UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

OR

 

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

COMMISSION FILE NUMBER 000-54697

  

THE CORETEC GROUP INC. 

(Exact Name of small business issuer as specified in its charter)

 

Oklahoma

73-1479206

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

6804 South Canton Avenue, Suite 150, Tulsa, Oklahoma 74136

(Address of principal executive offices) (Zip Code)

 

 

(918) 494-0505

 
 

(Registrant’s telephone number, including area code) 

 
 

 

 
 

 

 
 

(Former name, former address and former fiscal year, if changed
since last report)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange on Which Registered

None

 

None

 

None

 

Indicate by check mark whether the registrant (1) has filed reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒ Yes  ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes    ☐ No

 

 

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b- 2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer 

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

   

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐  No ☐

 

As of November 14, 2019, the issuer had 70,190,699 outstanding shares of Common Stock.

 

 

 
 

 

TABLE OF CONTENTS

 

 

 

Page 

 

PART I - Financial Information

 

Item 1.

Financial Statements.

F-1

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

3

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

6

Item 4.

Controls and Procedures.

6

 

PART II - Other Information

 

Item 1.

Legal Proceedings.

6

Item 1A.

Risk Factors.

6

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

6

Item 3.

Defaults Upon Senior Securities.

7

Item 4.

Mine Safety Disclosure.

7

Item 5.

Other Information.

7

Item 6.

Exhibits.

7

SIGNATURES

8

 

2

 
 

 

PART I

 

 

Item 1.    Financial Statements. 

 

 

THE CORETEC GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

Assets

               

Current assets:

               

Cash

  $ 8,681     $ 4,001  

Prepaid expenses

    87,511       37,237  

Total current assets

    96,192       41,238  
                 

Property and equipment, net

    315       882  
                 

Other assets:

               

Patents, net

    1,159,312       1,219,484  

Goodwill

    166,000       166,000  

Deposits-other

    2,315       2,315  

Total other assets

    1,327,627       1,387,799  

Total Assets

  $ 1,424,134     $ 1,429,919  
                 

Liabilities and Stockholders' Deficiency

               

Current liabilities:

               

Notes payable - related party, net of discount

  $ 2,017,434     $ 1,702,300  

Notes and debentures payable

    119,586       94,764  

Accounts payable and accrued expenses

    690,346       597,843  

Accrued interest payable - related party

    650,423       468,260  

Accrued interest payable

    25,844       26,051  

Total current liabilities

    3,503,633       2,889,218  
                 

Total Liabilities

    3,503,633       2,889,218  
                 

Stockholders' deficiency:

               

Preferred stock, Series A convertible, $0.0002 par value, 500,000 shares authorized; 345,000 shares issued and outstanding at September 30, 2019 and December 31, 2018

    69       69  

Common stock $0.0002 par value, 1,500,000,000 shares authorized; 70,190,699 and 68,474,520 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

    14,038       13,695  

Additional paid-in capital

    3,065,763       2,166,745  

Accumulated deficit

    (5,159,369 )     (3,639,808 )

Total Stockholders' Deficiency

    (2,079,499 )     (1,459,299 )

Total Liabilities and Stockholders' Deficiency

  $ 1,424,134     $ 1,429,919  

 

See notes to unaudited condensed consolidated financial statements

 

F-1

 
 

 

THE CORETEC GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30, 2019

   

September 30, 2018

   

September 30, 2019

   

September 30, 2018

 

Income:

                               

Revenue

  $ -     $ -     $ -     $ -  
                                 

Expenses:

                               

Research and development

    20,057       20,057       60,172       62,157  

General and administrative

    874,122       158,908       1,229,378       592,037  

Interest

    41,209       100,858       230,011       293,636  
                                 

Total expenses

    935,388       279,823       1,519,561       947,830  

Other income:

                               

Gain on settlement of accounts payable

    -       -       -       139,789  
                                 

Net loss

  $ (935,388 )   $ (279,823 )   $ (1,519,561 )   $ (808,041 )
                                 

Loss per share:

                               

Basic and diluted

  $ (0.013 )   $ (0.004 )   $ (0.022 )   $ (0.012 )
                                 

Weighted average shares outstanding, basic and diluted

    70,103,698       68,146,829       69,358,355       67,726,410  

 

See notes to unaudited condensed consolidated financial statements

 

F-2

 
 

 

THE CORETEC GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY

THREE and NINE MONTHS ENDED SEPTEMBER 30, 2019 and 2018

(unaudited)

 

   

Series A Preferred Stock

   

Common Stock

   

Additional

                 
           

Par

           

Par

   

Paid-In

   

Accumulated

         
   

Shares

   

Value

   

Shares

   

Value

   

Capital

   

Deficit

   

Total

 

Balance December 31, 2018

    345,000     $ 69       68,474,520     $ 13,695     $ 2,166,745     $ (3,639,808 )   $ (1,459,299 )

Common stock issued for liabilities

    -       -       199,017       40       7,822       -       7,862  

Net loss for the period

    -       -       -       -       -       (298,323 )     (298,323 )

Balance March 31, 2019

    345,000       69       68,673,537       13,735       2,174,567       (3,938,131 )     (1,749,760 )

Common stock issued for liabilities

    -       -       273,469       54       11,138       -       11,192  

Common stock issued for services

    -       -       972,668       195       29,496       -       29,691  

Net loss for the period

    -       -       -       -       -       (285,850 )     (285,850 )

Balance June 30, 2019

    345,000       69       69,919,674       13,984       2,215,201       (4,223,981 )     (1,994,727 )

Common stock issued for services

    -       -       271,025       54       10,062       -       10,116  

Options issued for compensation and services

    -       -       -       -       840,500       -       840,500  

Net loss for the period

    -       -       -       -       -       (935,388 )     (935,388 )

Balance September 30, 2019

    345,000     $ 69       70,190,699     $ 14,038     $ 3,065,763     $ (5,159,369 )   $ (2,079,499 )
                                                         
                                                         

Balance December 31, 2017

    345,000     $ 69       66,785,428     $ 13,357     $ 2,020,642     $ (2,593,337 )   $ (559,269 )

Warrants exercised

    -       -       -       -       24,525       -     $ 24,525  

Debentures converted to common stock

    -       -       244,618       49       176       -       225  

Common stock issued for liabilities

    -       -       552,924       111       71,768       -       71,879  

Net loss for the period

    -       -       -       -       -       (338,554 )     (338,554 )

Balance March 31, 2018

    345,000       69       67,582,970       13,517       2,117,111       (2,931,891 )     (801,194 )

Warrants exercised

    -       -       -       -       24,581       -       24,581  

Debentures converted to common stock

    -       -       396,635       79       146       -       225  

Net loss for the period

    -       -       -       -       -       (189,664 )     (189,664 )

Balance June 30, 2018

    345,000       69       67,979,605       13,596       2,141,838       (3,121,555 )     (966,052 )

Common stock issued for services

    -       -       199,543       40       11,954       -       11,994  

Net loss for the period

    -       -       -       -       -       (279,823 )     (279,823 )

Balance September 30, 2018

    345,000     $ 69       68,179,148     $ 13,636     $ 2,153,792     $ (3,401,378 )   $ (1,233,881 )

 

See notes to unaudited condensed consolidated financial statements

 

F-3

 
 

 

THE CORETEC GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   

Nine Months Ended September 30,

 
   

2019

   

2018

 

Cash Flows from Operating Activities

               

Net loss

  $ (1,519,561 )   $ (808,041 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation

    567       567  

Amortization - intangible assets

    60,172       60,172  

Amortization - debt discount

    45,134       135,333  

Common stock issued for services

    39,807       11,994  

Options issued for services

    724,631       -  

Gain on settlement of accounts payable

    -       (139,789 )

Change in:

               

Prepaid expenses

    11,229       32,139  

Accounts payable and accrued liabilities

    409,381       138,249  
                 

Net cash used in operating activities

    (228,640 )     (569,376 )
                 

Cash Flows from Financing Activities

               

Payments on insurance premium financing

    (36,680 )     (25,764 )

Proceeds from exercise of warrants

    -       23,765  

Proceeds from notes payable-related party

    270,000       110,001  

Net cash provided by financing activities

    233,320       108,002  
                 

Net change in cash

    4,680       (461,374 )

Cash, beginning of period

    4,001       470,630  
                 

Cash, end of period

  $ 8,681     $ 9,256  
                 

Supplemental Disclosure of Cash Flow Information

               

Cash paid during the period for interest

  $ 2,921     $ 1,898  
                 

Non-Cash Investing and Financing Activities

               

Debentures and warrants converted to common stock

  $ -     $ 25,791  

Options issued for accounts payable

  $ 115,869     $ -  

Common stock issued for liabilities

  $ 19,054     $ 71,879  

Common stock issued for services

  $ -     $ 11,994  

 

See notes to unaudited condensed consolidated financial statements

 

F-4

 

 

THE CORETEC GROUP INC. 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Note 1 – Business Organization, Nature of Business and Basis of Presentation  

 

Nature of Business

 

The Coretec Group Inc. (the “Group”) (formerly 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. 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 the Group (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).

 

Basis of Presentation

 

The accompanying condensed consolidated 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 condensed consolidated financial statements should be read in conjunction with the Company’s year-end audited consolidated financial statements and related footnotes included in the previously filed Form 10-K, and in the opinion of management, reflects all adjustments necessary to present fairly the condensed consolidated financial position of the Company. The condensed consolidated results of operations for interim periods may not be indicative of the results which may be realized for the full year. 

 

 

 

Note 2 – Going Concern and Management’s Plans

 

The Company has realized a cumulative net loss of $5,159,369 for the period from inception (June 2, 2015) to September 30, 2019, has negative working capital of $3,407,441, and no revenues. The Company has insufficient revenue and capital commitments to fund the development of its planned products and to pay operating expenses. These conditions, among others, 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 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 grants and 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.

 

F-5

 

 

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 financial statements include the accounts of the Group and its wholly owned subsidiary, Coretec. Intercompany transactions and balances have been eliminated in consolidation.

 

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.

 

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. 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.

  

F-6

 

 

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. 

 

Basic and diluted loss per common share are calculated the same for all periods presented due to the net loss. The following securities are excluded from the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive: 

 

   

September 30,

 
   

2019

   

2018

 

Options

    20,716,557       2,883,379  

Warrants

    61       1,061  

Series A convertible preferred stock

    115,000       115,000  

Convertible debentures

    253,106,815       166,249,033  

Total potentially dilutive shares

    273,938,433       169,248,473  

 

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 in Note 6. 

 

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. On January 1, 2019, the Company adopted topic 842 using the optional transition method of adoption, under which the new standards were applied to the current period rather than restating the prior periods presented.  The Company made the policy elections to not recognize lease assets and lease liabilities with an initial term of 12 months or less. The Company's only lease was a short-term lease, consequently, adoption had no impact in the consolidated financial statements.

 

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 liabilities following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, an entity should measure goodwill impairment and 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 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. 

 

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which eliminates the separate accounting model for nonemployee share-based payment awards and generally requires companies to account for share-based payment transactions with nonemployees in the same way as share-based payment transactions with employees. The accounting remains different for attribution, which represents how the equity-based payment cost is recognized over the vesting period, and a contractual term election for valuing nonemployee equity share options. The standard is effective for interim and annual periods beginning after December 15, 2018. We adopted ASU 2018-07 on January 1, 2019 and the adoption of this standard did not have a material impact on our condensed consolidated financial statements.

 

 

F-7

 

 

In July 2019, FASB issued ASU 2019-07, Codification Updates to SEC Sections. ASU 2019-07 clarifies the disclosure and presentation requirements of a variety of codification topics by more closely aligning them with the SEC disclosure rules and regulations, eliminating redundancies and simplifying application of the codification. ASU 2019-07 is effective upon issuance and it did not have a material impact to the Company's consolidated financial statements or related disclosures.

 

 

 

Note 4 – Debentures and Notes Payable

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

Notes and debentures payable:

               

6.05% Insurance premium finance agreement due July 2019

  $ -     $ 31,089  

6.30% Insurance premium finance agreement due July 2020

    55,911       -  

4.75% Convertible debenture due September 2019 (see Note 6)

    63,675       63,675  

Total notes and debentures payable

  $ 119,586     $ 94,764  
                 

Notes payable - related party:

               

14% Term loan due December 2019

  $ 374,993     $ 374,993  

14% Term loan due December 2019

    756,500       621,500  

14% Term loan due December 2019

    535,941       400,941  

7% Convertible promissory note due December 2019, net

    250,000       228,627  

7% Convertible promissory note due December 2019, net

    100,000       76,239  

Total notes payable - related party

  $ 2,017,434     $ 1,702,300  

 

 6.05% Insurance premium finance agreement, due July 2019 

 

The Company entered into an insurance financing agreement in September 2018 totaling $48,855. The agreement was due in eleven installments of $4,441 through July 2019. The Company made installment payments of $31,089 during the nine months ended September 30, 2019. 

 

6.3% Insurance premium finance agreement, due July 2020 

 

The Company entered into an insurance financing agreement in September 2019 totaling $61,503. The agreement was due in eleven installments of $5,591 through July 2020. The Company made installment payments of $5,591 during the nine months ended September 30, 2019. 

 

4.75% Convertible debenture due September 2019

 

On November 3, 2006, the Company issued to Golden State a 4.75% convertible debenture in a principal amount of $100,000, due December 31, 2014 and subsequently extended to September 30, 2019 and warrants to buy 61 post-split equivalent shares of common stock at a post-split exercise price of $114,450 per share. The convertible debenture was subsequently paid in full on October 15, 2019 (see Note 6).

 

F-8

 

 

14% Term loan due December 2019, related party

 

On April 18, 2016, the Company entered into an unsecured loan agreement whereby Carlton James North Dakota Limited ("CJNDL”), a company owned by Mr. Simon Calton, a director of the Company, agreed to provide the Company a loan facility of up to $100,000. Under the terms of the agreement, the Company shall pay interest on the outstanding unpaid balance at the rate of 1.167% per month. The interest is due quarterly, and the principal was due September 30, 2019 and subsequently extended to December 31, 2019. CJNDL has advanced $374,993 ($274,993 in excess of the facility) on the loan as of September 30, 2019. During 2017, CJNDL agreed that the excess amount funded and any future funding under the loan will be done on the same terms and conditions as the original note.

 

14% Term loan due December 2019, related party

 

On February 24, 2016, the Company entered into an unsecured loan agreement whereby Victor Keen, Co-Chairman of the Company (“Keen”) agreed to provide the Company a loan facility of up to $300,000. Under the terms of the agreement, the Company shall pay interest on the outstanding unpaid balance at the rate of 1.167% per month. The interest is due quarterly, and the principal was due September 30, 2019 and subsequently extended to December 31, 2019. Keen has advanced $756,500 ($456,500 in excess of the facility) on the loan through September 30, 2019. During 2017, Keen agreed that the excess amount funded and any future funding under the loan will be done on the same terms and conditions as the original note.  

 

14% Term loan due December 2019, related party

 

On June 1, 2015, Coretec obtained a $500,000 revolving note agreement with CJNDL. Coretec accrues interest on the outstanding balance at the rate of 1.167% per month, payable on a quarterly basis. CJNDL has advanced $535,941 on the loan ($35,941 in excess of the facility) through September 30, 2019. During 2019, CJNDL agreed that the excess amount funded and any future funding under the loan will be done on the same terms and conditions as the original note.  Outstanding borrowings are secured by substantially all assets of the Company. The note was due on September 30, 2019 and subsequently extended to December 31, 2019.

 

7% Convertible promissory note due December 2019, related party 

 

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”), subsequently extended to December 31, 2019. 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 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 was amortized over the original life of the debt and $21,373 and $97,830 was amortized during the nine months ended September 30, 2019 and 2018 respectively.

 

F-9

 

 

7% Convertible promissory note due December 2019, related party

 

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 and subsequently extended to December 31, 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 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 was amortized over the original life of the debt and $23,761and $37,503 was amortized during the nine months ended September 30, 2019 and 2018 respectively. 

 

 

 

Note 5 – Commitments and Contingencies

 

Options

 

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 is 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.

 

In August 2019, the Directors of the Company authorized options to purchase common stock in the aggregate of 20,500,000 options to certain officers and consultants of the Company, the estimated value of which was $840,500.  The $840,500 estimated fair value of options to purchase common stock 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 337.19% is based on the historical volatility of the stock. The risk-free interest rate of 1.52% is based on the U.S. Treasury Constant Maturity rates as of the issue date. The expected life of the option of five years is based on the life of the option.

 

The following table summarizes the Company’s option activity during the nine-month period September 30, 2019:

 

                   

Weighted

         
           

Weighted

   

Average

         
           

Average

   

Remaining

   

Aggregate

 
   

Number of

   

Exercise

   

Life

   

Intrinsic

 
   

Options

   

Price

   

In Years

   

Value

 
                                 

Outstanding, December 31, 2018

    216,557     $ 3.51       8.26     $ -  

Granted

    20,500,000       0.041       4.86       -  

Outstanding, September 30, 2019

    20,716,557     $ 0.077       7.26     $ -  
                                 

Exercisable, September 30, 2019

    20,716,557     $ 0.077       7.26     $ -  

  

F-10

 

 

The following table summarizes the Company’s options as of September 30, 2019:

 

Options Outstanding

   

Options Exercisable

 
               

Weighted

         
       

Outstanding

   

Average

   

Exercisable

 

Exercise

   

Number of

   

Remaining Life

   

Number of

 

Price

   

Options

   

In Years

   

Options

 
                             
$ 0.24       208,160       7.75       208,160  
$ 52.50       4,383       .75       4,383  
$ 70.26       3,449       2.75       3,449  
$ 420.00       565       1.65       565  
$ 0.041       20,500,000       4.86       20,500,000  

Total

      20,716,557       4.89       20,716,557  

 

 

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 condensed consolidated financial statements. The Company records legal costs associated with loss contingencies as incurred and accrues for all probable and estimable settlements. 

 

Office Lease

 

The Company has an office lease in Tulsa, Oklahoma.  As the lease is month-to-month and cancellable at any time, it is not included as a right-of-use asset or liability.  Rent expense for the lease was $17,820 and $17,358 for the nine-month periods ended September 30, 2019 and 2018 respectively. 

 

 

 

Note 6 – Subsequent Events

  

Notes payable-related party

 

Subsequent to September 30, 2019, CJNDL and Victor Keen agreed to extend the September 30, 2019 maturity date of all notes and debentures held by them to December 31, 2019.

 

On October 15, 2019, the Company received $106,483 ($125,000 net of $3,750 commitment fee, $6,250 advance interest and $8,157 legal fees), the first advance of financing under a $2,500,000 credit agreement (the “Credit Agreement”) and related convertible promissory note (the “Note”) that the Company entered into, on October 11, 2019, with Diversified Alpha Fund of Navigator Global Fund Manager Platform SPC, a Grand Cayman entity (the “Lender” or “DAF”). DAF is a mutual fund managed by The Carlton James Group (Carlton James”). Simon Calton is the Chief Executive Officer of Carlton James and also the Co-Chairman of Coretec.

 

The Credit Agreement and Note, among other things, provide for borrowings by the Company from the Lender in an aggregate principal amount of up to $2,500,000, to be issued in advances beginning in October 2019 through January 2021 in aggregate amounts beginning at $125,000 per month and increasing to $175,000 per month in April 2020. Interest is due with each advance at 10% per annum on the outstanding principle. Additionally, pursuant to the terms set forth in the Credit Agreement and Note, a 3% commitment fee is due on each advance, totaling $75,000 over the life of the loan.

 

F-11

 

 

Pursuant to the Credit Agreement and Note, the Lender has the right to convert all or part of the Note to shares of common stock of the Company at $0.043, a price equal to seventy percent (70%) of the average closing price of the Company’s common stock as reported on the OTC Markets during the fifteen (15) calendar days prior to the loan closing date. All shares underlying the Note that may be issued to the Lender shall be fully paid, non-assessable restricted shares of common stock of the Company.

 

In addition, as an inducement to enter into the Credit Agreement and to fund each advance thereunder, the Company issued to the Lender a warrant (the “Warrant”) to purchase up to 3,000,000 shares of the Company’s common stock (“Common Shares”) at $0.052 per share. The number of Common Shares issuable upon exercise of the Warrant shall be proportionate to the principal amount actually advanced under the Note. Under the terms of the notes, warrants in the amounts of 150,000 to 210,000 will be issued monthly from October 2019 through April 2020 with each advance.

 

The estimated value of the warrants issued with the October advance was $3,615 or $0.0241 per warrant. The $3,615 estimated fair value of the warrants to purchase common stock 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 342.48% is based on the historical volatility of the stock. The risk-free interest rate of 1.58% is based on the U.S. Treasury Constant Maturity rates as of the issue date. The expected life of the warrant of five years is based on the life of the warrant. During the term of the loan the estimated value of 3,000,000 warrants will total $72,300 and will be charged to debt cost over the five-year term of the convertible promissory note.

 

4.75% Convertible debenture due September 30, 2019

 

Subsequent to September 30, 2019, the Company retired the 4.75% convertible debenture due to Golden State in the amount of $63,675 along with accrued interest due of $23,565.

 

F-12

 
 

 

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 condensed 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 Group, formerly known as 3DIcon Corporation, was incorporated on August 11, 1995, under the laws of the State of Oklahoma. The Group’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. Pursuant to the Share Exchange Agreement, Coretec became a wholly owned subsidiary of the Group (collectively, 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

 

In August 2019, the Directors of the Company authorized options to purchase common stock in the aggregate of 20,500,000 options to certain officers and consultants of the Company, the estimated value of which was $840,500. The $840,500 estimated fair value of options to purchase common stock 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 337.19% is based on the historical volatility of the stock. The risk-free interest rate of 1.52% is based on the U.S. Treasury Constant Maturity rates as of the issue date. The expected life of the option of five years is based on the life of the option.

 

On October 15, 2019, the Company received $106,483 ($125,000 net of $3,750 commitment fee, $6,250 advance interest and $8,157 legal fees), the first advance of financing under a $2,500,000 credit agreement (the “Credit Agreement”) and related convertible promissory note (the “Note”) that the Company entered into, on October 11, 2019, with Diversified Alpha Fund of Navigator Global Fund Manager Platform SPC, a Grand Cayman entity (the “Lender” or “DAF”). DAF is a mutual fund managed by The Carlton James Group (Carlton James”). Simon Calton is the Chief Executive Officer of Carlton James and also the Co-Chairman of Coretec.

 

3

 

 

 

Results of Operations

 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2018.

 

Revenue

 

We did not have revenue for the three-month periods ended September 30, 2019 and 2018.

 

Research and Development Expenses

 

The research and development expenses were $20,057 for both the three months ended September 30, 2019, and for the three months ended September 30, 2018 which represents the amortization of the patent cost.

 

General and Administrative Expenses

 

Our general and administrative expenses were $874,122 for the three months ended September 30, 2019, as compared to $158,908 for the three months ended September 30, 2018.  The approximately $715,000 net increase is due primarily to the options issued to consultants in the amount of approximately $725,000 offset by a decrease in marketing cost of approximately $2,000, approximately $3,000 decrease in accounting fees and approximately $5,000 decrease in consultants fees.

 

Interest Expense

 

Interest expense for the three months ended September 30, 2019 was $41,209 as compared to $100,858 for the three months ended September 30, 2018.  The approximately $64,000 net decrease was a result of the approximately $45,000 decrease in the amount of our debt discount being amortized and an approximately $19,000 decrease in interest on our notes payable and debentures payable outstanding during the period.

 

 

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2018

 

Revenue

 

We did not have revenue for the nine-month periods ended September 30, 2019 and 2018.

 

Research and Development Expenses

 

The research and development expenses were $60,172 for the nine months ended September 30, 2019, as compared to $62,157 for the nine months ended September 30, 2018.  The approximate $2,000 decrease was a result of the decrease in travel activity with the research and development staff.

 

General and Administrative Expenses 

 

Our general and administrative expenses were $1,229,378 for the nine months ended September 30, 2019, as compared to $592,037 for the nine months ended September 30, 2018.  The approximately $637,000 net increase is due primarily to the options issued to consultants in the amount of approximately $725,000 in 2019, an increase in our insurance cost of approximately $4,000 and approximately $20,000 incurred for a feasibility study performed for our new financing agreement. These increases were offset by decreased marketing expense of approximately $77,000, consultant fees of approximately $24,000, and legal fee related to the NDSURF cancellation of approximately $11,000.

 

Interest Expense

 

Interest expense for the nine months ended September 30, 2019 was $230,011 as compared to $293,636 for the nine months ended September 30, 2018.  The approximate $64,000 net decrease was a result of the approximately $90,000 decrease in the amount of our debt discount being amortized and an approximately $26,000 increase in interest on our notes payable and debentures payable outstanding during the period.

 

Other Income

 

The Company recognized a gain of $139,789 for the settlement of accounts payable during the nine months ended September 30, 2018.

 

4

 

 

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:

 

General and administrative expenses: salaries, insurance, investor related expenses, rent, travel, website, etc.

Hiring executive officers for technology, operations and finance. 

Professional fees for accounting and audit; legal services for securities and financing; patent research and protection.

 

Our independent registered public accountants, in their audit report accompanying our consolidated financial statements for the year ended December 31, 2018, 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 $8,681 at September 30, 2019. 

We had negative working capital of $3,340,441 at September 30, 2019.

 

During the nine months ended September 30, 2019, we used $228,640 of cash for operating activities, a net decrease of $340,736 or 60% compared to the nine months ended September 30, 2018. The net decrease in the use of cash for operating activities was a result of an increase in the net loss of $711,520, a decrease in the amortization of debt discount of $90,199, a decrease in prepaid expenses of $20,910, an increase in accounts payable and accrued liabilities of $271,132, an increase in common stock issued for services of $27,813, an increase in options issued for services of $724,631 and a decrease in the gain on settlement of accounts payable of $139,789.

 

During the nine months ended September 30, 2019 and 2018, there were no investing activities.

 

During the nine months ended September 30, 2019, there was $233,320 of net cash provided by financing activities, an increase of $125,318 or 116% compared to the nine months ended September 30, 2018. The increase was a result of $159,999 increase in proceeds from note advances from related parties, offset by a $10,916 increase in payments on our insurance premium financing and a decrease of $23,765 in proceeds from exercise of warrants.

 

We expect to fund the ongoing operations through the existing financing in place and through raising additional funds as permitted by the terms of new 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, 2018, which was filed on April 12, 2019.

 

5

 

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

 

The Company is a smaller reporting company, as defined by Rule 229.10(f)(1) and is not required to provide the information required by this Item.

 

Item 4.   Controls and Procedures.

 

Limitations on Effectiveness of Controls. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019. The term “disclosure controls and procedures,” as defined in Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2019, our disclosure controls and procedures were not effective at a reasonable assurance level as we do not have sufficient resources in our accounting function, which restricts the Company’s ability to gather, analyze and properly review information related to financial reporting in a timely manner. In addition, due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, management will engage financial consultants and perform additional analysis and other procedures to help address this material weakness. Until remediation actions are fully implemented, and the operational effectiveness of related internal controls are validated through testing, the material weaknesses described above will continue to exist. 

 

Notwithstanding the assessment that our disclosure controls and procedures were not effective and that there is a material weakness as identified herein, we believe that our condensed consolidated financial statements contained in this Quarterly Report fairly present our condensed consolidated financial position, results of operations and cash flows for the periods covered thereby in all material respects.

 

Changes in Disclosure Controls and Procedures. There has been no change in our disclosure controls and procedures identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the quarter ended September 30, 2019, that has materially affected, or is reasonably likely to materially affect, our disclosure controls and procedures. 

 

 

PART II

 

Item 1.   Legal Proceedings.

 

We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

 

Item 1A. Risk Factors.

 

Not Applicable.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.  

 

None

 

6

 

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosure.

 

Not Applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

Exhibit
Number

Description of Exhibit

 

 

31.1

Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer.

 

 

31.2

Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer.

 

 

32.1

Section 1350 Certifications of Chief Executive Officer.

 

 

32.2

Section 1350 Certifications of Chief Financial Officer.

 

 

101.INS

XBRL Instance

 

 

101.SCH

XBRL Taxonomy Extension Schema

 

 

101.CAL

XBRL Taxonomy Extension Calculation

 

 

101.DEF

XBRL Taxonomy Extension Definition

 

 

101.LAB

XBRL Taxonomy Extension Labels

 

 

101.PRE

XBRL Taxonomy Extension Presentation

 

7

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

THE CORETEC GROUP INC.

 

 

Date: November 14, 2019

/s/ Michael A. Kraft

 

Name:  

Michael A. Kraft

 

Title:

Chief Executive Officer

 

 

 

 

/s/ Ronald W. Robinson

 

Name:

Ronald W. Robinson

 

Title:

Chief Financial Officer

 

8