UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(MARK ONE)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 20182019

 

OR

 

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

 

For the transition period from ___________ to___________

 

Commission File No. 333-181719

 

CARDAX, INC.

(Exact name of registrant as specified in its charter)

 

Delaware 45-4484428
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

 

2800 Woodlawn Drive, Suite 129, Honolulu, Hawaii 96822

(Address of principal executive offices, zip code)

 

(808) 457-1400

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year,

if changed since last report)

 

Indicate by check mark whether the issuer (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[X] No [  ]

 

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[X] No [  ]

 

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

 

Large accelerated filer[  ] Accelerated filer[  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X][X]
Emerging growth company [X][  ]  

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act): Yes[  ]No [X][X]

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

Title of each classTrading Symbol(s)Name of exchange on which registered
CommonCDXIOTC

 

As of November 13, 2018,14, 2019, there were 133,338,573137,261,594 shares of common stock, $0.001 par value per share (“Common Stock”), of the registrant outstanding.

 

 

 

   
 

 

TABLE OF CONTENTS

 

 Page
PART I. FINANCIAL INFORMATION4
Item 1. Financial Statements.4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.2430
Item 3. Quantitative and Qualitative Disclosures About Market Risk.2835
Item 4. Controls and Procedures.2835
  
PART II. OTHER INFORMATION2936
Item 1. Legal Proceedings.2936
Item 1A. Risk Factors.2936
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds2936
Item 3. Defaults Upon Senior Securities.3036
Item 4. Mine Safety Disclosures.3036
Item 5. Other Information.3036
Item 6. Exhibits.3037

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

 

There are statements in this quarterly report that are not historical facts. These “forward-looking statements” can be identified by use of terminology such as “anticipate,” “believe,” “estimate,” “expect,” “hope,” “intend,” “may,” “plan,” “positioned,” “project,” “propose,” “should,” “strategy,” “will,” or any similar expressions. You should be aware that these forward-looking statements are subject to risks and uncertainties that are beyond our control. Although we believe that our assumptions underlying such forward-looking statements are reasonable, we do not guarantee our future performance, and our actual results may differ materially from those contemplated by these forward-looking statements. Our assumptions used for the purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances, including the development, acceptance and sales of our products and our ability to raise additional funding sufficient to implement our strategy. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. In light of these numerous risks and uncertainties, we cannot provide any assurance that the results and events contemplated by our forward-looking statements contained in this quarterly report will in fact transpire.These forward-looking statements are not guarantees of future performance. You are cautioned to not place undue reliance on these forward-looking statements, which speak only as of their dates. We do not undertake any obligation to update or revise any forward-looking statements.

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

Condensed Consolidated Financial Statements

 

Cardax, Inc., and Subsidiary

 

September 30, 20182019 and 20172018

 

Contents

 

 Page
  
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: 
  
Condensed consolidated balance sheets5
  
Condensed consolidated statements of operations6
  
Condensed consolidated statementsstatement of cash flowschanges in stockholders’ deficit7
  
Condensed consolidated statements of cash flows9
Notes to the condensed consolidated financial statements810

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

As of

 

  September 30,  December 31, 
  2018  2017 
  (Unaudited)    
ASSETS        
CURRENT ASSETS        
Cash $198,574  $2,236,837 
Accounts receivable  452,225   37,243 
Inventories  326,174   340,425 
Deposits and other assets  119,066   90,831 
Prepaid expenses  24,052   22,838 
         
Total current assets  1,120,091   2,728,174 
         
PROPERTY AND EQUIPMENT, net  -   1,901 
         
INTANGIBLE ASSETS, net  435,141   426,610 
         
TOTAL ASSETS $1,555,232  $3,156,685 
         
LIABILITIES AND STOCKHOLDERS' DEFICIT        
         
CURRENT LIABILITIES        
Accrued payroll and payroll related expenses, current portion $3,450,570  $3,404,610 
Accounts payable and accrued expenses  875,957   603,391 
Fees payable to directors  418,546   418,546 
Employee settlement  50,000   50,000 
         
Total current liabilities  4,795,073   4,562,162 
         
ACCRUED PAYROLL AND PAYROLL RELATED EXPENSES, net of current portion  94,885   85,615 
         
COMMITMENTS AND CONTINGENCIES  -   - 
         
Total liabilities  4,889,958   4,647,777 
         
STOCKHOLDERS’ DEFICIT        
Preferred Stock - $0.001 par value; 50,000,000 shares authorized, 0 shares issued and outstanding as of September 30, 2018, and December 31, 2017, respectively  -   - 
Common stock - $0.001 par value; 400,000,000 shares authorized, 133,338,573 and 122,674,516 shares issued and outstanding as of September 30, 2018, and December 31, 2017, respectively  133,339   122,675 
Additional paid-in-capital  58,067,566   56,401,069 
Subscriptions receivable  (539,662)  - 
Deferred compensation  -   (10,125)
Accumulated deficit  (60,995,969)  (57,919,096)
         
Total stockholders’ deficit  (3,334,726)  (1,405,477)
         
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT $1,555,232  $3,156,685 

  September 30, 2019  December 31, 2018 
ASSETS  (Unaudited)     
         
CURRENT ASSETS        
Cash $7,470  $243,753 
Accounts receivable  185,419   157,082 
Inventories  1,307,727   1,480,380 
Deposits and other assets  119,066   119,066 
Prepaid expenses  45,096   24,083 
         
Total current assets  1,664,778   2,024,364 
         
INTANGIBLE ASSETS, net  427,621   434,534 
         
RIGHT TO USE LEASED ASSETS  22,015   - 
         
         
TOTAL ASSETS $2,114,414  $2,458,898 
         
LIABILITIES AND STOCKHOLDERS’ DEFICIT        
         
CURRENT LIABILITIES        
Accrued payroll and payroll related expenses, current portion $3,471,812  $3,428,011 
Accounts payable and accrued expenses  1,706,117   1,996,097 
Fees payable to directors  418,546   418,546 
Accrued separation costs, current portion  9,000   9,000 
Current portion of related party notes payable  575,000   - 
Related party convertible note payable $537,848   - 
Convertible notes payable, net of discount $256,698   - 
Employee settlement  50,000   50,000 
Lease liability, current portion  17,129   - 
Derivative liability on convertible note payable  246,414   - 
         
Total current liabilities  7,288,564   5,901,654 
         
NON-CURRENT LIABILITIES        
Related party notes payable, net of current portion  1,000,000   - 
Accrued separation costs, less current portion  85,885   92,635 
Lease liability, less current portion  4,886   - 
         
Total non-current liabilities  1,090,771   92,635 
         
COMMITMENTS AND CONTINGENCIES  -   - 
         
Total liabilities  8,379,335   5,994,289 
         
STOCKHOLDERS’ DEFICIT        
Preferred Stock - $0.001 par value; 50,000,000 shares authorized, 0 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively  -   - 
Common stock - $0.001 par value; 400,000,000 shares authorized, 137,261,594 and 133,888,573 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively  137,262   133,889 
Additional paid-in-capital  59,191,875   58,274,038 
Accumulated deficit  (65,594,058)  (61,943,318)
         
Total stockholders’ deficit  (6,264,921)  (3,535,391)
         
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT $2,114,414  $2,458,898 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 For the three-months ended For the nine-months ended 
 September 30, September 30, 
 For the three-months ended September 30, For the nine-months ended September 30,  2019 2018 2019 2018 
 2018 2017 2018 2017  (Unaudited) (Unaudited) (Unaudited) (Unaudited) 
 (Unaudited) (Unaudited) (Unaudited) (Unaudited)          
REVENUES, net $549,540  $321,861  $1,134,899  $496,088  $229,142  $549,540  $439,505  $1,134,899 
                                
COST OF GOODS SOLD  240,152   149,207   521,353   222,056   120,818   240,152   254,479   521,353 
                                
GROSS PROFIT  309,388   172,654   613,546   274,032   108,324   309,388   185,026   613,546 
                                
OPERATING EXPENSES:                                
Salaries and wages  387,119   129,670   1,202,576   451,351   387,636   387,119   1,177,362   1,202,576 
Professional fees  375,298   225,875   817,546   637,042 
Selling, general, and administrative expenses  350,630   213,538   1,168,747   492,895   206,042   350,630   731,487   1,168,747 
Professional fees  225,875   124,769   637,042   299,569 
Stock based compensation  180,562   58,250   443,249   142,500   175,712   180,562   534,774   443,249 
Research and development  86,115   1,798   214,093   74,215   145,273   86,115   250,141   214,093 
Depreciation and amortization  6,718   7,388   23,853   22,189   10,074   6,718   29,102   23,853 
                                
Total operating expenses  1,237,019   535,413   3,689,560   1,482,719   1,300,035   1,237,019   3,540,412   3,689,560 
                                
Loss from operations  (927,631)  (362,759)  (3,076,014)  (1,208,687)  (1,191,711)  (927,631)  (3,355,386)  (3,076,014)
                                
OTHER INCOME (EXPENSES):                
OTHER INCOME (EXPENSE):                
Interest income  3   7   5   1,941 
Other income  -   -   556   12,598   -   -   -   556 
Interest income  7   676   1,941   1,844 
Change in fair value of derivative liability  (20,524)  -   (3,139)  - 
Loss on abandonment of patents  (36,205)  -   (36,205)  - 
Interest expense  (1,264)  (1,073)  (3,356)  (2,790)  (185,189)  (1,264)  (256,015)  (3,356)
                                
Total other (expenses) income, net  (1,257)  (397)  (859)  11,652 
Total other (expense) income, net  (241,915)  (1,257)  (295,354)  (859)
                                
Loss before the provision for income taxes  (928,888)  (363,156)  (3,076,873)  (1,197,035)  (1,433,626)  (928,888)  (3,650,740)  (3,076,873)
                                
PROVISION FOR INCOME TAXES  -   -   -   -   -   -   -   - 
                                
NET LOSS $(928,888) $(363,156) $(3,076,873) $(1,197,035) $(1,433,626) $(928,888) $(3,650,740) $(3,076,873)
                                
NET LOSS PER SHARE                                
Basic $(0.01) $(0.00) $(0.02) $(0.01) $(0.01) $(0.01) $(0.03) $(0.02)
Diluted $(0.01) $(0.00) $(0.02) $(0.01) $(0.01) $(0.01) $(0.03) $(0.02)
                                
SHARES USED IN CALCULATION OF NET LOSS PER SHARE                                
Basic  130,083,598   100,587,843   125,271,516   92,513,317   136,640,761   130,083,598   135,516,490   125,271,516 
Diluted  130,083,598   100,587,843   125,271,516   92,513,317   136,640,761   130,083,598   135,516,490   125,271,516 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWSCHANGES IN STOCKHOLDER DEFICIT

 

For the nine-months ended September 30, 2018 and 2019

 

  2018  2017 
  (Unaudited)  (Unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $(3,076,873) $(1,197,035)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization  23,853   22,189 
Stock based compensation  443,249   142,500 
Bad debt expense on note receivable and accrued interest  89,933   - 
Changes in assets and liabilities:        
Accounts receivable  (193,168)  (276,303)
Inventories  14,251   (43,963)
Deposits and other assets  (118,168)  (74,850)
Prepaid expenses  (1,214)  (229)
Accrued payroll and payroll related expenses  55,230   (25,720)
Accounts payable and accrued expenses  50,752   55,979 
         
Net cash used in operating activities  (2,712,155)  (1,397,432)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Increase in intangible assets  (30,483)  (16,137)
         
Net cash used in investing activities  (30,483)  (16,137)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from the issuance of common stock  704,375   4,013,456 
Proceeds from the exercise of warrants  -   40,000 
         
Net cash provided by financing activities  704,375   4,053,456 
         
NET DECREASE (INCREASE) IN CASH  (2,038,263)  2,639,887 
         
CASH AT THE BEGINNING OF THE PERIOD  2,236,837   158,433 
         
CASH AT THE END OF THE PERIOD $198,574  $2,798,320 
         
         
SUPPLEMENTAL DISCLOSURES:        
Cash paid for interest $3,356  $2,790 
Cash paid for income taxes $-  $- 
         
NON-CASH INVESTING AND FINANCING ACTIVITIES:        
Conversion of accounts payable into restricted stock $-  $44,700 
Settlement of receivables with payables $221,814  $- 
Subscription receivable recognized for common shares issued $539,662  $- 
  Common Stock  Additional Paid-In-  Deferred  Accumulated    
  Shares  Amount  Capital  Compensation  Deficit  Total 
                   
Balance at January 1, 2018  122,674,516  $122,675  $56,401,069  $(10,125) $(57,919,096) $(1,405,477)
                         
Common stock grants to independent directors  906,774   907   199,093   -   -   200,000 
                         
Deferred compensation  -   -   -   10,125   -   10,125 
                         
Cardax 2018 Warrant Exchange Offering  9,600,286   9,600   1,234,437   -   -   1,244,037 
                         
Stock option exercises - cashless  156,997   157   (157)  -   -   - 
                         
Stock based compensation - options  -   -   233,124   -   -   233,124 
                         
Net loss  -   -   -   -   (3,076,873)  (3,076,873)
                         
Balance at September 30, 2018  133,338,573  $133,339  $58,067,566  $-  $(60,995,969) $(2,795,064)
                         
Balance at January 1, 2019  133,888,573  $133,889  $58,274,038  $-  $(61,943,318) $(3,535,391)
                         
Common stock grants to independent directors  1,627,191   1,627   260,873   -   -   262,500 
                         
Common stock grant to service providers  112,500   113   14,287   -   -   14,400 
                         
Stock based compensation - options  -   -   257,875   -   -   257,875 
                         
Restricted stock issuances  1,633,330   1,633   243,367   -   -   245,000 
                         
Issuance of warrants attached to a convertible note  -   -   141,435   -   -   141,435 
                         
Net loss  -   -   -   -   (3,650,740)  (3,650,740)
                         
Balance at September 30, 2019  137,261,594  $137,262  $59,191,875  $-  $(65,594,058) $(6,264,921)

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER DEFICIT

(continued)

For the three-months ended September 30, 2018 and 2019

  Common Stock  Additional Paid-In-  Deferred  Accumulated    
  Shares  Amount  Capital  Compensation  Deficit  Total 
                   
Balance at July 1, 2018  123,300,787  $123,301  $56,653,005  $    -  $(60,067,081) $(3,290,775)
                         
Common stock grants to independent directors  437,500   438   87,062   -   -   87,500 
                         
Cardax 2018 Warrant Exchange Offering  9,600,286   9,600   

 

1,234,437

   -   -   

 

1,244,037

 
                         
Deferred compensation  -   -   -   -   -   - 
                         
Stock based compensation - options  -   -   93,062   -   -   93,062 
                         
Net loss  -   -   -   -   (928,888)  (928,888)
                         
Balance at September 30, 2018  133,338,573  $133,339  $58,067,566  $-  $(60,995,969) $(2,795,064)
                         
Balance at July 1, 2019  136,640,761  $136,641  $58,908,648  $-  $(64,160,432) $(5,115,143)
                         
Common stock grants to independent directors  583,333   583   86,917   -   -   87,500 
                         
Common stock grant to service providers  37,500   38   3,300   -   -   3,338 
                         
Stock based compensation - options  -   -   84,875   -   -   84,875 
                         
Issuance of warrants attached to a convertible note  -   -   108,135   -   -   108,135 
                         
Net loss  -   -   -   -   (1,433,626)  (1,433,626)
                         
Balance at September 30, 2019  137,261,594  $137,262  $59,191,875  $-  $(65,594,058) $(6,264,921)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Cardax, Inc., and Subsidiary

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine-months ended September 30, 2018 and 2019

  2019  2018 
  (Unaudited)  (Unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $(3,650,740) $(3,076,873)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization  29,102   23,853 
Amortization of debt discount  129,256   - 
Stock based compensation  534,775   443,249 
Bad debt expense on note receivable and accrued interest  -   89,933 
Loss on abandonment of patents  36,205   - 
Change in fair value of derivative liability  3,139     
Changes in assets and liabilities:        
Accounts receivable  32,333   (193,168)
Inventories  172,653   14,251 
Deposits and other assets  -   (118,168)
Prepaid expenses  (21,013)  (1,214)
Accrued payroll and payroll related expenses  43,801   55,230 
Accounts payable and accrued expenses  (350,650)  50,752 
Accrued separation costs  (6,750)  - 
         
Net cash used in operating activities  (3,047,889)  (2,712,155)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Increase in intangible assets  (58,394)  (30,483)
         
Net cash used in investing activities  (58,394)  (30,483)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from the issuances of related party notes payable  1,575,000   - 
Proceeds from the issuance of a related party convertible note payable  750,000   - 
Proceeds from the issuances of convertible notes payable  300,000   - 
Proceeds from the issuance of common stock  245,000   704,375 
         
Net cash provided by financing activities  2,870,000   704,375 
         
NET DECREASE IN CASH  (236,283)  (2,038,263)
         
BEGINNING OF THE PERIOD  243,753   2,236,837 
         
END OF THE PERIOD $7,470  $198,574 
         
SUPPLEMENTAL DISCLOSURES:        
Cash paid for interest $13,937  $3,356 
Cash paid for income taxes $-  $- 
         
NON-CASH INVESTING AND FINANCING ACTIVITIES:        
Discount recognized on notes payable at issuance $384,710  $- 
Settlement of receivables with payables $60,670  $221,814 
Right to use assets funded through leases $22,015  $539,662 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

 

NOTE 1 – COMPANY BACKGROUND

 

The Company’s predecessor, Cardax Pharmaceuticals, Inc. (“Holdings”), was incorporated in the State of Delaware on March 23, 2006.

 

Holdings was formed for the purpose of developing a platform of proprietary, exceptionally safe, small molecule compounds for large unmet medical needs where oxidative stress and inflammation play important causative roles. Holdings’ platform has application in arthritis, metabolic syndrome, liver disease, and cardiovascular disease, as well as macular degeneration and prostate disease. Holdings’ current primary focus is on the development of astaxanthin technologies. Astaxanthin is a naturally occurring marine compound that has robust anti-oxidant and anti-inflammatory activity.

In May of 2013, Holdings formed a 100% owned subsidiary company called Cardax Pharma, Inc. (“Pharma”). Pharma was formed to maintain Holdings’ operations going forward, leaving Holdings as an investment holding company.

On November 29, 2013, Holdings entered into a definitive merger agreement (“Merger Agreement”) with Koffee Korner Inc., a Delaware corporation (“Koffee Korner”) (OTCQB:KOFF), and its wholly owned subsidiary (“Koffee Sub”), pursuant to which, among other matters and subject to the conditions set forth in such Merger Agreement, Koffee Sub would merge with and into Pharma. In connection with such merger agreement and related agreements, upon the consummation of such merger, Pharma would become a wholly owned subsidiary of Koffee Korner and Koffee Korner would issue shares of its common stock to Holdings. At the effective time of such merger, Holdings would own a majority of the shares of the then issued and outstanding shares of common stock of Koffee Korner.

On February 7, 2014, Holdings completed its merger with Koffee Korner, which was renamed to Cardax, Inc. (the “Company”) (OTCQB:CDXI). Concurrent with is a development stage biopharmaceutical company primarily focused on the merger: (i) thedevelopment of pharmaceuticals for chronic diseases driven by inflammation. The Company received aggregate gross cash proceeds of $3,923,100 in exchangealso has a commercial business unit that markets dietary supplements for the issuance and sale of an aggregate 6,276,960 of shares ofinflammatory health. CDX-101, the Company’s common stock, togetherastaxanthin pharmaceutical candidate, is being developed for cardiovascular inflammation and dyslipidemia, with five year warrants to purchase an aggregatea target initial indication of 6,276,960 shares ofsevere hypertriglyceridemia. CDX-301, the Company’s common stock at $0.625 per share, (ii) the notes issued on January 3, 2014, in the outstanding principal amountzeaxanthin pharmaceutical candidate, is being developed for macular degeneration, with a target initial indication of $2,076,000 and all accrued interest thereon, automatically converted into 3,353,437 shares of the Company’s common stock upon the reverse merger at $0.625 per share, together with five year warrants to purchase 3,321,600 shares of common stock at $0.625 per share, (iii) the notes issued in 2013, in the outstanding principal amount of $8,489,036 and all accrued interest thereon, automatically converted into 14,446,777 shares of the Company’s common stock upon the reverse merger at $0.625 per share, together with five year warrants to purchase 14,446,777 shares of common stock at $0.625 per share, (iv) stock options to purchase 15,290,486 shares of Holdings common stock at $0.07 per share were cancelled and substituted with stock options to purchase 6,889,555 shares of the Company’s common stock at $0.155 per share, (v) additional stock options to purchase 20,867,266 shares of the Company’s common stock at $0.625 per share were issued, and (vi) the notes issued in 2008 and 2009, in the outstanding principal amounts of $55,000 and $500,000, respectively, and all accrued interest thereon, were repaid in full. The assets and liabilities of Koffee Korner were distributed in accordance with the terms of a spin-off agreement on the closing date.

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 1 – COMPANY BACKGROUND (continued)

The share exchange transaction was treated as a reverse acquisition, with Holdings and Pharma as the acquirers and Koffee Korner and Koffee Sub as the acquired parties. Unless the context suggests otherwise, when the Company refers to business and financial information for periods prior to the consummation of the reverse acquisition, the Company is referring to the business and financial information of Holdings and Pharma. Under accounting principles generally accepted in the United States of America (“U.S. GAAP”) guidance Accounting Standards Codification (“ASC”) No. 805-40,Business Combinations – Reverse Acquisitions, the Acquisition has been treated as a reverse acquisition with no adjustment to the historical book and tax basis of the Company’s assets and liabilities.

On August 28, 2014, the Company entered into an Agreement and Plan of Merger (the “Holdings Merger Agreement”) with its principal stockholder, Holdings, pursuant to which Holdings would merge with and into the Company (the “Holdings Merger”). On September 18, 2015, the Company filed a Form S-4 with the SEC in contemplation of the Holdings Merger. There would not be any cash consideration exchanged in the Holdings Merger. Upon the closing of the Holdings Merger, the stockholders of Holdings would receive an aggregate number of shares and warrants to purchase shares of the Company’s common stock equal to the aggregate number of shares of the Company’s common stock that were held by Holdings on the date of the closing of the Holdings Merger.Stargardt disease. The Company’s restricted sharespharmaceutical candidates are currently in pre-clinical development, including the planning of common stock held by Holdings would be cancelled upon the closing of the Holdings Merger. Accordingly, there would not be not any change to the Company’s fully diluted capitalization due to the Holdings Merger.

On November 24, 2015, the Holdings Merger Agreement was amended and restated (the “Amended Holdings Merger Agreement”). Under the terms of Amended Holdings Merger Agreement, the shares of common stock, par value $0.001 per share of Holdings and the shares of all other issued and outstanding capital stock of Holdings that by their terms were convertible or could otherwise be exchanged for shares of Holdings common stock, would be converted into and exchanged for the Company’s shares of Common Stock in a ratio of approximately 2.2:1. In addition, the Company would grant Holdings’ option and warrant holders warrants to purchase the Company’s warrants at the same stock conversion ratio. On November 24, 2015, the Company filed an amendment to the Form S-4 with the SEC and on March 29, 2015, the Form S-4 was declared effective by the SEC.

On December 30, 2015, the Company completed its merger with Holdings, pursuant to the Amended Holdings Merger Agreement. At closing, Holdings merged with and into the Company, with the Company surviving the Holdings Merger. Pursuant to the Amended Holdings Merger Agreement, there was not any cash consideration exchanged in the Holdings Merger. Upon the closing of the Holdings Merger, the stockholders of Holdings received an aggregate number of shares and warrants to purchase shares of Company common stock equal to the aggregate number of shares of Company common stock that were held by Holdings on the date of the closing of the Holdings Merger. The Company’s restricted shares of common stock held by Holdings were cancelled upon the closing of the Holdings Merger. Accordingly, there was not any change to the Company’s fully diluted capitalization due to the Holdings Merger.

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 1 – COMPANY BACKGROUND (continued)

The Company is engaged in the development and commercialization of dietary supplements and pharmaceuticals. The Company’s first commercial product,IND enabling studies. ZanthoSyn®, is a physician recommended anti-inflammatoryastaxanthin dietary supplement for health and longevity that provides astaxanthin with enhanced absorption and purity.inflammatory health. The Company sells ZanthoSyn® primarily through wholesale and e-commerce channels. The Company is also developing astaxanthin and related compounds, including CDX-085, for pharmaceutical applications. The safety and efficacy of the Company’s products have not been directly evaluated in clinical trials or confirmed by the FDA.

 

Going concern matters

 

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying condensed consolidated financial statements, the Company incurred net losses of $1,433,626 and $3,650,740 for the three and nine-months ended September 30, 2019, respectively, and incurred net losses of $928,888 and $3,076,873 for the three and nine-months ended September 30, 2018, respectively, and net losses of $363,156 and $1,197,035 for the three and nine-months ended September 30, 2017, respectively. The Company has incurred losses since inception resulting in an accumulated deficit of $60,995,969$65,594,058 as of September 30, 2018,2019, and has had negative cash flows from operating activities since inception. The Company expects that its marketing program for ZanthoSyn® will continue to focus on outreach to physicians, healthcare professionals, retail personnel, and consumers, and anticipates further losses in the development of its consumer business. The Company also plans to advance the research and development of its pharmaceutical candidates and anticipates further losses in the development of its pharmaceutical business. As a result of these and other factors, management has determined there is substantial doubt about the Company’s ability to continue as a going concern.

 

During the quarternine-months ended September 30, 2018,2019, the Company raised additional capital to carry out its business plan. As part of the Company’s efforts, it raised an additional $1.44 million$245,000 in equity from existing stockholders and $2,625,000 in gross proceeds throughfrom debt, including $2,325,000 from related parties. On August 14, 2019, the exchangeCompany filed a registration statement on Form S-1 for a proposed $15 million public offering of 9.6 million warrants via a warrant exchangecommon stock and warrants. The Company intends to use the proceeds from the proposed public offering that closed on July 27, 2018. As of September 30, 2018, $653,278 of this amount remained in an escrow account as subscriptions receivableprimarily to fund pharmaceutical development and was collected on October 5, 2018, less $113,616 in placement fees and expenses, to net $539,662.

its operations. The Company’s continued ability to raise additional capital through future equity and debt securities issuances is unknown. Obtaining additional financing, the successful development of the Company’s contemplated plan of operations, and its transition, ultimately, to profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raises substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these uncertainties.

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Unaudited interim financial information

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. In the opinion of the Company’s management, the accompanying condensed consolidated financial statements reflect all adjustments, consisting of normal, recurring adjustments, considered necessary for a fair presentation of the results for the interim periods ended September 30, 20182019 and 2017.

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Unaudited interim financial information (continued)2018.

 

Although management believes that the disclosures in these unaudited condensed consolidated financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements that have been prepared in accordance U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC.

 

These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2017,2018, filed with the SEC on March 27, 2018.28, 2019.

 

Revenue from contracts with customers

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard related to revenue recognition. Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

 

The Company adopted this standard effective January 1, 2018, using the retrospective method. As there was no impact on contracts that were previously completed and no significant impact to contracts completed after adoption, there was no need to restate prior results from operations.

 

The Company recognizes revenues from its contracts with customers for its products through wholesale and e-commerce channels when goods and services have been identified, the payment terms agreed to, the contract has commercial substance, both parties have approved the contract, and it is probable that the Company will collect all substantial consideration.

 

The following table presents our revenues disaggregated by revenue source and geographical location. Sales and usage-based taxes are included as a component of revenues for the nine-months ended:

 

   September 30, 2018 September 30, 2017    September 30, 2019 September 30, 2018 
Geographical area Source  (Unaudited) (Unaudited)  Source (Unaudited)  (Unaudited) 
United States Nutraceuticals  $1,118,486  $496,088  Nutraceuticals $439,505  $1,118,486 
Hong Kong Nutraceuticals  $16,413  $-  Nutraceuticals $-  $16,413 

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue from contracts with customers (continued)

 

Sales discounts, rebates, promotional amounts to vendors, and returns and allowances are recorded as a reduction to sales in the period in which sales are recorded. The Company records shipping charges and sales tax gross in revenues and cost of goods sold. Sales discounts and other adjustments are recorded at the time of sale.

 

Other significant accounting policies

There have been no other material changes to our significant accounting policies during the nine-months ended September 30, 2018, as compared to the significant accounting policies described in our Annual Report.

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recently issued accounting pronouncements not yet adoptedLeases

 

In February 2016, the FASB issued ASU No. 2016-02,Leases. This ASU requires management to recognize lease assets and lease liabilities for all leases. ASU No. 2016-02 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous lease guidance. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model, the effect of leases in the statement of comprehensive income and the statement of cash flows is largely unchanged from previous U.S. GAAP. The guidance in ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently assessing the impact of this ASU on the Company’s condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07,Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent accounting for employee share-based compensation. The guidance in ASU No. 2018-07 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. The Company is currently in the process of evaluating the impact of the adoption of this ASU on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13,Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements in Topic 820,Fair Value Measurement, based on the concepts in the FASB’s Concepts Statement, including the consideration of costs and benefits. The guidance in ASU No. 2018-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of the adoption of this ASU on its condensed consolidated financial statements.

Recently adopted accounting pronouncements

In November 2016, the FASB issued ASU 2016-18,Statement of Cash Flows (Topic 23). The amendments of ASU No. 2017-18 require that a statement of cash flow explain the change during a period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The guidance of ASU No. 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company has assessed the impact of this ASU and does not believe that this update has a significant impact on its condensed consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09,Compensation-Stock Compensation: Scope of Modification Accounting. The amendments of ASU No. 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The guidance of ASU No. 2017-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company has assessed the impact of this ASU and does not believe that this update has a significant impact on its condensed consolidated financial statements.

 

The Company doesapplied the modified retrospective approach in adopting this standard. The modified retrospective approach includes a number of optional practical expedients that the Company elected to apply; primarily the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. As part of this adoption, the Company will, in effect, continue to account for leases that commence before the effective date in accordance with previous U.S. GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous U.S. GAAP. This adoption of this standard on January 1, 2019, resulted in the Company recognizing a right-to-use asset and lease liability. The Company elected to not believerecognize any right-to-use assets or liabilities for leases that any other recently issued, butare twelve months or less. Lease costs are recognized straight-line over the term of the lease. The adoption of this standard did not yet effective accounting pronouncements, if adopted, would haveimpact retained earnings or cash flows of the Company.

Derivative financial instruments

The Company accounts for the fair value of the conversion feature in accordance with ASC 815-15,Derivatives and Hedging; Embedded Derivatives, which requires the Company to bifurcate and separately account for the conversion feature as an embedded derivative contained in the Company’s convertible note. The Company is required to carry the embedded derivative on its balance sheet at fair value. The initial value of the embedded derivative is accounted for as a material effectdiscount to the convertible note and a derivative liability. The liability is required to be remeasured at each reporting date and changes in fair value is recognized as a component in its results of operations. The Company valued the embedded derivatives on the condensed consolidated financial statements.

balance sheet at fair value using the Black-Scholes valuation model.

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Other significant accounting policies

There have been no other material changes to our significant accounting policies during the nine-months ended September 30, 2019, as compared to the significant accounting policies described in our Annual Report.

 

Reclassifications

 

The Company has made certain reclassifications to conform its prior periods’ data to the current presentation, such as reclassifying a separation agreement that has terms extending beyond one year. These reclassifications had no effect on the reported results of operations or cash flows.

 

NOTE 3 – INVENTORIES

 

Inventories consist of the following as of:

 

 September 30, 2018
(Unaudited)
  December 31, 2017  September 30, 2019
(Unaudited)
 December 31, 2018 
Finished goods $267,543  $240,917  $533,139  $96,750 
Raw materials 58,631 98,937   774,588   1,383,630 
Packing supplies and materials  -  571 
Total inventories $326,174 $340,425  $1,307,727  $1,480,380 

 

NOTE 4 – PROPERTY AND EQUIPMENT, net

Property and equipment, net, consistsAs of the following as of:

  

September 30, 2018

(Unaudited)

  December 31, 2017 
Information technology equipment $-  $31,892 
Less accumulated depreciation  -   (29,991)
Total property and equipment, net $-  $1,901 

Depreciation expense was $0 and $1,901, for the three and nine-months ended September 30, 2019 and December 31, 2018, respectively, and $1,496 and $4,513,all raw materials were held at the manufacturer’s facility for the three and nine-months ended September 30, 2017, respectively.future production.

During the nine-months ended September 30, 2018, Company wrote off its fully depreciated equipment. There was no gain or loss recognized for this write-off.

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 54 – INTANGIBLE ASSETS, net

 

Intangible assets, net, consists of the following as of:

 

 

September 30, 2018

(Unaudited)

  December 31, 2017  September 30, 2019(Unaudited) December 31, 2018 
Patents $522,575  $493,027  $613,943  $578,326 
Less accumulated amortization  (285,795)  (263,843)  (321,614))  (292,512)
 236,780 229,184   292,329   285,814 
Patents pending  198,361  197,426   135,292   148,720 
Total intangible assets, net $435,141 $426,610  $427,621  $434,534 

 

Patents are amortized straight-line over a period of fifteen years. Amortization expense was $10,074 and $29,102 for the three and nine-months ended September 30, 2019, respectively. Amortization expense was $6,717 and $21,952 for the three and nine-months ended September 30, 2018, respectively,respectively.

Cardax, Inc., and $5,892 and $17,676 for the three and nine-months ended September 30, 2017, respectively.Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 4 – INTANGIBLE ASSETS, net (continued)

 

The Company has capitalized costs for several patents that are still pending. In those instances, the Company has not recorded any amortization. The Company will commence amortization when these patents are approved.

 

During the three and nine-months ended September 30, 2019, the Company abandoned three patent applications in progress resulting in a loss of $36,205 on the abandonment of patents.

The Company owns 2529 issued patents, including 14 in the United States and 1115 others in Europe, Canada, China, India, Japan, and Hong Kong. These patents will expire beginning in 2023 through 2028, subject to any patent term extensions of the individual patent. The Company has 32 patent applications pending in the United States and 2 foreign patent applications pending in Europe and Brazil.the Patent Cooperation Treaty (“PCT”) countries.

 

NOTE 65 –ACCRUED SEPARATION COSTS

 

On August 9, 2016, the Company entered into a separation agreement with an employee to pay $118,635 of accrued compensation over nine-years. This amountAs of September 30, 2019, $94,885 remains outstanding of which $9,000 is included in accrued payrolldue within one-year and payroll related expenses in the accompanying balance sheets. This amount does not yield interest and maturesis reflected as follows for the twelve-months ended September 30:

2019 $9,000 
2020  9,000 
2021  11,250 
2022  12,000 
2023  16,500 
Thereafter  46,135 
   103,885 
Less current portion  (9,000)
  $94,885 

a current liability.

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 6 – RELATED PARTY NOTES PAYABLE

Notes payable consisted of the following as of:

  September 30, 2019  December 31, 2018 
  (Unaudited)    
Inventory financing. On January 11, 2019, the Company entered into a $1,000,000 revolving inventory financing facility with a lender that is also a current stockholder that beneficially owns more than 5% of the Company’s common stock. Use of proceeds from this facility is limited to the purchase of inventory, including raw materials, intermediates, and finished goods, unless otherwise waived by the lender. This facility accrues interest at the rate of 12% per annum, is unsecured, and matures in three years from origination. This facility requires monthly interest payments. $1,000,000  $      - 
         
Officer loan. On June 26, 2019, the Company borrowed $75,000 from the Chief Executive Officer of the Company with principal and interest due on August 26, 2019, which was subsequently extended to December 31, 2019. This note accrues interest at the rate of 4.5% per annum and is unsecured.  75,000     
         
Promissory note. On May 20, 2019, the Company entered into a $400,000 promissory note with a lender that is also a current stockholder that beneficially owns more than 5% of the Company’s common stock. On July 10, 2019, this note was amended to increase the principal sum by an additional $100,000. This note accrues interest at the rate of 12% per annum, is unsecured, and originally matured on August 20, 2019, which was subsequently extended to June 30, 2020. All principal and accrued interest is due on the maturity date.  500,000   - 
         
Total notes payable $1,575,000  $- 
         
Less current portion  (575,000)  - 
         
Long term notes payable $1,000,000  $- 

Interest expense

The Company incurred interest charges of $45,925 and $101,385 during the three and nine-months ended September 30, 2019, respectively, on these notes payable of which $31,111 was accrued and payable as of September 30, 2019.

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 6 – RELATED PARTY NOTES PAYABLE (continued)

Maturities

Future maturities of notes payable are as follows as of September 30:

2020 $575,000 
2021  - 
2022  1,000,000 
  $1,575,000 

NOTE 7 – RELATED PARTY CONVERTIBLE NOTE PAYABLE

Related party convertible note payable consisted of the following as of:

  September 30, 2019  December 31, 2018 
  (Unaudited)    
       

Convertible note 2019-02.On July 19, 2019, the Company issued a convertible note payable in the amount $815,217, with an original issue discount of $65,217 in exchange for $750,000. This note accrues interest at 8% per annum and matures on June 30, 2020. This note and accrued interest may convert into shares of common stock at the conversion price then in effect (initially $0.12 per share, subject to adjustment) any time at the holder’s option or automatically upon a qualified financing of at least $5 million at the lower of the conversion price then in effect or a 25% discount to the offering price. The conversion price is subject to adjustment upon the issuance of the Company’s common stock or securities convertible into common stock at a price per share less than the then prevailing conversion price, other than specified exempt issuances; accordingly, on November 8, 2019, the conversion price was adjusted to $0.07 per share. This note was also issued with a detachable warrant to purchase 1,500,000 shares of stock at $0.12 per share, which shall be adjusted in accordance with any adjustment to the conversion price of this note; accordingly, on November 8, 2019, the exercise price was adjusted to $0.07 per share. The valuation of the conversion feature and detachable warrants resulted in the recognition of an additional $286,050 discount on this note. This note requires monthly interest payments.

 $815,217  $- 
         
Total notes payable  815,217   - 
         
Less original issue discounts  (65,217)  - 
         
Related party convertible note payable, net  750,000   - 
         
Less conversion rights and warrant discounts  (286,050)  - 
         
Plus amortization of discounts  73,898          - 
         
Total convertible notes payable, net $537,848  $- 

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 7 – RELATED PARTY CONVERTIBLE NOTE PAYABLE (continued)

Discounts

Total discounts of $351,267 are amortized using the interest method, which resulted in amortization recorded as interest expense of $73,898 for the three and nine-months ended September 30, 2019.

Interest expense

The Company incurred interest charges of $13,222 during the three and nine-months ended September 30, 2019, on this related party convertible note payable of which $5,360 was accrued and payable as of September 30, 2019.

Maturities

Future maturities of notes payable are as follows as of September 30:

2020 $815,217 
  $815,217 

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 8 – CONVERTIBLE NOTES PAYABLE

Convertible notes payable consisted of the following as of:

  September 30, 2019   
  (Unaudited)  December 31, 2018 
Convertible note 2019-01. On April 18, 2019, the Company issued a convertible note payable in the amount $150,000. This note accrues interest at 10% per annum and matures on December 31, 2019. This note and accrued interest may convert into shares of common stock atthe conversion price then in effect (initially $0.12 per share, subject to adjustment) any time at the holder’s option or automatically upon maturity provided the 20-day volume weighted average price per share of the Company’s common stock upon maturity is at least $0.12 per share. The conversion price is subject to adjustment upon the issuance of the Company’s common stock or securities convertible into common stock at a price per share less than the then prevailing conversion price, other than specified exempt issuances; accordingly, on November 8, 2019, the conversion price was adjusted to $0.07 per share. This note was also issued with a detachable warrant to purchase 500,000 shares of stock at $0.20 per share. The valuation of the conversion feature and detachable warrants resulted in the recognition of an $83,300 aggregate discount on this note. $150,000  $       - 
         

Convertible note 2019-03.On September 4, 2019, the Company issued a convertible note payable in the amount $108,696, with an original issue discount of $8,696 in exchange for $100,000. This note accrues interest at 8% per annum and matures on June 30, 2020. This note and accrued interest may convert into shares of common stock at $0.12 per share any time at the holder’s option. If this note, or any portion thereof, has not been repaid or converted in full on or prior to the maturity date, then repayment of the unpaid principal balance plus any accrued and unpaid interest thereon, shall be amortized over the following thirty-six (36) months. This note was also issued with a detachable warrant to purchase 200,000 shares of stock at $0.12 per share. The valuation of the detachable warrants resulted in the recognition of an additional $11,170 discount on this note. This note requires monthly interest payments.

  108,696   - 

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 8 – CONVERTIBLE NOTES PAYABLE (continued)

  September 30, 2019  December 31, 2018 
  (Unaudited)    

Convertible note 2019-04.On September 25, 2019, the Company issued a convertible note payable in the amount $54,348, with an original issue discount of $4,348 in exchange for $50,000. This note accrues interest at 8% per annum and matures on June 30, 2020. This note and accrued interest may convert into shares of common stock at $0.12 per share any time at the holder’s option. If this note, or any portion thereof, has not been repaid or converted in full on or prior to the maturity date, then repayment of the unpaid principal balance plus any accrued and unpaid interest thereon, shall be amortized over the following thirty-six (36) months. This note was also issued with a detachable warrant to purchase 100,000 shares of stock at $0.12 per share. The valuation of the detachable warrants resulted in the recognition of an additional $4,190 discount on this note. This note requires monthly interest payments.

  54,348        - 
         
Total notes payable  313,044   - 
         
Less original issue discounts  (13,044)  - 
         
Convertible notes payable, net  300,000   - 
         
Less conversion rights and warrant discounts  (98,660)  - 
         
Plus amortization of discounts  55,358   - 
         
Total convertible notes payable, net $256,698  $- 

Discounts

Total discounts of $111,704 are amortized using the interest method, which resulted in amortization recorded as interest expense of $31,696 and $55,358 for the three and nine-months ended September 30, 2019, respectively.

Interest expense

The Company incurred interest charges of $4,496 and $7,537 during the three and nine-months ended September 30, 2019, respectively, on these notes payable of which $7,537 was accrued and payable as of September 30, 2019.

Maturities

Future maturities of notes payable are as follows as of September 30:

2020 $313,044 
  $313,044 

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 9 – DERIVATIVE FINANCIAL INSTRUMENTS

The Company has identified the embedded derivatives related to the convertible notes described in Note 8. These embedded derivatives included certain conversion and reset features. The accounting treatment of derivative financial instruments requires that the Company record fair value of these derivative liabilities as of the inception date of those convertible notes and each subsequent reporting date.

The Company estimates the fair value of these derivative liabilities using the Black-Scholes valuation model. The initial value is used in the determination of a note discount with each subsequent change in fair value as a component of operations. The range of fair value assumptions used for derivative financial instruments during the nine-months ended September 30, 2019, were as follows:

Dividend yield0.0%
Risk-free rate1.75% - 2.44%
Volatility102% - 137%
Expected term1 year

Volatility was calculated based on the historical volatility of the Company. The risk-free interest rate used was based on the U.S. Treasury constant maturity rate in effect at the time of grant for the expected term of the derivative liabilities to be valued. The expected dividend yield was zero, because the Company does not anticipate paying a dividend within the relevant timeframe.

For the nine-months ended September 30, 2019, the Company recognized total derivative liabilities and convertible note discounts of $243,275 based on the fair value at the convertible notes’ inception dates. These derivative liabilities were subsequently revalued at $246,414 as of September 30, 2019, which resulted in a loss of $3,139 on the change in value of these derivative liabilities.

The following table presents the three-level hierarchy prescribed by U.S. GAAP for derivative liabilities since it is a liability that is measured and recognized at fair value on a recurring basis as of:

  Level 1  Level 2  Level 3 
             
September 30, 2019  -   -  $246,414 

 

NOTE 710 – STOCKHOLDERS’ DEFICIT

 

Warrant exchangeSelf-directed stock issuance 2019

 

During the nine-months ended September 30, 2019, the Company sold securities in a self-directed offering to existing stockholders of the Company in the aggregate amount of $245,000, respectively, at $0.30 per unit. Each $0.30 unit consisted of 2 shares of restricted common stock (1,633,330 shares) and a five-year warrant to purchase 1 share of restricted common stock (816,665 warrant shares) at $0.20 per share.

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 10 – STOCKHOLDERS’ DEFICIT (continued)

Warrant exchange offering

In June 2018, the Company commenced an offering to exchange outstanding warrants for shares of common stock under a Form S-4 Registration Statement. These shares of common stock would bewere issued to warrant holders in exchange for (i) their outstanding warrants to purchase shares of common stock at $0.625 per share, and (ii) cash payment of $0.15 per share. This offering closed on July 27, 2018, and resulted in an exchange of 9.6 million warrants forand $1,440,043 in gross proceeds andfor 9,600,286 shares of common stock. OfStock issuance costs associated with this amount, $653,278 was held in escrow as subscriptions receivable as of September 30, 2018 and received on October 5, 2018, less $113,616 in placement fees and expenses, to net $539,662.

Self-directed stock issuance

During the year ended December 31, 2017, the Company sold securitiescapital raise totaled $196,006, resulting in a self-directed offeringnet total of $1,244,037 raised in the aggregate amount of $179,000, $3,774,456, and $124,979 at $0.08, $0.12, and $0.30, respectively, per unit. Each $0.08 unit consisted of 1 share of restricted common stock (2,237,500 shares), a five year warrant to purchase 1 share of restricted common stock (2,237,500 warrant shares) at $0.08 per share, a five year warrant to purchase 1 share of restricted common stock (2,237,500 warrant shares) at $0.12 per share, and a five year warrant to purchase 1 share of restricted common stock (2,237,500 warrant shares) at $0.16 per share. Each $0.12 unit consisted of 1 share of restricted common stock (31,453,788 shares) and a five-year warrant to purchase 1 share of restricted common stock (31,453,788 warrant shares) at $0.12 per share. Each $0.30 unit consisted of 1 share of restricted common stock (416,595 shares) and a five-year warrant to purchase 1 share of restricted common stock (416,595 warrant shares) at $0.30 per share.

Equity purchase agreement

In July 2016, the Company entered into an equity purchase agreement (the “EPA”) and a registration rights agreement with an investor. Pursuant to the terms of the EPA, the Company has the right, but not the obligation, to sell shares of its common stock to the investor on the terms specified in the EPA. On the date of the EPA, the Company issued 1,500,000 shares to the investor. The total fair value of this stock on the date of grant was $106,500. These shares were fully vested upon issuance.

During the nine-months ended September 30, 2018 and 2017, the Company sold 0 and 567,644 shares of common stock for $0 and $60,000, respectively, pursuant to the EPA.

Payable settlement

In May 2017, the Company settled a payable in the amount of $44,700 with a previously engaged broker dealer through the issuance of securities at $0.08 per unit. Each unit consisted of 1 share of restricted common stock (558,750 shares), a five-year warrant to purchase 1 share of restricted common stock (558,750 warrant shares) at $0.08 per share, a five-year warrant to purchase 1 share of restricted common stock (558,750 warrant shares) at $0.12 per share, and a five-year warrant to purchase 1 share of restricted common stock (558,750 warrant shares) at $0.16 per share.offering.

 

Shares outstanding

 

As of September 30, 20182019 and December 31, 2017,2018, the Company had a total of 133,338,573137,261,594 and 122,674,516,133,888,573, respectively, shares of common stock outstanding.

 

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 811 – STOCK GRANTS

 

Director stock grants

 

During the nine-months ended September 30, 20182019 and 2017,2018, the Company granted its independent directors an aggregate of 1,627,191 and 906,774, and 418,025respectively, shares of restricted common stock in the Company, respectively.Company. These shares were fully vested upon issuance. The increase in number of shares issued was due to the expansion of the Board of Directors by two members in JuneSeptember 2018. The totalexpense recognized for these grants based on the grant date fair value of this stock on the date of grant was $200,000$262,500 and $93,750$200,000 for the nine-months ended September 30, 20182019 and 2017,2018, respectively.

 

Consultant stock grants

 

On April 10, 2017, the Company granted a consultant 100,000 shares of restricted common stock valued at $0.23 per share. These shares were subject to a risk of forfeiture and vested quarterly in arrears commencing on April 1, 2017. The Company recognized $0 and $5,750 and $11,500 in stock basedstock-based compensation related to this grant during the nine-months ended September 30, 20182019 and 2017,2018, respectively.

 

On August 8, 2017, the Company granted a consultant 100,000 shares of restricted common stock valued at $0.175 per share. These shares were subject to a risk of forfeiture and vested 25% upon grant and quarterly in arrears thereafter commencing on September 1, 2017. The Company recognized $0 and $4,375 and $8,750 in stock basedstock-based compensation related to this grant during the nine-months ended September 30, 2019 and 2018, respectively.

On December 31, 2018, the Company granted consultants 112,500 shares of restricted common stock valued at $0.20 per share. These shares were fully vested upon issuance. The Company recognized $22,500 in stock-based compensation related to these grants during the year ended December 31, 2018.

On March 31, 2019, the Company granted consultants 37,500 shares of restricted common stock valued at $0.17 per share. On June 30, 2019, the Company granted consultants 37,500 shares of restricted common stock valued at $0.125 per share. On September 30, 2019, the Company granted consultants 37,500 shares of restricted common stock valued at $0.089 per share. These shares were fully vested upon issuance. The Company recognized $14,400 in stock-based compensation related to these grants during the nine-months ended September 30, 2019.

Cardax, Inc., and 2017, respectively.Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 912 – STOCK OPTION PLANS

 

On February 7, 2014, the Company adopted the 2014 Equity Compensation Plan. Under this plan, the Company may issue options to purchase shares of common stock to employees, directors, advisors, and consultants. The aggregate number of shares that could be issuedreserved under this plan upon adoption was 30,420,148. On April 16, 2015, the majority stockholder of the Company approved an increase in the Company’s 2014 Equity Compensation Plan by 15 million shares. On December 4, 2018, the stockholders of the Company approved an increase in the Company’s 2014 Equity Compensation Plan by an additional 5 million shares, for a total of 50,420,148 shares reserved under the plan.

 

Under the terms of the 2014 Equity Compensation Plan and the 2006 Stock Incentive Plan (collectively, the “Plans”), incentive stock options may be granted to employees at a price per share not less than 100% of the fair market value at date of grant. If the incentive stock option is granted to a 10% stockholder, then the purchase or exercise price per share shall not be less than 110% of the fair market value per share of common stock on the grant date. Non-statutory stock options and restricted stock may be granted to employees, directors, advisors, and consultants at a price per share, not less than 100% of the fair market value at date of grant. Options granted are exercisable, unless specified differently in the grant documents, over a default term of ten years from the date of grant and generally vest over a period of four years.

 

A summary of stock option activity is as follows:

  Options  Weighted
average
exercise price
  Weighted
average
remaining
contractual
term in years
  Aggregate
intrinsic value
 
Outstanding January 1, 2018  38,213,427  $  0.41   5.23  $562,456 
Exercisable January 1, 2018  36,213,427  $0.41   4.98  $562,456 
Canceled  (350,000)            
Granted  2,833,334             
Exercised  (200,000)            
Forfeited  -             
Outstanding December 31, 2018  40,496,761  $0.40   4.52  $986,808 
Exercisable December 31, 2018  37,157,179  $0.41   4.10  $966,808 
Canceled  (58,336)            
Granted  -             
Exercised  -             
Forfeited  -             
Outstanding September 30, 2019  40,438,425  $0.40   3.77  $149,089 
Exercisable September 30, 2019  38,130,093  $0.41   3.48  $149,089 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 912 – STOCK OPTION PLANS (continued)

A summary of stock option activity is as follows:

  Options  Weighted average exercise price  Weighted average remaining contractual term in years  Aggregate intrinsic value 
Outstanding January 1, 2017  36,821,969  $0.41   5.94  $301,273 
Exercisable January 1, 2017  36,771,969  $0.41   5.94  $299,273 
Canceled  -             
Granted  2,161,458             
Exercised  (770,000)  -         
Forfeited  -             
Outstanding December 31, 2017  38,213,427  $0.41   5.23  $562,456 
Exercisable December 31, 2017  36,213,427  $0.41   4.98  $562,456 
Canceled  (350,000)            
Granted  1,833,334             
Exercised  (156,997)  -         
Forfeited  (43,003)            
Outstanding September 30, 2018  39,496,761  $0.41   4.64  $986,808 
Exercisable September 30, 2018  36,580,097  $0.41   4.28  $963,475 

 

The aggregate intrinsic value in the table above is before applicable income taxes and represents the excess amount over the exercise price option recipients would have received if all options had been exercised on September 30, 2018,2019, based on a valuation of the Company’s stock for that day.

 

A summary of the Company’s non-vested options for the nine-months ended September 30, 2019 and year ended December 31, 2017, and nine-months ended September 30, 2018, are presented below:

 

Non-vested at January 1, 201750,000
Granted2,161,458
Vested(211,458)
Canceled-
Non-vested at December 31, 20172018  2,000,000 
Granted  1,833,3342,833,334 
Vested  (566,6701,143,752)
Canceled  (350,000)
Non-vested at September 30,December 31, 2018  2,916,6643,339,582
Granted-
Vested(972,914)
Canceled(58,336)
Non-vested at September 30, 20192,308,332 

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 9 – STOCK OPTION PLANS (continued)

 

The Company estimates the fair value of stock options granted on each grant date using the Black-Scholes option valuation model and recognizes an expense ratably over the requisite service period. The range of fair value assumptions related to options issued were as follows for the:

 

 

Nine-months ended
September 30, 2018

 

Year ended

December 31, 2017

  Nine-months ended
September 30, 2019
 Year ended
December 31, 2018
 
Dividend yield  0.0%  0.0%  0.0%  0.0%
Risk-free rate 2.38% - 2.80% 1.89% - 2.26%  2.38% - 3.04%  2.38% - 3.04%
Expected volatility 217% - 226% 221% - 232%
Volatility  214% - 226%  214% - 226%
Expected term 3 - 7 years 5 - 7 years   3 - 7 years   3 - 7 years

 

The expected volatilityVolatility was calculated based on the historical volatility of the Company. The risk-free interest rate used was based on the U.S. Treasury constant maturity rate in effect at the time of grant for the expected term of the stock options to be valued. The expected dividend yield was zero, because the Company does not anticipate paying a dividend within the relevant timeframe. Due to a lack of historical information needed to estimate the Company’s expected term, it was estimated using the simplified method allowed.

 

The Company records forfeitures as they occur and reverses compensation cost previously recognized, in the period the award is forfeited, for an award that is forfeited before completion of the requisite service period.

 

Stock option exercise

 

During the nine-monthsyear ended September 30,December 31, 2018, the Company issued 156,997 shares of common stock in connection with the cashless exercise of stock options for 100,000, 50,000, and 50,000 shares of common stock exercisable at $0.06 per share with 43,003 shares of common stock withheld with an aggregate fair market value equal to the aggregate exercise price.

During the year ended December 31, 2017, the Company issued 645,288 shares of common stock in connection with the cashless exercise of stock options for 100,000, 45,000, and 625,000 shares of common stock exercisable at $0.155, $0.06, and $0.06, respectively, per share with 124,712 shares of common stock withheld with an aggregate fair market value equal to the aggregate exercise price.

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 912 – STOCK OPTION PLANS (continued)

 

Stock based compensation

 

The Company recognized stock-based compensation expense related to options during the:

 

 Nine-months ended September 30  Nine-months ended September 30 
 2018 2017  2019 2018 
 Number Amount Number Amount  Amount Amount 
         
Service provider compensation $133,125  $76,250 
Employee compensation  450,000  $156,875   -  $-   124,750   156,875 
Compensation for outside services 375,000 76,250 50,000 3,500 
Director compensation  -  -  161,458  25,000 
         
Total  825,000 $233,125  211,458 $28,500  $257,875  $233,125 

 

NOTE 1013 – WARRANTS

 

The following is a summary of the Company’s warrant activity:

 

  Warrants  Weighted average exercise price  Weighted average remaining contractual term in years  Aggregate intrinsic value 
Outstanding January 1, 2017  88,365,036  $0.30   3.50  $543,770 
Exercisable January 1, 2017  88,365,036  $0.30   3.50  $543,770 
Canceled  -             
Granted  40,259,133             
Exercised  (798,000)            
Forfeited  (392,047)            
Outstanding December 31, 2017  127,434,122  $0.24   3.15  $3,957,689 
Exercisable December 31, 2017  127,434,122  $0.24   3.15  $3,957,689 
Canceled  -             
Granted  315,010             
Exercised  9,600,286             
Forfeited  -             
Outstanding September 30, 2018  118,148,846  $0.20   2.57  $7,848,637 
Exercisable September 30, 2018  118,148,846  $0.20   2.57  $7,848,637 
  Warrants  Weighted average exercise price  Weighted average remaining contractual term in years  Aggregate intrinsic value 
Outstanding January 1, 2018  127,434,122  $0.24   3.15  $3,957,689 
Exercisable January 1, 2018  127,434,122  $0.24   3.15  $3,957,689 
Canceled  -             
Granted  315,010             
Exercised  (9,600,286)            
Expired  (101,984)            
Outstanding December 31, 2018  118,046,862  $0.20   2.32  $7,848,637 
Exercisable December 31, 2018  118,046,862  $0.20   2.32  $7,848,637 
Canceled  -            
Granted  3,116,665             
Exercised  -             
Expired  (18,405,496)            
Outstanding September 30, 2019  102,758,031  $0.13   2.07  $146,779 
Exercisable September 30, 2019  102,758,031  $0.13   2.07  $146,779 

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 13 – WARRANTS (continued)

 

The Company estimates the fair value of warrants granted on each grant date using the Black-Scholes option valuation model. The expected volatilityVolatility is calculated based on the historical volatility of the Company. The risk-free interest rate used is based on the U.S. Treasury constant maturity rate in effect at the time of grant for the expected term of the warrants to be valued. The expected dividend yield is zero, because the Company does not anticipate paying a dividend within the relevant timeframe. Due to a lack of historical information needed to estimate the Company’s expected term, it is estimated using the simplified method allowed.

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 10 – WARRANTS (continued)

 

The Company did not recognize any stock-based compensation expense related to warrants during the nine-monthsthree-months ended September 30, 20182019 and 2017, respectively.2018.

 

Warrant exerciseConvertible note warrants

 

During the year ended December 31, 2017, the Company issued 233,217 shares of common stock in connection with the cashless exercise of a warrant for 298,000Warrants to purchase 2,300,000 shares of common stock at $0.10$0.12 to $0.20 per share with 64,783 shares of common stock withheld with an aggregate fair market value equal to the aggregate exercise price.

During the year ended December 31, 2017, the Companywere issued 500,000 shares of common stock in connection with the exerciseissuance of a warrant for 500,000 sharesconvertible notes. These warrants were immediately vested and expire in five years and were recorded as discounts on the convertible notes in the aggregate amount of common stock at $0.08 per share in exchange for $40,000.

Warrant expiration

During the year ended December 31, 2017, warrants to purchase an aggregate of 392,047 shares of restricted common stock expired.$141,435.

 

Warrant exchange offering

 

In June 2018, the Company commenced an offering to exchange outstanding warrants for shares of common stock under a Form S-4 Registration Statement. These shares of common stock would bewere issued to warrant holders in exchange for (i) their outstanding warrants to purchase shares of common stock at $0.625 per share, and (ii) cash payment of $0.15 per share. This offering closed on July 27, 2018, and resulted in an exchange of 9.6 million warrants forand $1,440,043 in gross proceeds andfor 9,600,286 shares of common stock. OfStock issuance costs associated with this amount, $653,278 was heldcapital raise totaled $196,006, resulting in escrow as subscriptions receivable asa net total of September 30, 2018. The subscriptions receivable amount was received on October 5, 2018, less $113,616$1,244,037 raised in placement fees and expenses, to net $539,662.this offering. As part of this exchange,offering, warrants to purchase 315,010 shares of common stock at $0.21 per share were issued to investment bankers for their services.

 

Warrant expiration

During the nine-months ended September 30, 2019, warrants to purchase an aggregate of 18,405,496 shares of common stock expired. During the year ended December 31, 2018, warrants to purchase an aggregate of 101,984 shares of common stock expired.

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 1114 – INCOME TAXES

 

The Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based upon the difference between the financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed.

 

The effective tax rate for the three and nine-monthsthree-months ended September 30, 20182019 and 2017,2018, differs from the statutory rate of 21% as a result of state taxes (net of Federal benefit), permanent differences, and a reserve against deferred tax assets.

 

The Company’s valuation allowance was primarily related to the operating losses. The valuation allowance is determined in accordance with the provisions of ASC No. 740,Income Taxes, which requires an assessment of both negative and positive evidence when measuring the need for a valuation allowance. Based on the available objective evidence and the Company’s history of losses, management provides no assurance that the net deferred tax assets will be realized. As of September 30, 20182019, and December 31, 2017,2018, the Company has applied a valuation allowance against its deferred tax assets net of the expected income from the reversal of the deferred tax liabilities.

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 11 – INCOME TAXES

 

Recent tax legislation

 

On March 22, 2018, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changes existing U.S. tax law and includes numerous provisions that affect our business, such as reducing the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018.

 

Uncertain tax positions

 

The Company is subject to taxation in the United States and twothree state jurisdictions. The preparation of tax returns requires management to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. Management, in consultation with its tax advisors, files its tax returns based on interpretations that are believed to be reasonable under the circumstances. The income tax returns, however, are subject to routine reviews by the various taxing authorities. As part of these reviews, a taxing authority may disagree with respect to the tax positions taken by management (“uncertain tax positions”) and therefore may require the Company to pay additional taxes.

 

Management evaluates the requirement for additional tax accruals, including interest and penalties, which the Company could incur as a result of the ultimate resolution of its uncertain tax positions. Management reviews and updates the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, completion of tax audits, expiration of statute of limitations, or upon occurrence of other events.

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

NOTE 14 – INCOME TAXES (continued)

Uncertain tax positions (continued)

 

As of September 30, 20182019 and December 31, 2017,2018, there was no liability for income tax associated with unrecognized tax benefits. The Company recognizes accrued interest related to unrecognized tax benefits as well as any related penalties in interest income or expense in its condensed consolidated statements of operations, which is consistent with the recognition of these items in prior reporting periods.

 

The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they were filed.

 

NOTE 1215 – BASIC AND DILUTED NET LOSS PER SHARE

 

The following table sets forth the computation of the Company’s basic and diluted net loss per share for:

 

 Three-months ended September 30, 2018(Unaudited)  Three-months ended September 30, 2019(Unaudited) 
 Net Loss
(Numerator)
 Shares
(Denominator)
 Per share
amount
  Net Loss (Numerator) Shares (Denominator) Per share
amount
 
Basic loss per share $(928,888) 130,083,598 $(0.01) $(1,433,626)  136,640,761  $(0.01)
Effect of dilutive securities—Common stock options and warrants  -  -  - 
Effect of dilutive securities—Common stock options, warrants, and convertible note  -   -   - 
Diluted loss per share $(928,888)  130,083,598 $(0.01) $(1,433,626)  136,640,761  $(0.01)

 

  Three-months ended September 30, 2018(Unaudited) 
  Net Loss (Numerator)  Shares (Denominator)  Per share
amount
 
Basic loss per share $(928,888)  130,083,598  $(0.01)
Effect of dilutive securities—Common stock options, warrants, and convertible note  -   -   - 
Diluted loss per share $(928,888)  130,083,598  $(0.01)

  Nine-months ended September 30, 2019(Unaudited) 
  Net Loss (Numerator)  Shares (Denominator)  Per share
amount
 
Basic loss per share $(3,650,740)  135,516,490   (0.03)
Effect of dilutive securities—Common stock options, warrants, and convertible note  -   -   - 
Diluted loss per share $(3,650,740)  135,516,490   (0.03)

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 1215 – BASIC AND DILUTED NET LOSS PER SHARE (continued)

 

  Three-months ended September 30, 2017(Unaudited) 
  Net Loss
(Numerator)
  Shares
(Denominator)
  Per share
amount
 
Basic loss per share $(363,156)  100,587,843  $(0.00)
Effect of dilutive securities—Common stock options and warrants  -   -   - 
Diluted loss per share $(363,156)  100,587,843  $(0.00)

  Nine-months ended September 30, 2018(Unaudited) 
  Net Loss
(Numerator)
  Shares
(Denominator)
  Per share
amount
 
Basic loss per share $(3,076,873)  125,271,516  $(0.02)
Effect of dilutive securities—Common stock options and warrants  -   -   - 
Diluted loss per share $(3,076,873)  125,271,516  $(0.02)

 Nine-months ended September 30, 2017(Unaudited)  Nine-months ended September 30, 2018(Unaudited) 
 Net Loss
(Numerator)
 Shares
(Denominator)
 Per share
amount
  Net Loss (Numerator) Shares (Denominator) Per share
amount
 
Basic loss per share $(1,197,035)  92,513,317  $(0.01) $(3,076,873)  125,271,516  $(0.02)
Effect of dilutive securities—Common stock options and warrants  -  -  - 
Effect of dilutive securities—Common stock options, warrants, and convertible note  -   -   - 
Diluted loss per share $(1,197,035)  92,513,317 $(0.01) $3,076,873   125,271,516  $(0.02)

 

The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have been antidilutive for the periods ended:

 

  September
30, 2018
  September
30, 2017
 
  (Unaudited)  (Unaudited) 
Common stock options  39,496,761   36,838,427 
Common stock warrants  118,148,846   127,018,546 
Total common stock equivalents  157,645,607   163,856,973 

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

  September 30, 2019  September 30, 2018 
  (Unaudited)  (Unaudited) 
Convertible notes  9,490,186   - 
Common stock options  40,438,425   39,496,761 
Common stock warrants  102,758,031   118,148,846 
Total common stock equivalents  152,686,642   157,645,607 

 

NOTE 1316 – LEASES

 

Manoa Innovation Center

 

The Company entered into an automatically renewable month-to-month lease for office space on August 13, 2010. Under the terms of this lease, the Company must provide a written notice 45 days prior to vacating the premises. Total rent expense under this agreement as amended was $8,989 and $27,188 for the three and nine-months ended September 30, 2019, respectively, and $8,760 and $29,662 for the three and nine-months ended September 30, 2018, respectively, and $8,164 and $23,935, for the three and nine-months ended September 30, 2017, respectively.

 

Fleet Lease

 

In January 2018, the Company entered into a vehicle lease arrangement with a rental company for three vehicles. The terms of the leases require total monthly payments of $1,619 for three years. These leases convert to month-to-month leases in January 2021 unless terminated. Total rentlease expense under this agreement was $4,964 and $16,520 for the three and nine-months ended September 30, 2019, respectively, and $5,602 and $14,953 for the three and nine-months ended September 30, 2018, respectively,respectively.

Right-to-use leased asset and $0liability

As a result of the adoption of ASU No. 2016-02,Leases, on January 1, 2019, the Company recognized a right-to-use leased asset and liability for the threeFleet Leases. The balance of this right-to-use asset and nine-months endedliability was $22,015 as of September 30, 2017.2019.

Cardax, Inc., and Subsidiary

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 1417 – SUBSEQUENT EVENTS

 

The Company evaluated all material events through the date the financials were ready for issuance. On October 5, 2018,issuance and identified the Company received the subscriptions receivable amount outstanding of $653,278, less $113,616 in placement fees and expenses, to net $539,662.following for additional disclosure.

 

***Convertible Notes

On the dates set forth in the table below, the Company entered into convertible notes with lenders, who are also current stockholders, for the amounts set forth in the table below. Each of these notes accrues interest payable monthly at the rate of 8% per annum and matures on June 30, 2020. Each of these notes and accrued interest thereon may convert into shares of common stock at the conversion price set forth in the table below any time at the holder’s option. If any of these notes, or any portion thereof, has not been repaid or converted in full on or prior to the maturity date, then repayment of the unpaid principal balance plus any accrued and unpaid interest thereon, shall be amortized over the following thirty-six (36) months. The Company has the right to prepay each of these notes without penalty or premium. Each of these notes were issued with detachable five-year warrants to purchase shares of common stock as set forth in the table below.

Issuance Date Principal Amount  Original Issue Discount  Gross Proceeds  Note Conversion Price Per Share  Number of Shares Underlying Warrants  Warrant Exercise Price Per Share 
October 3, 2019 $27,174  $2,174  $25,000  $0.12   50,000  $0.12 
October 10, 2019  27,174   2,174   25,000   0.12   50,000   0.12 
October 23, 2019  108,696   8,696   100,000   0.12   250,000   0.15 
                   250,000   0.20 
October 29, 2019  27,174   2,174   25,000   0.12   50,000   0.12 
November 8, 2019  16,304   1,304   15,000   0.07   30,000   0.07 
Total $206,522  $16,522  $190,000  $0.07-0.12   680,000  $0.07-0.20 

On the date set forth in the table below, the Company entered into a senior convertible note payable with a lender, who is also a current stockholder and beneficial owner of more than 5% of the Company’s common stock, in the amount set forth in the table below. This note accrues interest payable monthly at the rate of 8% per annum and matures on June 30, 2020. This note and accrued interest thereon may convert into shares of common stock at the conversion price then in effect (initially $0.12 per share, subject to adjustment) any time at the holder’s option or automatically upon a qualified financing of at least $5 million at the lower of the conversion price then in effect or a 25% discount to the offering price. The conversion price is subject to adjustment upon the issuance of the Company’s common stock or securities convertible into common stock at a price per share less than the then prevailing conversion price, other than specified exempt issuances; accordingly, on November 8, 2019, the conversion price was adjusted to $0.07 per share. The Company has the right to prepay this note without penalty or premium. This note was issued with a detachable five-year warrant to purchase shares of common stock as set forth in the table below. The exercise price of this warrant shall be adjusted in accordance with any adjustment to the conversion price of this note; accordingly, on November 8, 2019, the exercise price was adjusted to $0.07 per share.

Issuance Date Principal Amount  Original Issue Discount  Gross Proceeds  Note Conversion Price Per Share  Number of Shares Underlying Warrants  Warrant Exercise Price Per Share 
October 16, 2019 $217,391  $17,391  $200,000  $0.07   400,000  $0.07 

General Nutrition Corporation

On October 16, 2019, the exclusivity provision of the Company’s purchasing agreement with GNC expired, however, all other provisions of the Company’s purchasing agreement with GNC remain in effect. The Company may expand ZanthoSyn® distribution to mass market retailers, other specialty nutrition stores, pharmacies, and other retailers. The Company also plans to increase its sales and marketing efforts through e-commerce.

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

 

Explanatory Note

 

Unless otherwise noted, references in this Quarterly Report on Form 10-Q to “Cardax,” the “Company,” “we,” “our”“our,” or “us” means Cardax, Inc., the registrant, and, unless the context otherwise requires, together with its wholly-owned subsidiary, Cardax Pharma, Inc., a Delaware corporation (“Pharma”), and Pharma’s predecessor, Cardax Pharmaceuticals, Inc., a Delaware corporation (“Holdings”), which merged with and into Cardax, Inc., on December 30, 2015.

Unless otherwise noted, references in this Quarterly Report on Form 10-Q to our “product” or “products” includes our dietary supplements, pharmaceutical candidates, and any of our other current or future products, product candidates, and technologies, to the extent applicable.

 

Corporate Overview and History

 

We acquired Cardax Pharma, Inc. (“Pharma”) and its life science business through the merger of Cardax Acquisition, Inc. (“Cardax Sub”), our wholly-owned transitory subsidiary (“Cardax Sub”), with and into Pharma on February 7, 2014 (the “Merger”), andare a stock purchase agreement. As a result of these transactions, Pharma became our wholly-owned subsidiary. The only consideration that we paid under the stock purchase agreement and the Merger was shares of our Common Stock. On May 31, 2013, Pharma acquired all of the assets and assumed all of the liabilities of Cardax Pharmaceuticals, Inc. (“Holdings”). Accordingly, we have two predecessors: Pharma and Pharma’s predecessor, Holdings. Prior to the February 7, 2014 effective date of the Merger, we operated under the name “Koffee Korner Inc.” and our business was limited to a single location retailer of specialty coffee located in Houston, Texas. On the effective date of the Merger, we divested our coffee business and now exclusively continue Pharma’s life sciences business. On December 30, 2015, our former principal stockholder, Holdings, merged with and into us (the “Holdings Merger”). There was not any cash consideration exchanged in the Holdings Merger. Upon the closing of the Holdings Merger, the stockholders of Holdings received an aggregate number of shares and warrants to purchase shares of our Common Stock equal to the aggregate number of shares of our Common Stock that were held by Holdingsdevelopment stage biopharmaceutical company primarily focused on the datedevelopment of the closing of the Holdings Merger. Our restricted shares of our Common Stock heldpharmaceuticals for chronic diseases driven by Holdings were cancelled upon the closing of the Holdings Merger. Accordingly, there was not any change to our fully diluted capitalization due to the Holdings Merger.

inflammation. We are devoting substantially all of our present efforts to establishing ouralso have a commercial business related to the development and commercialization ofunit that markets dietary supplements for inflammatory health. CDX-101, our astaxanthin pharmaceutical candidate, is being developed for cardiovascular inflammation and pharmaceuticals.dyslipidemia, with a target initial indication of severe hypertriglyceridemia. CDX-301, our zeaxanthin pharmaceutical candidate, is being developed for macular degeneration, with a target initial indication of Stargardt disease. Our first commercial product,pharmaceutical candidates are currently in pre-clinical development, including the planning of IND enabling studies. ZanthoSyn®, is a physician recommended anti-inflammatoryastaxanthin dietary supplement for health and longevity that provides astaxanthin with enhanced absorption and purity. The form of astaxanthin utilized in ZanthoSyn® has demonstrated excellent safety in peer-reviewed published studies and is designated as GRAS (Generally Recognized as Safe) according to FDA regulations.inflammatory health. We sell ZanthoSyn® primarily through wholesale and e-commerce channels and expect that our marketing program will continue to focus on education of physicians, healthcare professionals, retail personnel, and consumers. We are also developing astaxanthin and related compounds, including CDX-085, for pharmaceutical applications.channels. The safety and efficacy of our products have not been directly evaluated in clinical trials or confirmed by the FDA.

 

At present we are not able to estimate if or when we will be able to generate sustained revenues. Our financial statements have been prepared assuming that we will continue as a going concern; however, given our recurring losses from operations, our independent registered public accounting firm has determined there is substantial doubt about our ability to continue as a going concern.

 

Subsequent Events

 

Convertible Promissory Notes

On October 5, 2018, the Company receiveddates set forth in the subscriptions receivable amount outstandingtable below, we entered into convertible notes with lenders, who are also current stockholders, for the amounts set forth in the table below. Each of $653,278, less $113,616these notes accrues interest payable monthly at the rate of 8% per annum and matures on June 30, 2020. Each of these notes and accrued interest thereon may convert into shares of our common stock at the conversion price set forth in placement feesthe table below any time at the holder’s option. If any of these notes, or any portion thereof, has not been repaid or converted in full on or prior to the maturity date, then repayment of the unpaid principal balance plus any accrued and expenses,unpaid interest thereon, shall be amortized over the following thirty-six (36) months. We have the right to net $539,662.prepay each of these notes without penalty or premium. Each of these notes were issued with detachable five-year warrants to purchase shares of our common stock as set forth in the table below.

 

24
Issuance Date Principal Amount  Original Issue Discount  Gross Proceeds  Note Conversion Price Per Share  Number of Shares Underlying Warrants  Warrant Exercise Price Per Share 
October 3, 2019 $27,174  $2,174  $25,000  $0.12   50,000  $0.12 
October 10, 2019  27,174   2,174   25,000   0.12   50,000   0.12 
October 23, 2019  108,696   8,696   100,000   0.12   250,000   0.15 
                   250,000   0.20 
October 29, 2019  27,174   2,174   25,000   0.12   50,000   0.12 
November 8, 2019  16,304   1,304   15,000   0.07   30,000   0.07 
Total $206,522  $16,522  $190,000  $0.07-0.12   680,000  $0.07-0.20 

 

On the date set forth in the table below, we entered into a senior convertible note payable with a lender, who is also a current stockholder and beneficial owner of more than 5% of our common stock, in the amount set forth in the table below. This note accrues interest payable monthly at the rate of 8% per annum and matures on June 30, 2020. This note and accrued interest thereon may convert into shares of our common stock at the conversion price then in effect (initially $0.12 per share, subject to adjustment) any time at the holder’s option or automatically upon a qualified financing of at least $5 million at the lower of the conversion price then in effect or a 25% discount to the offering price. The conversion price is subject to adjustment upon the issuance of our common stock or securities convertible into our common stock at a price per share less than the then prevailing conversion price, other than specified exempt issuances; accordingly, on November 8, 2019, the conversion price was adjusted to $0.07 per share. We have the right to prepay this note without penalty or premium. This note was issued with a detachable five-year warrant to purchase shares of our common stock as set forth in the table below. The exercise price of this warrant shall be adjusted in accordance with any adjustment to the conversion price of this note; accordingly, on November 8, 2019, the exercise price was adjusted to $0.07 per share.

Issuance Date Principal Amount  Original Issue Discount  Gross Proceeds  Note Conversion Price Per Share  Number of Shares Underlying Warrants  Warrant Exercise Price Per Share 
October 16, 2019 $217,391  $17,391  $200,000  $0.07   400,000  $0.07 

General Nutrition Corporation

On October 16, 2019, the exclusivity provision of our purchasing agreement with GNC expired, however, all other provisions of our purchasing agreement with GNC remain in effect. We may expand ZanthoSyn® distribution to mass market retailers, other specialty nutrition stores, pharmacies, and other retailers. We also plan to increase our sales and marketing efforts through e-commerce.

Results of Operations

 

Results of Operations for the Three and Nine-Months Ended September 30, 20182019 and 2017:2018:

 

The following table reflects our operating results for the three and nine-months ended September 30, 20182019 and 2017:2018:

 

Operating Summary Three-months ended September 30, 2018  Three-months ended September 30, 2017  Nine-months ended
September 30, 2018
  Nine-months ended
September 30, 2017
 
Revenues $549,540  $321,861  $1,134,899  $496,088 
Cost of Goods Sold  (240,152)  (149,207)  (521,353)  (222,056)
Gross Profit  309,388   172,654   613,546   274,032 
Operating Expenses  (1,237,019)  (535,413)  (3,689,560)  (1,482,719)
Net Operating Loss  (927,631)  (362,759)  (3,076,014)  (1,208,687)
Other (Loss) Income  (1,257)  (397)  (859)  11,652 
Net Loss $(928,888) $(363,156) $(3,076,873) $(1,197,035)

Operating Summary Three-months ended September 30, 2019  Three-months ended September 30, 2018  Nine-months ended
September 30, 2019
  Nine-months ended
September 30, 2018
 
Revenues $229,142  $549,540  $439,505  $1,134,899 
Cost of Goods Sold  (120,818)  (240,152)  (254,479)  (521,353)
Gross Profit  108,324   309,388   185,026   613,546 
Operating Expenses  (1,300,035)  (1,237,019)  (3,540,412)  (3,689,560)
Net Operating Loss  (1,191,711)  (927,631)  (3,355,386)  (3,076,014)
Other (Expense) Income  (241,915)  (1,257)  (295,354)  (859)
Net Loss $(1,433,626) $(928,888) $(3,650,740) $(3,076,873)

 

Operating Summary for the Three-Months Ended September 30, 20182019 and 20172018

 

We sellOur revenues presently derive from the sale of ZanthoSyn® primarily through wholesale and, to a lesser extent, e-commerce channels. We launched our e-commerce channel in August 2016 and began selling to GNC stores in Hawaii on January 25, 2017 and2017. ZanthoSyn® is currently available at over three thousand GNC corporate stores acrossin the United States on August 10, 2017.States. As a result, revenues were $549,540$229,142 and $321,861$549,540 for the three-months ended September 30, 2019 and 2018, and 2017, respectively. Costs of goods sold were $240,152 and $149,207The decrease in revenues for the three-months ended September 30, 20182019 was primarily attributed to decreased replenishment orders by GNC during the current period compared to the previous year. Costs of goods sold were $120,818 and 2017,$240,152 for the three-months ended September 30, 2019 and 2018, respectively, and included costs of the product, shipping and handling, sales taxes, merchant fees, and other costs incurred on the sale of goods. Gross profits were $309,388$108,324 and $172,654$309,388 for the three-months ended September 30, 20182019 and 2017,2018, respectively, which represented gross profit margins of approximately 56%47% and 54%56%, respectively.

Operating expenses were $1,237,019 and $535,413 The decrease in gross profit margin for the three-months ended September 30, 2018 and 2017, respectively. The increase in operating expenses2019, was primarily dueattributed to (i)increased promotional activities at GNC stores, which increased the sales discounts passed through to us during the current period.

Operating expenses were $1,300,035 and marketing personnel$1,237,019 for the three-months ended September 30, 2019 and related activities, (ii) partial restoration of employee salaries, (iii) stock-based compensation for new employees and directors, (iv) initiation of a clinical trial, and (v) pharmaceutical development efforts.2018, respectively. Operating expenses primarily consisted of expenses for services provided to the Company, including payroll, consultation, and consultation,contract services, for research and development, administration,including our clinical trial and pharmaceutical development programs, sales and marketing.marketing, and administration. These expenses were paid in accordance with agreements entered with each employee consultant, or service provider agreements.provider. Included in operating expenses were $180,562$175,712 and $58,250$180,562 in stock-based compensation for the three-months ended September 30, 2019 and 2018, respectively. The increase in operating expenses for the period from the same period in the prior year was primarily related to an increase in professional fees as a result of clinical trials and 2017, respectively.

debt and equity issuances and filings.

 

Other income (expenses),expenses, net, were $(1,257)$241,915 and $(397)$1,257 for the three-months ended September 30, 2019 and 2018, respectively. For the three-months ended September 30, 2019, other expenses, net, consisted of the change in the fair value of a derivative liability, loss on abandonment of patents, and 2017, respectivelyinterest expense of $20,524, $36,205, and primarily$185,189, respectively. These expenses were partially offset by interest income of $3 realized during the nine-months ended September 30, 2019. For the three-months ended September 30, 2018, other expenses, net, consisted of interest income and expense.

interest expense of $7 and $(1,264), respectively.

Operating Summary for the Nine-Months Ended September 30, 20182019 and 20172018

 

We sell ZanthoSyn® primarily through wholesale and e-commerce channels. We launched our e-commerce channel in August 2016 and began selling to GNC stores in Hawaii on January 25, 2017 and GNC corporate stores across the United States on August 10, 2017. As a result,Our revenues were $1,134,899$439,505 and $496,088$1,134,899 for the nine-months ended September 30, 2019 and 2018, and 2017, respectively. Costs of goods sold were $521,353 and $222,056The decrease in revenues for the nine-months ended September 30, 20182019 was primarily attributed to a combination of (i) GNC selling through existing ZanthoSyn® inventory we sold to GNC during the prior year, which impacted the timing and 2017,amounts of replenishment orders during the current period, (ii) increased promotional activities at GNC stores, which increased the sales discounts passed through to us during the current period, and (iii) GNC inventory adjustments to focus on ZanthoSyn 60 count and 90 count bottles, which are the top performing ZanthoSyn variants at GNC, resulting in a one-time return of remaining ZanthoSyn 30 count bottles from GNC inventory to us. Costs of goods sold were $254,479 and $521,353 for the nine-months ended September 30, 2019 and 2018, respectively, and included costs of the product, shipping and handling, sales taxes, merchant fees, and other costs incurred on the sale of goods. Gross profits were $613,546$185,026 and $274,032$613,546 for the three-monthsnine-months ended September 30, 20182019 and 2017,2018, respectively, which represented gross profit margins of approximately 54%42% and 55%54%, respectively.

Operating expenses were $3,689,560 and $1,482,719 The decrease in gross profit margin for the nine-months ended September 30, 2018 and 2017, respectively. The increase in operating expenses2019 was primarily dueattributed to (i)increased promotional activities at GNC stores, which increased the sales discounts passed through to us during the current period.

Operating expenses were $3,540,412 and marketing personnel$3,689,560 for the nine-months ended September 30, 2019 and related activities, (ii) partial restoration of employee salaries, (iii) stock-based compensation for new employees and directors, (iv) initiation of a clinical trial, and (v) pharmaceutical development efforts.2018, respectively. Operating expenses primarily consisted of expenses for services provided to the Company, including payroll, consultation, and consultation,contract services, for research and development, administration,including our clinical trial and pharmaceutical development programs, sales and marketing.marketing, and administration. These expenses were paid in accordance with agreements entered with each employee consultant, or service provider agreements.provider. Included in operating expenses were $443,249$534,774 and $142,500$443,249 in stock-based compensation for the nine-months ended September 30, 2019 and 2018, respectively. The decrease in operating expenses for the period from the same period in the prior year was primarily related to a sales and 2017, respectively.

marketing conference and related expenses that occurred in 2018 but not in 2019.

 

Other income (expenses),expenses, net, were $(859)$295,354 and $11,652$859 for the nine-months ended September 30, 2019 and 2018, and 2017, respectively and primarily consisted of interest income and expense.respectively. For the nine-months ended September 30, 2017,2019, other expenses, net, consisted of the change in the fair value of a derivative liability, loss on abandonment of patents, and interest expense of $3,139, $36,205, and $256,015, respectively. These expenses were partially offset by interest income of $5 realized during the nine-months ended September 30, 2019. For the nine-months ended September 30, 2018, other expenses, net, consisted of interest income of $1,941, other income also consisted of a state refundable tax credit$556, and interest expense of $12,598.$(3,356).

 

32

 

Liquidity and Capital Resources

 

Since our inception, we have sustained operating losses and have used cash raised by issuing securities in our operations. During the nine-months ended September 30, 20182019 and 2017,2018, we used cash in operating activities in the amount of $2,712,155$3,047,889 and $1,397,432,$2,712,155, respectively, and incurred net losses of $3,076,873$3,650,740 and $1,197,035,$3,076,873, respectively.

 

We require additional financing in order to continue to fund our operations and to pay existing and future liabilities and other obligations.

On August 14, 2019, we filed a registration statement on Form S-1 for a proposed $15 million public offering of common stock and warrants. We raised an additional $1.44 million in grossintend to use the proceeds throughfrom the exchange of 9.6 million warrants via a warrant exchangeproposed public offering primarily to fund pharmaceutical development and our operations. After giving effect to the net proceeds that we will receive from the proposed public offering, if closed, on July 27, 2018. On October 5, 2018, we receivedexpect to have sufficient cash resources to fund the subscriptions receivable amount outstanding of $653,278, less $113,616 in placement fees and expenses, to net $539,662.budgeted expenditures for our expected operations for at least one year. We cannot give any assurance that the proposed public offering will be consummated.

 

We intend to raise additional capital that would fund our operations through at least September 30, 2019. Wealso may continue to obtain additional financing from investors through the private placement of our Common Stockcommon stock and warrants to purchase our Common Stock. Any financing transaction could also,common stock or in the alternative, includethrough the issuance of our debt or convertible debt securities.securities and plan to do so prior to the closing of the proposed public offering. There can be no assurance that a financing transaction wouldwill be available to us on terms and conditions that we determined are acceptable. We also may access capital under the previously reported equity purchase agreement, pursuant to which we have the right, but not the obligation, to sell shares of our Common Stock, as described in our Registration Statement on Form S-1 (333-214049) filed on February 8, 2017.

 

We cannot give any assurance that we will in the future be able to achieve a level of profitability from the sale of existing or future products or otherwise to sustain our operations. These conditions raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on recoverability and reclassification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

Any inability to obtain additional financing on acceptable terms will materially and adversely affect us, including requiring us to significantly further curtail or cease business operations altogether.

 

Our working capital and capital requirements at any given time depend upon numerous factors, including, but not limited to:

 

 revenues from the sale of any products or licenses;
 
costs of production, marketing and sales capabilities, or other operating expenses; and
 
costs of research, development, and commercialization of our products and technologies.

 

We have undertaken certain actions regarding the advancement of our pharmaceutical development program, the conduct of a dietary supplement clinical trial, and the continued sales and marketing of our commercial dietary supplement. We plan to fund such activities, including compensation to service providers, with a combination of cash and equity payments. The amount of payments in cash and equity will be determined by us from time to time.

We expect that the proposed public offering should provide sufficient capital to satisfy our ongoing obligations, although no assurance can be made that such public offering will be consummated on acceptable terms, if at all. To the extent our cash and cash equivalents, cash flow from operating activities, and proceeds from the revolving inventory financing facility or the proposed public offering are insufficient to fund our future activities, including the development of our pharmaceutical candidates, we will need to raise additional funds through private or public equity or debt financings or bank credit arrangements. We also may need to raise additional funds in the event we determine to effect one or more acquisitions of, or investments in, businesses, services, or technologies. If additional funding is required, we may not be able to effect equity or debt financing or obtain bank credit arrangements on terms acceptable to us or at all.

The following is a summary of our cash flows provided by (used in) operating, investing, and provided by financing activities during the periods indicated:

 

Cash Flow Summary Nine-months ended
September 30, 2018
 Nine-months ended
September 30, 2017
  Nine-months ended
September 30, 2019
 Nine-months ended
September 30, 2018
 
Net Cash Used in Operating Activities $(2,712,155) $(1,397,432) $(3,047,889) $(2,712,155)
Net Cash Used in Investing Activities (30,483) (16,137)  (58,394)  (30,483)
Net Cash Provided by Financing Activities  704,375  4,053,456   2,870,000   704,375 
Net Cash (Decrease) Increase for Period (2,038,263) 2,639,887 
Net Cash (Decrease) for Period  (236,283)  (2,038,263)
Cash at Beginning of Period  2,236,837  158,433   243,753   2,236,837 
Cash at End of Period $198,574 $2,798,320  $7,470  $198,574 

Cash Flows from Operating Activities

 

During the nine-months ended September 30, 20182019 and 2017,2018, our operating activities primarily consisted of receipts and receivables from sales and payments or accruals for employees, directors, and consultants for services related to administration, sales and marketing, research and development, and inventory deposits.

 

Cash Flows from Investing Activities

 

During the nine-months ended September 30, 20182019 and 2017,2018, our investing activities were related to expenditures on patents.

 

Cash Flows from Financing Activities

 

During the nine-months ended September 30, 2018 and 2017,2019, our financing activities consisted of transactions in which we raised proceeds through the issuance of our Common Stock. In June 2018, we commenced an offering to exchange outstanding warrants for sharescommon stock and convertible and other notes payable. The issuance of our Common Stock under a Form S-4 Registration Statement. The shares of our Common Stock would be issued to warrant holders in exchange for (i) their outstanding warrants to purchase shares of our Common Stock at $0.625 per share, and (ii) cash payment of $0.15 per share. This offering closed on July 27, 2018, andthe convertible notes resulted in an exchangea derivative liability of 9.6 million warrants for $1,440,043 in gross proceeds and 9,600,286 shares of our Common Stock. Of this amount, $653,278 was held in escrow as subscriptions receivable$246,414 as of September 30, 2018. The subscriptions receivable amount was received on October 5, 2018, less $113,616 in placement fees and expenses, to net $539,662.

Our existing liquidity is not sufficient to fund our operations, anticipated capital expenditures, working capital, and other financing requirements for the foreseeable future. We will need to seek to obtain additional equity or debt financing, especially if we experience downturns or cyclical fluctuations in our business that are more severe or longer than anticipated, or if we experience significant increases in the cost of components and manufacturing or increases in our expense levels resulting from being a publicly-traded company. If we attempt to obtain additional equity or debt financing, we cannot assure you that such financing will be available to us on favorable terms, or at all.2019.

 

Off-Balance Sheet Arrangements

 

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

27

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Internal control over financial reporting is a process designed 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 and includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (b) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of the our management and directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of September 30, 2018.2019.

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 20182019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

 

Item 1A. Risk Factors.

 

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

 

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

 

There were no unregistered sales of equity securities issued duringDuring the three-monthsnine-months ended September 30, 2018.2019, the Company sold securities in a self-directed offering to existing stockholders of the Company in the aggregate amount of $245,000, respectively, at $0.30 per unit. Each $0.30 unit consisted of 2 shares of restricted common stock (1,633,330 shares) and a five-year warrant to purchase 1 share of restricted common stock (816,665 warrant shares) at $0.20 per share. We used the net proceeds for our general working capital and to fund our research, development, and clinical programs.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

Item 6. Exhibits.

 

Exhibit No. Description
31.1(1) Certification of the Chief Executive Officer pursuant to Exchange Act Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2(1) Certification of the Chief Financial Officer pursuant to Exchange Act Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1(1) Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2(1) Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS(2) XBRL Instance Document
   
101.SCH(2) XBRL Taxonomy Extension Schema Document
   
101.CAL(2) XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF(2) XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB(2) XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE(2) XBRL Taxonomy Extension Presentation Linkbase Document
   
(1) Filed herewith.
(2) Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under those sections.

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SIGNATURES

 

Pursuant to the requirements of Section 15(d) 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.

 

Dated: November 13, 201814, 2019

 

 CARDAX, INC.
  
 By:/s/ David G. Watumull
 Name:David G. Watumull
 Title:Chief Executive Officer and President

 

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