Note 2 – Going Concern and Management’s Plans
The Company has realized a cumulative net
loss of $2,192,919 for the period from inception (June 2, 2015) to September 30, 2017, has negative working capital of $2,319,578,
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 condensed consolidated balance sheets
as of September 30, 2017 and December 31, 2016 include the accounts of the Group and its wholly owned subsidiary, Coretec. The
condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and cash flows for the nine
months ended September 30, 2017 include the accounts of the Group and its wholly owned subsidiary, Coretec. The condensed consolidated
statements of operations for the three and nine months ended September 30, 2016 and cash flows for the nine months ended September
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 three and nine months
ended September 30, 2016.
The following securities are excluded from
the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive:
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Options
|
|
|
284,071
|
|
|
|
-
|
|
Warrants
|
|
|
65,228
|
|
|
|
-
|
|
Series A convertible preferred stock
|
|
|
115,000
|
|
|
|
-
|
|
Series B convertible preferred stock
|
|
|
-
|
|
|
|
41,842,241
|
|
Convertible debentures
|
|
|
55,991,166
|
|
|
|
-
|
|
Total potentially dilutive shares
|
|
|
56,455,465
|
|
|
|
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 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 nine months ended September 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:
|
|
September 30, 2016
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
Net revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
Net loss
|
|
$
|
(404,014
|
)
|
|
$
|
(1,048,340
|
)
|
THE CORETEC GROUP INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 5 – Debentures and Notes Payable
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Notes and debentures payable:
|
|
|
|
|
|
|
|
|
5.25% Insurance premium finance agreement due June 2018 and June 2017, respectively
|
|
$
|
34,555
|
|
|
$
|
24,794
|
|
9% Promissory note due December 2017
|
|
|
25,341
|
|
|
|
25,341
|
|
4.75% Convertible debenture due December 2017
|
|
|
64,124
|
|
|
|
64,124
|
|
Total notes and debentures payable
|
|
$
|
124,020
|
|
|
$
|
114,259
|
|
|
|
|
|
|
|
|
|
|
Notes payable - related party:
|
|
|
|
|
|
|
|
|
14% Term loan due June 2018
|
|
$
|
253,993
|
|
|
$
|
213,993
|
|
14% Term loan due June 2018
|
|
|
596,500
|
|
|
|
440,500
|
|
14% Term loan due June 2018
|
|
|
400,582
|
|
|
|
399,832
|
|
7% Convertible promissory note due March 2019, net
|
|
|
65,577
|
|
|
|
-
|
|
7% Convertible promissory note due June 2019, net
|
|
|
13,734
|
|
|
|
-
|
|
Total notes payable - related party
|
|
|
1,330,386
|
|
|
|
1,054,325
|
|
Less current portion
|
|
|
(1,251,075
|
)
|
|
|
-
|
|
Long term debt
|
|
$
|
79,311
|
|
|
$
|
1,054,325
|
|
5.25% Insurance premium finance agreement, due June 2018
The
Company made payments of $24,794 against the insurance premium financing obligation due June 2017. The Company entered into a new
financing agreement totaling $38,637
due June 2018, and made
a payment of $4,082 during the nine months ended September 30, 2017.
9% Promissory note due December 31,
2017
On September 28, 2017, the Company 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 December 31, 2017.
14% Term loans due June 2018, related
party
Mr. Victor Keen, Co-Chairman of the Board
of Directors, advanced an additional $156,000 during the nine months ended September 30, 2017. As of September 30, 2017, an aggregate
amount of $596,500 is due to Mr. Keen under the 14% term loan. As of September 30, 2017, accrued interest related to the 14% term
loan amounted to $80,571 and interest expense was $60,053 for the nine months ended September 30, 2017.
As of September 30, 2017, Carlton James
North Dakota Limited (“CJNDL”), a company owned by Mr. Simon Calton, Co-Chairman of the Board of Directors, has advanced
$654,575 to the Company under the terms of two loans, which are included in notes payable. As of September 30, 2017, accrued interest
related to the CJNDL term loans amounted to $115,805 and interest expense was $65,015 during the nine months ended September 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 $9,071 during
the nine months ended September 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 $65,577 was amortized during the nine months ended September 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 $1,937 during the
nine months ended September 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 $13,734 was amortized during the nine months ended September 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.
North Dakota State University Foundation
License Agreement
Under the terms of the Exclusive License
agreement signed on June 16, 2016 with North Dakota State University Research Foundation (“NDSURF”), the Group has
been unable to make timely payment and meet certain milestones in accordance with the agreement. The delinquent payments of approximately
$76,000 bear interest at 18% and the related interest is approximately $4,000 as of September 30, 2017. The License Agreement is
currently being renegotiated with NDSURF and all terms and milestone are being evaluated. The Group expects that the discussion
will cure the default.
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 $25,000
and $17,000 for the nine-month periods ended September 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
month and nine month periods ended September 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 option
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 option of ten years is based on historical exercise behavior and expected future experience.
Note 9 – Series B Preferred Shares
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 formed in 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 consolidated 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 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 received 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 SEPTEMBER
30, 2017 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2016
Revenue
We did not have revenue for the three-month
periods ended September 30, 2017 and 2016.
Research and Development Expenses
The research and development
expenses were $62,075 for the three months ended September 30, 2017, as compared to $69,668 for the three months ended September
30, 2016. The approximate $7,600 decrease was a net result of the decrease in activity with NDSU under the Exclusive
License and the cost incurred under the Sponsored Research Agreement (“SRA”) with NDSU of approximately $31,000 and
an increase of patent amortization of approximately $23,400.
General and Administrative Expenses
Our general and administrative
expenses were $173,023 for the three months ended September 30, 2017, as compared to $109,530 for the three months ended September
30, 2016. The approximate $64,000 net increase is due primarily to the increased costs incurred of being a publicly
reporting company and the related administrative expense of our combined entities. Those costs include an increase of approximately
$28,000 for consultants and executive officers, approximately $4,800 increase in legal fees, approximately $14,300 in insurance
costs, approximately $1,800 for transfer agent fees, approximately $3,000 for computer services and approximately $17,000 for administrative
salaries and related expenses. The increases were partially offset by a decrease in audit fees of approximately $5,000.
Interest Expense
Interest expense for
the three months ended September 30, 2017 was $96,427 as compared to $12,341 for the three months ended September 30, 2016. The
approximate $84,000 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 NINE MONTHS ENDED SEPTEMBER
30, 2017 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2016
Revenue
We did not have revenue for the nine-month
periods ended September 30, 2017 and 2016.
Research and Development Expenses
The research and development
expenses were $322,882 for the nine months ended September 30, 2017, as compared to $151,868 for the nine months ended September
30, 2016. The approximate increase of $171,000 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 $104,000, approximately $64,000 increase in patent amortization
and travel expenses of approximately $3,000.
General and Administrative Expenses
Our general and administrative expenses
were $769,842 for the nine months ended September 30, 2017, as compared to $173,909 for the nine months ended September 30, 2016. The
approximately $596,000 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 $195,000 for consultants and executive
officers, $75,000 increase in stock bonuses and options issued, approximately $55,000 increase in legal fees, approximately $26,000
in filing fees, approximately $44,000 in insurance costs, approximately $20,000 for transfer agent fees, $5,000 for web page design,
accounting and audit fees of $62,000, approximately $22,000 for marketing and news releases, approximately $8,000 in rent expense,
$5,000 increase in telephone expense, $6,500 increase in office supplies, $11,000 increase in computer and internet expense, $8,000
increase in outside services related to shareholder conferences, and approximately $51,000 for administrative salaries and related
expenses.
Interest Expense
Interest expense for
the nine months ended September 30, 2017 was $220,091 as compared to $23,649 for the nine months ended September 30, 2016. The
approximate $196,000 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 whenever 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 having insufficient revenues
to fund development and operating expenses.
We had net cash of
$15,813 at September 30, 2017.
We had negative working
capital of $2,319,578 at September 30, 2017.
During the nine months
ended September 30, 2017, we used $541,524 of cash for operating activities, an increase of $283,382 or 110% compared to the nine
months ended September 30, 2016. The increase in the use of cash for operating activities was a result of an increase in the net
loss of $963,389 partially offset by an increase in accounts payable and accrued liabilities of $470,024, an increase in prepaid
expenses of $11,279, an increase in options issued for common stock of $50,000 and an increase in amortization expense of $145,595.
During the nine months
ended September 30, 2017, we gained $232 of cash from investing activities, a decrease of $60,445. The decrease was a net result
of proceeds from sale of equipment of $2,500 offset by the purchase of equipment of $2,268 in the nine months ended September 30,
2017, and $20,000 of intangible assets purchased, $5,000 collected from a related party and the $75,687 of cash acquired in the
reverse acquisition in the nine months ended September 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.