CORETEC GROUP INC. - Quarter Report: 2019 September (Form 10-Q)

 

 

 

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.

 

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		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

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		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

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		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	)

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		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

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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.

 

 

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.

  

 

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: 

 

 

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.

 

 

 

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

 

 

 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).

 

 

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.

 

 

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:

 

  

 

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

 

 

 

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.

 

 

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.

 

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