Note 2 – Going Concern and Management’s Plans
The Company has realized a cumulative net
loss of $1,861,394 for the period from inception (June 2, 2015) to June 30, 2017, has negative working capital of $2,053,412,
and no revenues. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for
a year following the issuance of these condensed consolidated financial statements. The Company has insufficient revenue and capital
commitments to fund the development of its planned products and to pay operating expenses.
THE CORETEC GROUP INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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.
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 condensed consolidated financial
statements have been prepared in conformity with U.S. GAAP, which contemplates 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 condensed consolidated financial statements do not necessarily purport to represent realizable
or settlement values. The condensed consolidated financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Note 3 – Summary of Significant Accounting
Policies
Principles of Consolidation
The consolidated condensed balance sheets as of June 30, 2017 and December 31, 2016 include the accounts
of the Group and its wholly owned subsidiary, Coretec. The consolidated condensed statements of operations for the three and six
months ended June 30, 2017 and cash flows for the six months ended June 30, 2017 include the accounts of the Group and its wholly
owned subsidiary, Coretec. The consolidated condensed statements of operations for the three and six months ended June 30, 2016
and cash flows for the six months ended June 30, 2016 include 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
or cash flows for the Group prior to the completion of the acquisition. Intercompany transactions and balances have been eliminated
in consolidation.
Reclassification
Certain amounts in prior periods have been
reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported net loss.
Use of Estimates
The preparation of condensed 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.
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.
Fair Value of Financial Instruments
The following methods and assumptions were
used to estimate the fair value of each class of financial instrument held by the Company:
Current assets and current
liabilities
- The carrying value approximates fair value due to the short maturity of these items.
Notes payable –
The fair value of the Company’s notes payable has been estimated by the Company based upon the liability’s characteristics,
including interest rate. The carrying value approximates fair value.
THE CORETEC GROUP INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Beneficial Conversion Feature of Convertible
Notes Payable
The Company accounts for convertible notes
payable in accordance with the guidelines established by the Financial Accounting Standards Board’s (“FASB”)
Accounting Standards Codification (“ASC”) Topic 470-20, Debt with Conversion and Other Options, Emerging Issues Task
Force ("EITF") 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, and EITF 00-27, Application of Issue No 98-5 To Certain Convertible Instruments. The beneficial conversion feature
of a convertible note is normally characterized as the convertible portion or feature of certain notes payable that provide a rate
of conversion that is below market value or in-the-money when issued. The Company records a beneficial conversion feature related
to the issuance of a convertible note when issued.
The beneficial conversion feature of a convertible
note is credited to additional paid-in-capital. The intrinsic value is recorded in the consolidated financial statements
as a debt discount and such discount is amortized over the expected term of the convertible note and is charged to interest expense.
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 loss 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
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 periods ended June 30, 2016.
The following securities are excluded from
the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive:
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Options
|
|
|
284,166
|
|
|
|
-
|
|
Warrants
|
|
|
65,228
|
|
|
|
-
|
|
Series A convertible preferred stock
|
|
|
115,000
|
|
|
|
-
|
|
Series B convertible preferred stock
|
|
|
41,842,241
|
|
|
|
41,842,241
|
|
Convertible debentures
|
|
|
61,122,346
|
|
|
|
-
|
|
Total potentially dilutive shares
|
|
|
103,428,981
|
|
|
|
41,842,241
|
|
The table above for all periods has been retroactively adjusted to reflect the Reverse Split.
Subsequent Events
The Company evaluates events that have occurred
after the balance sheet date but before the condensed consolidated financial statements are issued. Based upon the evaluation,
the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure
in the condensed consolidated financial statements, except as disclosed.
Recent Accounting Pronouncements
The following is a summary of recent accounting
pronouncements that are relevant to the Company:
In February 2016, the FASB issued accounting
standards update (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.
Note 4 – Share Exchange Agreement
On May 31, 2016, the Group 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 the Group in exchange for the Group’s issuance of an aggregate 4,760,872 shares
of the Group’s Series B Convertible Preferred Stock to the Members. Upon the closing of the Share Exchange on the Closing
Date, considering any preferred stock on an “as converted” basis, approximately 65% of the Group’s issued and
outstanding common stock is now owned by the former Coretec Members. The remaining 35% is held by the Group’s prior stockholders.
The acquisition is treated as a “reverse acquisition” (See Note 1).
The following unaudited
pro forma results for the three and six months ended June 30, 2016 summarizes the consolidated results of operations of the Company,
assuming the reverse acquisition had occurred on January 1, 2016 and after giving effect to the reverse acquisition adjustments,
including amortization of tangible and intangible assets acquired in the transaction:
|
|
June 30, 2016
|
|
|
|
Three
Months Ended
|
|
|
Six
Months
Ended
|
|
Net revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
Net loss
|
|
$
|
(559,476
|
)
|
|
$
|
(851,158
|
)
|
THE CORETEC GROUP INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 5 – Debentures and Notes Payable
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Notes and debentures payable:
|
|
|
|
|
|
|
|
|
5.25% Insurance premium finance agreement, due June 2017
|
|
$
|
-
|
|
|
$
|
24,794
|
|
9% Promissory note due June 2017
|
|
|
25,341
|
|
|
|
25,341
|
|
4.75% Convertible debenture due December 2017
|
|
|
64,124
|
|
|
|
64,124
|
|
Total notes and debentures payable
|
|
$
|
89,465
|
|
|
$
|
114,259
|
|
|
|
|
|
|
|
|
|
|
Notes payable - related party:
|
|
|
|
|
|
|
|
|
14% Term loan due June 2018
|
|
$
|
213,993
|
|
|
$
|
213,993
|
|
14% Term loan due June 2018
|
|
|
576,500
|
|
|
|
440,500
|
|
14% Term loan due June 2018
|
|
|
400,582
|
|
|
|
399,832
|
|
7% Convertible promissory note due March 2019, net
|
|
|
32,967
|
|
|
|
-
|
|
7% Convertible promissory note due June 2019, net
|
|
|
1,233
|
|
|
|
-
|
|
Total notes payable - related party
|
|
|
1,225,275
|
|
|
|
1,054,325
|
|
Less current portion
|
|
|
(1,191,075
|
)
|
|
|
-
|
|
Long term debt
|
|
$
|
34,200
|
|
|
$
|
1,054,325
|
|
5.25% Insurance premium finance agreement, due June 2017
The Company made payments of $24,794 against
the insurance premium financing obligation during the six months ended June 30, 2017.
9
% Promissory note due
June 1, 2017
On February 21, 2017, the Group received
a letter from Golden State Equity Investors, Inc. (“Golden State”), the holder of the note, extending the maturity
date of the 9% promissory note to June 1, 2017 with the condition that if the Reverse Split occurred by June 1, 2017, the maturity
date of the note would be further extended to April 1, 2018. The Reverse Split did not occur until June 28, 2017 and the Group
is in default on the 9% note. During default, the unpaid principal balance and unpaid accrued interest will accrue interest at
14% and all unpaid principal and interest may become immediately due under the terms of the note.
The Group is currently in discussions with
Golden Gate to further extend the maturity date of the note and cure the default.
14% Term loan due June 2018, related party
Mr. Victor Keen, Co-Chairman of the Board of Directors, advanced an additional $136,000 during the six
months ended June 30, 2017. As of June 30, 2017, an aggregate amount of $576,500 is due to Mr. Keen under the 14% term loan. As
of June 30, 2017, accrued interest related to the 14% term loan amounted to $59,945 and interest expense was $39,427 for the six
months ended June 30, 2017.
As of June 30, 2017, Carlton James North Dakota
Limited (“CJNDL”), a company owned by Mr. Simon Calton, Co-Chairman of the Board of Directors, has advanced $614,575
to the Company under the terms of two loans, which are included in notes payable. As of June 30, 2017, accrued interest related
to the CJNDL term loans due June 2018 amounted to $93,896 and interest expense was $43,105 during the six months ended June 30,
2017.
7% Convertible promissory note due March 2019
On March 30, 2017, the Company issued to
Mr. Victor Keen, Co-Chairman of the Board of Directors, a 7% convertible promissory note in a principal amount of $250,000, due
March 1, 2019 (“Maturity Date”). The promissory note shall automatically convert into eight percent (8%) of the fully
diluted outstanding shares of common stock of the Company calculated after giving effect to (a) the exercise of all outstanding
options, warrants or other rights to acquire shares of common stock of the Company, (b) the conversion of all outstanding convertible
or exchangeable securities, and (c) after giving effect to the issuance of common stock upon conversion of this note (the “Conversion
Shares”). The conversion shall not occur until both of the following two events shall have occurred (the “Conversion
Event”): (i) the consummation of the Reverse Split by the Company as reflected in the Preliminary Information Statement filed
with the Securities and Exchange Commission on March 7, 2017, and (ii) the conversion of all the Company’s issued and outstanding
Series A Convertible Preferred Stock and Series B Convertible Preferred Stock into the Conversion Shares. If the Conversion Event
has not occurred prior to the earlier to occur of the Maturity Date and the occurrence of an event of default, then this note shall
not be automatically converted into the Conversion Shares and Mr. Victor Keen may elect, at his sole discretion, (i) to have the
outstanding principal balance of this note converted into the Conversion Shares; or (ii) to declare the outstanding principal balance
of this note, together with all accrued interest, be paid in accordance with the terms of the note. Such election may be made at
any time on or following the Maturity Date or the occurrence of an event of default. This note is an unsecured obligation of the
Company. The accrued interest and interest expense related to the $250,000 7% Convertible Promissory Note amounted to $4,599 during
the six months ended June 30, 2017. The embedded conversion option was deemed to be a beneficial conversion feature because the
active conversion price was less than the commitment date market price of the common stock. The dollar amount of the beneficial
conversion feature is limited to the carrying value of the promissory note, so a $250,000 debt discount was recorded, with a corresponding
credit to additional paid-in capital for the beneficial conversion feature. The debt discount will be amortized over the life of
the debt and $32,967 was amortized during the six months ended June 30, 2017.
7% Convertible promissory note due June 2019
On June 21, 2017, the Company issued to Mr. Victor Keen, Co-Chairman of the Board of Directors, a 7% convertible
promissory note in a principal amount of $100,000, due June 21, 2019. The promissory note shall automatically convert into four
percent (4%) of the fully diluted outstanding shares of common stock of the Company calculated after giving effect to (a) the exercise
of all outstanding options, warrants or other rights to acquire shares of common stock of the Company, (b) the conversion of all
outstanding convertible or exchangeable securities, and (c) after giving effect to the issuance of common stock upon conversion
of this note (the “Conversion Shares”). The conversion shall not occur until both of the following two events shall
have occurred (the “Conversion Event”): (i) the consummation of the Reverse Split by the Company as reflected in the
Preliminary Information Statement filed with the Securities and Exchange Commission on March 7, 2017, and (ii) the conversion of
all of the Company’s issued and outstanding Series A Convertible Preferred Stock and Series B Convertible Preferred Stock
into the Conversion Shares. If the Conversion Event has not occurred prior to the earlier to occur of the Maturity Date and the
occurrence of an event of default, then this note shall not be automatically converted into the Conversion Shares and Mr. Victor
Keen may elect, at his sole discretion, (i) to have the outstanding principal balance of this note converted into the Conversion
Shares; or (ii) to declare the outstanding principal balance of this note, together with all accrued interest, be paid in accordance
with the terms of the note. Such election may be made at any time on or following the Maturity Date or the occurrence of an event
of default. This note is an unsecured obligation of the Company. The accrued interest and interest expense related to the $100,000
7% Convertible Promissory Note amounted to $175 during the six months ended June 30, 2017. The embedded conversion option was deemed
to be a beneficial conversion feature because the active conversion price was less than the commitment date market price of the
common stock. The dollar amount of the beneficial conversion feature is limited to the carrying value of the promissory note, so
a $100,000 debt discount was recorded, with a corresponding credit to additional paid-in capital for the beneficial conversion
feature. The debt discount will be amortized over the life of the debt and $1,233 was amortized during the six months ended June
30, 2017.
THE CORETEC GROUP INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 6 – Commitments and Contingencies
Litigation, Claims, and Assessments
The Company may be involved in legal proceedings,
claims and assessments arising in the ordinary course of business. In the opinion of management, such matters are currently not
expected to have a material impact on the Company’s consolidated financial statements. The Company records legal costs associated
with loss contingencies as incurred and accrues for all probable and estimable settlements.
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 Cyclohexasilane
(“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 Research Foundation (“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 between 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.
Office Lease
The Company entered into a lease agreement
in June 2015 for office space in North Dakota that was canceled on April 30, 2017 with no cancellation costs paid or due. The Company
has an amended office lease in Tulsa, Oklahoma that will expire on July 31, 2018. Rent expense for operating leases was $19,500
and $14,936 for the six-month periods ended June 30, 2017 and 2016, respectively.
Note 7 – Research Grant North
Dakota
The North Dakota Center of Excellence Commission awarded a funding request for Research North Dakota (“RND”)
grant to NDSU Chemistry and Biochemistry in partnership with the Company.
RND promotes the development
and commercialization of products and processes through industry/university research partnerships. RND provides matching funds
to help companies pay for the university research.
The $150,000 matching grant is effective April 1, 2017 and expires on
March 31, 2018. The Company shall provide for a match to State dollars of at least $1:$1. The match can be in the form of
contribution directly to NDSU or cash expended by the Company on valid cost incurred in support of the project. The purpose
of the grant is to improve the yield and purity of the key ingredients required for an economical synthesis of CHS, an ingredient
for making a variety of commercially important silicon based materials and materials for lightweight batteries and lightweight
solar cells. There were no expenditures under the grant for the three months and six months periods
ended June 30, 2017.
Note 8 – Options Issued to Purchase
Common Stock
On March 21, 2017, the Company and Mr.
Michael Kraft entered into a Consulting Agreement, pursuant to which the Company granted Mr. Kraft an option to purchase from the
Company $50,000 of stock at the market price on the date of the execution of the Reverse Split, which became effective on June
28, 2017. Accordingly, the $50,000 value of options calculates to 208,160 shares based upon the $0.24 closing price on June 28,
2017.
The $50,000 estimated fair value of options
to purchase common stock issued in 2017 was determined using the Black-Scholes option pricing model. The expected dividend yield
of $0 is based on the average annual dividend yield at the date issued. Expected volatility of 260.52% is based on the historical
volatility of the stock. The risk-free interest rate of 1.84% is based on the U.S. Treasury Constant Maturity rates as of the issue
date. The expected life of the warrants of ten years is based on historical exercise behavior and expected future experience.
Note 9 – Subsequent Events
On July 27, 2017, the Company converted the
total outstanding Series B Preferred shares of 6,558,345 into Common shares totaling 41,842,241 under the terms of the Certificate
of Designation of the Series B Convertible Preferred Stock.
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Forward-Looking Statements
The information in
this report contains forward-looking statements. All statements other than statements of historical fact made in this report are
forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial
position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,”
“estimates,” “could,” “possibly,” “probably,” “anticipates,” “projects,”
“expects,” “may,” “will,” or “should” or other variations or similar words. No
assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking
statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly
from management’s expectations.
This Quarterly Report
on Form 10-Q includes the accounts of The Coretec Group Inc., an Oklahoma corporation, together with its wholly-owned subsidiary,
Coretec Industries LLC, a North Dakota limited liability corporation based in Fargo, North Dakota (individually referred to as
“Coretec”). References in this Report to “we”, “our”, “us” or the “Group”
refer to The Coretec Group Inc. and its consolidated subsidiary unless context dictates otherwise.
The following discussion
and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed
to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will
necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment
of our management.
Plan of Operation
Background:
On June 22, 2017, The Coretec Group Inc. (the “Group”) filed an Amended Certificate of Incorporation
with the Secretary of State of the State of Oklahoma to change its name from “3DIcon Corporation” to “The Coretec
Group Inc.”, which became effective on June 29, 2017.
The Company, formerly known
as 3DIcon Corporation, was incorporated on August 11, 1995, under the laws of the State of Oklahoma. The Company’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.
On September 30, 2016 (the
“Closing Date”), we closed a transaction contemplated by a Share Exchange Agreement dated May 31, 2016 (the “Share
Exchange Agreement”) with Coretec Industries, LLC (“Coretec”). Pursuant to the Share Exchange Agreement, Coretec
became a wholly-owned subsidiary of the Company. Coretec was organized on June 2, 2015 in the state of North Dakota. It is currently
developing, testing, and providing new and/or improved technologies, products, and service solutions for medical, electronic, photonic,
display, and lighting markets among others.
The combination of the
two companies provides a significant number of opportunities to increase shareholder value by:
|
·
|
Providing technological support to advance the refinement
of CSpace image material;
|
|
·
|
Adding recognized expertise to the team;
|
|
·
|
Creating the opportunity for near-term revenue; and
|
|
·
|
Adding a significant portfolio of Intellectual Property.
|
Recent Developments
Supply Agreement
On December 13, 2016, we
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 Cyclohexasilane (“CHS”) as set forth in the Supply Agreement
(the “Products”), pursuant to which the Company agrees to use Gelest as a primary source to manufacture the Products
for a period of three years. North Dakota State University (“NDSU”) provided raw materials required to produce
CHS to Gelest in January 2017. Efforts by Gelest to scale the manufacturing process for CHS are ongoing with the goal
of producing up to 400 grams of material that will be available for sale to potential customers. 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 and quality
of material that is being purchased. We believe this price is competitive with competing higher order silanes such as
trisilane and neopentasilane while offering a number of advantages.
Research North Dakota Grant
The North Dakota Center of Excellence Commission awarded a funding request for Research North Dakota (“RND”)
grant to NDSU Chemistry and Biochemistry in partnership with the Company.
RND promotes the development
and commercialization of products and processes through industry/university research partnerships. RND provides matching funds
to help companies pay for the university research.
The $150,000 matching grant is effective April 1, 2017 and expires
on March 31, 2018. We shall provide for a match to State dollars of at least $1:$1. The match can be in the form of contribution
directly to NDSU or cash expended by us on valid costs incurred in support of the project. The purpose of the grant is to
improve the yield and purity of the key ingredients required for an economical synthesis of CHS, an ingredient for making a variety
of commercially important silicon based materials and materials for lightweight batteries and lightweight solar cells.
Name Change and Reverse Stock Split
On June 22, 2017, the
Company filed an Amended Certificate of Incorporation (the “Amendment”) with the Secretary of State of the State of
Oklahoma, to (i) change its name from “3DIcon Corporation” to “The Coretec Group Inc.” (“Name Change”)
and to (ii) effect a 1-for-300 reverse stock split (“Reverse Split”). The Name Change and Reverse Split became effective
with the State of Oklahoma on June 28, 2017 and with the Financial Industry Regulatory Authority, Inc. (“FINRA”) on
June 29, 2017 (“Effective Time”).
At the Effective Time,
each 300 shares of the Company’s common stock, par value $.0002 per share (“Common Stock”), issued and outstanding
were converted and reclassified into one share of the Company’s Common Stock. No fractional shares of the Company’s
Common Stock were issued in connection with the Reverse Split. Shareholders who would otherwise be entitled to a fractional share
will instead receive a new certificate rounding up their fractional share to the next nearest full share.
The Common Stock is
currently quoted on OTC Pink under “CRTG”.
Results of Operations
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2017
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2016
Revenue
We did not have revenue for the three-month periods ended June 30, 2017 and 2016.
Research and Development Expenses
The research and development expenses were $155,437 for the three months ended June 30, 2017, as compared
to $69,451 for the three months ended June 30, 2016. The approximate $86,000 increase was a result of the increase in
activity with NDSU under the Exclusive License and the cost incurred under the SRA with NDSU of approximately $63,000 and an increase
of patent amortization of approximately $23,000.
General and Administrative Expenses
Our general and administrative expenses were $315,489 for the three months ended June 30, 2017, as compared
to $32,665 for the three months ended June 30, 2016. The approximate $283,000 increase is due primarily to costs incurred
of being a publicly reporting company and the related administrative expense of our combined entities. Those costs include the
increase of approximately $108,000 for consultants and executive officers, $75,000 increase in stock bonuses and stock options
issued, approximately $23,000 increase in legal fees, approximately $8,000 in filing fees, approximately $15,000 in insurance costs,
approximately $20,000 for transfer agent fees, $5,000 for web page design and approximately $28,000 for administrative salaries
and related expenses.
Interest Expense
Interest expense for the
three months ended June 30, 2017 was $81,497 as compared to $6,736 for the three months ended June 30, 2016. The approximate
$75,000 increase was a result of the increase in the amount of our notes payable and debentures payable outstanding during the
period.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2017
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2016
Revenue
We did not have revenue for the six-month periods ended June 30, 2017 and 2016.
Research and Development Expenses
The research and development
expenses were $260,807 for the six months ended June 30, 2017, as compared to $82,199 for the six months ended June 30, 2016. The
approximate increase of $179,000 was a result of the increase in activity with NDSU under the Exclusive License and the cost incurred
under the SRA with NDSU of approximately $130,000, the approximately $47,000 increase of patent amortization and travel expenses
of $2,000.
General and Administrative Expenses
Our general and administrative expenses were $596,820 for the six months ended June 30, 2017, as compared
to $64,381 for the six months ended June 30, 2016. The approximately $532,000 increase is due primarily to costs incurred
of being a publicly reporting company and the related administrative expense of our combined entities. Those cost include the increase
of approximately
$187,000 for consultants and executive
officers, $75,000 increase in stock bonuses and options issued, approximately $51,000 increase in legal fees, approximately $19,000
in filing fees, approximately $30,000 in insurance costs, approximately $19,000 for transfer agent fees, $12,000 for marketing
and new releases, $5,000 for web page design, accounting and audit fees of $67,000 and approximately $59,000 for administrative
salaries and related expenses.
Interest Expense
Interest expense for the
six months ended June 30, 2017 was $123,663 as compared to $11,307 for the six months ended June 30, 2016. The approximate
$112,000 increase was a result of the increase in the amount of our notes payable and debentures payable outstanding during the
period.
Financial Condition, Liquidity and Capital
Resources
Management remains focused
on controlling cash expenses. We recognize our limited cash resources and plan our expenses accordingly. We intend to leverage
stock-for-services wherever possible. The operating budget consists of the following expenses:
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Research and development expenses pursuant to the development of an initial demonstrable prototype and a second prototype for static volume technology.
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Acceleration of research and development through increased research personnel as well as other research agencies.
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General and administrative expenses: salaries, insurance, investor related expenses, rent, travel, website, etc.
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Hiring executive officers for technology, operations and finance.
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Professional fees for accounting and audit; legal services for securities and financing; patent research and protection.
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Our independent registered public accountants, in their audit report accompanying our consolidated financial
statements for the year ended December 31, 2016, expressed substantial doubt about our ability to continue as a going concern due
to our organization has insufficient revenues to fund development and operating expenses.
We had net cash of $5,323
at June 30, 2017.
We had negative working capital of $2,053,412 at June 30, 2017.
During the six months
ended June 30, 2017, we used $457,459 of cash for operating activities, an increase of $308,628 or 207% compared to the six months
ended June 30, 2016. The increase in the use of cash for operating activities was a result of an increase in the net loss of $823,403
partially offset by the increase in accounts payable and accrued liabilities of $329,627, a decrease in prepaid expenses of $51,523,
and an increase in amortization expense of $80,426.
During the six months
ended June 30, 2017, we gained $232 of cash from investing activities, an increase of $15,232. The increase was a net result of
proceeds from sale of equipment of $2,500 and offset by the purchase of equipment of $2,268 in the six months ended June 30, 2017
and $20,000 of intangible assets purchased and the collection of $5,000 from a related party in the six months ended June 30, 2016.
We expect to fund
the ongoing operations through the existing financing in place and through raising additional funds as permitted by the terms
of Golden State financing.
Our ability to fund the
operations of the Company is highly dependent on the underlying stock price of the Company.
There is no assurance that we’ll be successful in raising additional funds on reasonable terms or
that the funding will be sufficient to enable us to fully complete our development activities or attain profitable operations.
If we are unable to obtain such additional financing on a timely basis or, notwithstanding any request we may make, our debt holders
do not agree to convert their notes into equity or extend the maturity dates of their notes, we may have to curtail development,
marketing and promotional activities, which would have a material adverse effect on our business, financial condition and results
of operations, and ultimately, we could be forced to discontinue our operations and liquidate.
Off Balance Sheet Arrangements
We do not engage in any off-balance sheet arrangements
that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations,
liquidity or capital expenditures.
Significant Accounting Policies
There has been no change in the significant
accounting policies summarized in our Form 10-K for the year ended December 31, 2016, which was filed on April 14, 2017, except
for the additional beneficial conversion features discussed in Note 3 in this Quarterly Report.