
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on January 29, 2013 |
|
(15) |
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on June 25, 2013 |
| (16) | Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on December 23, 2014 |
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.
|
InterCore, Inc. |
|
|
Dated: December 31, 2014 |
/s/ James F. Groelinger |
|
By: |
James F. Groelinger |
|
Its: |
Chief Executive Officer |
EXHIBIT 31.1
Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer
I, James F. Groelinger, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of InterCore, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this
report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exhibit Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered
by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize, and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Dated: December 31, 2014 |
|
|
|
|
/s/ James F. Groelinger |
|
By: |
James F. Groelinger |
|
|
Chief Executive Officer |
EXHIBIT 31.2
Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer
I, Frederick Larcombe, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of InterCore, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this
report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exhibit Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered
by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting. |
Dated: December 31, 2014 |
|
|
|
|
/s/Frederick Larcombe |
|
By: |
Frederick Larcombe |
|
|
Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 USC, SECTION
1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report
of InterCore, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2014, as filed with the Securities and
Exchange Commission on or about the date hereof (the “Report”), I, James F. Groelinger, Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) |
The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
|
(2) |
Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: December 31, 2014 |
|
|
|
|
/s/ James F. Groelinger |
|
By: |
James F. Groelinger |
|
|
Chief Executive Officer |
A signed original of this written statement
required by Section 906 has been provided to InterCore, Inc. and will be retained by InterCore, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 USC, SECTION
1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the Quarterly Report
of InterCore, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2014, as filed with the Securities and
Exchange Commission on or about the date hereof (the “Report”), I, Frederick Larcombe, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) |
The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
|
(2) |
Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: December 31, 2014 |
|
|
|
|
/s/ Frederick Larcombe |
|
By: |
Frederick Larcombe |
|
|
Chief Financial Officer |
A signed original of this written statement
required by Section 906 has been provided to InterCore, Inc. and will be retained by InterCore, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.