CORETEC GROUP INC. - Quarter Report: 2020 March (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 March 31, 2020

 

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 May 15, 2020, the issuer had 202,650,642 outstanding shares of Common Stock.

 

 

 

		March 31,				December 31,
		2020				2019
Assets
Current assets:
Cash		$	80,494			$	58,149
Prepaid expenses			47,518				88,821
Total current assets			128,012				146,970
Property and equipment, net			-				126
Other assets:
Patents, net			1,119,197				1,139,255
Goodwill			166,000				166,000
Deposits-other			3,575				3,575
Total other assets			1,288,772				1,308,830
Total Assets		$	1,416,784			$	1,455,926
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable		$	22,365			$	39,138
Accounts payable and accrued expenses			557,122				615,815
Total current liabilities			579,487				654,953
Long term debt:
Notes payable - related party, net of discounts			23,389				120,508
Total Liabilities			602,876				775,461
Stockholders' equity:
Preferred stock, Series A convertible, $0.0002 par value, 500,000 shares authorized; 345,000 shares issued and outstanding at March 31, 2020 and December 31, 2019			69				69
Common stock $0.0002 par value, 1,500,000,000 shares authorized; 202,650,642 and 193,521,506 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively			40,530				38,704
Additional paid-in capital			6,797,809				6,135,885
Accumulated deficit			(6,024,500	)			(5,494,193	)
Total Stockholders' Equity			813,908				680,465
Total Liabilities and Stockholders' Equity		$	1,416,784			$	1,455,926

 

		Three Months Ended March 31,
		2020				2019
Income:
Revenue		$	-			$	-
Expenses:
Research and development			20,057				20,057
General and administrative			289,811				184,896
Interest			220,439				93,370
Total expenses			530,307				298,323
Net loss		$	(530,307	)		$	(298,323	)
Loss per share:
Basic and diluted		$	(0.003	)		$	(0.004	)
Weighted average shares outstanding, basic and diluted			193,621,826				68,622,677

 

		Series A Preferred Stock								Common Stock								Additional
						Par								Par				Paid-In				Accumulated
		Shares				Value				Shares				Value				Capital				Deficit				Total
Balance December 31, 2019			345,000			$	69				193,521,506			$	38,704			$	6,135,885			$	(5,494,193	)		$	680,465
Debt converted to common stock			-				-				9,129,136				1,826				298,174				-				300,000
Beneficial conversion feature of note payable			-				-				-				-				310,303				-				310,303
Warrants issued			-				-				-				-				53,447				-				53,447
Net loss for the period			-				-				-				-				-				(530,307	)			(530,307	)
Balance March 31, 2020			345,000			$	69				202,650,642			$	40,530			$	6,797,809			$	(6,024,500	)		$	813,908
Balance December 31, 2018			345,000			$	69				68,474,520			$	13,695			$	2,166,745			$	(3,639,808	)		$	(1,459,299	)
Common stock exchanged 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	)

 

		Three Months Ended March 31,
		2020				2019
Cash Flows from Operating Activities
Net loss		$	(530,307	)		$	(298,323	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			126				189
Amortization - intangible assets			20,057				20,057
Amortization - debt discount			202,882				33,874
Change in:
Prepaid expenses			41,303				10,652
Accounts payable and accrued liabilities			(58,693	)			157,946
Net cash used in operating activities			(324,632	)			(75,605	)
Cash Flows from Financing Activities
Payments on insurance premium financing			(16,773	)			(13,324	)
Proceeds from debt and warrants issued			363,750				85,000
Net cash provided by financing activities			346,977				71,676
Net change in cash			22,345				(3,929	)
Cash, beginning of period			58,149				4,001
Cash, end of period		$	80,494			$	72
Supplement Disclosure of Cash flow Information
Cash paid during the period for interest		$	18,780			$	2,675
Non-Cash Financing Activities
Notes payable converted to common stock		$	300,000			$	-
Common stock issued to satisfy accounts payable		$	-			$	7,862
Recognition of beneficial conversion feature		$	310,303			$	-

 

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 consolidated financial position of the Company. The 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 $6,024,500 for the period from inception (June 2, 2015) to March 31, 2020, has negative working capital of $474,864, and no revenues. The Company has insufficient revenue and capital commitments to fund the development of its planned products and 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 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 rates, embedded instruments and conversion discounts. 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 condensed 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 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 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 Company adopted this standard effective January 1, 2020 and will apply the standard on a prospective basis. The adoption of this standard did not have a material impact on the Company's consolidated financial position and results of operations.  

 

 

 

Note 4 –Notes Payable 

 

 

 

 6.3% Insurance premium finance agreement, due July 2020 

 

The Company entered into an insurance financing agreement in September 2019 totaling $61,503. The monthly payments under the agreement are due in eleven installments of $5,591 through July 2020. The Company made installment payments of $16,773 during the three months ended March 31, 2020. 

 

10% Promissory note due January 2024, net

 

On October 4, 2019, the Company entered into a Credit Agreement and related Promissory Note with DAF the Lender. DAF is managed by Carlton James, Ltd, a UK based company of which Simon Calton is the Chief Executive Officer. Mr. Calton is Co-Chairman of Coretec. The 10% Promissory Note, in a principal amount of $2,500,000, is due January 15, 2024 and has attached warrants to subscribe for and purchase 3,000,000 shares of common stock at an exercise price of $0.052 per share. Under the terms of the Credit Agreement, DAF will fund the Promissory Note in sixteen (16) tranches in amounts of $125,000 and $175,000 per month beginning in October 2019.   Interest is accrued monthly and paid in advance for the first 12 months and thereafter principal and interest payments shall be paid monthly in equal amounts, amortized over a 36-month period.

 

Under the terms of the Promissory Note, DAF has the right to elect to convert all or part of the Promissory Notes at a price equal to seventy percent (70%) of the average closing price of the Company’s common stock as reported on the over-the-counter quotation system on the OTC Markets during the fifteen (15) calendar days prior to the loan closing date of October 4, 2019, which calculates to $0.0329 per share.

 

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. Given the terms and related-party nature of the agreement, the commitment date was determined to be the date the funds are advanced to the Company and is limited to the funding value less other debt discounts (see below). A debt discount of $310,303 and $281,837 was recorded, with a corresponding credit to additional paid-in capital for the beneficial conversion feature for the three months ended March 31, 2020 and the year ended December 31, 2019, respectively. The debt discount will be amortized over the life of the debt and $30,770 was amortized to interest expense during the three months ended March 31, 2020.

 

Under the terms of the DAF Credit Agreement, warrants to subscribe for and purchase 3,000,000 shares of common stock at an exercise price of $0.052 per share are available to be issued to DAF. The warrants will be issued in amounts of 150,000 and 210,000 per month as the advance is received during the funding period. As of March 31, 2020, 1,020,000 warrants have been granted under the terms of the DAF Credit Agreement. The estimated value of the warrants granted monthly, with each advance, is calculated using the Black-Scholes option pricing model. The resulting estimated value of the warrant is used to proportionally allocate the fair value of the debt advance and the fair value of the warrants. The allocated cost of the warrants amounted to $53,447 and $60,593 during the three months ended March 31, 2020 and the year ended December 31, 2019, respectively, and is being amortized over the life of the debt. $6,114 was amortized during the three months ended March 31, 2020.

 

Additionally, under the terms of the Credit Agreement, the Company agreed to pay a commitment fee of 3% of each advance and reimburse DAF for certain expenses in connection with the preparation, interpretation, performance and enforcement of the Credit Agreement. Those costs amounted to $11,250 and $22,767 for three months ended March 31, 2020 and the year ended December 31, 2019 and are being amortized over the life of the debt and $2,073 was amortized during the three months ended March 31, 2020.

 

 

On March 31, 2020, under the terms of the Credit Agreement, DAF converted $300,000 of the principle of the Promissory Note into 9,129,136 shares of common stock at $0.0329 per share. A related charge of $130,370 of the beneficial conversion feature was made to interest expense along with debt issue related charges of $25,523 for the warrants and $8,123 for the deferred cost, during the three months ended March 31, 2020.

 

 

 

Note 5 – Commitments and Contingencies

 

Warrants

 

Under the terms of the DAF Credit Agreement, warrants to subscribe for and purchase 3,000,000 shares of common stock at an exercise price of $0.052 per share are available to be issued to DAF. The warrants are being issued in amounts of 150,000 and 210,000 per month during the funding period. As of March 31, 2020, 1,020,000 warrants have been granted under the terms of the DAF Credit Agreement. The estimated value of the warrants granted monthly, with each advance, is calculated 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 resulting estimated value of the warrant is used to proportionally allocate the fair value of the debt advance and the fair value of the warrant.

 

Warrants Summary

 

The following table summarizes the Company’s warrant activity during the three months ended March 31, 2020:

 

 

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.

 

 

The following table summarizes the Company’s option activity during the three-month period ended March 31, 2020:

 

  

 

The following table summarizes the Company’s options as of March 31, 2020:

 

 

 

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 Leases

 

The Company has an amended office lease in Tulsa, Oklahoma that expired on July 31, 2018. The Company is now on a month to month basis at $1,980 per month under the terms of the Tulsa lease.  Additionally, on December 3, 2019, the Company signed a one-year office lease in Ann Arbor, Michigan commencing January 1, 2020. The remaining rent obligation on the Ann Arbor office is $11,340 ($1,260 per month). Rent expense for the operating lease was $8,262 and $5,940 for the three months ended March 31, 2020 and 2019, respectively.

 

 

 

Note 6 – Subsequent Events

  

Notes payable - related party

 

Subsequent to March 31, 2020, DAF funded $175,000 and earned 210,000 warrants under the terms of the DAF Credit Agreement.