NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
September 30, 2016
(unaudited)
Note 1 – Summary of Significant Accounting Policies
Nature of Business
3DIcon Corporation (“3DIcon”)
was incorporated on August 11, 1995, under the laws of the State of Oklahoma as First Keating Corporation. The articles of incorporation
were amended August 1, 2003 to change the name to 3DIcon Corporation. The initial focus of First Keating Corporation was to market
and distribute books written by its founder, Martin Keating. During 2001, First Keating Corporation began to focus on the development
of 360-degree holographic technology. From January 1, 2001, 3DIcon’s primary activity has been the raising of capital in
order to pursue its goal of becoming a significant participant in the development, commercialization and marketing of next generation
3D display technologies.
Coretec Industries, LLC (“Coretec”),
a wholly owned subsidiary of 3DIcon (collectively the “Company”), was organized on June 2, 2015 in the state of North
Dakota. Coretec is currently developing, testing, and providing new and/or improved technologies, products, and service solutions
for energy-related industries including, but not limited to oil/gas, renewable energy, and distributed energy industries. Many
of these technologies and products also have application for medical, electronic, photonic, display, and lighting markets among
others. Early adoption of these technologies and products is anticipated in markets for energy storage (Li-ion batteries), renewable
energy (BIPV), and electronics (Asset Monitoring).
Reverse Acquisition
On May 31, 2016, 3DIcon entered into a
Share Exchange Agreement (the “Share Exchange Agreement”) with Coretec and four Coretec members (the “Members”),
which Members held all outstanding membership interests in Coretec. On September 30, 2016 (the “Closing Date”), the
Company closed the transaction contemplated by the Share Exchange Agreement. Pursuant to the Share Exchange Agreement, the Members
agreed to sell all their membership interests in Coretec to 3DIcon in exchange for 3DIcon’s issuance of an aggregate 4,760,872
shares of 3DIcon’s Series B Convertible Preferred Stock to the Members (the “Exchange”). Coretec became a wholly-owned
subsidiary of 3DIcon and the former Members beneficially own approximately 65% of 3DIcon’s common stock on a fully-diluted
basis. Upon the closing of the Share Exchange Agreement, two of 3DIcon’s Directors resigned and three new Directors associated
with Coretec were nominated and elected, giving control of the board of directors to former Coretec Members. The 65% holders of
3DIcon common stock will be unable to sell that stock for a period of one year under the terms of a lock-up agreement reached between
the parties. Victor Keen, the largest shareholder of 3DIcon prior to the reverse acquisition, is also a participant in the lock-up
agreement.
Basis of Presentation
The accompanying consolidated condensed
financial statements of the Company have been prepared without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the consolidated financial
statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed
or omitted pursuant to such rules and regulations. The Company believes that the disclosures made are adequate to make the information
presented not misleading. These consolidated condensed financial statements should be read in conjunction with Coretec’s
and 3DIcon’s year-end audited financial statements and related footnotes included in the previously filed Form 8-K/A and
Form 10-K, respectively, and in the opinion of management, reflects all adjustments necessary to present fairly the consolidated
condensed financial position of the Company. The consolidated condensed results of operations for interim periods may not be indicative
of the results which may be realized for the full year.
Under accounting principles generally accepted
in the United States of America (“U.S. GAAP”), the acquisition is treated as a “reverse acquisition” under
the purchase method of accounting (see Note 2). The consolidated condensed statements of operations herein reflect the historical
results of Coretec prior to the completion of the reverse acquisition since it was determined to be the accounting acquirer, and
do not include the historical results of operations for 3DIcon prior to the completion of the acquisition. The pre-merger balance
sheet presented herein reflects the assets and liabilities of Coretec. 3DIcon’s assets and liabilities are consolidated with
the assets and liabilities of Coretec as of the September 30, 2016 consummation of the acquisition. The number of shares issued
and outstanding and additional paid-in capital of 3DIcon have been retroactively adjusted to reflect the equivalent number of shares
issued by 3DIcon in the Share Exchange, while Coretec’s historical members’ deficit is being carried forward as the
Company’s accumulated deficit. All costs attributable to the reverse merger were expensed.
Principles of Consolidation
The consolidated condensed balance sheet
as of September 30, 2016 includes the accounts of 3DIcon and its wholly owned subsidiary, Coretec. Intercompany transactions and
balances have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Actual results could differ
from the estimates and assumptions used.
Property and Equipment
Property and equipment are recorded at
cost. Depreciation is recorded over the estimated useful lives using the straight-line method. Maintenance and repairs are expensed
as incurred; major improvements and betterments are capitalized.
Estimated useful lives of property and
equipment are as follows for the major classes of assets:
Asset Description
|
|
Estimated Lives
|
Furniture and fixtures
|
|
7 years
|
Intangible Assets
Intangible assets consist primarily of acquired patents. The
Company acquired $1,400,000 of intangible assets in conjunction with the reverse acquisition discussed in Note 1 and Note 2. Intangible
assets with finite lives are amortized on a straight-line basis over their useful lives.
Goodwill
Goodwill was acquired with the reverse
merger discussed in Note 1 and Note 2. The Company evaluates the carrying value of goodwill on an annual basis and between annual
evaluations if events occur or circumstances change that would more likely than not reduce the fair value of goodwill below its
carrying amount. When assessing whether goodwill is impaired, management considers first a qualitative approach to evaluate whether
it is more likely than not the fair value of the goodwill is below its carrying amount; if so, management considers a quantitative
approach by analyzing changes in performance and market based metrics as compared to those used at the time of the initial acquisition.
For the periods presented, no impairment charges were recognized.
Long-Lived Assets
Long-lived assets, such as property and
equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment,
the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value.
If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment
is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation
techniques including discounted cash flow models, quoted market values and third party independent appraisals, as considered necessary.
Basic and Diluted Loss Per Common
Share
Basic loss per
common share is computed by dividing net loss by the weighted average number of vested common shares outstanding during the period.
Diluted earnings per share reflects the potential dilution that could occur if securities or other instruments to issue common
stock were exercised or converted into common stock. Since the Closing Date of the Share Exchange Agreement occurred on September
30, 2016 and no common stock was issued to Coretec in the reverse acquisition, the Company did not compute weighted average common
shares outstanding for the three and nine months ended September 30, 2016 and 2015.
Research and Development
Research and development costs are expensed
as incurred. Research and development costs amounted to approximately $70,000 and $152,000 for the three and nine months ended
September 30, 2016. There were no research and development costs during the three months ended September 30, 2015 and the period
from inception (June 2, 2015) to September 30, 2015.
Income Taxes
The Company accounts for income taxes under
an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. In estimating
future tax consequences, the Company generally considers all expected future events other than enactments of changes in tax laws
or rates. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized as income or expense in
the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets
to the amount expected to be realized.
Prior to the reverse acquisition, Coretec
elected to be taxed as a Partnership for federal and state income tax purposes. Under this election substantially all of the profits,
losses, credits and deductions of Coretec were passed through to the individual members. Therefore, prior to the reverse acquisition,
no provision or liability for income taxes has been included in these consolidated financial statements.
Prior to the reverse acquisition, 3DIcon’s
tax benefits were fully offset by a valuation allowance due to the uncertainty that the deferred tax assets would be realized.
Management considers the likelihood of changes by taxing authorities in its filed income tax returns and recognizes a liability
for or discloses potential changes that management believes are more likely than not to occur upon examination by tax authorities.
Management has not identified any uncertain tax positions in filed income tax returns that require recognition or disclosure in
the accompanying consolidated financial statements.
Recent Accounting Pronouncements
The following is a summary of recent accounting
pronouncements that are relevant to the Company:
In February 2016, the FASB issued ASU No.
2016-02,
Leases (Topic 842)
intended to increase transparency and comparability among companies by requiring most
leases to be included on the balance sheet and by expanding disclosure requirements. This is effective for public business entities
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted
for all public business entities and all nonpublic business entities upon issuance. The Company is currently evaluating the impact
that this new guidance may have on its consolidated results of operations, cash flows, financial position and disclosures.
In April 2015, the FASB issued ASU 2015-03,
Interest – Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs
. The amendments
in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct
deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance
for debt issuance costs are not affected by this update. The provisions of ASU 2015-03 are effective for financial statements issued
for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The guidance in this ASU is
to be applied on a retrospective basis. The adoption of this standard did not have a material impact on the Company’s consolidated
financial position and results of operations.
The FASB has issued ASU 2014-09,
Revenue
from Contracts with Customers
. This ASU supersedes the revenue recognition requirements in FASB ASC 605 - Revenue Recognition
and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects
to be entitled in exchange for those goods or services. On July 9, 2015, the FASB deferred the effective date of ASU No. 2014-09
from annual periods beginning after December 15, 2016 to annual periods beginning after December 15, 2017. This ASU should be applied
retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the
ASU recognized at the date of initial application. The adoption of this standard is not expected to have a material impact on the
Company’s consolidated financial position and results of operations.
The FASB has issued ASU 2014-12,
Compensation
- Stock Compensation
(ASC Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance
Target Could Be Achieved after the Requisite Service Period.
This ASU requires that a performance target that affects vesting,
and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance
target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation
cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent
the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in
this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The
adoption of this standard did not have a material impact on the Company's consolidated financial position and results of operations.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern
. This ASU explicitly requires management to evaluate, at each annual or interim reporting
period, whether there are conditions or events that exist which raise substantial doubt about an entity’s ability to continue
as a going concern and to provide related disclosures. The standard is effective for annual periods ending after December 15, 2016,
and annual and interim periods thereafter, with early adoption permitted. The Company does not anticipate that the adoption of
this standard will have a material impact on its financial statement disclosures.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. This ASU provides a screen to determine when
a set is not a business. The screen requires that when substantially all of the fair value of gross assets acquired (or disposed
of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The amendments
in this ASU are effective beginning after December 15, 2017, including interim periods within those periods and should be applied
prospectively. The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated
financial position and results of operations.
In January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. This ASU simplifies the
subsequent measurement of goodwill by eliminating Step 2 from the goodwill test. Under Step 2, an entity had to perform procedures
to determine the fair value at the impairment testing date of its assets and labilities following the procedure that would be required
in determining the fair value of assets acquires and labilities assumed in a business combination. Instead, an entity should perform
its annual, or intern, goodwill impairment test by comparing the fair value of a reporting unity with its carrying amount. The
amendments in this ASU are effective beginning after December 15, 2019, however early adoption is permitted on beginning January
1, 2017 and should be applied on a prospective basis. The Company does not anticipate that the adoption of this standard will have
a material impact on its consolidated financial position and results of operations.
Uncertainties
The Company has realized a cumulative net
loss of $484,679 for the period from inception (June 2, 2015) to September 30, 2016, and a net loss of $349,426 and $92,696 for
the nine months ended September 30, 2016 and from inception (June 2, 2015) to September 30, 2015, respectively. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern for a year following the issuance of these
consolidated condensed financial statements. The Company has insufficient revenue and capital commitments to fund the development
of its planned products and to pay operating expenses.
The ability of the Company to continue
as a going concern depends on the successful completion of the Company's capital raising efforts to fund the development of its
planned products. The Company intends to continue to raise additional capital through debt and equity financings. There is no assurance
that these funds will be sufficient to enable the Company to fully complete its development activities or attain profitable operations.
There is no assurance that these funds will be sufficient to enable the Company to fully complete its development activities or
attain profitable operations. If the Company is unable to obtain such additional financing on a timely basis or, notwithstanding
any request the Company may make, the Company’s debt holders do not agree to convert their notes into equity or extend the
maturity dates of their notes, the Company may have to curtail its development, marketing and promotional activities, which would
have a material adverse effect on the Company’s business, financial condition and results of operations, and ultimately the
Company could be forced to discontinue its operations and liquidate.
The accompanying consolidated condensed
financial statements have been prepared in conformity with U.S. GAAP, which contemplate the continuation of the Company as a going
concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of
assets and liabilities presented in the consolidated financial statements do not necessarily purport to represent realizable or
settlement values. The consolidated condensed financial statements do not include any adjustment that might result from the outcome
of this uncertainty.
Under the terms of the Golden State Equity
Investors, Inc (“Golden State”) 4.75% Convertible Debenture due on December 31, 2016, subsequently extended to June
1, 2017, Golden State is obligated to submit conversion notices in an amount such that Golden State receives 1% of the outstanding
shares of the Company every calendar quarter for a period of one year. In connection with each conversion, Golden State is expected
to simultaneously exercise a percentage of warrants equal to the percentage of the principal being converted. The warrants are
exercisable at $381.50 per share. The number of warrants exercisable is subject to certain beneficial ownership limitations contained
in the 4.75% Convertible Debenture (“the Beneficial Ownership Limitations”). The Beneficial Ownership Limitations prevent
Golden State from converting on the 4.75% Convertible Debenture or exercising warrants if such conversion or exercise would cause
Golden State’s holdings to exceed 9.99% of the Company’s issued and outstanding common stock. Subject to the Beneficial
Ownership Limitations and provided that Golden State is able to sell the shares under Rule 144, Golden State is required to convert
$85.71 of the 4.75% Convertible Debenture and exercise 857 warrants per month. Based upon the current stock price, the issued and
outstanding shares as of September 30, 2016 and ignoring the impact of the Beneficial Ownership Limitations, the Company may receive
up to $327,000 per month in funding for the duration of the debenture from Golden State as a result of warrant exercises. Additionally,
the Company has issued 1,481,754,533 common shares of the authorized 1,500,000,000 common shares, leaving a balance of 18,245,467
common shares available to be issued.
Note 2 – Share Exchange Agreement
On May 31, 2016,
3DIcon entered into a Share Exchange Agreement with Coretec and its Members, which Members held all outstanding membership interests
in Coretec. Pursuant to the Share Exchange Agreement, the Members agreed to sell all their membership interests in Coretec to 3DIcon
in exchange for 3DIcon’s issuance of an aggregate 4,760,872 shares of 3DIcon’s Series B Convertible Preferred Stock
to the Members.
Upon the closing
of the Share Exchange Agreement on September 30, 2016 (the “Closing Date”), considering any preferred stock on an “as
converted” basis, approximately 65% of 3DIcon’s issued and outstanding common stock is now owned by the former Coretec
Members. The remaining 35% is held by 3DIcon’s prior stockholders. Upon the closing of the Share Exchange Agreement, two
of the former 3DIcon directors resigned and three new directors associated with Coretec were nominated and elected, giving control
of the board of directors to the former Coretec Members. The 65% holders of 3DIcon common stock will be unable to sell that stock
for a period of one year under the terms of a lock-up agreement reached between the parties. Victor Keen, the largest shareholder
of 3DIcon prior to the reverse acquisition, is also a participant in the lock-up agreement.
Consummation of
the Exchange was subject to customary conditions, including without limitation, (i) Coretec’s delivery to 3DIcon a representation
letter attesting to each of the Members’ or their designees’ status as an “accredited investor;” (ii) Coretec’s
delivery to 3DIcon a letter agreement executed by each of the Members or their designees, if any, agreeing to automatically convert
the shares of Series B Preferred issued to them pursuant to the Share Exchange Agreement upon the occurrence of certain events;
(iii) Coretec’s delivery to 3DIcon a lock up agreement executed by each of the Members or their designees, if any, in the
form attached to the Share Exchange Agreement; (iv) Coretec’s delivery to 3DIcon a license agreement between Coretec and
North Dakota State University allowing Coretec to license certain intellectual property concerning cyclohexasilane or other silicon-based
materials; (v) the delivery to 3DIcon of the required Coretec audited and unaudited consolidated financial statements; and (vi)
delivery by 3DIcon and Coretec all required consents to consummate all transactions contemplated by the Share Exchange Agreement.
The Company engaged
a law firm to prepare the necessary documents for the Share Exchange Agreement, including resolutions of the entities authorizing
the closing, preparation and filing of form 14F, and filing of the Form 8K. The total fees agreed to for the entire engagement
total $100,000. As of September 30, 2016, the law firm had completed approximately 75% of the engagement and the Company has expensed
$75,000. The Company is obligated to fund the remaining $25,000 as the agreed upon tasks are completed.
The Company has a complex equity structure which includes
two series of preferred stock, common stock, warrants and options. The acquisition date fair value of the consideration
transferred was calculated as follows:
Company enterprise value
|
|
$
|
1,378,026
|
|
|
|
|
|
|
Less: interest bearing debt
|
|
|
(493,958
|
)
|
|
|
|
|
|
Company equity value
|
|
$
|
884,068
|
|
The
fair valu
e of the assets acquired and liabilities assumed at the closing date were based on management estimates, except
for the patents which were valued by an independent valuation expert. Based upon the preliminary purchase price allocation, the
following table summarizes the estimated provisional fair value of the assets acquired and liabilities assumed at the date of acquisition:
Cash
|
|
$
|
75,687
|
|
Prepaid expenses
|
|
|
46,513
|
|
Due from related party
|
|
|
52,019
|
|
Patents
|
|
|
1,400,000
|
|
Deposits
|
|
|
2,315
|
|
Total assets acquired at fair value
|
|
|
1,576,534
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
364,508
|
|
Notes payable
|
|
|
89,465
|
|
Notes payable - related party
|
|
|
404,493
|
|
Total liabilities assumed
|
|
|
858,466
|
|
Total identifiable net assets
|
|
|
718,068
|
|
Goodwill
|
|
|
166,000
|
|
Total preliminary purchase consideration
|
|
$
|
884,068
|
|
The purchase price exceeded the fair value
of the net assets acquired by approximately $166,000, which was recorded as goodwill.
In connection with the reverse acquisition,
the Company incurred approximately $12,000 and $98,000 for related transaction costs for the three and nine months ended September
30, 2016, which are included in general and administrative expenses in the accompanying consolidated condensed statements of operations.
The following unaudited pro forma results
for the three and nine month periods ended September 30, 2016 and 2015 summarizes the consolidated results of operations of the
Company, assuming the reverse acquisition had occurred on January 1, 2015 and after giving effect to the reverse acquisition adjustments,
including amortization of tangible and intangible assets acquired in the transaction:
|
|
Three Months Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
Net revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
Net loss
|
|
$
|
(404,014
|
)
|
|
$
|
(277,003
|
)
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
Net revenues
|
|
$
|
-
|
|
|
$
|
5,122
|
|
Net loss
|
|
$
|
(1,048,340
|
)
|
|
$
|
(886,577
|
)
|
Note 3 – Property and Equipment
Property and equipment consists of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Furniture and fixtures
|
|
$
|
7,805
|
|
|
$
|
7,805
|
|
Less: Accumulated depreciation
|
|
|
(1,395
|
)
|
|
|
(558
|
)
|
Totals
|
|
$
|
6,410
|
|
|
$
|
7,247
|
|
Note 4 – Patents
The following table sets forth patents:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Useful Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
In Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
1,400,000
|
|
|
$
|
-
|
|
|
$
|
1,400,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
17.45
|
The patents were acquired with the September
30, 2016 reverse acquisition (see Note 2), therefore amortization expense is not reflected in either the three and nine months
periods ended September 30, 2016. Amortization expense for the next five fiscal years and thereafter is expected to be as approximately
$20,000 for the three months ended December 31, 2016 and approximately $80,000 annually thereafter.
Note 5 – Debentures and Notes Payable
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Notes and debentures payable:
|
|
|
|
|
|
|
|
|
9% Promissory note due June 2017
|
|
$
|
25,341
|
|
|
$
|
-
|
|
4.75% Convertible debenture due
June 2017
|
|
|
64,124
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total notes and debentures payable
|
|
$
|
89,465
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Notes payable - related party:
|
|
|
|
|
|
|
|
|
14% Term loan due June 2018
|
|
$
|
103,993
|
|
|
$
|
-
|
|
14% Term loan due June 2018
|
|
|
300,500
|
|
|
|
-
|
|
14% Term loan due June 2018
|
|
|
395,961
|
|
|
|
130,572
|
|
|
|
|
|
|
|
|
|
|
Total notes payable - related party
|
|
$
|
800,454
|
|
|
$
|
130,572
|
|
9% Promissory note due June 2017
On April 26, 2016, 3DIcon signed a 9% Promissory
Note with Golden State in the amount of $40,000. Interest is due monthly in the amount of $300. Golden State advanced the $40,000
on the note and, on June 16, 2016, applied $14,659 to fund the exercise of warrants under the terms of the 4.75% Convertible debenture
(described below) held by Golden State, leaving $25,341 outstanding on the 9% Promissory note. Subsequent to September 30, 2016,
Golden Gate extended the maturity date of their 9% promissory note payable to June 1, 2017.
4.75% Convertible debenture due June
2017
On November 3, 2006, 3DIcon issued to Golden
State a 4.75% convertible debenture in a principal amount of $100,000, due December 31, 2014, subsequently extended to December
31, 2016 and most recently, June 1, 2017, and warrants to buy 28,571 shares of the common stock at an exercise price of $381.50
per share. In connection with each conversion, Golden State is expected to simultaneously exercise a percentage of warrants equal
to the percentage of the principal being converted.
The conversion price for the 4.75% $100,000
convertible debenture is the lesser of (i) $4.00 or (ii) 80% of the average of the five lowest volume weighted average prices (“VWAP”)
during the twenty (20) trading days prior to the conversion. If Golden State elects to convert a portion of the debenture and,
on the day that the election is made, the volume weighted average pre-split price is below $0.70, the Company shall have the right
to prepay that portion of the debenture that Golden State elected to convert, plus any accrued and unpaid interest, at 135% of
such amount.
14% Term loan due June 2018, related
party
On April, 18, 2016, 3DIcon entered into
an unsecured loan agreement whereby Carlton James North Dakota Limited ("CJNDL”) agreed to provide 3DIcon a loan facility
of up to $100,000. Under the terms of the agreement, 3DIcon shall pay interest on the outstanding unpaid balance at the rate of
1.167% per month. The interest is due quarterly and the principal is due June 29, 2018. CJNDL has advanced $103,993 ($3,993 in
excess of the facility) on the loan. Subsequent to September 30, 2016, CJND agreed that the excess amount funded to date and any
future funding under the loan will be done on the same terms and conditions as the original note. CJNDL is a party to the Share
Exchange Agreement discussed in Note 2.
14% Term loan due June 2018, related
party
On April, 18, 2016, 3DIcon entered into
an unsecured loan agreement whereby Victor Keen, former CEO of 3DIcon (“Keen”) agreed to provide 3DIcon a loan facility
of up to $300,000. Under the terms of the agreement, 3DIcon shall pay interest on the outstanding unpaid balance at the rate of
1.167% per month. The interest is due quarterly and the principal is due June 29, 2018. Keen has advanced $300,500 ($500 in excess
of the facility) on the loan. Subsequent to September 30, 2016, Keen agreed that the excess amount funded to date and any future
funding under the loan will be done on the same terms and conditions as the original note. Keen is a party to the Share Exchange
Agreement discussed in Note 2.
14% Term loan due June 2018, related
party
In June 2015, Coretec obtained a $500,000 revolving note agreement
with CJNDL. The total amount of borrowings by Coretec shall not exceed $500,000. Coretec pays interest on the outstanding balance
at the rate of 1.167% per month, payable on a quarterly basis. CJNDL has advanced $395,961 on the loan. Outstanding borrowings
are secured by substantially all assets of the Company. The Note is due on June 29, 2018.
Note 6 – Commitments
The Company entered into a consulting agreement
dated July 15, 2016 with Mr. Phillip Boudjouk in the area of working as a scientific and technical consultant. The Company anticipates
that Mr. Boudjouk’s work under this consulting agreement will be performed for the Company, in support of their business
development, research, development, and commercialization activities. The consulting agreement was effective as of July 15, 2016
and shall continue in full force and effect through July 14, 2017. The Company shall pay Mr. Boudjouk a fee of $7,000 per month.
During the three and nine months ended September 30, 2016, the Company paid $17,500.
The Company entered into a Sponsored Research
Agreement (“SRA”) dated August 14, 2015 with North Dakota State University Research Foundation (“NDSU/RF”).
With the proposed research for this project, NDSU/RF plans to make prototypical compounds and materials from
Cyclohexasilane
(“CHS”)
and CHS derivatives with the potential; 1) to act as efficient photoactive materials for solar cells,
2) to serve in electro active devices for optimization of current and voltage performance, 3) to perform at high levels of efficiency
as silicon anodes in lightweight batteries (silicon has more than 11 times the capacity of carbon in the ubiquitous carbon based
batteries), and, 4) to be incorporated into to specialty inks for printed electronics applications. The research commenced August
14, 2015 through August 31, 2016. The Company agreed to reimburse NDSU/RF for all costs incurred in performing the research up
to a maximum amount of $70,000. On June 7, 2016 the Company and NDSU/RF mutually agreed to amend the SRA. Under the terms of the
amendment the term was extended to June 30, 2017 and the consideration was increased by $120,000 to a maximum amount of $190,000.
The Company recognized expense of $28,893 and $61,904 during the three and nine months ended September 30, 2016, respectively,
leaving a balance of $128,096.
The Company entered into a one-year Independent
Consulting Agreement with Concordia Financial Group (“Concordia”) effective August 1, 2016, and month-to-month thereafter.
Under the terms of the agreement Concordia will provide business strategy services by assisting the Company by reviewing and evaluating
the Company's plans, personnel, board composition, technology, development of business models, building financial models for projections,
developing materials to describe the Company, developing capital sources and assisting and advising the Company in its financial
negotiations with capital sources. Concordia also advises with respect to effective registration of offerings of Company securities,
the management team, the Company's development of near and long-term budgets, marketing strategies and plans, and assists in presentations
related to the above services. Concordia is paid an hourly fee of $185.
Effective June 16, 2016, (the "Effective
Date") Coretec (“Licensee”) and NDSU/RF signed an Exclusive License agreement (the “NDSU/RF Agreement")
to have certain intellectual property rights (the “Patent Rights”), owned by NDSU/RF, developed and commercialized.
Under the terms of the NDSU/RF Agreement,
NDSU/RF granted Coretec an exclusive license to make, have made, use, sell, or any combination of the foregoing, Licensed Products
and Licensed Processes in the Field of Use and the Licensed Territory as defined in the NDSU/RF Agreement. Additionally NDSU/RF
granted to Licensee a limited exclusive eighteen month option (the “Option Term”) to license Optioned Technologies'
Patent Rights (”Optioned Technologies”), as described in the NDSU/RF Agreement. Licensee may only undertake technical,
economic, and commercial evaluation of each optioned patent during the Option Term. Such evaluation by Licensee shall only be to
determine if Licensee exercises its option and negotiates a license to such patent(s) as a Licensed Technology under the NDSU/RF
Agreement and not to develop intellectual property or patents during the Option Period. Licensee agreed to actively and diligently
evaluate Optioned Technologies so as to determine and report to NDSU/RF the status and progress toward the licensing of each patent
listed in the NDSU/RF Agreement during the Option Period. If Licensee decides to not pursue any further evaluation of any patent
or patent application of Optioned Technology Patent Rights in any quarter or during the previous quarter has not carried out any
evaluation activities on any such patent or patent application, then any such patent or patent application shall be deleted from
the NDSU/RF Agreement at the end of such quarter and all rights to such deleted Patent Rights shall revert to NDSU/RF.
In consideration for signing the NDSU/RF
Agreement, Coretec agreed to pay NDSU/RF a license issue fee of $25,000 upon signing the NDSU/RF Agreement and an annual license
maintenance fee of $25,000 beginning one year from the Effective Date of the NDSU/RF Agreement and annually thereafter in the event
net sales of the Licensed Technology do not exceed three million dollars ($3,000,000) of which NDSU/RF shall receive a 6% royalty
on the net sales. NDSU/RF shall also receive fifty percent (50%) of all sublicense fees received by Coretec. Coretec also agreed
to pay to NDSU/RF all fees and costs relating to the filing, prosecution, and maintenance of the Patent Rights, whether such fees
and costs were incurred before or after the Effective Date of this NDSU/RF Agreement and reimburse NDSU/RF for all prior invoiced
patenting expenses (not to exceed to $227,111 as of April 1, 2016), (“LT Prior Expenses”). On an on-going basis, Coretec
agreed to reimburse NDSU/RF patenting expenses invoiced after April 1, 2016 (“LT On-going Expenses”) and each month
thereafter during the term of the Agreement. The LT On-going Expenses are due monthly within thirty days of being invoiced. The
LT Prior Expenses of $227,111 are to be paid to NDSU/RF according to the following schedule:
|
a.
|
Twenty-five thousand dollars ($25,000) upon execution of the NDSU/RF Agreement
|
|
b.
|
Quarterly payments of twenty-five thousand dollars ($25,000), beginning on October 31, 2016, and
on January 31, 2017, April 30, 2017, July 31, 2017, October 31, 2017, January 31, 2018, April 30, 2018 and the remainder on July
31, 2018.
|
In regards to the Optioned Technologies,
in the event Coretec exercises its option on the Optioned Technology, Coretec agreed to reimburse NDSU/RF for all prior invoiced
patenting expenses (not to exceed $240,332 as of April 1, 2016) pertaining to the Optioned Technologies incurred and invoiced prior
to April 1, 2016 (“OT Prior Expenses"). Licensee shall reimburse NDSU/RF for OT Prior Expenses of Optioned Technologies
according to the following schedule:
|
a.
|
Twenty-five thousand dollars ($25,000) upon the licensing of one or more of the Optioned Technologies
on the effective date that the Optioned Technologies are licensed.
|
|
b.
|
Quarterly payments of twenty-five thousand dollars ($25,000) beginning on the next quarter after
the effective date that the Optioned Technologies are licensed and paid by January 31, April 30, July 31, October 31, until all
OT Prior Expenses on Optioned Technologies have been paid.
|
Beginning April 1, 2016 and during the
Option Period, Licensee also agreed to reimburse NDSU/RF for all ongoing and future patenting expenses ("OT On-going Expenses")
pertaining to Optioned Technologies accrued and invoiced after April 1, 2016. OT On-going Expenses of Optioned Technologies are
to be reimbursed within thirty (30) days of being invoiced.
Licensee may terminate this NDSU/RF Agreement
at any time by providing at least six (6) months written, unambiguous notice of such termination to NDSU/RF. Licensee shall remain
obligated to pay all amounts due NDSU/RF through the effective date of the termination.
During the three and nine months ended
September 30, 2016, Coretec paid $37,442 and $86,074 respectively under the terms of the NDSU/RF Agreement.
As of the date of filing, the Company has
not exercised the Optioned Technologies.
Note 7 – Preferred Stock, Warrants
and Options
The terms of the Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock and Warrants are as follows:
Series A Convertible Preferred Sto
ck
A total of 500,000 shares of Series A Convertible
Preferred Stock (the “Series A Preferred Stock”) have been authorized for issuance under the Certificate of Designation
of Preferences, Rights and Limitation of Series A Convertible Preferred Stock of 3DIcon Corporation (the “Certificate of
Designation”), which Certificate of Designation was filed with the Secretary of State of the State of Oklahoma on December
11, 2013. The shares of Series A Preferred Stock have a par value of $0.0002 per share and a stated value of $1.00 per share (the
“Stated Value”), and shall receive a dividend of 6% of their Stated Value per annum payable or upon conversion or redemption
of Series A Preferred at the option of the Corporation. We have not paid any cash or stock dividends to the holders of our Series
A Preferred. As of September 30, 2016 dividends in arrears totaled approximately $60,000. Under the Certificate of Designation,
the holders of the Series A Preferred Stock have the following rights, preferences and privileges:
The Series A Preferred Stock may, at the
option of the Investor, be converted at any time after the first anniversary of the issuance of the Series A Preferred Stock or
from time to time thereafter into 50,000,000 shares of Common Stock that such investor is entitled to in proportion to the 500,000
shares of Series A Preferred so designated in the Certificate of Designation.
The Series A Preferred Stock will automatically
be converted into Common Stock anytime the 5 day average VWAP of the Company’s Common Stock prior to such conversion is equal
to $0.05 or more. Such mandatory conversion would be converted by the same method described above for discretionary conversions.
Except as otherwise required by law, the
holders of shares of Series A Preferred Stock shall not have voting rights or powers.
In the event of any (i) liquidation, dissolution
or winding up of the Company, whether voluntary or involuntary, or ii) sale, merger, consolidation, reorganization or other transaction
that results in a change of control of the Company, each holder of a share of Series A Preferred shall be entitled to receive,
subject to prior preferences and other rights of any class or series of stock of the Company senior to the Series A Preferred,
but prior and in preference to any distribution of any of the assets or surplus funds of the Company to holders of Common Stock,
or any other class or series of stock of the Company junior to the Series A Preferred, an amount equal to the Stated Value plus
accrued and unpaid dividends (as adjusted for any stock dividends, combinations or splits with respect to such shares) (the “Preference
Amount”). After such payment has been made to the holders of Series A Preferred of the full Preference Amount to which such
holders shall be entitled, the remaining net assets of the Company available for distribution, if any, shall be distributed pro
rata among the holders of Common Stock. In the event the funds or assets legally available for distribution to the holders of Series
A Preferred are insufficient to pay the Preference Amount, then all funds or assets available for distribution to the holders of
capital stock shall be paid to the holders of Series A Preferred pro rata based on the full Preference Amount to which they are
entitled.
The Company may not declare, pay or set
aside any dividends on shares of any class or series of capital stock of the Company (other than dividends on shares of Common
Stock payable in shares of Common Stock) unless the holders of the Series A Preferred Stock shall first receive, or simultaneously
receive, a dividend on each outstanding share of Series A Preferred in an amount equal to the dividend per share that such holders
would have received had they converted their shares of Series A Preferred into shares of Common Stock immediately prior to the
record date for the declaration of the Common Stock dividend in an amount equal to the average VWAP during the 5 trading days prior
to the date such dividend is due.
In regards to the implications of the Exchange
Transaction on Section 6 of the Series A Certificate of Designation (“COD”), the Company’s position is that a
“Liquidity Event” as defined in Section 6(b) of the COD, as the concept was intended by all the Company and investors
purchasing the shares, has not occurred.
Series A Warrants
Each Unit under the Securities Purchase
Agreement consists of warrants entitling the investor to purchase fifty (50) shares of Common Stock for each share of Series A
Preferred purchased by such investor in the Private Placement, at an initial exercise price per share of $0.0055. The exercise
price and number of shares of Common Stock issuable under the warrants are subject to adjustments for stock dividends, splits,
combinations and similar events. On or after the first anniversary of the issuance of the warrants and prior to close of business
on the fourth anniversary of the issuance of the warrants, the warrants may be exercised at any time upon the election of the holder,
provided however, that an investor may at any given time convert only up to that number of shares of Common Stock so that, upon
conversion, the aggregate beneficial ownership of the Company’s Common Stock (calculated pursuant to Rule 13d-3 of the Securities
Exchange Act of 1934, as amended) of such investor and all persons affiliated with such investor, is not more than 4.99% of the
Company’s Common Stock then outstanding (subject to adjustment up to 9.99% at the investor’s discretion upon 61 days’
prior notice).
Series B Convertible Preferred Stock
On March 22, 2016, 3DIcon filed with the
Secretary of State of the State of Oklahoma a Certificate of Designation (the “Certificate of Designation”), setting
for the Preferences, Rights and Limitation of the Company’s Series B Convertible Preferred Stock (the “Series B Preferred”).
The Two Million (2,000,000) shares of Series B Preferred designated under the Certificate of Designation have a stated value of
$1.00 per share (the “Stated Value”). Under the Certificate of Designation, the holders of the Series B Preferred have
the following rights, preferences and privileges:
The holders of Series B Preferred are not
entitled to receive dividends but have voting rights equal to the number of shares of the Company’s Common Stock into which
their Series B Preferred can be converted, whether or not the shares are available for issuance.
At the option of the holder, Series B Preferred
may be converted in whole or in part, from time to time, into One Thousand Nine Hundred Fourteen (1,914) shares of Common Stock.
The Series B Preferred Stock will automatically be converted into Common Stock if (i) at anytime the 5 day average VWAP of the
Company’s Common Stock prior to such automatic conversion is equal to $0.10 or more; or (ii) the Company enters into a transaction
for which the Company enters into a share exchange agreement or agreement and plan of merger, which agreement is executed within
ninety (90) days after the date of the Certificate of Designation and pursuant to which the Company thereafter becomes a consolidated
company with another entity, and the Company issues equity securities of the Company. Such automatic conversion would be converted
by the same method described above for discretionary conversions.
In the event of any i) liquidation, dissolution
or winding up of the Company, whether voluntary or involuntary, or ii) sale, merger, consolidation, reorganization or other transaction
that results in a change of control of the Company, each holder of a share of Series B Preferred shall be entitled to receive,
subject to prior preferences and other rights of any class or series of stock of the Company senior to the Series B Preferred,
but prior and in preference to any distribution of any of the assets or surplus funds of the Company to holders of Common Stock,
or any other class or series of stock of the Company junior to the Series B Preferred, an amount equal to the Stated Value (as
adjusted for any stock dividends, combinations or splits with respect to such shares) (the “Preference Amount”). After
such payment has been made to the holders of Series B Preferred of the full Preference Amount to which such holders shall be entitled,
the remaining net assets of the Company available for distribution, if any, shall be distributed pro rata among the holders of
Common Stock. In the event the funds or assets legally available for distribution to the holders of Series B Preferred are insufficient
to pay the Preference Amount, then all funds or assets available for distribution to the holders of capital stock shall be paid
to the holders of Series B Preferred pro rata based on the full Preference Amount to which they are entitled.
On September 30, 2016, 3DIcon filed with
the Secretary of State of the State of Oklahoma a Certificate of Amendment to the Certificate of Designation, increasing the number
of authorized shares of Series B Preferred Stock from 2,000,000 shares to 6,600,000 shares.
Pursuant to the
Share Exchange Agreement (see Note 2), 3DIcon issued 4,760,872 shares of 3DIcon’s Series B Convertible Preferred Stock in
the reverse acquisition of Coretec.
Golden State
Warrants and Options
As of September
30, 2016, Golden State has warrants outstanding to purchase 18,318 shares of common stock at a price of $381.50 per share which
expire December 31, 2016, subsequently extended to June 1, 2017. Global Capital has warrants outstanding to purchase 300,000 shares
of common stock at a price of $0.0032 per shares which expire on March 31, 2019. Additionally, from the Series A preferred stock
issuance, there are 6,000,000 warrants outstanding to purchase common shares at $0.0055 per share which expire December 31, 2017
and 13,250,000 warrants outstanding that were issued to Victor Keen, the Chairman of the Board of Directors of 3DIcon, which expire
on January 17, 2018.
Stock options for employees, directors
or consultants that vest immediately, are valued at the date of award, which does not precede the approval date, and compensation
cost is recognized in the period the options are vested. Stock options generally become exercisable on the date of grant and expire
based on the terms of each grant.
The estimated fair value of options for
common stock granted was determined using the Black-Scholes option pricing model. The expected dividend yield is based on the average
annual dividend yield as of the grant date. Expected volatility is based on the historical volatility of our stock. The risk-free
interest rate is based on the U.S. Treasury Constant Maturity rates as of the grant date. The expected life of the option is based
on historical exercise behavior and expected future experience.
Note 8 – Incentive Stock Plan
In March 2014, the 3DIcon Corporation 2014
Equity Incentive Plan (the “2014 EIP”) was established. The total number of shares of stock which may be purchased
or granted directly by options, stock awards or restricted stock purchase offers, or purchased indirectly through exercise of options
granted under the 2014 EIP shall not exceed fifty million (50,000,000) shares. The shares are included in a registration statement
filed March 2014. As of September 30, 2016, there were 750,103 shares available for issuance under the 2014 EIP.
In March 2015, the 3DIcon Corporation 2015
Equity Incentive Plan (the “2015 EIP”) was established. The total number of shares of stock which may be purchased
or granted directly by options, stock awards or restricted stock purchase offers, or purchased indirectly through exercise of options
granted under the 2015 EIP shall not exceed eighty-five million (85,000,000) shares. The shares are included in a registration
statement filed March, 2015. There are 142,244 shares available for issuance under the 2015 EIP as of September 30, 2016
.
Note 9 – Office Lease
The Company entered into a lease agreement
in June 2015 for office space in North Dakota that will expire in November 2017. The Company has an amended office lease in Tulsa,
Oklahoma that will expire on July 31, 2018. At September 30, 2016, the minimum future lease payments to be paid under the non-cancellable
leases are payable as follows:
2016
|
|
$
|
11,500
|
|
2017
|
|
|
44,000
|
|
2018
|
|
|
13,000
|
|
Rent expense for operating leases was $5,700
and $17,000 for the three and nine months ended September 30, 2016, respectively.
Note 10 – Related Party Transactions
As of December 31, 2015 the Company advanced
$5,000 to an entity partially owned by an owner of a former member of Coretec. This amount was due on demand and repaid in April
2016.
The Company entered into a consulting
agreement dated July 7, 2015 with Mr. Doug Freitag, who became the Company’s CEO on October 1, 2016. Mr. Freitag’s
field of consultation was in the area of working as a federal business and private sector business consultant and technical consultant.
The work under this consulting agreement was performed for the Company, in support of business development, research, development,
and commercialization activities. The consulting agreement was effective as of July 2015 and continued in full force through July
2016 and will continue monthly thereafter, unless terminated under the terms of the agreement. On October 1, 2016, the Company
entered into a consulting agreement with Mr. Doug Freitag which replaces the previous agreement but the terms are identical. The
consulting agreement became effective as of October 1, 2016 and continued in full force and effect through December 31, 2016.
Subsequent to December 31, 2016, Mr. Freitag and the Company entered into a consulting agreement pursuant to which he will be
compensated $194 per hour.
The Company paid Mr. Freitag a fee of $30,341
and $70,546 during the three and nine months ended September 30, 2016, respectively.
During the nine months ended September
30, 2016, Mr. Victor Keen advanced $300,500 to 3DIcon under the terms of a loan which is included in notes payable – related
party (see Note 5).
During the nine months ended September
30, 2016, CJNDL, a company owned by Mr. Carlton James, a director of 3DIcon, advanced $265,389 to 3DIcon under the terms of a loan,
which is included in term loans (see Note 5).
As of September 30, 2016, accrued interest
related to the $500,000 14% term loan due June 2018 amounted to $26,697 and interest expense was $12,341 and $26,697 during the
three and nine months ended September 30, 2016, respectively.
Note 11 – Subsequent Events
Authorization of Name
Change
On February 21, 2017, the Board unanimously
approved the proposal to seek stockholder approval and authorization to amend the Company’s Certificate of Incorporation
to change the name of the Company to “The Coretec Group Inc.” (the “Name Change”) and thereafter change
its trading symbol to a trading symbol resembling the name of the Company following the Name Change. On February 21, 2017, a majority
of the Company’s stockholders adopted resolutions by written consent authorizing the Board to undertake the Name Change.
This Name Change will become effective immediately upon the Company’s filing of the Name Change Amendment with the Secretary
of State of the State of Oklahoma.
Authorization of Reverse Stock Split
On February 21, 2017 (the “Record
Date”), the Board of Directors unanimously approved, and a majority of the Company’s stockholders, as of the Record
Date, approved by written consent pursuant to Section 18-1073 of the Oklahoma Act, to permit the Company’s Board of
Directors, in its sole discretion, to effectuate one or more consolidations of the issued and outstanding shares of common stock
at some future date no later than the first anniversary of the Record Date, pursuant to which the shares of common stock would
be combined and reclassified into one validly issued- fully paid and non-assessable share of common stock at a ratio (the “Reverse
Split Ratio”) within the range of 1-for-50 and up to 1-for-300 (the “Reverse Split Range”), with each stockholder
otherwise entitled to receive a fractional share of common stock as a result of the Reverse Stock Split. If effectuating
a Reverse Stock Split pursuant to the minimum stated Reverse Split Ratio, each 50 shares of the Company’s issued and outstanding
common stock will be automatically converted into 1 share of common stock. If effectuating a Reverse Stock Split pursuant to the
maximum stated Reverse Split Ratio, each 300 shares of our issued and outstanding common stock will be automatically converted
into 1 share of common stock.
Supply Agreement
On December 13, 2016, the Company entered
into a Supply Agreement (the “Supply Agreement”) with Gelest Inc., a Pennsylvania corporation (“Gelest”).
This Supply Agreement is for the purchase and sale of CHS (or the “Products”) as set forth in the Supply Agreement,
pursuant to which the Company agrees to use Gelest as a primary source to manufacture the Products for the duration of three years
from the effective date.
An initial estimate of
pricing for the Products is set forth in the Supply Agreement, which varies from $28/gram to $35/gram based on the quantity that
is being purchased. Final pricing will be reviewed and adjusted annually based on prior year’s consumption and/or as the
global economic conditions dictate, taking into account market conditions and raw material price fluctuations.
Under the
terms of the Supply Agreement, Gelest
will scale-up production of CHS, within their available capacity of 12-18 Kg per year,
and further optimize the manufacturing process licensed by the purchaser from NDSU/RF. The term of this project is 90 days from
the receipt of the first installment of YSi6Cl14 salt from the purchaser. The cost for scale-up and manufacturing optimization
is $180,000 to be paid by the purchaser in two installments. The initial installment of $18,000 was paid upon finalizing this Supply
Agreement. The second installment of $162,000 is to be paid net 30 days from availability for shipment of up 200 – 400 grams
of the initial product of the quality stated in the Supply Agreement. As of the date of filing, the Company has not paid the second
installment, as Gelest has yet to complete the production of material.
Consulting Agreements
On January 22, 2017, the Company hired
silicon materials expert Ragnar Avery as Vice President, CHS Marketing and Sales. Mr. Avery will lead new business development
and sales initiatives for the Company’s proprietary liquid silicon precursor, CHS. The consulting agreement shall be effective
as of February 1, 2017 and shall continue in full force and effect through February 1, 2018. The Company shall pay Mr. Avery a
fee of $125 per hour for the first three months and $150 per hour thereafter.
Debentures Payable
Subsequent to September 30, 2016, Golden
Gate extended their debenture and note payable to June 1, 2017.
Newly Appointed Chief Executive Officer
On March 21, 2017, Doug
Freitag resigned as Chief Executive Officer of the Company in order to allow Michael A. Kraft to take over in his place as the
Company’s newly appointed Chief Executive Officer. In connection with Mr. Kraft’s appointment, the Company entered
into a consulting agreement with Mr. Kraft, pursuant to which it agreed to compensate Mr. Kraft, $1,500 per day for his commitment
to allocate seven days a month to the Company and a $25,000 bonus payable in the Company’s restricted stock upon the occurrence
of certain events. In addition, the Company agreed to issue to Mr. Kraft, an option to purchase up to $50,000 of the Company’s
common stock at an exercise price equal to the market price as of the date on which certain milestones are completed.
Mr. Freitag will assume a strategic
consulting role as the Company’s Vice President of Technology and will remain on the Company’s Board
of Directors. Mr. Freitag will continue to be compensated $194 per hour pursuant to the consulting agreement he
entered into with the Company in January 2017.