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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________ to _______________.

 

Commission file number: 000-53125

 

InterCore, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

27-2506234

(I.R.S. Employer

Identification No.)

   

1615 South Congress Avenue - Suite 103

Delray Beach, FL

(Address of principal executive offices)

 

33445

(Zip Code)

 

Registrant’s telephone number, including area code (561) 900-3709

 

 
(Former Name, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all 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 x.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ¨ No x.

 

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

 

Large accelerated filer  ¨ Accelerated filer  ¨
   
Non-accelerated filer  ¨ Smaller reporting company  x
(Do not check if a smaller reporting company)  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ Nox.

 

Applicable only to issuers involved in bankruptcy proceedings during the preceding five years:

 

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

 

Applicable only to corporate issuers:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of January 16, 2015, there were 41,933,066 shares of common stock, $0.0001 par value, issued and outstanding.

 

 
 

 

INTERCORE, INC.

 

TABLE OF CONTENTS

  

PART I – FINANCIAL INFORMATION 3
   
ITEM 1 Financial Statements 4
     
ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
     
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 33
     
ITEM 4 Controls and Procedures 33
   
PART II – OTHER INFORMATION 36
   
ITEM 1 Legal Proceedings 36
     
ITEM 1A Risk Factors 36
     
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds 36
     
ITEM 3 Defaults Upon Senior Securities 37
     
ITEM 4 Mining Safety Disclosures 37
     
ITEM 5 Other Information 37
     
ITEM 6 Exhibits 38

  

2
 

 

PART I – FINANCIAL INFORMATION

 

This Quarterly Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on management’s beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning our possible or assumed future results of operations set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider,” or similar expressions are used.

 

Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties, and assumptions. Our future results and shareholder values may differ materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward-looking statements.

 

3
 

 

ITEM 1           Financial Statements

 

InterCore, Inc. and Subsidiary

Condensed Consolidated Balance Sheets

 

   September 30,   December 31, 
   2014   2013 
   (Unaudited)   (Audited) 
           
Assets          
           
Current assets:          
           
Cash  $127,818   $23,225 
Accounts receivable   400,864    49,714 
Prepaid expenses and other current assets   227,434    288,828 
           
Total current assets   756,116    361,767 
           
Fixed assets   1,421,172    - 
Deferred financing costs, net   1,102,590    - 
Other   15,364    - 
           
Total assets  $3,295,242   $361,767 
           
Liabilities and Stockholders' Deficiency          
           
Current liabilities:          
           
Accounts payable  $707,788   $253,970 
Accounts payable due to related parties   308,289    58,500 
Accrued expenses   703,625    152,663 
Credit facility - $3,827,073 balance net of discount of $3,184,250   662,323    - 
Notes payable   805,961    803,343 
Note payable due to related party   480,000    800,000 
Derivative financial instrument liability   7,825,283    - 
           
Total liabilities   11,493,269    2,068,476 
           
Commitments and contingencies   -    - 
           
Stockholders' deficiency:          
           
Preferred stock, $0.0001 par value, 20,000,000 shares authorized; 302,000 and 142,000 shares of Series D issued and outstanding as of September 30, 2014 and December 31, 2013, respectively; Liquidation preferences of $9,751 and $4,275 as of September 30, 2014 and December 31, 2013, respectively; Liquidation preferences of $-0- and $4,275 as of September 30, 2014 and December 31, 2013, respectively.   30    14 
           
Common stock, $0.0001 par value, 275,000,000 shares authorized, 40,603,031 and 40,595,031 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively.   4,060    4,059 
           
Additional paid-in capital   16,667,567    12,428,791 
           
Accumulated deficit   (24,513,944)   (14,108,050)
           
Accumulated other comprehensive gains   (355,740)   (31,523)
           
Total stockholders' deficiency   (8,198,027)   (1,706,709)
           
Total liabilities and stockholders' deficiency  $3,295,242   $361,767 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4
 

 

InterCore, Inc. and Subsidiary

Condensed Consolidated Statements of Operations

and Comprehensive Income/(Loss)

(Unaudited)

 

   Three months ended September 30,   Nine months ended September 30, 
   2014   2013   2014   2013 
                 
Revenues  $351,450   $42,932   $615,374   $67,620 
                     
Operating expenses:                    
                     
Research and development   1,506,789    751,344    3,990,777    1,611,020 
Charge for acquired in-process research and development   -    -    -    1,467,505 
General and administrative   447,041    91,966    1,472,839    407,046 
                     
Total operating expenses   1,953,830   843,310    5,463,616   3,485,571 
                     
Operating loss   (1,602,380)   (800,378)   (4,848,242)   (3,417,951)
                     
Other income (expense):                    
                     
Interest expense:                    
Derivative financial instrument   (1,934,380)   -    (4,154,872)   - 
Amortization of deferred financing costs   (282,146)   -    (465,910)   - 
Amortization of debt discount   (549,766)   -    (687,467)   - 
Note payable to Fandeck (related party)   -    -    -    (182,490)
Other   (151,062)   (106,733)   (337,772)   (189,647)
Change in fair value of derivative financial instrument   71,661    -    88,369    - 
Charge to expense for:                    
Loss on settlement with Epec   -    -    -    (187,500)
Loss on settlement of related party note payable   -    -    -    (883,628)
Loss on settlement with vendors   -    -    -    (170,650)
Loss on distribution of assets to HLBCDC (related party)   -    -    -    (327,000)
                     
Other income (expense)   (2,845,693)   (106,733)   (5,557,652)   (1,940,915)
                     
Net loss   (4,448,073)   (907,111)   (10,405,894)   (5,358,866)
                     
Other comprehensive gain (loss) - Foreign currency transalation   (163,445)   (46,571)   (324,217)   35,890 
                     
Comprehensive loss  $(4,611,518)  $(953,682)  $(10,730,111)   (5,322,976)
                     
                     
Net loss per common share - Basic and diluted  $(0.11)  $(0.12)  $(0.26)  $(0.76)
                     
Weighted average common shares outstanding - Basic and diluted   40,597,553    7,470,459    40,595,881    7,025,762 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5
 

 

InterCore, Inc. and Subsidiary

Condensed Consolidated Statement of Stockholders' Deficiency

For the Nine Months Ended September 30, 2014

(Unaudited)

 

   Preferred Stock Series D   Common Stock   Additional   Accumulated   Accumulated   Total 
   Shares   Amount   Shares   Amount   Paid-In Capital   Deficit   Other   Stockholders' 
                           Comprehensive   Deficiency 
                           Loss     
                                 
Balance, December 31, 2013   142,000   $14    40,595,031    4,059   $12,428,791   $(14,108,050)  $(31,523)  $(1,706,709)
                                         
Issuance of warrants on January 3, 2014 in connection with the issuance of a promissory note - Note 11   -    -    -    -    5,914    -    -    5,914 
                                         
Issuance of warrant on March 6, 2014 for services received - Note 11   -    -    -    -    14,275    -    -    14,275 
                                         
Issuance of warrant on May 2, 2014 in connection with a debt agreement - Note 11   -    -    -    -    1,382,000    -    -    1,382,000 
                                         
Issuance of shares of Series D Preferred Stock on various dates between January 3, 2014 and June 26, 2014 at $10 per share net of commissions - Note 8   160,000    16    -    -    1,522,484    -    -    1,522,500 
                                         
Issuance of common shares on September 1, 2014 in connection with issuance of a note payable - Note 9   -    -    8,000    1    25,999    -    -    26,000 
                                         
Issuance of warrants on September 2, 2014 for cash - Note 11   -    -    -    -    18,000    -    -    18,000 
                                         
Reclass warrant to derivative liability on September 2, 2014 - Note 11   -    -    -    -    (161,330)   -    -    (161,330)
                                         
Share based compensation - Options issued to management - Note 10   -    -    -    -    1,431,434    -    -    1,431,434 
                                         
Net loss   -    -    -    -    -    (10,405,894)   -    (10,405,894)
                                         
Unrealized loss on foreign currency translation   -    -    -    -    -    -    (324,217)   (324,217)
                                         
Balance, September 30, 2014   302,000   $30    40,603,031   $4,060   $16,667,567   $(24,513,944)  $(355,740)  $(8,198,027)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6
 

 

InterCore, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   Nine Months Ended September 30, 
   2014   2013 
         
Cash flows used in operating activities:          
           
Net loss  $(10,405,894)  $(5,358,866)
           
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:          
Stock-based compensation expense:          
Options issued for services   1,431,434    - 
Warrants issued for services   14,275    60,361 
Amortization of deferred financing costs   465,910    - 
Amortization of debt discount   687,467    50,000 
Charge to interest expense related to derivative financial instruments   4,154,872    - 
Change in the fair value of derivative financial instrument   (88,369)   - 
Charge for acquired in-process research and development   -    1,467,505 
Debt issuance charges related to Fandeck note recorded as interest expense:   -    181,870 
Charges for issuance of common shares in connection with:          
Settlement with Epec   -    137,500 
Settlement of note due to Rockland   -    883,628 
Settlement of trade accounts payable   -    170,649 
Loss on distribution of assets and liabilities and issuance of common shares and warrants to HLBCDC   -    330,684 
           
Changes in operating assets and liabilities:          
Increase in accounts receivable   (351,150)   (32,948)
(Increase) decrease in prepaid expenses and other current assets   66,394    (325,430)
Increase in other assets   (15,364)   - 
Increase in accounts payable   453,814    81,823 
Decrease (decrease) in accounts payable due to related parties   249,789    (86,130)
Increase in accrued compensation   -    22,500 
Increase in accrued expenses   550,962    233,596 
Decrease in deferred revenue   -    (4,328)
           
Net cash used in operations   (2,785,860)   (2,187,586)
           
Cash flows provided by (used in) investing activities:          
           
Investment in fixed assets   (1,421,172)   - 
Cash acquired in SRG acquisition   -    240,731 
           
Net cash provided by (used in) investing activities   (1,421,172)   240,731 
           
Cash flows provided by (used in) financing activities:          
           
Proceeds from sale of preferred stock   1,522,504    812,250 
Proceeds from sale of warrants   13,000    - 
Proceeds from credit facility   3,827,073      

Cash paid for facility fee and origination fees

   (409,623)   - 
Proceeds from issuance of notes payable   72,206    1,000,428 
Proceeds from issuance of notes payable to related party   -    50,000 
Proceeds from issuance of notes payable - Other   -    28,174 
Repayment of notes payable   (69,318)   (11,263)
Repayment of notes payable - Related party   (320,000)   - 
           
Net cash flows provided by financing activities   4,635,842    1,879,589 
           
Net increase (decrease) in cash   428,810    (67,266)
           
Effect of foreign exchange rate changes on cash   (324,217)   35,892 
           
Cash - Beginning of period   23,225    53,744 
           
Cash - End of period  $127,818   $22,370 
           
Supplemental disclosures of cash flow information:          
           
Cash paid for:          
Interest  $-   $115 
Income taxes  $-   $- 
           
Supplemental disclosures of non-cash operating, investing, and financing activities:          
           
Issuance of Common and Preferred Stock:          
Conversion of note payable into Series C Convertible Preferred Stock  $-   $75,971 
Settlement of note payable to New Horizon, Inc.  $-   $1,509,361 
Settlement of note payable to the Rockland Group, Inc.  $-   $1,463,566 
Settlement of accounts payable  $-   $513,053 
Distribution/assumption of assets and liabilities to HLBC Distribution Company, Inc.  $-   $321,630 
           
Issuance of warrants:          
Issuance in connection with credit facility  $1,387,914   $- 
Transfer of assets and liabilities to HLBC Distribution Company, Inc.  $-   $295,000 
           
Acquisition of SRG International, Inc.:          
Acquisition of assets other than cash  $-   $1,722,941 
Assumption of liabilities  $-   $1,596,970 
Issuance of Series C Convertible Preferred Stock - Purchase price  $-   $125,971 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7
 

 

InterCore, Inc. and Subsidiary

Notes to the Condensed Consolidated Financial Statements

September 30, 2014

(Unaudited)

 

1)Business

 

InterCore, Inc. (the "Company") was incorporated under the laws of the State of Delaware on April 29, 2010. Through March 20, 2012, the Company focused upon investments and acquisition opportunities primarily in products and companies involved in the market segments of clean and renewable energy, medical technology, nanotechnology, and environmentally-friendly (green) waste management. On March 30, 2012, the Company decided to intensify its focus in the energy sector and the related opportunities within and, to that end, the Board of Directors elected to change the name of the Company from Heartland Bridge Capital, Inc., to InterCore Energy, Inc.

 

On January 23, 2013, the Company:

 

a)Transferred investments to a related party in exchange for the assumption of certain obligations. The Company then converted the majority of the remaining accounts payable, notes payable, and other commitments into shares of its common stock; and

 

b)Closed on a transaction with SRG International, Inc. ("SRG") and its shareholders whereby the Company acquired 100% of the outstanding common stock of SRG in exchange for ICOR's issuance of 5,000,000 shares of a newly created Series C Convertible Preferred Stock ("Series C"). Immediately after a reverse split of the Company's common stock, which occurred on December 31, 2013, all of the then outstanding shares of Series C automatically converted into 80% of the then outstanding shares of the Company's common stock and the acquisition was accounted for as a purchase of a business. The SRG shareholders which received the initial block of Series C in January 2013 did not perfect their interest in such securities due to non-performance of certain provisions of the acquisition agreement. On October 28, 2013, the Company waived such provisions. Subsequent to January 2013, the Company issued additional shares of Series C to other investors. On December 31, 2013, all outstanding shares of Series C converted into 80% of the then outstanding common shares of the Company.

 

During 2013 the operations of SRG consisted primarily of researching, developing, and testing the Driver Alertness Detection System ("DADS™"). DADS™ is designed around proprietary alertness detection technologies, which enables individuals to modulate their work activity based on real time assessment of their actual state of alertness. The DADS™ methodology employs a unique approach for assessing sleepiness and low alertness levels via the observed behavior of individuals in real work conditions.

 

On December 31, 2013, the name of the Company was changed to InterCore, Inc.

 

8
 

 

2)Basis of Presentation

 

The accompanying unaudited condensed financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America. However, in the opinion of management, the accompanying unaudited condensed financial statements contain all normal and recurring adjustments necessary to present fairly the financial position of the Company as of September 30, 2014 and the related statements of operations and cash flows for the interim period then ended. The balance sheet amounts as of December 31, 2013 were derived from audited financial statements. For further information, refer to the audited financial statements and related disclosures that were filed by the Company with the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 2013 on November 13, 2014. Certain prior year amounts have been reclassified to conform to current year presentation.

 

3)Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred significant losses and negative cash flows from operations since its inception in April 2010 and has an accumulated deficit of $24,513,944 as of September 30, 2014. Cash used in operating activities during the nine months ended September 30, 2014 and 2013 totaled $2,785,860 and $2,187,568, respectively, and the Company has a working capital deficiency of $10,737,153 as of September 30, 2014. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The Company has historically financed its activities through the private placement of debt and equity securities. Since inception, it has dedicated most of its financial resources to general and administrative expenses in the pursuit of the business plan described in the preceding paragraphs and, effective January 23, 2013, research, development, testing and commercialization of the DADS™ technology. As of January 12, 2015, the Company had cash-on-hand of approximately $125,000.

 

The Company’s ability to continue those activities is dependent upon its ability to raise additional equity, secure debt financing, and/or generate revenue.

 

The Company can give no assurance that such financing will be available on acceptable terms or at all, or that it can generate revenue. Should the Company not be successful in obtaining the necessary financing or generating revenue to fund its operations, the Company would need to curtail or cease its operational activities. The accompanying financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

 

9
 

 

4)Significant Accounting Policies

 

Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All other significant inter-company balances and transactions have been eliminated in consolidation.

 

Use of Estimates - The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

 

Revenue Recognition - The Company recognizes revenue when persuasive evidence that an arrangement exists with a customer or client, the price to the purchaser is fixed or determinable, the product has been shipped or the service has been performed, the Company has no significant remaining obligation, and collectability is reasonably assured. Revenue from cloud-based services arrangements that allow for the use of a hosted software product or service over a contractually determined period of time without taking possession of software are accounted for as subscriptions and recognized as revenue ratably over the coverage period beginning on the date the service is made available to customers.

 

Research and Development - The Company expenses research and development costs as incurred. The Company incurred research and development expense of $1,506,789 and $751,344 during the three months ended September 30, 2014 and 2013, respectively, and $3,990,777 and $1,611,020 during the nine months ended September 30, 2014 and 2013, respectively. Additionally, the Company recorded a charge for acquired research and development of $1,467,505 during the three months ended March 31, 2013.

 

Stock-Based Compensation - The Company accounts for options granted to employees by measuring the cost of services received in exchange for the award of equity instruments based upon the fair value of the award on the date of grant. The fair value of that award is then ratably recognized as expense over the period during which the recipient is required to provide services in exchange for that award. Options and warrants granted to consultants and other non-employees are recorded at fair value as of the grant date and subsequently adjusted to fair value at the end of each reporting period until such options and warrants vest, and the fair value of such instruments, as adjusted, is expensed over the related vesting period.

 

Stock-based compensation expense totaled $577,748 and $14,550 for the three months ended September 30, 2014 and 2013, respectively, and $1,445,709 and $60,361 for the nine months ended September 30, 2014 and 2013, respectively, and was classified as follows:

 

10
 

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2014   2013   2014   2013 
                 
Research and development expense  $505,539   $-   $906,429   $- 
General and administrative expense   72,209    14,550    539,280    60,361 
   $577,748   $14,550   $1,445,709   $60,361 

 

Earnings (Loss) Per Share - The Company calculates basic and diluted net loss per common share by dividing net loss by the weighted-average number of common shares outstanding for the period. Basic and diluted net loss per common share were the same since the inclusion of common shares issuable pursuant to the exercise of warrants and the conversion of preferred stock in the calculation of diluted net loss per common share would have been anti-dilutive.

 

The following table summarizes the number of common shares and common share equivalents excluded from the calculation of diluted net loss per common share for the three and nine months ended September 30, 2014 and 2013:

 

   2014   2013 
         
Options   4,600,000    - 
Warrants   3,328,304    1,293,304 
Conversion shares underlying the credit facility   3,417,029    - 
    11,345,333    1,293,304 

 

Fair Value - The Company determines the estimated fair value of amounts presented in these financial statements using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented in the financial statements are not necessarily indicative of the amounts that could be realized in a current exchange between buyer and seller. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. These fair value estimates were based upon pertinent information available as of September 30, 2013 and, as of that date, the carrying value of all amounts approximates fair value.

 

The Company has categorized its assets and liabilities at fair value based upon the following fair value hierarchy:

 

a)Level 1 inputs which utilize quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

b)Level 2 inputs which utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and other information that are observable at commonly quoted intervals.

 

11
 

 

c)Level 3 inputs which are unobservable and are typically based on assumptions, including situations where there is little, if any, market activity.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the related asset or liability was categorized based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company data) inputs.

 

Financial assets and liabilities are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques, and at least one significant model assumption or input is unobservable. The Company’s Level 3 liabilities consisted of derivative liabilities associated with the convertible credit facility that contains an indeterminable conversion share price as the Company cannot determine if it will have sufficient authorized common stock to settle such arrangements.

 

The carrying amounts of the Company’s cash, accounts receivables, prepaid expenses, accounts payable and accrued expenses, debt and other current liabilities approximate fair value to the short-term nature of these investments.

 

The following are the major categories of liabilities were measured at fair value as of September 30, 2014 using quoted prices in active markets for identical liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):

 

   Level 1:             
   Quoted Prices             
   In Active             
   Markets For   Level 2:         
   Identical   Significant   Level 3:     
   Liabilities Or   Other   Significant     
   Financial   Observable   Unobservable     
   Instruments   Inputs   Inputs   Total 
                 
Embedded conversion option  $-   $-   $7,674,648   $7,674,648 
Warrant   -    -    150,635    150,635 
   $-   $-   $7,825,283   $7,825,283 

 

12
 

 

The following table provides a summary of the Company’s level 3 changes in fair value, including net transfers in and/or out, of all financial liabilities measured at fair value on a recurring basis using significant unobservable inputs during the nine months ended September 30, 2014:

 

   Embedded         
   Conversion         
   Option   Warrants   Total 
             
Balance - December 31, 2013  $-   $-   $- 
Included in debt discount (Note 6)   3,597,450    -    3,597,450 
Included in interest expense (Note 6)   4,154,872    -    4,154,872 
Reclassification of additional paid-in capital to derivative liability (Note 11)   -    161,330    161,330 
Change in fair value of derivative liability   (77,674)   (10,695)   (88,369)
Balance - September 30, 2014  $7,674,648   $150,635   $7,825,283 

 

The Company utilized the Binomial Lattice Model for determining the fair value of the liabilities related to the embedded conversion option. The following table summarizes significant unobservable inputs in the fair value measurement of the Company’s embedded conversion feature as of September 30, 2014:

 

Stock price $2.80
Risk free interest rate 1.3%
Expected life of the agreement 3.6 years
Expected stock price volatility 100%
Expected dividend yield Zero

 

The stock prices are based upon the Company's closing prices in the open market. The risk free interest rates were United States Treasury rates for the applicable periods. The expected life of the agreement is the remaining term of the credit facility. The expected stock price volatility was determined by reference to the historical volatility of the Company's own stock price and the expected volatility as reported by industry peers. The expected dividend yield is zero because the Company has not paid dividends in the past and does not expect to pay dividends in the foreseeable future.

 

The Company utilized the Black Scholes Model for determining the fair value of the liabilities related to the warrants. The following table summarizes significant unobservable inputs in the fair value measurement of the Company’s warrants as of September 30, 2014:

 

Stock price $2.80
Risk free interest rate 0.5%
Expected life of the agreement 1.9 years
Expected stock price volatility 100%
Expected dividend yield Zero

  

Foreign Operations - The Company operates in the United States and Canada. Revenues and other financial statistics are attributed to the country in which each legal entity is domiciled. The financial information by geographic area is as follows:

 

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   US   Canada   Total 
             
Three months ended September 30, 2014:               
Revenues by geographic area  $-   $351,450   $351,450 
Operating loss by geographic area   502,340    1,100,040    1,602,380 
Net loss by geographic area   3,348,033    1,100,040    4,448,073 
                
Three months ended September 30, 2013:               
Revenues by geographic area   -    42,932    42,932 
Operating loss by geographic area   550,204    250,174    800,378 
Net loss by geographic area   656,937    250,174    907,111 
                
Nine months ended September 30, 2014:               
Revenues by geographic area   -    615,374    615,374 
Operating loss by geographic area   1,627,426    3,220,816    4,848,242 
Net loss by geographic area   7,185,078    3,220,816    10,405,894 
                
Nine months ended September 30, 2013:               
Revenues by geographic area   644    66,976    67,620 
Operating loss by geographic area   919,814    2,498,137    3,417,951 
Net loss by geographic area   2,860,729    2,498,137    5,358,866 
                
As of September 30, 2014               
Identifiable assets by geographic area   1,144,336    2,150,906    3,295,242 
Long lived assets by geographic area   1,156,591    1,436,535    2,593,126 
                
As of December 31, 2013               
Identifiable assets by geographic area   32,370    329,397    361,767 
Long lived assets by geographic area   -    -    - 

 

Concentration of Activities - During the three and nine months ended September 30, 2014, the Company earned 100% of its revenues from one customer. As of September 30, 2014, 100% of its outstanding accounts receivable were due from that customer.

 

Fixed Assets - Fixed assets are stated at cost, net of accumulated depreciation, and are depreciated on a straight line basis over their estimated useful lives ranging from three to five years. Leasehold improvements are depreciated on a straight line basis over the term of the related lease. Expenditures for additions, major renewals, or betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred.

 

Deferred Financing Costs - Cost incurred in conjunction with the debt financing has been capitalized and will be amortized to interest expense using the straight line method, which approximates the interest rate method over the term of the debt and is included as a component of other assets. The Company incurred amortization expense of $282,146 and zero during the three months ended September 30, 2014 and 2013, respectively, and $465,910 and zero during the nine months ended September 30, 2014 and 2013, respectively.

 

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Derivative Liabilities - In connection with the Company entering into a convertible credit facility, the terms of the agreement included an embedded conversion feature; which provided for the settlement of the credit facility into shares of common stock at a rate which was determined to be variable. The Company determined that the conversion feature was an embedded derivative instrument pursuant to ASC 815 “Derivatives and Hedging”. The accounting treatment of derivative financial instruments requires that the Company record the conversion option as of the inception date of the agreements and at fair value as of each subsequent balance sheet date. Any change in fair value was recorded as a change in the fair value of derivative liabilities for each reporting period at each balance sheet date. The Company reassesses the classification at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.

 

The fair value of an embedded conversion option that is convertible into a variable amount of shares are deemed to be a “down-round protection” and therefore, do not meet the scope exception for treatment as a derivative under ASC 815. Since, “down-round protection” is not an input into the calculation of the fair value of the conversion option and cannot be considered “indexed to the Company’s own stock” which is a requirement for the scope exception as outlined under ASC 815.

 

The Company used the Binomial Lattice Model to determine the fair value of embedded conversion option. The Company used the Black Scholes Model to determine the fair value of the warrant liability. The warrants have a fixed exercise price and do not have any down round price protection features.

 

As a result of entering into a convertible credit facility (Note 6) for which such instruments contained a variable conversion feature with no floor, the Company has adopted a sequencing policy in accordance with ASC 815-40-35-12 whereby all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation.

 

Foreign Currency Translation - The functional currency of the Company's Canadian operations is the Canadian dollar. Assets and liabilities related to that operation are translated at end-of-period exchange rates while the related revenues and expenses are translated at average exchange rates prevailing during the period. Unrealized foreign currency translation gains and losses are recorded in Accumulated Other Comprehensive Gains/Losses on the balance sheet and presented as separate components of activity in the statements of operations. Foreign currency translation gains (losses) totaled ($163,445) and ($46,571) for the three months ended September 30, 2014 and 2013, respectively, and ($324,217) and $35,890 for the nine months ended September 30, 2014 and 2013, respectively,

 

Comprehensive Income (Loss) - The Company reports comprehensive income (loss) and components thereof in the condensed consolidated statement of operations. Comprehensive loss consists of net loss and foreign currency translation adjustments affecting shareholder’s deficiency which, under US GAAP, are excluded from net loss.

 

15
 

 

 

Retroactive Adjustment For Stock Splits - On December 31, 2013, the Company effected a one hundred-for-one reverse stock split of its Common Stock. Consequently, all earnings per share and other share related amounts and disclosures have been retroactively adjusted for those actions.

 

Subsequent Events - The Company has evaluated subsequent events and transactions through the date these financial statements were issued to determine if such events and transactions required adjustment to or disclosure in these financial statements.

 

5)Fixed Assets

 

Fixed assets as of September 30, 2014 and December 31, 2013 consist of the following:

 

   2014   2013 
         
Computer equipment  $914,064   $- 
Software   156,196      
Leasehold improvements   350,912    - 
           
   $1,421,172   $- 

 

No depreciation or amortization has been recorded during the nine months ended September 30, 2014 as those assets have yet to be placed in service.

 

6)Note Payable

 

On January 3, 2014, the Company issued a note payable in the amount of $40,000 plus a warrant for the purchase of 10,000 shares of the Company's common stock at $2.00 per share until May 1, 2017. This warrant was 100% vested upon issuance. This note matures on May 1, 2014 and accrues interest at the rate of 12% per annum for the first six months they are outstanding and then 18% per annum thereafter. The warrants were valued at $6,940. This note was issued to a related party as further described in Note 13. The Company recorded a debt discount based on the estimated relative fair values of the instruments issued in the transaction. The Company recorded a debt discount of $5,914 which was amortized over the life of the debt.

 

The interest expense associated with this note for the nine months ended September 30, 2014 consisted of the following:

 

Accrued interest of the face amount of the note  $2,344 
Amortization of debt discount   5,914 
   $8,258 

 

The Company is not in compliance with the terms of this note or others similar to it with principal amounts totaling $664,000. However, those noteholders have not issued the Company a formal notice of default.

 

16
 

 

On September 2, 2014, the entered into a note payable with Epec in the amount of $110,000. The note earns 18% annually compounded daily, requires monthly principal payments of $3,000 on the 15th of each month from September through December and matures on December 31, 2014. In connection with the issuance of that note, the Company issued to Epec 8,000 shares of its common stock with a value of $26,000 based upon the closing price of $3.25 per share on that date. The value of those shares was recorded as a debt discount and is being amortized to financing expense ratably over the life of the note.

 

7)Convertible Credit Facility

 

On May 5, 2014, the Company entered into a Loan and Security Agreement and a Secured Promissory Note (collectively the "Credit Facility") with Rhine Partners, LP ("Rhine"). The Credit Facility permits borrowings up to $4,000,000, bears interest at 18% per annum, is secured by a lien on the assets of the Company, and matures on November 15, 2015. The credit facility is collateralized by substantially all of the Company's assets.

 

In connection with securing this Credit Facility, the Company paid a 4.5% facility fee of $180,000 and granted to Rhine a warrant for the purchase of up to 2,000,000 shares of the Company's common stock at an exercise price of $1.00 per share through May 2, 2018. The warrant had a fair value of $1,382,000. This warrant was fully vested and its fair value was determined by utilizing the Black Scholes valuation model. The combined amount of $1,562,000 represents costs incurred to secure this Credit Facility and are being amortized on a straight lines over the term of this agreement. Additionally, the Company is obligated to pay a 6% origination fee at the time of each withdrawal.

 

Outstanding principal may be converted at the election of Rhine at any time into the Company's Series D Preferred Shares at the price of $10.00 per share or into restricted common stock at a price equal to 40% of the market price based upon the average closing price of the five days preceding such election. Additionally, Rhine has the right to make such a conversion election up to five days after the Company has tendered repayment of the principal.

 

The Company accounted for proceeds from this Credit Facility in accordance with ASC 815 "Derivatives and Hedging". The fair value of the embedded conversion option for each individual advance was determined using the Binomial Lattice Model and recorded on the date of such advances as a derivative liability. They are collectively marked-to-market at the end of each reporting period with a related non-cash charge or benefit recorded in the Other Income (Expense) section in the Statement of Operations. As a result of entering into a convertible credit facility (Note 6) for which such instruments contained a variable conversion feature with no floor, the Company has adopted a sequencing policy in accordance with ASC 815-40-35-12 whereby all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation.

 

During the three months ended September 30, 2014, the Company received gross advances of $1,802,074 and simultaneously recorded a derivative liability of $3,628,330. To account for the market discounts of the conversion rights, the gross advances were recorded net of debt discounts immediately for $108,124 related to the 6% origination fee and $1,693,950 related to the fair value attributed to the embedded conversion options. To the extent the derivative liability exceeded the debt discount value attributed to the embedded conversion options, that difference of $1,934,380 was immediately recorded as interest expense in the Statement of Operations.

 

17
 

 

During the nine months ended September 30, 2014, the Company received gross advances of $3,827,073 and simultaneously recorded a derivative liability of $7,752,322. To account for the market discounts of the conversion rights, the gross advances were recorded net of debt discounts immediately for $229,623 related to the 6% origination fee and $3,597,450 related to the fair value attributed to the embedded conversion options. To the extent the derivative liability exceeded the debt discount value attributed to the embedded conversion options, that difference of $4,154,872 was immediately recorded as interest expense in the Statement of Operations.

 

The debt discount associated with each Advance is being charged to interest expense ratably over the remaining term of the Credit Facility.

 

The Company used the Binomial Lattice Model to calculate the fair value of the embedded conversion options upon the date of each advance. The significant inputs and assumptions are summarized in the following table:

 

Stock price   $0.76 to $3.80 
Risk free interest rate   1.3%
Expected life of the agreement   3.6 to 4.00 years 
Expected stock price volatility   100%
Expected dividend yield   Zero 

 

The stock prices are based upon the Company's closing prices in the open market. The risk free interest rates were United States Treasury rates for the applicable periods. The expected life of the agreement is the remaining term of the credit facility. The expected stock price volatility was determined by reference to the historical volatility of the Company's own stock price and the expected volatility as reported by industry peers. The expected dividend yield is zero because the Company has not paid dividends in the past and does not expect to pay dividends in the foreseeable future.

 

The Company is obligated to commence repayment of the principal when it becomes cash flow positive and may do so without penalty. As of September 30, 2014 the principal balance of $3,827,073 is presented less a debt discount of $3,164,750 resulting in a net amount of $662,323. The credit facility has been classified as a current liability since it may be terminated by the lender at any time.

 

On November 28, 2014, the Company repaid principal and interest of $518,477 and $273,523, respectively. Therefore, the total principal currently outstanding in connection with this Credit Facility is $3,308,596.

 

18
 
8)Series D Preferred Stock

 

Series D Preferred Stock has the following rights and preferences: (i) For each $200,000 invested in 20,000 shares of Series D Preferred Stock at $10 per share, the holder of such shares is entitled to royalty payments equal to: a) one percent of the Company's gross revenue until $1,000,000 has been paid to such holder; and b) one half of one percent of the Company's gross revenue until an additional $1,000,000 has been paid to such holder. Such payments are due on a quarterly basis and once payments totaling $2,000,000 have been made to such holder, those shares will cease earning royalty payments and be returned to the Company for no additional consideration; (ii) no dividend rights; (iii) no liquidation rights other than what is owed in connection with the terms described in "(i)" above; (iv) no conversion rights; (v) no redemption rights; (v) no call rights by the Company; and (vi) no voting rights.

 

On various dates from January 3, 2014 to June 26, 2014, the Company raised $1,600,000 through the sale of 160,000 shares of Series D Preferred Stock and received net proceeds of $1,522,500. In this connection, a commission of $77,500 was earned by a related party as further described in Note 13.

 

9)Common Stock

 

On September 2, 2014 and as more fully described in Note 6 in connection with the amendment of a note payable, the Company issued 8,000 shares of its common stock with a value of $26,000 based upon the closing price of $3.25 per share on that date.

 

10)Adoption of Stock Option Plan and Issuance of Options

 

On February 3, 2014, the Company's Board of Directors approved the adoption of the InterCore, Inc. 2014 Non-Qualified Stock Option Plan (the “Plan”). The Plan is intended to aid the Company in maintaining and developing a management team, attracting qualified officers and employees capable of assisting in the future success of the Company, and rewarding those individuals who have contributed to the success of the Company.

 

On that same date, the Board approved the issuance of options to the Company's management team for the purchase of up to 4,600,000 shares of the Company's common stock at $1.00 per share for a period of ten years. The fair value of that option award was $1,384,000. Such options were one-third vested on the date of issuance and the remaining thirds will vest on December 31, 2014 and 2015. During the three and nine months ended September 30, 2014, the Company recorded share-based compensation of $647,667 and $1,445,705, respectively, in this connection.

 

Assumptions made in calculating the fair value of those options were as follows:

 

Risk free interest rate  1.5%
Dividend yield  Zero
Volatility  100%
Expected term  4.5 years

 

19
 

 

The stock prices are based upon the Company's closing prices in the open market. The risk free interest rates were United States Treasury rates for the applicable periods. The expected life of the agreement is the remaining term of the option. The expected stock price volatility was determined by reference to the historical volatility of the Company's own stock price and the expected volatility as reported by industry peers. The expected dividend yield is zero because the Company has not paid dividends in the past and does not expect to pay dividends in the foreseeable future.

 

A summary of the changes in options outstanding during the nine months ended September 30, 2014 is as follows:

 

       Weighted   Weighted     
       Average   Average     
       Exercise   Remaining   Aggregate 
   Number of   Price   Contractual   Intrinsic 
   Shares   Per Share   Term (Years)   Value 
                 
Outstanding at December 31, 2013   -    -    -    - 
Granted   4,600,000   $1.00    10.0    - 
Exercised   -                
Forfeited   -                
Outstanding at September 30, 2014   4,600,000   $1.00    9.3   $8,280,000 
                     
Options exercisable at September 30, 2014   1,533,333   $1.00    9.3   $2,759,999 

 

11)Warrants

 

On January 3, 2014 and as more fully described in Note 6 in connection with the issuance of a note payable, the Company issued a warrant for the purchase of 10,000 shares of common stock through May 1, 2017 at $2.00 per share. This warrant was 100% vested upon issuance and had a fair value of $6,940.

 

On March 6, 2014, the Company granted a warrant to an advisor to the Company for services rendered for the purchase of 25,000 shares of common stock through March 6, 2019 at $1.00 per share. This warrant was 100% vested upon issuance and had a fair value of $14,275. During the nine months ended September 30, 2014, the Company recorded share-based compensation of $14,275 in this connection.

 

On May 2, 2014 and as more fully described in Note 7 in connection with entering into a credit facility, the Company issued a warrant for the purchase of 2,000,000 shares of common stock through May 2, 2018 at $1.00 per share. This warrant was 100% vested upon issuance and had a fair value of $1,382,000.

 

20
 

 

On September 2, 2014, the Company issued to independent investors a series of warrants for the purchase of 85,000 shares of restricted common stock through September 2, 2016 at $1.75 per share and received proceeds of $18,000. These warrants were 100% vested upon issuance.

 

In accordance with its sequencing policy, the Company could not determine if it had sufficient authorized shares to settle the contract as the outstanding Credit Facility (Note 7) is convertible into a variable amount of shares with no floor. On the date of the issuance of the warrants, the Company reclassified the fair value of the warrants of $161,330 from additional paid-in capital to derivative liability. These warrants are collectively marked-to-market at the end of each reporting period with a related non-cash charge or benefits recorded in the Statement of operations as a change in fair value of derivative liability.

 

The Company used the Black Scholes Model to calculate the fair value of the warrants upon the date of issuance and each reporting date thereafter. The significant inputs and assumptions are summarized in the following table:

 

Risk free interest rate  0.5%
Dividend yield  Zero
Volatility  100%
Expected term  1.9 to 2.0 years

 

The stock prices are based upon the Company's closing prices in the open market. The risk free interest rates were United States Treasury rates for the applicable periods. The expected life of the agreement is the remaining term of the warrant. The expected stock price volatility was determined by reference to the historical volatility of the Company's own stock price and the expected volatility as reported by industry peers. The expected dividend yield is zero because the Company has not paid dividends in the past and does not expect to pay dividends in the foreseeable future.

 

A summary of the changes in warrants outstanding during the nine months ended September 30, 2014 is as follows:

 

       Weighted   Weighted     
       Average   Average     
       Exercise   Remaining   Aggregate 
   Number of   Price   Contractual   Intrinsic 
   Shares   Per Share   Term (Years)   Value 
                 
Outstanding at December 31, 2013   1,293,304   $5.80    3.9    - 
Granted   2,120,000   $1.00    3.8    - 
Exercised   -                
Forfeited   -                
Outstanding at September 30, 2014   3,413,304   $2.86    3.6   $5,311,300 
                     
Warrants exercisable at September 30, 2014  3,413,304   $2.86    3.6   $5,311,300 

 

12)Commitments and Contingencies

 

The Company is subject to litigation in the ordinary course of business. Certain conditions may exist as of the date the condensed consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

21
 

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s condensed consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability and an estimate of the range of possible losses, if determinable and material, would be disclosed.

 

Loss contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the guarantees would be disclosed. There can be no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows. As of September 30, 2014 and December 31, 2013 the Company has not accrued for any loss contingencies.

 

13)Related Party Transactions

 

On January 3, 2014 and as more fully described in Note 6, the Company issued a note payable in the amount of $40,000 plus a warrant for the purchase of 10,000 shares of the Company's common stock. This note was purchased by an entity controlled by Mr. Frederick Voight, the Company's Vice president of Investments and a member of the Company's Board of Directors.

 

During the nine months ended September 30, 2014 and as more fully described in Note 8, the Company raised $1,600,000 through the sale of shares of Series D Preferred Stock. Mr. Frederick Voight, the Company's Vice president of Investments and a member of the Company's Board of Directors, earned a commission of $77,500 in connection with these issuances.

 

14)Subsequent Events

 

a)

Compensation for Services

 

On October 8, 2014, the Company entered into an agreement with its major customer to be compensated for software licenses provided by the Company during the nine months ended September 30, 2014 through the payment of twelve monthly amounts of $125,000 in Canadian dollars. Due to the uncertainty of payment, revenue is being recognized upon the collection of such funds. The Company has recorded revenues of $351,450 in connection with this agreement during the three and nine months ended September 30, 2014.

 

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b)Issuance of Convertible Note Payable #1 to Topside

 

On October 15, 2014, the Company entered into a Loan and Security Agreement and Secured Promissory Note (collectively the "Note") with Topside Partners, LP ("Topside") under which the Company borrowed various amounts between that date and October 22, 2014 totaling $1,000,000 and received net proceeds of $974,900. The Note bears interest at 18% per annum, is secured by a lien on all the Company's assets, and matures on April 30, 2015. The Company is obligated to commence repayment of the principal when it becomes cash flow positive and may do so without penalty. Outstanding principal may be converted at the election of Topside at any time into the Company's Series D Preferred Shares at the price of $10.00 per share or into restricted common stock at a price of a 60% discount to market based on the average closing price of the five days preceding such election except that through April 15, 2015, Topside may convert the outstand principal into common stock at a price equal to the lesser of: a) $2.00 per share; or b) a 60% discount to market based upon the average closing price five days preceding such election. Topside has the right to make such a conversion election up to five days after the Company has tendered repayment of the principal. Additionally on that same day and under the terms of the Note, the Company issued a warrant for Topside to purchase up to 2,000,000 shares of the Company's common stock at an exercise price of $1.00 per share for a period of four years. The warrant was 100% vested upon issuance.

 

c)Exercise of Warrants

 

On October 15 and November 7, 2014, we issued 1,290,491 shares of restricted common stock to Topside in connection with its exercise of warrants to purchase 1,518,130 shares of our common stock. We did not receive any consideration for the exercise of these warrants as they were issued pursuant to the cashless exercise provision contained in those warrants.

 

d)Issuance of Convertible Note Payable #2 to Topside

 

On October 29, 2014, the Company entered into a Loan and Security Agreement and Secured Promissory Note (collectively the "Note") with Topside Partners, LP ("Topside") under which the Company borrowed various amounts between that date and November 5, 2014 totaling $1,000,000 and received net proceeds of $895,000. The Note bears interest at 18% per annum, is secured by a lien on all the Company's assets, and matures on May 31, 2015. The Company is obligated to commence repayment of the principal when it becomes cash flow positive and may do so without penalty. Outstanding principal may be converted at the election of Topside at any time into the Company's Series D Preferred Shares at the price of $10.00 per share or into restricted common stock at a price of a 60% discount to market based on the average closing price of the five days preceding such election except that through April 29, 2015, Topside may convert the outstand principal into common stock at a price equal to the lesser of: a) $2.00 per share; or b) a 60% discount to market based upon the average closing price five days preceding such election. Topside has the right to make such a conversion election up to five days after the Company has tendered repayment of the principal. Additionally on that same day and under the terms of the Note, the Company issued a warrant for Topside to purchase up to 2,000,000 shares of the Company's common stock at an exercise price of $1.00 per share for a period of four years. The warrant was 100% vested upon issuance.

 

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e)Issuance of Convertible Note Payable #3 to Topside

 

On November 7, 2014, the Company entered into a Loan and Security Agreement and Secured Promissory Note (collectively the "Note") with Topside Partners, LP ("Topside") under which the Company borrowed various amounts between that date and November 19, 2014 totaling $1,000,000 and received net proceeds of $900,000. The Note bears interest at 18% per annum, is secured by a lien on all the Company's assets, and matures on May 31, 2015. The Company is obligated to commence repayment of the principal when it becomes cash flow positive and may do so without penalty. Outstanding principal may be converted at the election of Topside at any time into the Company's Series D Preferred Shares at the price of $10.00 per share or into restricted common stock at a price of a 60% discount to market based on the average closing price of the five days preceding such election except that through April 29, 2015, Topside may convert the outstand principal into common stock at a price equal to the lesser of: a) $2.00 per share; or b) a 60% discount to market based upon the average closing price five days preceding such election. Topside has the right to make such a conversion election up to five days after the Company has tendered repayment of the principal. Additionally on that same day and under the terms of the Note, the Company issued a warrant for Topside to purchase up to 2,000,000 shares of the Company's common stock at an exercise price of $1.00 per share for a period of four years. The warrant was 100% vested upon issuance.

 

f)Issuance of Series D Preferred Stock

 

On various dates from November 5, 2014 through November 26, 2014, the Company raised $1,117,000 through the sale of 111,700 shares of Series D Preferred Stock and received net proceeds of $1,061,150.

 

g)Exercise of Warrants

 

On November 12, 2014, the Company issued 18,750 shares of restricted common stock at $2.00 per share to private investors in connection with the exercise of warrants and received proceeds of $37,500.

 

h)Sale of Common Stock

 

On November 18 2014, the Company issued 17,000 shares of restricted common stock at $2.95 per share to a private investor and received proceeds of $50,150.

 

i)Repayments In Connection With The Credit Facility

 

On November 26, 2014, the Company made principal and interest payments totaling $792,000 in connection with the Credit Facility. Therefore, the total principal currently outstanding in connection with the Credit Facility is $3,308,596 and $73,599, respectively.

 

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j)Issuance of $300K note to Rhine.

 

On December 8, 2014, the Company entered into a Loan Agreement ("Note") with Rhine Partners, LP ("Rhine") under which the Company borrowed $300,000. The Note bears interest at the rate of 1.5% every ten days or portions thereof and matures on January 30, 2015. Additionally, a one-time facility fee of $25,000 was earned by Rhine upon the execution of the Note. Outstanding principal may be converted at the election of Rhine at any time into the Company's Series D Preferred Shares at the price of $10.00 per share or into restricted common stock at a price of a 40% discount to market based on the average closing price of the five days preceding such election. Rhine has the right to make such a conversion election up to five days after the Company has tendered repayment of the principal. Additionally on that same day and under the terms of the Note, the Company issued a warrant for Rhine to purchase up to 500,000 shares of the Company's common stock at an exercise price of $1.00 per share for a period of four years. The warrant was 100% vested upon issuance. If the Company fails to repay the loan in full by the maturity date, the Company must pay a penalty of $35,000 and issue a warrant to Rhine for the purchase of 2,000,000 shares of the Company's common stock at an exercise price of $1.00 per share for a period of four years. The warrant would be 100% vested upon issuance.

 

k)Leases

 

On December 29, 2013, the Company entered into a lease agreement for 3,250 square feet for offices in Montreal which expires at the end of December 2016. Effective July 1 and October 1, 2014, the company entered into two additional lease agreements for 12,036 and 5,486 square feet for additional office space in the same building in Montreal which expires at the end of November 2018 and December 2016, respectively.

 

Total remaining commitments under these three lease agreements as of September 30, 2014 are as follows:

 

2014  $54,904 
2015   386,724 
2016   396,228 
2017   291,108 
2018   279,379 
   $1,408,343 

 

* * * * *

 

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ITEM 2Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Our Management’s Discussion and Analysis contains statements that are historical facts and statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national, and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

 

Although the forward-looking statements in this Quarterly Statement reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known or believed by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

 

The following discussion and analysis of financial condition and results of operations of the Company is based upon, and should be read in conjunction with, its unaudited financial statements and related notes elsewhere in this Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States. All dollar amounts in this section have been rounded to the nearest thousand.

 

Overview

 

Corporate History Prior to December 31, 2012

 

We were incorporated under the laws of the State of Delaware on April 29, 2010. Through March 20, 2012, we focused on investments and acquisition opportunities primarily in products and companies involved in the market segments of clean and renewable energy, medical technology, nanotechnology, and environmentally-friendly (green) waste management.

 

On March 30, 2012, we decided to further intensify our focus in the energy sector and the related opportunities within and, to that end, we elected to change the name of the Company to InterCore Energy, Inc.

 

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Through December 31, 2012 and as more fully described in our Annual Report on Form 10-K for the year then ended as filed with the Commission on June 25, 2013, we assembled a portfolio of investments in the life sciences and energy arenas. However, we found this approach to be lacking in appeal to investors, thereby making it difficult to raise capital to fund investments once we identified them and to fund the operations of the Company.

 

Corporate History Subsequent to December 31, 2012

 

a)Acquisition of SRG International, Inc.

 

On January 23, 2013, we consummated a transaction with SRG, and the shareholders of SRG who were the owners of 100% of the outstanding common stock of SRG, pursuant to which the shareholders of SRG transferred to us all of the common stock of SRG in exchange for 5,000,000 shares of our Series C Convertible Preferred Stock, which shares were convertible into 80% of our then outstanding common stock immediately after consummation of a reverse stock split. As a result of this transaction and a transaction with HLBCDC (whereby we sold our assets and operations in exchange for relief from certain debt obligations, as described earlier and in greater detail below), SRG became our wholly-owned subsidiary and we became a holding company with all of our current operations conducted through SRG.

 

Those operations consisted primarily of researching, developing, and testing the Driver Alertness Detection System ("DADS™"). DADS™ is designed around proprietary alertness detection technologies, which enables individuals to modulate their work activity based on real time assessment of their actual state of alertness. The DADS™ methodology employs a unique approach for assessing sleepiness and low alertness levels via the observed behavior of individuals in real work conditions.

 

b)Assignment and Assumption Agreement

 

Simultaneously with consummating the transaction with SRG, we closed a transaction contemplated by an Assignment and Assumption Agreement between us and HLBCDC pursuant to which the majority of the assets we owned prior to the acquisition of SRG were transferred to HLBCDC in exchange for HLBCDC assuming the majority of our liabilities and receiving our common shares and a warrant for the purchase of additional common shares. The assets we transferred to HLBCDC were the shares we owned in Legends and Epec as well as the intangible rights associated with the Myself™ pelvic muscle trainer and a novel medical applicator referred to as the “Soft and Smooth Assets.” In addition to transferring those assets, we issued to HLBDC 402,038 shares of our common stock (the “HLBCDC Shares”) and warrants to purchase 500,000 shares of our common stock at the exercise price of $0.55 per share (the fair market value of our common stock as of the date of the Agreement) (the “HLBCDC Warrant”). In exchange for the assets, the HLBCDC Shares, and the HLBCDC Warrant, HLBCDC agreed to assume liabilities valued at $985,948 consisting of fees owed to management, notes payables, and trade payables.

 

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c)Asset Purchase Agreement

 

Immediately prior to consummating the transaction with SRG, we closed a transaction contemplated by an Asset Purchase Agreement with Rockland, our majority shareholder. and an entity controlled by one of our Directors. Pursuant to that agreement, we sold the shares we owned in HepatoChem to Rockland in exchange for Rockland agreeing to forgive $579,938 of debt owed to it by us.

 

d)MeliaLife Agreement

 

On March 12, 2013, we entered into a Distribution Agreement (the “Distribution Agreement”) with MeliaLife International, Inc. (“MeliaLife”), pursuant to which we were awarded the rights to distribute and sell various natural supplement products produced by MeliaLife. Under the terms of the Distribution Agreement we would be the exclusive distributor to sell certain products as described therein (the “Products”). The duration of the Distribution Agreement is the lesser of five (5) years, or when we purchase Products in an amount by which the MeliaLife has received $30 million, representing 50% of the total product value of the Products purchased by us, whichever happens first. At the end of this contract, MeliaLife would assign its rights in all the Products to us for 4% of future net profits (total product value minus direct costs related to the Products), calculated and paid monthly, generated by the sale by us of those Products worldwide.

 

Our relationship with MeliaLife as been inactive since the date of the Distribution Agreement and we expect it to expire of its own accord with the passage of time.

 

Going Concern

 

These financial statements were prepared under the assumption that we will continue as a going concern. Our ability to do so is dependent upon our ability to obtain additional equity or debt financing, reduce expenditures, and/or generate revenue, any and all of which is uncertain. These financial statements do not include any adjustments that might result from the outcome of that uncertainty.

 

Current cash and working capital resources, including funds recently received from the sale of equity securities, are not sufficient to support our activities. We plan to fund our activities through the sale of equity securities as more fully described in the Liquidity and Capital Resources section in the following paragraphs.

 

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Liquidity and Capital Resources

 

We had cash of $128,000 as of September 30, 2014 compared to $23,000 as of December 31, 2013. This net increase of $105,000 was attributable:

 

$4,636,000   Cash received through financing activities
 (3,110,000)  Cash used in operating activities net of the effect of foreign exchange rate changes
 (1,421,000)  Cash used in investing activities
$105,000   Net increase

 

We have incurred significant losses and negative cash flows from operations since our inception in April 2010. We have an accumulated deficit of $24,514,000 and a working capital deficiency of $10,737,000 as of September 30, 2014. These conditions raise substantial doubt about our ability to continue as a going concern. We have historically financed our activities through the sale of debt and the private placement of equity securities. Through December 31, 2012, we have dedicated our financial resources to investments as well as general and administrative expenses in the pursuit of the business plan described in the preceding paragraphs. Subsequent to that date, we have dedicated our financial resources to the researching, developing, and testing of the Driver Alertness Detection System™ (DADS™) as well as general and administrative expenses.

 

We plan to fund our development and eventually commercialization activities beyond September 30, 2014 primarily through the sale of debt and/or equity securities. Subsequent to September 30, 2014 and through the date of this report, we have raised $4,280,000 through the sale of debt and equity securities. As of January 12, 2015, the Company had cash-on-hand of approximately $125,000.

 

However, we cannot be certain that such funding will continue to be available on acceptable terms or at all. To the extent that we secure additional debt or raise funds by issuing equity securities, our stockholders may experience significant dilution. If we are unable to raise funds when required or on acceptable terms, we may have to: a) Significantly delay, scale back, or discontinue the development and/or commercialization of DADS™; b) Seek collaborators at an earlier stage than would otherwise be desirable and/or on terms that are less favorable than might otherwise be available; c) Relinquish or otherwise dispose of rights to technologies, product candidates, products, or services that we would otherwise seek to develop or commercialize ourselves; or d) Otherwise curtail or cease operational activities.

 

The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.

 

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Critical Accounting Policies

 

The following accounting policies are critical in fully understanding and evaluating our financial statements:

 

a)Accounting for acquisitions;

b)Accounting for research and development costs;
c)Accounting for derivative financial instruments; and
d)Stock-based compensation.

 

Our accounting policies are described in Note 3 to the condensed consolidated financial statements for the nine months ended September 30, 2014 contained elsewhere in this report and in Note 3 to the audited financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Results of Operations

 

For the three months ended September 30, 2014 compared to the three months ended September 30, 2013

 

Revenues

 

Revenues for the three months ended September 30, 2014 were $351,000 compared to $43,000 for the comparable period in the prior year. Such revenues were exclusively related to DADS™ and this increase of $308,000 was attributable to expanded activities with clients in connection with the testing and development of that technology.

 

There were no significant direct costs of revenues associated with such revenue.

 

Research and Development Expense

 

Research and development expense for the three months ended September 30, 2014 was $1,507,000 compared to $751,000 for the comparable period in the prior year. Such expenses during were exclusively related to the development of DADS™. This increase of $756,000 was attributable primarily to expanded activities in that regard and consisted primarily of an increase in salaries and benefits of $158,000, an increase in the use of subcontractors of $230,000 and an increase in stock-based compensation expense of $505,000 which was offset by a decrease in hardware and software related costs of $64,000.

 

General and Administrative Expense

 

General and administrative expense for the three months ended September 30, 2014 was $447,000 compared to $92,000 for the comparable period in the prior year. This increase of $355,000 was primarily attributable to an increase in salaries and benefits of $245,000 and an increase in stock-based compensation expense of $58,000.

 

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Other Expense

 

Other expense for the three months ended September, 2014 was $2,846,000 compared to $107,000 for the comparable period in the prior year. This increase of $2,739,000 was attributable to an increase of $1,934,000 related to the issuance of derivative financial instruments, an increase of $282,000 in amortization of deferred financing costs, and an increase of $550,000 in amortization of debt discount costs. Those increases were offset by a $61,000 benefit related to the change in the fair value of derivative financial instruments. Other amounts included in other expense for the three months ended September 30, 2014 consisted primarily of interest related to notes payable and such amounts were consistent with those in the comparable period in the prior year.

 

Other Comprehensive Loss

 

Other comprehensive loss for the three months ended September 30, 2014 and 2013 was $163,000 and $47,000, respectively. Such variations are attributable to changes in the exchange rate between the Canadian and United States dollars and the effect of those changes upon the translation of SRG's financial statements into United States dollars.

 

For the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013

 

Revenues

 

Revenues for the nine months ended September 30, 2014 were $615,000 compared to $68,000 for the comparable period in the prior year. Such revenues were exclusively related to DADS™ and this increase of $547,000 was attributable to expanded activities with clients in connection with the testing and development of that technology.

 

There were no significant direct costs of revenues associated with such revenue.

 

Research and Development Expense

 

Research and development expense for the nine months ended September 30, 2014 was $3,991,000 compared to $1,611,000 for the comparable period in the prior year. Such expenses during were exclusively related to the development of DADS™. This increase of $2,380,000 was attributable to expanded activities in that regard and consisted primarily of an increase in salaries and benefits of $827,000, an increase in the use of subcontractors of $683,000, and an increase in stock-based compensation expense of $906,000.

 

Charge for Acquired Research and Development Expense

 

The charge for acquired research and development expense for the nine months ended September 30, 2013 was $1,468,000. We acquired SRG on January 23, 2013 and its operations consist primarily of research, development, testing, and commercialization of the DADS™ System. We accounted for the acquisition of SRG under the purchase method of accounting whereby assets acquired and liabilities were recorded at their estimated fair values as of the date of the acquisition. A total of $1,468,000 was allocated to acquired in-process research and development and, in conformity with generally accepted accounting practices to expense such costs as incurred, that amount was immediately charged to expense.

 

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There was no similar expense for the nine months ended September 30, 2014.

 

General and Administrative Expense

 

General and administrative expense for the nine months ended September 30, 2014 was $1,473,000 compared to $407,000 for the comparable period in the prior year. This increase of $1,066,000 was attributable to an increase in salaries and benefits of $657,000 and an increase in stock-based compensation expense of $479,000. The remaining general and administrative expenses were generally consistent with the comparable period in the prior year.

 

Other Expense

 

Other expense for the nine months ended September, 2014 was $5,558,000 compared to $1,941,000 for the comparable period in the prior year. This increase of $3,617,000 in expenses was attributable to:

 

a)An increase in expenses totaling $5,308,000 consisting of an increase of $4,155,000 related to the issuance of derivative financial instruments, an increase of $466,000 in amortization of deferred financing costs, and an increase of $687,000 in amortization of debt discount costs;

 

b)An increase in a benefit of $78,000 related to the change in the fair value of derivative financial instruments; and

 

c)A decrease in expenses totaling $1,569,000 consisting primarily of a number of charges related to transactions executed in advance of the acquisition of SRG on January 23, 2013. In those transactions we divested ourselves of a number of assets which were not complimentary to our stated goal of developing DADS™.

 

Other amounts included in other expense for the nine months ended September, 2014 consisted primarily of interest related to notes payable and such amounts were consistent with those in the comparable period in the prior year.

 

Other Comprehensive Income (Loss)

 

Other comprehensive income (loss) for the nine months ended September 30, 2014 was ($324,000) compared to $36,000 for the comparable period in the prior year. Such variations are attributable to changes in the exchange rate between the Canadian and United States dollars and the effect of those changes upon the translation of SRG's financial statements into United States dollars.

 

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ITEM 3Quantitative and Qualitative Disclosures About Market Risk

 

As a smaller reporting company, we are not required to provide the information required by this Item.

 

ITEM 4Controls and Procedures

 

a)Disclosure Controls and Procedures

 

We conducted an evaluation, with the participation of our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of September 30, 2014 to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities Exchange Commission's rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2014, our disclosure controls and procedures were not effective at the reasonable assurance level as evidenced by the inability of the Company to file its 10-Q for the quarter ended September 30, 2014 in a timely manner. This deficiency is attributable to an insufficient number of qualified financial personnel within the Company, specifically at SRG, and cash flow constraints that limited the Company in obtaining the services of external professionals necessary to fulfill its reporting obligations in a timely manner.

 

b)Management Reporting on Internal Controls Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as amended, as a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that:

 

i)Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and any disposition of our assets;

 

ii)Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

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iii)Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2014. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management has identified the following material weaknesses that have caused management to conclude that, as of September 30, 2014, our internal control over financial reporting, were not effective at the reasonable assurance level:

 

i)We do not have a sufficient number of qualified internal accounting personnel, specifically at SRG, nor an adequate internal reporting structure necessary to meet the reporting requirements of a public company.

 

ii)We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. 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, the initiation of transactions, the custody of assets, and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

iii)We have not documented our internal controls. We have limited policies and monitoring procedures that cover the recording and reporting of financial transactions and accounting provisions. As a result we may be delayed in our ability to calculate certain accounting provisions. While we believe these provisions are accounted for correctly in the attached unaudited financial statements, our lack of internal controls could lead to a delay in our reporting obligations and possibly the delays we encountered with the SRG transaction. Reporting companies have been required to provide written documentation of key internal controls over financial reporting beginning with fiscal years ended on or after December 31, 2009. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

 

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c)Remediation of Material Weaknesses

 

The material weaknesses described above and summarized below are expected to be remediated when additional financial resources are made available to us through either additional fundraising and/or cash flows from operations. Those weaknesses consist of:

 

i)The absence of a sufficient number of qualified internal accounting personnel, specifically at SRG, and an adequate internal reporting structure necessary to meet the reporting requirements of a public company;

 

ii)The lack of segregation of duties; and

 

iii)The absence of documented internal controls.

 

During 2015, the Company plans to hire qualified personnel, improve the internal reporting structure, improve segregation of duties, and document internal controls as financial resources permit.

 

d)Changes in Internal Control over Financial Reporting

 

As previously reported, effective January 23, 2013 we acquired SRG, a foreign entity based in Canada through which we conduct most of our day-to-day business activities. Consequently, the material weaknesses described above combined with the acquisition of SRG have affected our internal control over financial reporting as described in the preceding paragraphs.

 

There were no changes in internal control over financial reporting during the quarter ended September 30, 2014.

 

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PART II – OTHER INFORMATION

 

ITEM 1Legal Proceedings

 

We are not a party to or otherwise involved in any legal proceedings.

 

In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.

 

ITEM 1ARisk Factors

 

As a smaller reporting company, we are not required to provide the information required by this Item.

 

ITEM 2Unregistered Sales of Equity Securities and Use of Proceeds

 

1)Common Stock

 

On September 1, 2014 and in connection with the revision of a debt agreement, we issued 8,000 shares of common stock with a market price that day of $3.35 per share. The issuance of the warrants are exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, due to the fact the investors are either accredited or sophisticated investors and are familiar with our operations

 

2)Preferred Stock

 

None.

 

3)Sale of Warrants to Purchase Common Stock

 

On September 2, 2014, we sold warrants for the purchase of up to 85,000 shares of common stock through September 2, 2016 at $1.75 per share and received proceeds of $18,000. The issuance of the warrants are exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, due to the fact the investors are either accredited or sophisticated investors and are familiar with our operations.

 

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4)Convertible Notes

 

On May 5, 2014, we entered into a Loan and Security Agreement and Secured Promissory Note (collectively the "Note") with Rhine Partners, LP ("Rhine") under which we borrowed various amounts between that date and September 29, 2014 totaling $3,827,073 and received net proceeds of $3,417,450. The Note bears interest at 18% per annum, is secured by a lien on substantially all of our assets, and matures on November 15, 2015. We are obligated to commence repayment of the principal when we become cash flow positive and may do so without penalty. Outstanding principal may be converted at the election of the Rhine at any time into shares of our Series D Preferred Stock at the price of $10.00 per share or into restricted shares of our common stock at a price of a 60% discount to market based on the average closing price of the five days preceding such election. Rhine has the right to make such a conversion election up to five days after we have tendered repayment of the principal. Additionally on that same day and under the terms of the Note, we issued a warrant for Rhine to purchase up to 2,000,000 shares of our common stock at an exercise price of $1.00 per share through May 2, 2018. The warrant was 100% vested upon issuance. The issuance of the Note and the warrant are exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, due to the fact the investors are either accredited or sophisticated investors and are familiar with our operations.

 

ITEM 3Defaults Upon Senior Securities

 

There have been no events which are required to be reported under this Item.

 

ITEM 4Mine Safety Disclosures

 

There have been no events which are required to be reported under this Item.

 

ITEM 5Other Information

 

There have been no events which are required to be reported under this Item.

 

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ITEM 6Exhibits

 

(a)Exhibits

 

2.1 (1)   Plan of Reorganization of AP Corporate Services, Inc.
     
3.1 (1)   Articles of Incorporation of I-Web Media, Inc. filed April 29, 2010
     
3.2 (5)   Amended Articles of Incorporation of I-Web Media, Inc., filed December 8, 2010 (effective December 29, 2010)
     
3.3 (5)   Restated Articles of Incorporation of InterCore Energy, Inc., filed December 8, 2010 (effective December 29, 2010)
     
3.4 (13)   Amendment to Articles of Incorporation of Heartland Bridge Capital, Inc. filed November 26, 2012 (effective May 16, 2012)
     
3.5 (1)   Bylaws of I-Web Media, Inc.
     
3.5 (5)   Restated Bylaws of InterCore Energy, Inc.
     
3.7 (14)   Certificate of Designation for Series C Convertible Preferred Stock
     
10.1 (1)   Form of “A” Warrant
     
10.2 (1)   Form of “B” Warrant
     
10.3 (1)   Form of “C” Warrant
     
10.4 (1)   Form of “D” Warrant
     
10.5 (1)   Form of “E” Warrant
     
10.6 (2)   Agreement to Purchase Common Stock by and between Kenneth S. Barton, Rockland Group, LLC, and I-Web Media, Inc., dated November 3, 2010
     
10.7 (2)   Securities Purchase Agreement by and between I-Web Media, Inc. and Rockland Group, LLC, dated November 4, 2010
     
10.8 (3)   Asset Purchase Agreement with New Horizon, Inc. dated December 9, 2010

 

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10.9 (6)   Amendment No. 1 to Asset Purchase Agreement with New Horizon, Inc.
     
10.10 (3)   Convertible Promissory Note Held by New Horizon, Inc. dated December 9, 2010
     
10.11 (3)   Assignment of Rights Agreement with New Horizon, Inc. dated December 9, 2010
     
10.12 (3)   Asset Purchase Agreement with RWIP, LLC dated December 10, 2010
     
10.13 (3)   Convertible Promissory Note Held by RWIP, LLC dated December 10, 2010
     
10.14 (3)   Warrant Agreement with RWIP, LLC dated December 10, 2010
     
10.15 (3)   Consulting Agreement with RWIP, LLC dated December 13, 2010
     
10.16 (4)   Development Services Agreement with NorthStar Partners Consulting, LLC, dated December 22, 2010
     
10.17 (4)   Warrant Agreement with NorthStar Partners Consulting, LLC, dated December 22, 2010
     
10.18 (5)   Promissory Note Held by Rockland Group, LLC, dated December 16, 2010
     
10.19 (5)   Promissory Note Held by Rockland Group, LLC, dated December 27, 2010
     
10.20 (5)   Form of Warrant Issued to Officers, Directors and Consultants on December 29, 2010
     
10.21 (7)   Common Stock Purchase Warrant issued to Wexford Partners, L.P. dated March 21, 2011
     
10.22 (7)   Reorganization and Stock Purchase Agreement with the iSafe Entities and iSafe Holders dated March 21, 2011
     
10.23 (7)   Employment Agreement with Joseph W. Tischner dated March 22, 2011
     
10.24 (8)   Promissory Note Held by Rockland Group dated December 29, 2010

 

39
 

 

10.25 (9)   Series A Preferred Stock Purchase Agreement by and between InterCore Energy, Inc. and HepatoChem, Inc. dated September 15, 2011
     
10.26 (9)   Purchase Agreement by and between InterCore Energy, Inc. and Digisort, LLC dated November 18, 2011
     
10.27 (10)   Letter of Intent with Legends & Heroes, Inc. dated December 1, 2011
     
10.28 (11)   Form of Warrant Repricing Agreement
     
10.29 (11)   Form of Repriced Warrant
     
10.30 (14)   Amended and Restated Share Exchange Agreement by and between InterCore Energy, Inc., SRG, Inc. and the shareholders of SRG dated January 15, 2013
     
10.31 (14)   Assignment and Assumption Agreement by and between InterCore Energy, Inc. and HLBC Distribution Company, Inc. dated January 15, 2013
     
10.32 (14)   Asset Purchase Agreement by and between InterCore Energy, Inc. and Rockland Group, LLC dated January 15, 2013
     
10.33 (15)   Promissory Note issued to Fandeck Associates, Inc., a Texas corporation, dated March 15, 2013
     
10.34 (15)   Letter Agreement with Fandeck Associates, Inc. dated April 17, 2013
     
99.1 (16)   InterCore, Inc. 2014 Non-Qualified Stock Option Plan
     
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

 

40
 

 

32.1*   Chief Executive Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2*   Chief Financial Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS**   XBRL Instance Document
     
101.SCH**   XBRL Taxonomy Extension Schema Document
     
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF**   XBRL Extension Definition Linkbase Document
     
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document

 

*Filed herewith.

 

**Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.

 

(1)Incorporated by reference from our Registration Statement on Form 10-12G/A filed with the Commission on August 12, 2010.
(2)Incorporated by reference from our Current Report on Form 8-K filed with the Commission on November 8, 2010.
(3)Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 15, 2010.
(4)Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 23, 2010.
(5)Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 30, 2010.
(6)Incorporated by reference from our Current Report on Form 8-K filed with the Commission on January 14, 2011.
(7)Incorporated by reference from our Current Report on Form 8-K filed with the Commission on March 24, 2011.
(8)Incorporated by reference from our Annual Report on Form 10-K filed with the Commission on April 15, 2011.

 

41
 

 

(9)Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on November 21, 2011.
(10)Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 8, 2011
(11)Incorporated by reference from our Current Report on Form 8-K filed with the Commission on May 29, 2012
(12)Incorporated by reference from our Current Report on Form 8-K filed with the Commission on May 29, 2012
(13)Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on November 26, 2012
(14)Incorporated by reference from our Current Report on Form 8-K filed with the Commission on January 29, 2013
(15)Incorporated by reference from our Current Report on Form 8-K filed with the Commission on June 25, 2013
(16)Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on December 23, 2014

 

42
 

 

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.

 

  InterCore, Inc.
     
Dated:  January 21, 2015 /s/ James F. Groelinger
  By: James F. Groelinger
  Its: Chief Executive Officer

 

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