CRTG Coretec Group Inc (QB)

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” “anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.

This Quarterly Report on Form 10-Q includes the accounts of The Coretec Group Inc., an Oklahoma corporation, together with its wholly owned subsidiary, Coretec Industries LLC, a North Dakota limited liability corporation formed in North Dakota (individually referred to as “Coretec”). References in this Report to “we,” “our,” “us” or the “Group” refer to The Coretec Group Inc. and its consolidated subsidiary unless context dictates otherwise. The following discussion and analysis should be read in conjunction with our consolidated financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management. 

Plan of Operation

Background: 

On September 22, 2017, the Group filed an Amended Certificate of Incorporation (the “Amendment”) with the Secretary of State of the State of Oklahoma, to (i) change its name from “3DIcon Corporation” to “The Coretec Group Inc.” and to (ii) effect a 1-for-300 reverse stock split. The Name Change and Reverse Split became effective with the State of Oklahoma on September 28, 2017 and with FINRA on September 29, 2017. 

The Group 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. On July 15, 2005, the Group entered into a Sponsored Research Agreement (“SRA”) with the University of Oklahoma (the “University” or “OU”), which expired on January 14, 2007, under which they conducted a research project entitled "Investigation of 3-Dimensional Display Technologies”. On February 23, 2007, they entered into an SRA with the University, which expired on March 31, 2010, under which they conducted a research project entitled "3-Dimensional Display Development". The development to date has resulted in multiple new technologies, two working laboratory prototypes (Lab Proto 1 and Lab Proto 2), and eight provisional patents; five of the eight provisional patents have been combined and converted to five utility patents. These patents describe the foundation of what is called CSpace® technology (“CSpace”). Under the SRA, the Group has obtained the exclusive worldwide marketing rights to these 3D display technologies.

Coretec’s Technology. Coretec’s underlying technology is based on the production of a high value liquid silicon precursor, cyclohexasilane (“CHS”). A key advantage of CHS is that it remains in liquid form at room temperature and does not convert to a gas until heated above 450°F. CHS is a superior silicon precursor in many ways compared to materials commonly used for manufacturing silicon-based semiconductors and solar cells (monosilane or trichlorosilane) that have much lower boiling points which leads to higher cost handling and shipping. There are several technical advantages of using CHS versus common silicon precursors and one is that the production rate of the silicon-forming step can be increased by a factor of six, and relative to process temperature up to 10X or more, which leads to significant cost savings. We anticipate that CHS will first be used as an alternative to monosilane or trichlorosilane when adding silicon to lithium-ion batteries or when used in manufacturing silicon-based semiconductors.

We also see longer term potential in several emerging markets where there are opportunities in the conversion of CHS into nanoparticles and nanowires for use in such emerging, high-growth markets as:

Enhancement of CSpace. A key challenge in the development of CSpace® is the development of the material used for the image chamber. The Company has explored a variety of glass alternatives. While progress has been made, it has been concluded that limitations remain, primarily in the weight and cost of a glass medium.

A key virtue of having access to the Coretec IP portfolio of silicon-based materials is that we can now use all of the manufacturing infrastructure and knowledge that is available for optical plastics for the CSpace® image chamber. The benefit to CSpace® is that silicon-based optical plastics can be molded into a broad range of shapes and allow the image chamber to be much lighter and much lower in cost than the glass material we worked with before.

Near-Term Revenue Opportunities. Opportunities for near-term revenue continue to be explored in battery and microelectronic markets. Interest in the use of silicon in Li-ion batteries continues to increase driven by the growing demand for electrical vehicles, the exploitation of mobile electronics, and energy storage systems for backup power and improved efficiency of home and commercial wind and solar systems. Discussions are ongoing with suppliers of Li-ion battery anode materials that are seeking next generation materials to further increase performance while improving lifetime, charging time, safety and reliability. We believe these suppliers will be well positioned to take advantage of the benefits provided by CHS when combined as a liquid with other solid-based materials. While we believe the use of CHS in Li-ion batteries will provide near term revenue, we also continue to explore revenue opportunities in microelectronics and especially those early adopter markets where advanced microelectronics are being developed in lower volumes and with less price sensitivity.  

Recent Developments. 

Private Placement

On March 2, 2021, the Company entered into the Purchase Agreement with the Investor pursuant to which the Company agreed to sell to the Investor in a private placement (i) 23,500,000 Shares, (ii) Pre-Funded Warrants to purchase up to an aggregate of 51,500,000 shares of its common stock, and (iii) the Warrants to purchase up to an aggregate of 82,500,000 shares of its common stock for gross proceeds of approximately $6,000,000. The combined purchase price for one share of common stock and associated Warrant is $0.08 and for one Pre-Funded Warrant and associated Warrant is $0.0799. The sale of the securities under the Purchase Agreement closed on March 5, 2021.

The Warrants are exercisable for a period of five- and one-half years from the date of issuance and have an exercise price of $0.08 per share, subject to adjustment as set forth in the Warrants for stock splits, stock dividends, recapitalizations and similar events. The Investor may exercise the Warrant on a cashless basis if the Warrant Shares are not then registered pursuant to an effective registration statement. The Investor has contractually agreed to restrict its ability to exercise the Warrant such that the number of shares of the Company’s common stock held by the Investor and its affiliates after such exercise does not exceed the Beneficial Ownership Limitation set forth in the Warrant which may not exceed initially 4.99% of the Company’s then issued and outstanding shares of common stock.

The Pre-Funded Warrants have an exercise price of $0.0001 per share, subject to adjustment as set forth in the Pre-Funded Warrants for stock splits, stock dividends, recapitalizations and similar events.  The Pre-Funded Warrants were exercisable immediately and may be exercised at any time until all of the Pre-Funded Warrants are exercised in full.

In connection with the Purchase Agreement, the Company entered into the Registration Rights Agreement with the Investor. Pursuant to the Registration Rights Agreement, the Company was required to file the Registration Statement with the SEC to register for resale of the Shares, Warrant Shares and shares issuable upon exercise of the Pre-Funded Warrants, within 20 days of the Signing Date, and to have such Registration Statement declared effective within 45 days after the Signing Date in the event the Registration Statement was not reviewed by the SEC, or 90 days of the Signing Date in the event the Registration Statement was reviewed by the SEC. 

In support of the Purchase Agreement, the Company entered into an engagement with HCW to act as exclusive agent, advisor or underwriter in any offering of securities by the Company. Compensation to HCW includes 8.0% cash fee of gross proceeds and warrant coverage equal to 8% of the aggregate number of shares of common stock placed in each offering at an exercise price equal to 125% of the offering price per share available over a 5-year term. The Company also paid HCW (a) a management fee equal to 1.0% of the gross proceeds raised in each Offering; (b) $35,000 for non-accountable expenses (c) up to $50,000 for fees and expenses of legal counsel and other out-of-pocket expenses. The initial term of the agreement was for one month.

The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering.

Options Granted and Canceled / Reissued

On April 7, 2021, the Company granted options (“Options”) to purchase a total of 18,000,000 shares of the Company’s common stock, par value $0.0002 per share (the “Common Stock”) at an exercise price of $0.15 per share. The Options are exercisable for a period of five (5) years from the date of issuance. Of the 18,000,000 total Options granted, (i) Options to purchase 2,000,000 shares of Common Stock were granted to Victor Keen, the Company’s co-chairman; (ii) Options to purchase 2,000,000 shares of Common Stock were issued to Simon Calton, the Company’s co-chairman (iii) Options to purchase 1,000,000 shares of Common Stock were issued to Ron Dombrowski, a Director of the Company’s Board of Directors; (iv) Options to purchase 4,000,000 shares of Common Stock were issued to Michael Kraft, the Company’s Chief Executive Officer; (v) Options to purchase 2,000,000 shares of Common Stock were issued to Matthew Hoffman, the Company’s Chief Financial Officer; and (vi) Options to purchase an aggregate of 7,000,000 shares of Common Stock were issued to various employees and consultants of the Company. Specific individuals and positions held are relative to the time of the grant awards.

On September 30, 2021, the Board of Directors of the Company authorized the cancellation and reissuance of the following Options previously granted to various members of management: (i) 6,000,000 Options of Matthew Kappers, (ii) 2,000,000 Options of Matthew L. Hoffman, (iii) 2,000,000 Options of Victor F. Keen, (iv) 2,000,000 Options of Simon Calton, (v) 1,000,000 Options of Ron Dombrowski, and (vi) 4,000,000 Options of Michael Kraft. In addition, the Board of Directors of the Company authorized the cancellation and reissuance of an aggregate of 6,000,000 Options previously granted to employees and consultants of the Company. The options issued on September 30, 2021 have an exercise price of the $0.105.

On September 30, 2021, the Company granted five-year Options to members of the Company’s management, employees and consultants, as incentive compensation. The Company granted the following Options: (i) 2,000,000 Options to Matthew Kappers, (ii) 1,000,000 Options to Matthew L. Hoffman, (iii) 3,000,000 Options to Victor F. Keen, (iv) 3,000,000 Options to Simon Calton, (v) 2,000,000 Options to Ron Dombrowski, (vi) 2,000,000 Options to Doug Freitag, (vii) and an aggregate of 2,500,000 Options to employees and consultants of the Company. The options issued on September 30, 2021 have an exercise price of the $0.105.

Conversion of convertible debt

On March 31, 2021, DAF provided notice to convert $50,000 of debt at the stated conversion price of $0.0329 per share, resulting in an issuance of 1,519,757 common shares.

On April 29, 2021, DAF provided notice to convert $180,000 of debt at the stated conversion price of $0.0329 per share, resulting in an issuance of 5,471,125 common shares.

CEO and Board of Directors Appointment

On June 21, 2021, the Company announced the appointment of Matthew J. Kappers as Chief Executive Officer. Kappers will operate in the CEO role as an independent contractor for the period of June 15, 2021 through December 15, 2021. Kappers will be compensated at a monthly rate of $12,500 and received an option grant to purchase 5,000,000 shares of common stock. The options were fully vested pursuant to the Board of Directors consent, effective September 30, 2021.

In addition, Kappers was also appointed to the Board of Directors.

As a result of Mr. Kappers’ appointment, Michael Kraft transitioned to President and will continue to focus on commercialization of CHS and expanding the IP portfolio.

CFO contract renewal

On June 23, 2021, the Company renewed the CFO and Corporate Secretary contract with Matthew L. Hoffman under similar terms of the initial contract. The new agreement expires on May 31, 2022.

Adoption of The Coretec Group, Inc. 2021 Equity Incentive Plan

On September 30, 2021, the Board of Directors of The Coretec Group, Inc. (the “Company”) approved The Coretec Group, Inc. 2021 Equity Incentive Plan (the “Plan”), which covers the potential issuance of 62,000,000 shares of common stock, from which various awards may be granted, including but not limited to: (a) Incentive Stock Options, (b) Non-qualified Stock Options, (c) Stock Appreciation Rights, (d) Restricted Awards, (e) Performance Share Awards, and (f) Performance Cash Awards.

Director Appointment

On September 30, 2021, the Board of Directors of the Company appointed Douglas Freitag to serve on the Company’s Board of Directors. Mr. Freitag, age 66, brings a wealth of experience to his new role as a member of the Board of Directors. Since 1993, Mr. Freitag has supported organizations as the founder and owner of Bayside Materials Technology, including but not limited to Dow Corning, SCHOTT Government Services, LLC, Aduro Biotech, Cerus, DNA Electronics, General Electric, Triton Systems, UDRI, Avery Dennison, DuPont, Ancon Technologies, Honeywell, and Lockheed Martin. Mr. Freitag supported these organizations in the research, development and transition of new technologies and federal business development. Mr. Freitag also previously served as a Director and Vice President of Technology for the Company until his resignation on August 20, 2017, and has continued to serve as a consultant to the Company.

In connection with Mr. Freitag’s appointment, the Company granted Mr. Freitag, under the Plan, five-year non-qualified options (“Options”) to purchase 2,000,000 shares of the Company’s common stock at a price per share equal to $0.105.

No arrangement or understanding exists between Mr. Freitag and any other persons pursuant to which he was appointed to the Company’s Board of Directors. Mr. Freitag has not engaged in any transaction, since January 1, 2020, or any currently proposed transaction, in which the Company was or is to be a participant and the amount involved exceeds $120,000, and in which any related person had or will have a direct or indirect material interest.

Results of Operations

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2020.

Revenue

We did not have revenue for the three-month periods ended September 30, 2021 and 2020.

Research and Development Expenses

The research and development expenses were $192,255 and $37,197 for the three months ended September 30, 2021 and 2020, respectively. The costs include $105,000 of stock options to consultants, approximately $37,000 of research material, and approximately $50,000 of amortization of the patent cost and intangible legal expense for the three months ended September 30, 2021.

General and Administrative Expenses

Our general and administrative expenses were $2,480,697 for the three months ended September 30, 2021, as compared to $316,376 for the three months ended September 30, 2020.  

The approximate $2,164,000 expense increase includes an increase in approximately $2,042,000 of stock option expenses, increase in selling and marketing consultants’ fees of approximately $71,000, an increase in finance and administration consultants’ fees of approximately $23,000, an approximate increase of $32,000 related to selling and marketing expenses. These increases were offset by a net reduction of approximately $4,000 related to various administrative expenses.

Interest Expense

Interest expense for the three months ended September 30, 2021 was $44,077 as compared to $80,531 for the three months ended September 30, 2020. The approximately $36,000 net decrease was a result of the accounting change detailed in pronouncement ASU 2020-06, in which the Company will no longer separately present the embedded conversion feature of its convertible debt within stockholders’ equity and therefore not amortize those costs to interest expense. This accounting change resulted in a reduction of approximately $45,000. This reduction was offset by an increase of approximately $9,000 for interest expense related to the DAF promissory note and related warrant and deferred costs during the three months ended September 30, 2021.

Other Income

Other income for the three months ended September 30, 2021 was $45,124 as compared to $0 for the three months ended September 30, 2020. The company received a lump sum payment of $45,000 from a third party to vacate and assign the office lease.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2020.

Revenue

We did not have revenue for the nine-month periods ended September 30, 2021 and 2020.

Research and Development Expenses

The research and development expenses were $428,250 and $117,187 for the nine months ended September 30, 2021 and September 30, 2020, respectively. These costs include $234,000 of stock options to consultants, approximately $56,000 of research material, and approximately $138,000 of amortization of the patent cost and intangible legal expenses for the nine months ended September 30, 2021.

General and Administrative Expenses

Our general and administrative expenses were $5,340,325 for the nine months ended September 30, 2021, as compared to $780,491 for the nine months ended September 30, 2020.  

The approximate $4,560,000 expense increase includes an increase in approximately $4,273,000 of stock option expenses, increase in selling and marketing consultants’ fees of approximately $160,000, an increase in finance and administration consultants’ fees of approximately $62,000, and an approximate increase of $97,000 related to other selling and marketing expenses. These increases were offset by a reduction of approximately $32,000 of legal fees related to due diligence matters incurred in the nine months ending September 30, 2020.

Interest Expense

Interest expense for the nine months ended September 30, 2021 was $175,015 as compared to $357,615 for the nine months ended September 30, 2020.  The approximately $183,000 net decrease was a result of the accounting change detailed in pronouncement ASU 2020-06, in which the Company will no longer separately present the embedded conversion feature of its convertible debt within stockholders’ equity and therefore not amortize those costs to interest expense. This accounting change resulted in a reduction of approximately $238,000. This reduction was offset by an increase of approximately $55,000 for interest expense related to the DAF promissory note and related warrant and deferred costs during the nine months ended September 30, 2020. 

Other Income

Other income for the nine months ended September 30, 2021 was $45,124 as compared to $1,250 for the nine months ended September 30, 2020. The company received a lump sum payment of $45,000 from a third party to vacate and assign the office lease.

Financial Condition, Liquidity and Capital Resources

Management remains focused on controlling cash expenses. As a result of the securities purchase agreement and capital raise of $6,000,000 detailed in recent developments, management believes that the Company has sufficient capital commitments to fund the development of its planned products and to pay operating expenses for a period of more than one year following the issuance of these consolidated financial statements. In addition, the Company will continue to leverage stock-for-services whenever possible.

The operating budget consists of the following expenses:

We had net cash of $4,357,144 at September 30, 2021. 

We had positive working capital of $3,765,590 at September 30, 2021.

During the nine months ended September 30, 2021, we used $810,414 of cash for operating activities, a net decrease of $224,245 or 22% compared to the nine months ended September 30, 2020. The net decrease in the use of cash for operating activities was a net result of an increase in the net loss of $4,644,424 offset by an increase in stock option expense of $4,506,896, a decrease in the amortization of debt discount of $223,018, an increase in prepaid expenses of $141,942, an increase in deposits of $9,435, and an increase in accounts payable and accrued expenses of $432,940.

During the nine months ended September 30, 2021, we used $12,007 for website development costs compared with $0 used for investing activities during the nine months ended September 30, 2020.

During the nine months ended September 30, 2021, there was $5,157,346 of net cash provided by financing activities, an increase of $4,157,181 or 416% compared to the nine months ended September 30, 2020. The increase was a result of $4,913,200 in net proceeds of private placement stock issued, offset by $712,501 in less net proceeds of debt and warrants issued and $43,519 in payments on note payable and long term debt.

We expect to fund the ongoing operations through the existing cash on hand and financing in place.

Our ability to fund the operations of the Company is highly dependent on the underlying stock price of the Company.

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, 2020, which was filed on March 12, 2021.