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 SeptemberJune 30, 20192020
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] | |
| Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act): Yes[ ]No[X]
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||
Note: The registrant’s common stock, par value $0.001, is quoted under the symbol “CDXI” on the OTCQB
but is not registered under Section 12(b) of the Act.
As of NovemberAugust 14, 2019,2020, there were 137,261,594758,904 shares of common stock, $0.001 par value per share (“Common Stock”), of the registrant outstanding.
TABLE OF CONTENTS
| 2 |
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 financing or obtain grant 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 not 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.statements, except as required by law.
| 3 |
Condensed Consolidated Financial Statements
Cardax, Inc., and Subsidiary
SeptemberJune 30, 20192020 and 20182019
Contents
| 4 |
Cardax, Inc., and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
As of
| June 30, | December 31, | |||||||||||||||
| 2020 | 2019 | |||||||||||||||
| September 30, 2019 | December 31, 2018 | (Unaudited) | ||||||||||||||
| ASSETS | (Unaudited) | |||||||||||||||
| CURRENT ASSETS | ||||||||||||||||
| Cash | $ | 7,470 | $ | 243,753 | $ | 30,349 | $ | 19,303 | ||||||||
| Accounts receivable | 185,419 | 157,082 | ||||||||||||||
| Accounts receivable, net | - | 205,768 | ||||||||||||||
| Inventories | 1,307,727 | 1,480,380 | 1,083,248 | 1,177,831 | ||||||||||||
| Deposits and other assets | 119,066 | 119,066 | 3,063 | 2,066 | ||||||||||||
| Prepaid expenses | 45,096 | 24,083 | 177,074 | 181,093 | ||||||||||||
| Total current assets | 1,664,778 | 2,024,364 | 1,293,734 | 1,586,061 | ||||||||||||
| INTANGIBLE ASSETS, net | 427,621 | 434,534 | 410,583 | 420,373 | ||||||||||||
| RIGHT TO USE LEASED ASSETS | 22,015 | - | 6,724 | 12,488 | ||||||||||||
| TOTAL ASSETS | $ | 2,114,414 | $ | 2,458,898 | $ | 1,711,041 | $ | 2,018,922 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||||||||||
| CURRENT LIABILITIES | ||||||||||||||||
| Accrued payroll and payroll related expenses, current portion | $ | 3,471,812 | $ | 3,428,011 | $ | 3,949,488 | $ | 3,687,376 | ||||||||
| Accounts payable and accrued expenses | 1,706,117 | 1,996,097 | 1,569,058 | 1,544,402 | ||||||||||||
| Fees payable to directors | 418,546 | 418,546 | 418,546 | 418,546 | ||||||||||||
| Accrued separation costs, current portion | 9,000 | 9,000 | 10,500 | 9,000 | ||||||||||||
| Current portion of related party notes payable | 575,000 | - | 600,000 | 575,000 | ||||||||||||
| Related party convertible note payable | $ | 537,848 | - | |||||||||||||
Current portion of note payable | 92,933 | - | ||||||||||||||
| Related party convertible notes payable | 1,132,608 | 651,721 | ||||||||||||||
| Convertible notes payable, net of discount | $ | 256,698 | - | 984,939 | 358,289 | |||||||||||
| Employee settlement | 50,000 | 50,000 | 50,000 | 50,000 | ||||||||||||
| Lease liability, current portion | 17,129 | - | 6,724 | 11,527 | ||||||||||||
| Derivative liability on convertible note payable | 246,414 | - | ||||||||||||||
| Derivative liability on convertible notes payable | 337,068 | 827,314 | ||||||||||||||
| Total current liabilities | 7,288,564 | 5,901,654 | 9,151,864 | 8,133,175 | ||||||||||||
| NON-CURRENT LIABILITIES | ||||||||||||||||
| Related party notes payable, net of current portion | 1,000,000 | - | ||||||||||||||
Note payable, less current portion | 118,367 | - | ||||||||||||||
Related party notes payable, less current portion | 1,000,000 | 1,000,000 | ||||||||||||||
| Accrued separation costs, less current portion | 85,885 | 92,635 | 77,635 | 83,635 | ||||||||||||
| Lease liability, less current portion | 4,886 | - | - | 961 | ||||||||||||
| Total non-current liabilities | 1,090,771 | 92,635 | 1,196,002 | 1,084,596 | ||||||||||||
| COMMITMENTS AND CONTINGENCIES | - | - | - | - | ||||||||||||
| Total liabilities | 8,379,335 | 5,994,289 | 10,347,866 | 9,217,771 | ||||||||||||
| 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 | ||||||||||||||
| Preferred Stock - $0.001 par value; 50,000,000 shares authorized, 0 shares issued and outstanding as of June 30, 2020, and December 31, 2019, respectively | - | - | ||||||||||||||
| Common stock - $0.001 par value; 400,000,000 shares authorized, 752,654 and 687,564 shares issued and outstanding as of June 30, 2020, and December 31, 2019, respectively | 753 | 688 | ||||||||||||||
| Additional paid-in-capital | 59,191,875 | 58,274,038 | 61,101,987 | 59,836,818 | ||||||||||||
| Accumulated deficit | (65,594,058 | ) | (61,943,318 | ) | (69,739,565 | ) | (67,036,355 | ) | ||||||||
| Total stockholders’ deficit | (6,264,921 | ) | (3,535,391 | ) | (8,636,825 | ) | (7,198,849 | ) | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 2,114,414 | $ | 2,458,898 | $ | 1,711,041 | $ | 2,018,922 | ||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| 5 |
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 June 30, | For the six-months ended June 30 | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||||||||
| REVENUES, net | $ | 229,142 | $ | 549,540 | $ | 439,505 | $ | 1,134,899 | $ | 134,521 | $ | 45,391 | $ | 277,334 | $ | 210,363 | ||||||||||||||||
| COST OF GOODS SOLD | 120,818 | 240,152 | 254,479 | 521,353 | 38,870 | 29,481 | 101,865 | 133,661 | ||||||||||||||||||||||||
| GROSS PROFIT | 108,324 | 309,388 | 185,026 | 613,546 | 95,651 | 15,910 | 175,469 | 76,702 | ||||||||||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||||||||||||||||||
| Salaries and wages | 387,636 | 387,119 | 1,177,362 | 1,202,576 | 340,863 | 384,917 | 714,155 | 789,726 | ||||||||||||||||||||||||
| Professional fees | 375,298 | 225,875 | 817,546 | 637,042 | 118,126 | 200,880 | 340,442 | 442,248 | ||||||||||||||||||||||||
| Selling, general, and administrative expenses | 206,042 | 350,630 | 731,487 | 1,168,747 | 193,904 | 233,876 | 362,317 | 525,445 | ||||||||||||||||||||||||
| Stock based compensation | 175,712 | 180,562 | 534,774 | 443,249 | 166,562 | 178,687 | 344,375 | 359,062 | ||||||||||||||||||||||||
| Research and development | 145,273 | 86,115 | 250,141 | 214,093 | 56,494 | 59,196 | 91,776 | 104,868 | ||||||||||||||||||||||||
| Depreciation and amortization | 10,074 | 6,718 | 29,102 | 23,853 | 8,734 | 7,766 | 17,467 | 19,028 | ||||||||||||||||||||||||
| Total operating expenses | 1,300,035 | 1,237,019 | 3,540,412 | 3,689,560 | 884,683 | 1,065,322 | 1,870,532 | 2,240,377 | ||||||||||||||||||||||||
| Loss from operations | (1,191,711 | ) | (927,631 | ) | (3,355,386 | ) | (3,076,014 | ) | (789,032 | ) | (1,049,412 | ) | (1,695,063 | ) | (2,163,675 | ) | ||||||||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||||||||||||||||||
| Interest income | 3 | 7 | 5 | 1,941 | ||||||||||||||||||||||||||||
| Change in fair value of derivative liability | 80,833 | 17,385 | 77,166 | 17,385 | ||||||||||||||||||||||||||||
| Gain on modification of debt instruments | - | - | 354,791 | - | ||||||||||||||||||||||||||||
| Other income | - | - | - | 556 | 10,000 | - | 10,000 | - | ||||||||||||||||||||||||
| Change in fair value of derivative liability | (20,524 | ) | - | (3,139 | ) | - | ||||||||||||||||||||||||||
| Loss on abandonment of patents | (36,205 | ) | - | (36,205 | ) | - | ||||||||||||||||||||||||||
| Interest expense | (185,189 | ) | (1,264 | ) | (256,015 | ) | (3,356 | ) | (1,002,143 | ) | (49,667 | ) | (1,450,104 | ) | (70,824 | ) | ||||||||||||||||
| Total other (expense) income, net | (241,915 | ) | (1,257 | ) | (295,354 | ) | (859 | ) | (911,310 | ) | (32,282 | ) | (1,008,147 | ) | (53,439 | ) | ||||||||||||||||
| Loss before the provision for income taxes | (1,433,626 | ) | (928,888 | ) | (3,650,740 | ) | (3,076,873 | ) | (1,700,342 | ) | (1,081,694 | ) | (2,703,210 | ) | (2,217,114 | ) | ||||||||||||||||
| PROVISION FOR INCOME TAXES | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| NET LOSS | $ | (1,433,626 | ) | $ | (928,888 | ) | $ | (3,650,740 | ) | $ | (3,076,873 | ) | $ | (1,700,342 | ) | $ | (1,081,694 | ) | $ | (2,703,210 | ) | $ | (2,217,114 | ) | ||||||||
| NET LOSS PER SHARE | ||||||||||||||||||||||||||||||||
| Basic | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.02 | ) | $ | (2.26 | ) | $ | (1.59 | ) | $ | (3.72 | ) | $ | (3.28 | ) | ||||||||
| Diluted | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.02 | ) | $ | (2.26 | ) | $ | (1.59 | ) | $ | (3.72 | ) | $ | (3.28 | ) | ||||||||
| SHARES USED IN CALCULATION OF NET LOSS PER SHARE | ||||||||||||||||||||||||||||||||
| Basic | 136,640,761 | 130,083,598 | 135,516,490 | 125,271,516 | 753,222 | 680,186 | 727,050 | 675,250 | ||||||||||||||||||||||||
| Diluted | 136,640,761 | 130,083,598 | 135,516,490 | 125,271,516 | 753,222 | 680,186 | 727,050 | 675,250 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| 6 |
Cardax, Inc., and Subsidiary
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER DEFICIT
For the nine-monthsSix-months ended SeptemberJune 30, 20182019 and 20192020
| Common Stock | Additional Paid-In- | Deferred | Accumulated | Common Stock | Additional | Accumulated | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Compensation | Deficit | Total | Shares | Amount | Paid-In-Capital | 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 | ) | 669,967 | $ | 670 | $ | 58,407,257 | $ | (61,943,318 | ) | $ | (3,535,391 | ) | ||||||||||||||||||||
| Common stock grants to independent directors | 1,627,191 | 1,627 | 260,873 | - | - | 262,500 | 5,220 | 5 | 174,995 | - | 175,000 | |||||||||||||||||||||||||||||||||
| Common stock grant to service providers | 112,500 | 113 | 14,287 | - | - | 14,400 | ||||||||||||||||||||||||||||||||||||||
| Common stock grants to service providers | 375 | - | 11,062 | - | 11,062 | |||||||||||||||||||||||||||||||||||||||
| Stock based compensation - options | - | - | 257,875 | - | - | 257,875 | - | - | 173,000 | - | 173,000 | |||||||||||||||||||||||||||||||||
| Restricted stock issuances | 1,633,330 | 1,633 | 243,367 | - | - | 245,000 | ||||||||||||||||||||||||||||||||||||||
| Restricted stock issuance | 8,169 | 8 | 244,992 | - | 245,000 | |||||||||||||||||||||||||||||||||||||||
| Issuance of warrants attached to a convertible note | - | - | 141,435 | - | - | 141,435 | - | - | 33,300 | - | 33,300 | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | (3,650,740 | ) | (3,650,740 | ) | - | - | - | (2,217,114 | ) | (2,217,114 | ) | |||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 137,261,594 | $ | 137,262 | $ | 59,191,875 | $ | - | $ | (65,594,058 | ) | $ | (6,264,921 | ) | |||||||||||||||||||||||||||||||
| Balance at June 30, 2019 | 683,731 | $ | 683 | $ | 59,044,606 | (64,160,432 | ) | $ | (5,115,143 | ) | ||||||||||||||||||||||||||||||||||
| Balance at January 1, 2020 | 687,564 | $ | 688 | $ | 59,836,818 | $ | (67,036,355 | ) | $ | (7,198,849 | ) | |||||||||||||||||||||||||||||||||
| Common stock grants to independent directors | 11,458 | 11 | 37,489 | - | 37,500 | |||||||||||||||||||||||||||||||||||||||
| Warrants granted to independent directors | - | - | 150,000 | - | 150,000 | |||||||||||||||||||||||||||||||||||||||
| Stock based compensation - options | - | - | 156,875 | - | 156,875 | |||||||||||||||||||||||||||||||||||||||
| Common stock grant to convertible note holders | 81,409 | 81 | 532,131 | - | 532,212 | |||||||||||||||||||||||||||||||||||||||
| Issuance of warrants attached to convertible notes | - | - | 2,777 | - | 2,777 | |||||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature issued on convertible notes | - | - | 141,391 | - | 141,391 | |||||||||||||||||||||||||||||||||||||||
| Revaluation of notes payable discounts due to modification of conversion price | - | - | (214,498 | ) | - | (214,498 | ) | |||||||||||||||||||||||||||||||||||||
| Extinguishment of derivative liability upon repayment of convertible note | - | - | 458,977 | - | 458,977 | |||||||||||||||||||||||||||||||||||||||
| Stock retirement | (27,777 | ) | (27 | ) | 27 | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | (2,703,210 | ) | (2,703,210 | ) | |||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | 752,654 | $ | 753 | $ | 61,101,987 | $ | (69,739,565 | ) | $ | (8,636,825 | ) | |||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| 7 |
Cardax, Inc., and Subsidiary
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER DEFICIT
(continued)
For the three-monthsThree-months ended SeptemberJune 30, 20182019 and 20192020
| Common Stock | Additional Paid-In- | Deferred | Accumulated | Common Stock | Additional | Accumulated | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Compensation | Deficit | Total | Shares | Amount | Paid-In-Capital | Deficit | Total | ||||||||||||||||||||||||||||||||||
| Balance at July 1, 2018 | 123,300,787 | $ | 123,301 | $ | 56,653,005 | $ | - | $ | (60,067,081 | ) | $ | (3,290,775 | ) | |||||||||||||||||||||||||||||||
| Balance at April 1, 2019 | 673,958 | $ | 674 | $ | 58,632,628 | $ | (63,078,738 | ) | $ | (4,445,436 | ) | |||||||||||||||||||||||||||||||||
| Common stock grants to independent directors | 437,500 | 438 | 87,062 | - | - | 87,500 | 2,917 | 3 | 87,497 | - | 87,500 | |||||||||||||||||||||||||||||||||
| Cardax 2018 Warrant Exchange Offering | 9,600,286 | 9,600 |
1,234,437 | - | - |
1,244,037 | ||||||||||||||||||||||||||||||||||||||
| Deferred compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||
| Common stock grants to service providers | 188 | - | 4,687 | - | 4,687 | |||||||||||||||||||||||||||||||||||||||
| Stock based compensation - options | - | - | 93,062 | - | - | 93,062 | - | - | 86,500 | - | 86,500 | |||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||||||||||
| Restricted stock issuances | 6,668 | 7 | 199,993 | - | 200,000 | |||||||||||||||||||||||||||||||||||||||
| Issuance of warrants attached to a convertible note | - | - | 108,135 | - | - | 108,135 | - | - | 33,300 | - | 33,300 | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | (1,433,626 | ) | (1,433,626 | ) | - | - | - | (1,081,694 | ) | (1,081,694 | ) | |||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 137,261,594 | $ | 137,262 | $ | 59,191,875 | $ | - | $ | (65,594,058 | ) | $ | (6,264,921 | ) | |||||||||||||||||||||||||||||||
| Balance at June 30, 2019 | 683,731 | $ | 684 | $ | 59,044,605 | $ | (64,160,432 | ) | $ | (5,115,143 | ) | |||||||||||||||||||||||||||||||||
| Balance at April 1, 2020 | 762,098 | $ | 762 | $ | 60,457,139 | $ | (68,039,223 | ) | $ | (7,581,322 | ) | |||||||||||||||||||||||||||||||||
| Common stock grants to independent directors | 8,333 | 8 | 18,742 | - | 18,750 | |||||||||||||||||||||||||||||||||||||||
| Warrants granted to independent directors | - | - | 75,000 | - | 75,000 | |||||||||||||||||||||||||||||||||||||||
| Stock based compensation - options | - | - | 72,812 | - | 72,812 | |||||||||||||||||||||||||||||||||||||||
| Common stock grant to convertible note holders | 10,000 | 10 | 97,490 | - | 97,500 | |||||||||||||||||||||||||||||||||||||||
| Extinguishment of derivative liability upon repayment of convertible note | - | - | 380,777 | - | 380,777 | |||||||||||||||||||||||||||||||||||||||
| Stock retirement | (27,777 | ) | (27 | ) | 27 | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | (1,700,342 | ) | (1,700,342 | ) | |||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | 752,654 | $ | 753 | $ | 61,101,987 | $ | (69,739,565 | ) | $ | (8,636,825 | ) | |||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| 8 |
Cardax, Inc., and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine-monthssix-months ended SeptemberJune 30, 2018 and 2019
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
| Net loss | $ | (3,650,740 | ) | $ | (3,076,873 | ) | $ | (2,703,210 | ) | $ | (2,217,114 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
| Depreciation and amortization | 29,102 | 23,853 | 17,467 | 19,028 | ||||||||||||
| Amortization of debt discount | 129,256 | - | 1,185,108 | 9,459 | ||||||||||||
| Stock based compensation | 534,775 | 443,249 | 344,375 | 359,062 | ||||||||||||
| Bad debt expense on note receivable and accrued interest | - | 89,933 | 66,261 | - | ||||||||||||
| Loss on abandonment of patents | 36,205 | - | ||||||||||||||
| Change in fair value of derivative liability | 3,139 | (77,166 | ) | (17,385 | ) | |||||||||||
| Gain on modification of debt instruments | (354,791 | ) | ||||||||||||||
| Changes in assets and liabilities: | ||||||||||||||||
| Accounts receivable | 32,333 | (193,168 | ) | 109,412 | 170,225 | |||||||||||
| Inventories | 172,653 | 14,251 | 94,583 | 55,579 | ||||||||||||
| Deposits and other assets | - | (118,168 | ) | (997 | ) | - | ||||||||||
| Prepaid expenses | (21,013 | ) | (1,214 | ) | 4,019 | 1,315 | ||||||||||
| Accrued payroll and payroll related expenses | 43,801 | 55,230 | �� | 262,112 | 9,072 | |||||||||||
| Accounts payable and accrued expenses | (350,650 | ) | 50,752 | 54,750 | (452,689 | ) | ||||||||||
| Accrued separation costs | (6,750 | ) | - | (4,500 | ) | (4,500 | ) | |||||||||
| Net cash used in operating activities | (3,047,889 | ) | (2,712,155 | ) | (1,002,577 | ) | (2,067,948 | ) | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
| Increase in intangible assets | (58,394 | ) | (30,483 | ) | (7,677 | ) | (14,354 | ) | ||||||||
| Net cash used in investing activities | (58,394 | ) | (30,483 | ) | (7,677 | ) | (14,354 | ) | ||||||||
| 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 related party notes payable | 25,000 | 1,475,000 | ||||||||||||||
| Proceeds from the issuance of notes payable | 211,300 | - | ||||||||||||||
| Proceeds from the issuance of convertible notes payable | 1,225,000 | 150,000 | ||||||||||||||
| Repayment of principal on convertible notes payable | (400,000 | ) | - | |||||||||||||
| Payment of debt issuance costs | (40,000 | ) | - | |||||||||||||
| Proceeds from the issuance of common stock | 245,000 | 704,375 | - | 245,000 | ||||||||||||
| Net cash provided by financing activities | 2,870,000 | 704,375 | 1,021,300 | 1,870,000 | ||||||||||||
| NET DECREASE IN CASH | (236,283 | ) | (2,038,263 | ) | ||||||||||||
| NET INCREASE (DECREASE) IN CASH | 11,046 | (212,302 | ) | |||||||||||||
| BEGINNING OF THE PERIOD | 243,753 | 2,236,837 | 19,303 | 243,753 | ||||||||||||
| END OF THE PERIOD | $ | 7,470 | $ | 198,574 | $ | 30,349 | $ | 31,451 | ||||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||||||||||
| Cash paid for interest | $ | 13,937 | $ | 3,356 | $ | 203,861 | $ | 42,045 | ||||||||
| 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 | $ | 30,095 | $ | 47,597 | ||||||||
| Right to use assets funded through leases | $ | 22,015 | $ | 539,662 | $ | 5,764 | $ | 26,298 | ||||||||
| Retirement of issued stock | $ | 27 | $ | - | ||||||||||||
| Debt issuance costs withheld from proceeds | $ | 5,000 | $ | - | ||||||||||||
| Discounts recognized on notes payable at issuance | $ | 676,380 | $ | 83,300 | ||||||||||||
| Extinguishment of derivative liability upon repayment of convertible notes | $ | 458,977 | $ | - | ||||||||||||
| Revaluation of notes payable discounts due to modification of conversion price | $ | 214,498 | $ | - | ||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| 9 |
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.
Cardax, Inc. (the “Company”) (OTCQB:CDXI) is a development stage biopharmaceutical company primarily focused on the development of pharmaceuticals for chronic diseases driven by inflammation. The Company also has a commercial business unit that markets dietary supplements for inflammatory health. CDX-101, the Company’s astaxanthin pharmaceutical candidate, is being developed for cardiovascular inflammation and dyslipidemia, with a target initial indication of severe hypertriglyceridemia. CDX-301, the Company’s zeaxanthin pharmaceutical candidate, is being developed for macular degeneration, with a target initial indication of Stargardt disease. The Company’s pharmaceutical candidates are currently in pre-clinical development, including the planning of IND enabling studies. ZanthoSyn® is a physician recommended astaxanthin dietary supplement for inflammatory health. The Company sells ZanthoSyn® primarily through wholesale and e-commerce channels. 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$1,700,342 and $3,650,740$2,703,210 for the three and nine-monthssix-months ended SeptemberJune 30, 2019,2020, respectively, and incurred net losses of $928,888$1,081,694 and $3,076,873$2,217,114 for the three and nine-monthssix-months ended SeptemberJune 30, 2018,2019, respectively. The Company has incurred losses since inception resulting in an accumulated deficit of $65,594,058$69,739,565 as of SeptemberJune 30, 2019,2020, 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. The Company’s ability to access the capital markets is unknown during the coronavirus disease 2019 (“COVID-19”) pandemic, which may limit or prevent the funding of its operations and related obligations. 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 nine-months ended September 30, 2019, theThe Company raisedneeds to raise additional capital to carry out its business plan. As part ofDuring the Company’s efforts, itsix-months ended June 30, 2020, the Company raised an additional $245,000 in equity from existing stockholders and $2,625,000$1,461,300 in gross proceeds fromthrough the issuance of debt including $2,325,000 from related parties. On August 14, 2019, thesecurities. The Company filed a registration statement on Form S-1 on August 14, 2019, as amended September 27, 2019, and November 22, 2019, for a proposed $15 million public offering of common stock and warrants. The Company intends to use the proceeds fromwarrants; however, there can be no assurance that the proposed public offering primarily to fund pharmaceutical development and its operations.will be consummated. The Company’s continued ability to raise additional capital through future equity and debt securities issuances is unknown. Obtaining additional financing,unknown, especially during the successful development of the Company’s contemplated plan of operations, and its transition, ultimately, to profitable operations are necessary forCOVID-19 pandemic. If the Company is unable to continue operations.obtain adequate capital, the Company may be required to cease operations or substantially curtail its ongoing and planned commercial activities. 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.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act provides aid to small businesses through programs administered by the U.S. Small Business Administration (the “SBA”). The CARES Act includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act also established a Paycheck Protection Program (the “PPP”), under which certain small business are eligible for a loan to fund payroll expenses, rent, and related costs. In April 2020, the Company entered into a PPP loan with a financial institution (see Note 7). Under the terms of the program, the loan amount may be forgiven if certain terms and conditions are met.
| 10 |
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 SeptemberJune 30, 20192020 and 2018.2019.
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, 2018,2019, filed with the SEC on March 28, 2019.30, 2020 (the “Annual Report”).
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, revenueRevenue 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-monthssix-months ended:
| September 30, 2019 | September 30, 2018 | |||||||||
| Geographical area | Source | (Unaudited) | (Unaudited) | |||||||
| United States | Nutraceuticals | $ | 439,505 | $ | 1,118,486 | |||||
| Hong Kong | 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)
| June 30, 2020 | June 30, 2019 | |||||||||||
| Geographical area | Source | (Unaudited) | (Unaudited) | |||||||||
| United States | Nutraceuticals | $ | 266,962 | $ | 210,363 | |||||||
| Hong Kong | Nutraceuticals | $ | 10,372 | $ | - | |||||||
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.
Leases
| 11 |
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 applied 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 recognize any right-to-use assets or liabilities for leases that are twelve months or less. Lease costs are recognized straight-line over the term of the lease. The adoption of this standard did not impact 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 discount 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 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)
Notes payable
The Company issued various notes payable to related and non-related parties. These notes payable included original issue discounts, detachable warrants, conversion features, beneficial conversion features, and debt issuance costs.
| ● | Original issue discounts. The Company accounts for the original issue discounts in accordance with Accounting Standards Codification (“ASC”) No. 835-30, Interest and Imputation of Interest, which requires the Company to record the discount as a contra-liability and amortize it over the term of the underlying note using the interest method. | |
| ● | Detachable warrants. The Company accounts for detachable warrants in accordance with ASC No. 470-20, Debt, which requires the Company to bifurcate and separately account for the detachable warrant as a separated debt instrument. The values are assigned to detachable warrant based on a relative fair allocation between the note, the warrants, and any other debt instrument issued with the note payable. The fair value used for the warrant in this allocation is calculated using the Black-Scholes valuation model. | |
| ● | Conversion features. 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 discount to the convertible note and a derivative liability. The liability is required to be remeasured at each reporting date and the change in fair value is recognized as a component in the results of operations. The Company values the embedded derivatives on the condensed consolidated balance sheet at fair value using the Black-Scholes valuation model. | |
| ● | Beneficial conversion features. The Company accounts for beneficial conversion features in accordance with ASC No. 470-20, Debt, which requires the Company to recognize a discount and charge an amount to additional paid in capital equal to the intrinsic value of the beneficial conversion feature. | |
| ● | Debt issuance costs. The Company accounts for debt issuance costs in accordance with ASC No. 470-20, Debt, which requires the Company to recognize a contra-liability for costs incurred with the issuance of debt instruments. These contra-liabilities are amortized over the term of the underlying note payable using the interest method. |
Stock issuance costs
Stock issuance costs related to financing are accounted for as a reduction in stock proceeds in accordance with ASC No. 340-10, Other Assets and Deferred Costs. Such costs consist of underwriting and legal fees, as well as travel costs incurred. These costs were $182,811 as of June 30, 2020, and are being deferred as a component of prepaid expenses in the accompanying condensed consolidated balance sheet until completion of the proposed public offering.
| 12 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounts receivable
Accounts receivable, net, of $0 and $205,768 as of June 30, 2020, and December 31, 2019, respectively, consists of amounts due from sales of dietary supplements.
It is the Company’s policy to provide for an allowance for doubtful collections based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Normal receivables are due 60 days after the issuance of the invoice. Receivables past due more than 90 days are considered delinquent. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer. There was an allowance of $66,261 as of June 30, 2020, in connection with the Chapter 11 filing for reorganization under the U.S. Bankruptcy Code of General Nutrition Corporation (“GNC”), the Company’s largest customer, on June 23, 2020. There was no allowance necessary as of December 31, 2019.
Other significant accounting policies
There have been no other material changes to our significant accounting policies during the nine-monthssix-months ended SeptemberJune 30, 2019,2020, as compared to the significant accounting policies described in our Annual Report.
Recently adopted accounting pronouncements
In November 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-08, Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606). The amendments in this ASU require that an entity apply the guidance in Topic 718 to measure and classify share-based payment awards granted to a customer. The amount recorded as a reduction in the transaction price should be based on the grant-date fair value of the share-based payment award. The guidance in ASU No. 2019-08 is effective fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The adoption of this ASU did not have a significant impact on the Company or its results of operations.
Recently issued accounting pronouncements
In December 2019, the FASB Issued ASU No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Management is currently in the process of evaluating the impact of the adoption of this ASU on its condensed consolidated financial statements.
The Company does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the condensed consolidated financial statements.
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.presentation. These reclassifications had no effect on the reported results of operations or cash flows.
| 13 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 3 – INVENTORIES
Inventories consist of the following as of:
| September 30, 2019 (Unaudited) | December 31, 2018 | June 30, 2020 (Unaudited) | December 31, 2019 | |||||||||||||
| Raw materials | $ | 759,400 | $ | 763,800 | ||||||||||||
| Finished goods | $ | 533,139 | $ | 96,750 | 323,848 | 414,031 | ||||||||||
| Raw materials | 774,588 | 1,383,630 | ||||||||||||||
| Total inventories | $ | 1,307,727 | $ | 1,480,380 | $ | 1,083,248 | $ | 1,177,831 | ||||||||
As of SeptemberJune 30, 20192020, and December 31, 2018, all2019, $759,400 and $763,800, respectively, in raw materials were held at the manufacturer’s facility for future production. Additionally, as of June 30, 2020, and December 31, 2019, $298,185 and $407,756, respectively, in finished goods were held at the manufacturer’s facility for shipment.
NOTE 4 – INTANGIBLE ASSETS, net
Intangible assets, net, consists of the following as of:
| September 30, 2019(Unaudited) | December 31, 2018 | June 30, 2020 (Unaudited) | December 31, 2019 | |||||||||||||
| Patents | $ | 613,943 | $ | 578,326 | $ | 614,003 | $ | 614,003 | ||||||||
| Less accumulated amortization | (321,614 | )) | (292,512 | ) | (349,548 | ) | (332,081 | ) | ||||||||
| 292,329 | 285,814 | 264,455 | 281,922 | |||||||||||||
| Patents pending | 135,292 | 148,720 | 146,128 | 138,451 | ||||||||||||
| Total intangible assets, net | $ | 427,621 | $ | 434,534 | $ | 410,583 | $ | 420,373 | ||||||||
Patents are amortized straight-line over a period of fifteen years. Amortization expense was $10,074$8,734 and $29,102$17,467 for the three and nine-monthssix-months ended SeptemberJune 30, 2019,2020, respectively. Amortization expense was $6,717$7,766 and $21,952$19,028 for the three and nine-monthssix-months ended SeptemberJune 30, 2018,2019, respectively.
Cardax, Inc., and 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 ownshas 29 issued patents, including 14 in the United StatesU.S. and 15 others in Europe, Canada, China, India, Japan,outside the U.S. and Hong Kong. These patentsone patent pending outside the U.S. that will expire beginning inbetween 2023 throughand 2028, subject to any patent term extensions of the individual patent.extensions. The Company also has 2four additional patents pending that if issued would extend patent applications pendingcoverage in the United StatesU.S. and 2 foreign patent applications pending in Europe andoutside the Patent Cooperation Treaty (“PCT”) countries.U.S. to 2039-2041.
NOTE 5 –ACCRUED– 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. As of SeptemberJune 30, 2019, $94,8852020, $88,135 remains outstanding of which $9,000$10,500 is due within one-year and is reflected as a current liability.
| 14 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 6 – RELATED PARTY NOTES PAYABLE
NotesRelated party 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 | $ | - | ||||
| June 30, 2020 (Unaudited) | December 31, 2019 | |||||||
| 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 payable monthly, is unsecured, and matures in three years from origination. This facility requires monthly interest payments. | $ | 1,000,000 | $ | 1,000,000 | ||||
| Officer loan. On June 26, 2019, the Company borrowed $75,000 from the Chief Executive Officer of the Company. This note accrues interest at the rate of 4.5% per annum, is unsecured, and was originally due August 26, 2019, but the maturity date was extended to June 30, 2021. | 75,000 | 75,000 | ||||||
| Promissory note 2019-01. 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 was originally due August 20, 2019, but the maturity date was extended to June 30, 2021. The principal and accrued interest are due on the maturity date. | 500,000 | 500,000 | ||||||
| Promissory note 2012-01. On June 29, 2019, the Company entered into a $25,000 promissory note with a lender that is also a current stockholder that beneficially owns more than 5% of the Company’s common stock. This note accrues interest at the rate of 12% per annum, is unsecured, and matures on September 30, 2020. The principal and accrued interest are due on the maturity date. | 25,000 | - | ||||||
| Total related party notes payable | 1,600,000 | 1,575,000 | ||||||
| Less current portion | (600,000 | ) | (575,000 | ) | ||||
| Long term related party notes payable | $ | 1,000,000 | $ | 1,000,000 | ||||
Interest expense
| 15 |
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)
Interest expense
The Company incurred interest charges on these related party notes payable of $45,610 and $35,487 during the three-months ended June 30, 2020 and 2019, respectively. The Company incurred interest charges on these related party notes payable of $91,203 and $55,460 during the six-months ended June 30, 2020 and 2019, respectively. The aggregate amount of accrued and unpaid interest on these related party notes payable was $78,588 and $15,433 as of June 30, 2020 and 2019, respectively.
Maturities
Future maturities of these related party notes payable are as follows as of SeptemberJune 30:
| 2020 | $ | 575,000 | ||||||
| 2021 | - | $ | 600,000 | |||||
| 2022 | 1,000,000 | 1,000,000 | ||||||
| $ | 1,575,000 | $ | 1,600,000 | |||||
NOTE 7 – NOTE PAYABLE
On April 22, 2020, the Company received a Paycheck Protection Program (“PPP”) loan under the U.S. Small Business Administration (the “SBA”) for $211,300. Under the terms of the program, up to 100% of the loan amount may be forgiven if certain terms and conditions are met. The unforgiven amount, if any, matures in April 2022 and accrues interest at 1% per annum with principal and interest payments of $11,891 per month starting in November 2020.
Interest expense
The Company incurred interest charges on this note payable of $404 during the three and six-months ended June 30, 2020. The aggregate amount of accrued and unpaid interest on this note payable was $404 as of June 30, 2020.
Maturity
Future maturity of this note payable is as follows as of June 30:
| 2021 | $ | 92,933 | ||
| 2022 | 118,367 | |||
| $ | 211,300 |
The Company also applied for the Economic Injury Disaster Loan (“EIDL”) under the SBA, which remains pending as of the date hereof. The Company received an EIDL advance amount of $10,000 during the six-months ended June 30, 2020. According to the SBA, regardless of whether the loan application is approved or declined, the advance does not need to be repaid, so the Company recognized the advance as other income.
| 16 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 78 – RELATED PARTY CONVERTIBLE NOTENOTES PAYABLE
Related party convertible notenotes 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 | $ | - | ||||
| June 30, 2020 (Unaudited) | December 31, 2019 | |||||||
| 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 was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at the conversion price then in effect (initially $24 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, the adjusted conversion price was equal to $4.27 per share as of June 30, 2020, and $14 per share as of December 31, 2019. A beneficial conversion feature was recognized as a result of the conversion price upon issuance and adjustment being less than fair market value. This note was also issued with a detachable warrant to purchase 7,500 shares of stock at $24 per share, which is subject to adjustment in accordance with any adjustment to the conversion price of this note; accordingly, the adjusted exercise price was equal to $4.27 per share as of June 30, 2020, and $14 per share as of December 31, 2019. The valuation of the conversion feature and detachable warrant and intrinsic value of the beneficial conversion feature resulted in the recognition of discounts on this note equal to $234,300 and $582,533 as of June 30, 2020, and December 31, 2019, respectively, wherein the difference was due to the revaluation of such features upon adjustment of the conversion price in February 2020. This note requires monthly interest payments. | $ | 815,217 | $ | 815,217 | ||||
| 17 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 78 – RELATED PARTY CONVERTIBLE NOTENOTES PAYABLE (continued)
| June 30, 2020 (Unaudited) | December 31, 2019 | |||||||
| Convertible note 2019-07. On October 16, 2019, the Company issued a convertible note payable in the amount $217,391, with an original issue discount of $17,391 in exchange for $200,000. This note accrues interest at 8% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at the conversion price then in effect (initially $24 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, the adjusted conversion price was equal to $4.27 per share as of June 30, 2020, and $14 per share as of December 31, 2019. A beneficial conversion feature was recognized as a result of the conversion price upon adjustment being less than fair market value. This note was also issued with a detachable warrant to purchase 2,000 shares of stock at $24 per share, which is subject to adjustment in accordance with any adjustment to the conversion price of this note; accordingly, the adjusted conversion price was equal to $4.27 per share as of June 30, 2020, and $14 per share as of December 31, 2019. The valuation of the conversion feature and detachable warrant and intrinsic value of the beneficial conversion feature resulted in the recognition of discounts on this note equal to $63,060 and $110,783 as of June 30, 2020, and December 31, 2019, respectively, wherein the difference was due to the revaluation of such features upon adjustment of the conversion price in February 2020. This note requires monthly interest payments. | 217,391 | 217,391 | ||||||
| Officer convertible note. On November 15, 2019, the Company issued a convertible note payable in the amount $100,000. This note accrues interest at 14% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at the conversion price of $20 per share. This note requires monthly interest payments. | 100,000 | 100,000 | ||||||
| 18 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 8 – RELATED PARTY CONVERTIBLE NOTES PAYABLE (continued)
Related party convertible notes payable consisted of the following as of:
| June 30, 2020 (Unaudited) | December 31, 2019 | |||||||
| Total related party convertible notes payable | 1,132,608 | 1,132,608 | ||||||
| Less original issue discounts | (82,608 | ) | (82,608 | ) | ||||
| Related party convertible notes payable, net | 1,050,000 | 1,050,000 | ||||||
| Less discounts for conversion rights, beneficial conversion features, and detachable warrants | (297,360 | ) | (693,316 | ) | ||||
| Plus amortization of discounts | 379,968 | 295,037 | ||||||
| Total related party convertible notes payable, net | $ | 1,132,608 | $ | 651,721 | ||||
Discounts
Total discounts (original issue discounts plus discounts for conversion rights, beneficial conversion features, and detachable warrants) of $351,267$379,968 are amortized using the interest method, which resulted in amortization recorded as interest expense of $73,898$231,389 and $343,835 for the three and nine-monthssix-months ended SeptemberJune 30, 2019.2020, with total accumulated amortization equal to $379,968 as of June 30, 2020.
Modifications
In February 2020, the Company adjusted the conversion price of certain related party convertible notes payable in accordance with their terms, which triggered modification accounting and resulted in a gain of $258,903.
On June 30, 2020, the Company extended the maturity dates of the related party convertible notes payable as described in the table above. In conjunction with these extensions, management compared the present values of these notes prior to the extension and after the extension in accordance with FASB ASC No. 470-50, Debt Modifications and Extinguishments, noting that the change in present value was less than 10%. As such, these notes were determined to not be substantially different and no changes in values were recognized.
Interest expense
The Company incurred interest charges on these related party convertible notes payable of $13,222$24,020 and $48,040 during the three and nine-monthssix-months ended SeptemberJune 30, 2019,2020, respectively. The aggregate amount of accrued and unpaid interest on thisthese related party convertible notenotes payable of which $5,360 was accrued and payable$7,919 as of SeptemberJune 30, 2019.2020.
Maturities
Future maturities of these related party convertible notes payable are as follows as of SeptemberJune 30:
| 2020 | $ | 815,217 | ||
| $ | 815,217 |
| 2021 | $ | 1,132,608 | ||
| $ | 1,132,608 |
| 19 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 89 – 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 | - | ||||||
| June 30, 2020 (Unaudited) | December 31, 2019 | |||||||
| Convertible note 2019-01. On April 18, 2019, the Company issued a convertible note payable in the amount $150,000. This note accrued interest at 10% per annum and was originally due December 31, 2019, but the maturity date was extended to March 31, 2020. This note was fully repaid as of March 17, 2020. Prior to repayment, this note and accrued interest were convertible into shares of common stock at the conversion price then in effect (initially $24 per share, subject to adjustment) any time at the holder’s option. The conversion price was 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, the adjusted conversion price was equal to $4.27 per share as of March 17, 2020, and $14 per share as of December 31, 2019. A beneficial conversion feature was recognized as a result of the conversion price upon issuance and adjustment being less than fair market value. This note was also issued with a detachable warrant to purchase 2,500 shares of stock at $40 per share. The valuation of the conversion feature and detachable warrant and intrinsic value of the beneficial conversion feature resulted in the recognition of discounts on this note equal to $199,012 as of December 31, 2019. The discounts on this note and accumulated amortization of such discounts were eliminated upon repayment. | $ | - | $ | 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 was originally due June 30, 2020, but the maturity date was extended to September 30, 2020. This note and accrued interest may convert into shares of common stock at $24 per share any time at the holder’s option. A beneficial conversion feature was recognized as a result of the conversion price upon issuance being less than fair market value. 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-three (33) months, as amended. This note was also issued with a detachable warrant to purchase 1,000 shares of stock at $24 per share. The valuation of the detachable warrant and intrinsic value of the beneficial conversion feature resulted in the recognition of discounts on this note equal to $18,326. This note requires monthly interest payments. | 108,696 | 108,696 | ||||||
| 20 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 89 – 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 | $ | - | ||||
June 30, 2020 (Unaudited) | December 31, 2019 | |||||||
| 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 was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at $24 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 500 shares of stock at $24 per share. The valuation of the detachable warrant resulted in the recognition of a discount on this note equal to $4,190. This note requires monthly interest payments. | 54,348 | 54,348 | ||||||
| Convertible note 2019-05. On October 3, 2019, the Company issued a convertible note payable in the amount $27,174, with an original issue discount of $2,174 in exchange for $25,000. This note accrues interest at 8% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at $24 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 250 shares of stock at $24 per share. The valuation of the detachable warrant resulted in the recognition of a discount on this note equal to $2,705. This note requires monthly interest payments. | 27,174 | 27,174 | ||||||
| 21 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)
June 30, 2020 (Unaudited) | December 31, 2019 | |||||||
| Convertible note 2019-06. On October 10, 2019, the Company issued a convertible note payable in the amount $27,174, with an original issue discount of $2,174 in exchange for $25,000. This note accrues interest at 8% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at $24 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 250 shares of stock at $24 per share. The valuation of the detachable warrant resulted in the recognition of a discount on this note equal to $2,505. This note requires monthly interest payments. | 27,174 | 27,174 | ||||||
| Convertible note 2019-08. On October 23, 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 was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at $24 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 detachable warrants to purchase 1,250 shares of stock at $30 per share and 1,250 shares of stock at $40 per share. The valuation of the detachable warrants resulted in the recognition of a discount on this note equal to $21,363. This note requires monthly interest payments. | 108,696 | 108,696 | ||||||
| 22 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)
June 30, 2020 (Unaudited) | December 31, 2019 | |||||||
| Convertible note 2019-09. On October 29, 2019, the Company issued a convertible note payable in the amount $27,174, with an original issue discount of $2,174 in exchange for $25,000. This note accrues interest at 8% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at $24 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 250 shares of stock at $24 per share. The valuation of the detachable warrant resulted in the recognition of a discount on this note equal to $2,295. This note requires monthly interest payments. | 27,174 | 27,174 | ||||||
| Convertible note 2019-10. On November 8, 2019, the Company issued a convertible note payable in the amount $16,304, with an original issue discount of $1,304 in exchange for $15,000. This note accrues interest at 8% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at $14 per share any time at the holder’s option. A beneficial conversion feature was recognized as a result of the conversion price upon issuance being less than fair market value. 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 150 shares of stock at $14 per share. The valuation of the detachable warrant and intrinsic value of the beneficial conversion feature resulted in the recognition of discounts on this note equal to $3,279. This note requires monthly interest payments. | 16,304 | 16,304 | ||||||
| 23 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)
June 30, 2020 (Unaudited) | December 31, 2019 | |||||||
| Convertible note 2020-01. On January 6, 2020, the Company issued a convertible note payable in the amount $10,870, with an original issue discount of $870 in exchange for $10,000. This note accrues interest at 8% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at $10 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 shares of stock at $10 per share. The valuation of the detachable warrant resulted in the recognition of a discount on this note equal to $793. This note requires monthly interest payments. | 10,870 | - | ||||||
| Convertible note 2020-02. On January 21, 2020, the Company issued a convertible note payable in the amount $262,500, with an original issue discount of $12,500 in exchange for $250,000. This note had a one-time fixed interest charge equal to 10% of the principal amount and was originally due June 30, 2020. As a subsequent event, the maturity date of this note was extended to September 1, 2020, and 6,250 shares of common stock were issued as consideration for the extension. This note and accrued interest may convert into shares of common stock at $4.27 per share (as adjusted on February 21, 2020) any time at the holder’s option. A beneficial conversion feature was recognized as a result of the conversion price upon adjustment being less than fair market value. 5,855 shares of common stock were issued as a commitment fee in connection with the purchase of this note and recognized as a debt issuance cost. The debt issuance costs and intrinsic value of the beneficial conversion feature resulted in the recognition of discounts on this note equal to $85,247. This note is secured by finished goods inventory. | 262,500 | - | ||||||
| 24 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)
June 30, 2020 (Unaudited) | December 31, 2019 | |||||||
| Convertible note 2020-03. On February 25, 2020, the Company issued a convertible note payable in the amount $52,631, with an original issue discount of $2,632 in exchange for $50,000. This note accrues interest at 8% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at $7.50 per share 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. 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 500 shares of stock at $7.50 per share. The valuation of the detachable warrant resulted in the recognition of a discount on this note equal to $1,985. This note requires monthly interest payments. | 52,631 | - | ||||||
| Convertible note 2020-04. On March 16, 2020, the Company issued a convertible note payable in the amount $250,000, with an original issue discount of $20,000 in exchange for $230,000. This note accrues interest at 10% per annum and was originally due September 16, 2020. This note was fully repaid as of May 14, 2020. Prior to repayment, this note and accrued interest were convertible into shares of common stock at the conversion price then in effect (initially $4.50 per share, subject to adjustment) any time at the holder’s option. A beneficial conversion feature was recognized as a result of the conversion price upon issuance being less than fair market value. The conversion price was 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. 5,000 shares of common stock were issued as a commitment fee in connection with the purchase of this note and recognized as a debt issuance cost. 27,777 shares of common stock were also issued in connection with the purchase of this note and recognized as a debt issuance cost; however, these shares were subject to return if the note was fully repaid within 6 months of issuance and were therefore returned upon repayment. $5,000 was paid for the holder’s legal expenses in connection with the transaction and recognized as a debt issuance cost. The valuation of the conversion feature, debt issuance costs, and intrinsic value of the beneficial conversion feature resulted in the recognition of discounts on this note equal to $343,854 upon issuance. The discounts on this note and accumulated amortization of such discounts were eliminated upon repayment. | - | - | ||||||
| 25 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)
June 30, 2020 (Unaudited) | December 31, 2019 | |||||||
| Convertible note 2020-05. On March 16, 2020, the Company issued a convertible note payable in the amount $250,000, with an original issue discount of $20,000 in exchange for $230,000. This note accrues interest at 10% per annum and was originally due September 16, 2020. As a subsequent event, the maturity date of this note was extended to October 31, 2020, and the principal amount was increased by $10,000 as consideration for the extension. This note and accrued interest may convert into shares of common stock at the conversion price then in effect (initially $4.50 per share, subject to adjustment) any time at the holder’s option. A beneficial conversion feature was recognized as a result of the conversion price upon issuance being less than fair market value. 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. 5,000 shares of common stock were issued as a commitment fee in connection with the purchase of this note and recognized as a debt issuance cost. 27,777 shares of common stock were also issued in connection with the purchase of this note and recognized as a debt issuance cost; however, these shares are subject to return if the note is fully repaid within 6 months of issuance. $5,000 was withheld from the proceeds for the holder’s legal expenses in connection with the transaction and recognized as a debt issuance cost. The valuation of the conversion feature, debt issuance costs, and intrinsic value of the beneficial conversion feature resulted in the recognition of discounts on this note equal to $343,854. | 250,000 | - | ||||||
| Convertible note 2020-05. On May 14, 2020, the Company issued a convertible note payable in the amount $500,000, with an original issue discount of $40,000 in exchange for $460,000. This note accrues interest at 10% per annum and matures on May 14, 2021. This note and accrued interest may convert into shares of common stock at the conversion price then in effect (initially $9.75 per share, subject to adjustment) any time at the holder’s option. 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. 10,000 shares of common stock were issued as a commitment fee in connection with the purchase of this note and recognized as a debt issuance cost. $10,000 was paid for the holder’s legal expenses in connection with the transaction and recognized as a debt issuance cost. The valuation of the conversion feature and debt issuance costs resulted in the recognition of discounts on this note equal to $311,670. | 500,000 | - | ||||||
| 26 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)
| June 30, 2020 (Unaudited) | December 31, 2019 | |||||||
| Total convertible notes payable | 1,445,568 | 519,566 | ||||||
| Less original issue discounts | (105,568 | ) | (29,566 | ) | ||||
| Convertible notes payable, net | 1,340,000 | 490,000 | ||||||
| Less discounts for conversion rights, beneficial conversion features, debt issuance costs, and detachable warrants | (798,212 | ) | (253,675 | ) | ||||
| Plus amortization of discounts | 443,151 | 121,964 | ||||||
| Total convertible notes payable, net | $ | 984,939 | $ | 358,289 | ||||
Discounts
Total discounts (original issue discounts plus discounts for conversion rights, beneficial conversion features, debt issuance costs, and detachable warrants) of $111,704$903,780 are amortized using the interest method, which resulted in amortization recorded as interest expense of $31,696$656,063 and $55,358$841,273 for the three and nine-monthssix-months ended SeptemberJune 30, 2019, respectively.2020, with total accumulated amortization equal to $443,151 as of June 30, 2020.
Modifications
In February 2020, the Company adjusted the conversion price of a convertible note payable in accordance with its terms, which triggered modification accounting and resulted in a gain of $95,888.
On June 30, 2020, the Company extended the maturity dates of certain convertible notes payable as described in the table above. In conjunction with these extensions, management compared the present values of these notes prior to the extension and after the extension in accordance with FASB ASC No. 470-50, Debt Modifications and Extinguishments, noting that the change in present value was less than 10%. As such, these notes were determined to not be substantially different and no changes in values were recognized.
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 convertible notes payable of which $7,537 was$25,006 and $3,041 during the three-months ended June 30, 2020 and 2019, respectively. The Company incurred interest charges on these convertible notes payable of $64,432 and $3,041 during the six-months ended June 30, 2020 and 2019, respectively. The aggregate amount of accrued and unpaid interest on these convertible notes payable was $42,956 and $3,041 as of SeptemberJune 30, 2019.2020 and 2019, respectively.
Maturities
Future maturities of these convertible notes payable are as follows as of SeptemberJune 30:
| 2020 | $ | 313,044 | ||
| $ | 313,044 |
| 2021 | $ | 1,445,568 | ||
| $ | 1,445,568 |
| 27 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 910 – DERIVATIVE FINANCIAL INSTRUMENTS
The Company has identified the embedded derivatives related to the convertible notes described in Note 8.Notes 8 and 9. 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-monthssix-months ended SeptemberJune 30, 2019,2020, were as follows:
| Dividend yield | 0.0 | % | ||
| Risk-free rate | 0.15% - | % | ||
| Volatility | 175% - | % | ||
| Expected term | 1 year |
Volatility was calculated based onThe expected dividend yield is zero, because the historical volatility ofCompany does not anticipate paying a dividend within the Company.relevant timeframe. The risk-free interest rate used wasis based on the U.S. Treasury constant maturity rate in effect at the time of grantvaluation for the expected term of the derivative liabilities to be valued. The expected dividend yield was zero, becausevolatility is calculated based on the Company does not anticipate paying a dividend withinhistorical volatility of the relevant timeframe.Company.
For the nine-monthssix-months ended SeptemberJune 30, 2019,2020, the Company recognized total derivative liabilities and convertible note discounts of $243,275 based on thetheir fair value at the convertible notes’ inception and/or adjustment dates. These derivative liabilities were subsequently revalued at $246,414$337,068 as of SeptemberJune 30, 2019,2020, which resulted in a loss of $3,139$77,166 on the change in value of these derivative liabilities. During the six months ended June 30, 2020, there were derivative liabilities of $458,977 that expired upon repayment of outstanding convertible notes, which were recorded as adjustments to additional paid in capital.
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 | ||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| June 30, 2020 | $ | - | $ | - | $ | 337,068 | ||||||
| 28 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 1011 – STOCKHOLDERS’ DEFICIT
Reverse stock split
On January 15, 2020, the Company effected a 200-for-1 reverse stock split (the “Reverse Stock Split”) of its issued and outstanding shares of common stock. The Reverse Stock Split did not change the number of shares of common stock authorized for issuance, the par value of the common stock, or any other terms of the common stock. No fractional shares were issued in the Reverse Stock Split and any remaining share fractions were rounded up to the next whole share. Under the terms and conditions of outstanding options, warrants, and other convertible securities, the number of underlying shares of common stock and the exercise prices or conversion prices thereof were proportionately adjusted for the Reverse Stock Split. All share and per share amounts reported in the condensed consolidated financial statements reflect the Reverse Stock Split.
Self-directed stock issuance 2019
During the nine-monthsyear ended September 30,December 31, 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$60 per unit. Each $0.30$60 unit consisted of 2 shares of restricted common stock (1,633,330(8,169 shares) and a five-year warrant to purchase 1 share of restricted common stock (816,665(4,085 warrant shares) at $0.20$40 per share.
Shares outstanding
As of June 30, 2020, and December 31, 2019, the Company had a total of 752,654 and 687,564 shares of common stock outstanding, respectively.
NOTE 12 – STOCK GRANTS
Director stock grants
During the six-months ended June 30, 2020, the Company granted its independent directors an aggregate of 11,458 shares of restricted common stock, which were fully vested upon issuance. The expense recognized for these grants based on the fair value on the grant date was $37,500. Effective as of the quarter ended March 31, 2020, certain independent directors elected to receive compensation in the form of warrants rather than stock.
During the year ended December 31, 2019, the Company granted its independent directors an aggregate of 11,054 shares of restricted common stock, which were fully vested upon issuance. The expense recognized for these grants based on the fair value on the grant date was $350,000.
Consultant stock grants
During the six-months ended June 30, 2020, the Company did not grant consultants any stock and accordingly did not recognize any related expense.
During the year ended December 31, 2019, the Company granted consultants an aggregate of 750 shares of restricted common stock, which were fully vested upon issuance. The expense recognized for these grants based on the fair value on the grant date was $16,650.
| 29 |
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 were 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 and $1,440,043 in gross proceeds for 9,600,286 shares of common stock. Stock issuance costs associated with this capital raise totaled $196,006, resulting in a net total of $1,244,037 raised in this offering.
Shares outstanding
As of September 30, 2019 and December 31, 2018, the Company had a total of 137,261,594 and 133,888,573, respectively, shares of common stock outstanding.
NOTE 11 – STOCK GRANTS
Director stock grants
During the nine-months ended September 30, 2019 and 2018, the Company granted its independent directors an aggregate of 1,627,191 and 906,774, respectively, shares of restricted common stock in the 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 September 2018. The expense recognized for these grants based on the grant date fair value was $262,500 and $200,000 for the nine-months ended September 30, 2019 and 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 in stock-based compensation related to this grant during the nine-months ended September 30, 2019 and 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 in stock-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 Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 1213 – 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 reserved under this plan upon adoption was 30,420,148.152,101. On April 16, 2015, the majority stockholder of the Company approved an increase in the Company’s 2014 Equity Compensation Planshares reserved under this plan by 15 million75,000 shares. On December 4, 2018, the stockholders of the Company approved an increase in the Company’s 2014 Equity Compensation Planshares reserved under this plan by an additional 5 million25,000 shares for a totaland authorized the annual increase of 50,420,148the shares reserved under this plan on January 1st of each year, at the plan.discretion of the Board of Directors, by up to such number of shares that is equal to four percent (4%) of the shares of common stock issued and outstanding as of December 31st of the previous calendar year. Accordingly, effective as of January 1, 2020, the shares reserved under this plan were increased by 27,000 shares. An aggregate of 279,101 shares of common stock were reserved for issuance under this plan as June 30, 2020.
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 12 – STOCK OPTION PLANS (continued)
| Options | Weighted average exercise price | Weighted average remaining contractual term in years | Aggregate intrinsic value | |||||||||||||
| Outstanding January 1, 2019 | 202,537 | $ | 80.13 | 4.52 | $ | 987,064 | ||||||||||
| Exercisable January 1, 2019 | 185,837 | $ | 82.13 | 4.10 | $ | 967,064 | ||||||||||
| Canceled | (291 | ) | ||||||||||||||
| Granted | - | |||||||||||||||
| Exercised | - | |||||||||||||||
| Expired | - | |||||||||||||||
| Outstanding December 31, 2019 | 202,246 | $ | 80.14 | 3.52 | $ | - | ||||||||||
| Exercisable December 31, 2019 | 192,108 | $ | 81.32 | 3.26 | $ | - | ||||||||||
| Canceled | - | |||||||||||||||
| Granted | - | |||||||||||||||
| Exercised | - | |||||||||||||||
| Expired | 26,702 | |||||||||||||||
| Outstanding June 30, 2020 | 175,544 | $ | 85.07 | 3.48 | $ | - | ||||||||||
| Exercisable June 30, 2020 | 168,011 | $ | 86.33 | 3.28 | $ | - | ||||||||||
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 SeptemberJune 30, 2019,2020, based on a valuation of the Company’s stock for that day.
| 30 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 13 – STOCK OPTION PLANS (continued)
A summary of the Company’s non-vested options for the nine-monthssix-months ended SeptemberJune 30, 20192020, and year ended December 31, 2018,2019, are presented below:
| Non-vested at January 1, | ||||
| Granted | - | |||
| Vested | ( | ) | ||
| Canceled | ( | ) | ||
| Non-vested at | ||||
| Granted | - | |||
| Vested | (2,605 | ) | ||
| Canceled | - | |||
| Non-vested at June 30, 2020 | 7,533 |
Option valuation
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, 2019 | Year ended December 31, 2018 | |||||||
| Dividend yield | 0.0 | % | 0.0 | % | ||||
| Risk-free rate | 2.38% - 3.04 | % | 2.38% - 3.04 | % | ||||
| Volatility | 214% - 226 | % | 214% - 226 | % | ||||
| Expected term | 3 - 7 years | 3 - 7 years | ||||||
Volatility was calculated based onexpected dividend yield is zero, because the historical volatility ofCompany does not anticipate paying a dividend within the Company.relevant timeframe. The risk-free interest rate used wasis 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, becausevolatility is calculated based on the Company does not anticipate payinghistorical volatility of the Company. Due to a dividend withinlack of historical information needed to estimate the relevant timeframe.
Company’s expected term, it is 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.
During the six-months ended June 30, 2020, and the year ended December 31, 2019, no options were granted.
Stock option exerciseStock-based compensation expense
The Company recognized stock-based compensation expense related to options during the:
| Six-months ended June 30 | ||||||||
| 2020 | 2019 | |||||||
| Amount | Amount | |||||||
| Service provider compensation | $ | 77,500 | $ | 88,750 | ||||
| Employee compensation | 79,375 | 84,250 | ||||||
| Total | $ | 156,875 | $ | 173,000 | ||||
Option expiration
During the six-months ended June 30, 2020, options to purchase an aggregate of 26,702 shares of common stock expired. During the year ended December 31, 2018, the Company issued 156,997 shares of common stock in connection with the cashless exercise of stock2019, no 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.expired.
| 31 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 12 – STOCK OPTION PLANS (continued)
Stock based compensation
The Company recognized stock-based compensation expense related to options during the:
| Nine-months ended September 30 | ||||||||
| 2019 | 2018 | |||||||
| Amount | Amount | |||||||
| Service provider compensation | $ | 133,125 | $ | 76,250 | ||||
| Employee compensation | 124,750 | 156,875 | ||||||
| Total | $ | 257,875 | $ | 233,125 | ||||
NOTE 1314 – 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, 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
| Warrants | Weighted average exercise price | Weighted average remaining contractual term in years | Aggregate intrinsic value | |||||||||||||
| Outstanding January 1, 2019 | 590,340 | $ | 40.65 | 2.32 | $ | 7,846,743 | ||||||||||
| Exercisable January 1, 2019 | 590,340 | $ | 40.65 | 2.32 | $ | 7,846,743 | ||||||||||
| Canceled | - | |||||||||||||||
| Granted | 20,985 | |||||||||||||||
| Exercised | - | |||||||||||||||
| Expired | (94,577 | ) | ||||||||||||||
| Outstanding December 31, 2019 | 516,748 | $ | 24.60 | 1.86 | $ | - | ||||||||||
| Exercisable December 31, 2019 | 516,748 | $ | 24.60 | 1.86 | $ | - | ||||||||||
| Canceled | - | |||||||||||||||
| Granted | 47,604 | |||||||||||||||
| Exercised | - | |||||||||||||||
| Expired | (83,604 | ) | ||||||||||||||
| Outstanding June 30, 2020 | 480,748 | $ | 22.08 | 2.48 | $ | - | ||||||||||
| Exercisable June 30, 2020 | 480,748 | $ | 22.08 | 2.48 | $ | - | ||||||||||
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 13 – WARRANTS (continued)Warrant valuation
The Company estimates the fair value of warrants granted on each grant date using the Black-Scholes option valuation model. VolatilityThe range of fair value assumptions related to warrants issued were as follows for the:
| Six-months ended June 30, 2020 | Year ended December 31, 2019 | |||||||
| Dividend yield | 0.0 | % | 0.0 | % | ||||
| Risk-free rate | 0.29% – 1.55 | % | 1.34% – 2.37 | % | ||||
| Volatility | 152% – 207 | % | 145% – 168 | % | ||||
| Expected term | 2 – 5 years | 2 – 2.5 years | ||||||
The expected dividend yield is calculated based onzero, because the historical volatility ofCompany does not anticipate paying a dividend within the Company.relevant timeframe. 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 yieldvolatility is zero, becausecalculated based on the Company does not anticipate payinghistorical volatility of the Company. Due to a dividend withinlack of historical information needed to estimate the relevant timeframe.Company’s expected term, it is estimated using the simplified method allowed.
| 32 |
Cardax, Inc., and Subsidiary
The Company did not recognize any stock-based compensation expense related to warrants during the three-months ended September 30, 2019 and 2018.NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 14 – WARRANTS (continued)
Convertible note warrants
WarrantsDuring the six-months ended June 30, 2020, warrants to purchase 2,300,000600 shares of common stock at $0.12$7.50 to $0.20$10.00 per share were issued in connection with the issuance of convertible notes. During the year ended December 31, 2019, warrants to purchase 16,900 shares of common stock at $14 to $40 per share were issued in connection with the issuance of convertible notes. These warrants were immediately vested and expire in five years and wereyears. The value of the warrants was recorded as discountsa discount on the convertible notes in the aggregate amount of $141,435.$69,498 and $125,545 during the six-months ended June 30, 2020, and the year ended December 31, 2019, respectively.
Warrant exchange offeringDirector warrant grants
InDuring the six-months ended June 2018,30, 2020, the Company commenced an offeringgranted its independent directors warrants as follows:
| Date of Grant | Warrants | Exercise Price | ||||||
| March 31, 2020 | 12,756 | $ | 6.00 | |||||
| June 30, 2020 | 34,248 | $ | 2.25 | |||||
These warrants were immediately vested and expire in ten years. During the six-months ended June 30, 2020, the Company recognized stock-based compensation expense related to exchange outstandingthese warrants for sharesin the aggregate amount of common stock under a Form S-4 Registration Statement. These shares of common stock were issued$150,000.
During the year ended December 31, 2019, the Company did not recognize any stock-based compensation expense related 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 and $1,440,043 in gross proceeds for 9,600,286 shares of common stock. Stock issuance costs associated with this capital raise totaled $196,006, resulting in a net total of $1,244,037 raised in this offering. As part of this offering, warrants to purchase 315,010 shares of common stock at $0.21 per share were issued to investment bankers for their services.warrants.
Warrant expiration
During the nine-monthssix-months ended SeptemberJune 30, 2019,2020, warrants to purchase an aggregate of 18,405,49683,604 shares of common stock expired. During the year ended December 31, 2018,2019, warrants to purchase an aggregate of 101,98494,577 shares of common stock expired.
| 33 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 1415 – 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 three-monthssix-months ended SeptemberJune 30, 20192020 and 2018,2019, 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 SeptemberJune 30, 2019,2020, and December 31, 2018,2019, 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.
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 three 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 SeptemberJune 30, 20192020, and December 31, 2018,2019, 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.
| 34 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 1516 – 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, 2019(Unaudited) | Three-months ended June 30, 2020 (Unaudited) | |||||||||||||||||||||||
| Net Loss (Numerator) | Shares (Denominator) | Per share amount | Net Loss (Numerator) | Shares (Denominator) | Per share amount | |||||||||||||||||||
| Basic loss per share | $ | (1,433,626 | ) | 136,640,761 | $ | (0.01 | ) | $ | (1,700,342 | ) | 753,222 | $ | (2.26 | ) | ||||||||||
| Effect of dilutive securities—Common stock options, warrants, and convertible note | - | - | - | |||||||||||||||||||||
| Effect of dilutive securities—Common stock options, warrants, and convertible notes | - | - | - | |||||||||||||||||||||
| Diluted loss per share | $ | (1,433,626 | ) | 136,640,761 | $ | (0.01 | ) | $ | (1,700,342 | ) | 753,222 | $ | (2.26 | ) | ||||||||||
| Three-months ended September 30, 2018(Unaudited) | Three-months ended June 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 | ) | $ | (1,081,694 | ) | 680,186 | $ | (1.59 | ) | ||||||||||
| Effect of dilutive securities—Common stock options, warrants, and convertible note | - | - | - | |||||||||||||||||||||
| Effect of dilutive securities—Common stock options, warrants, and convertible notes | - | - | - | |||||||||||||||||||||
| Diluted loss per share | $ | (928,888 | ) | 130,083,598 | $ | (0.01 | ) | $ | (1,081,694 | ) | 680,186 | $ | (1.59 | ) | ||||||||||
| 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
| Six-months ended June 30, 2020 (Unaudited) | ||||||||||||
| Net Loss (Numerator) | Shares (Denominator) | Per share amount | ||||||||||
| Basic loss per share | $ | (2,703,210 | ) | 727,050 | $ | (3.72 | ) | |||||
| Effect of dilutive securities—Common stock options, warrants, and convertible notes | - | - | - | |||||||||
| Diluted loss per share | $ | (2,703,210 | ) | 727,050 | $ | (3.72 | ) | |||||
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 15 – BASIC AND DILUTED NET LOSS PER SHARE (continued)
| Nine-months ended September 30, 2018(Unaudited) | Six-months ended June 30, 2019 (Unaudited) | |||||||||||||||||||||||
| Net Loss (Numerator) | Shares (Denominator) | Per share amount | Net Loss (Numerator) | Shares (Denominator) | Per share amount | |||||||||||||||||||
| Basic loss per share | $ | (3,076,873 | ) | 125,271,516 | $ | (0.02 | ) | $ | (2,217,114 | ) | 675,250 | $ | (3.28 | ) | ||||||||||
| Effect of dilutive securities—Common stock options, warrants, and convertible note | - | - | - | |||||||||||||||||||||
| Effect of dilutive securities—Common stock options, warrants, and convertible notes | - | - | - | |||||||||||||||||||||
| Diluted loss per share | $ | 3,076,873 | 125,271,516 | $ | (0.02 | ) | $ | (2,217,114 | ) | 675,250 | $ | (3.28 | ) | |||||||||||
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, 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 | ||||||
| June 30, 2020 | June 30, 2019 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Common stock underlying convertible notes | 439,137 | 6,250 | ||||||
| Common stock underlying options | 175,544 | 202,537 | ||||||
| Common stock underlying warrants | 480,748 | 504,875 | ||||||
| Total common stock equivalents | 1,095,429 | 713,662 | ||||||
| 35 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 1617 – LEASES
Manoa Innovation CenterOffice lease
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$17,978 for the three and nine-monthssix-months ended SeptemberJune 30, 2019,2020, respectively, and $8,760$9,100 and $29,662$18,199 for the three and nine-monthssix-months ended SeptemberJune 30, 2018,2019, respectively.
Fleet Leaselease
In January 2018, the Company entered into a vehicle lease arrangement with a rental company for three vehicles. The terms of the leases require monthly payments of $1,619 for three years. These leases convert to month-to-month leases in January 2021 unless terminated. The Company terminated one lease in August of 2019, which reduced the monthly payments to $1,002. Total lease expense under this agreement was $4,964$3,773 and $16,520$7,527 for the three and nine-monthssix-months ended SeptemberJune 30, 2019,2020, respectively, and $5,602$5,597 and $14,953$11,556 for the three and nine-monthssix-months ended SeptemberJune 30, 2018,2019, respectively.
Right-to-use leased asset and liability
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 Fleet Leases. The balance of this right-to-use asset and liability was $22,015$6,724 as of SeptemberJune 30, 2019.2020.
| 36 |
Cardax, Inc., and Subsidiary
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
NOTE 1718 – SUBSEQUENT EVENTS
The Company evaluated all material events through the date the financials were ready for issuance and identified the following for additional disclosure.
Convertible NotesNote payable
On July 14, 2020, the dates set forthCompany issued a note payable in the table below,amount of $25,000. This note accrued interest at 12% per annum and matured on July 31, 2020. On July 31, 2020, this note was repaid in full.
Convertible notes payable
On July 21, 2020, the Company entered intoissued a convertible notes with lenders, who are also current stockholders, for the amounts set forthnote payable in the table below. Each of these notesamount $100,000. This note accrues interest payable monthly at the rate of 8% per annum and matures on June 30, 2020. Each of these notes2021. This note and accrued interest thereon may convert into shares of common stock at the conversion price set forth in the table below(i) any time at the holder’s option.option at a conversion price of $5.00 per share, or (ii) automatically upon a qualified financing of at least $5 million at a conversion price equal to the lower of $5.00 per share or a 25% discount to the market price. The Company has the right to prepay this note without penalty or premium. If any of these notes, or any portion thereof,this note 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 rightThis note also contains detachable warrants exercisable for 5 years to prepay each of these notes without penalty or premium. Each of these notes were issued with detachable five-year warrants to purchase 20,000 shares of common stock as set forth in the table below.at $7.50 per share and 20,000 shares of common stock at $10.00 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 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,July 30, 2020, the Company entered intoissued 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.$25,000. This note accrues interest at 12% per annum, payable monthly, at the rate of 8% per annum and matures on JuneSeptember 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 uponat 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$5.00 per share. The Company has the right to prepay this note without penalty or premium. If this note has not been repaid or converted in full on or prior to the maturity date, then repayment of the unpaid principal balance shall be amortized over the following thirty-three (33) months. This note was issued withalso contains a detachable five-year warrant exercisable for 5 years to purchase 250 shares of common stock as set forthat $5.00 per share.
On August 7, 2020, the Company issued a convertible note payable in the table below. The exercise priceamount $100,000. This note accrues interest at 8% per annum and matures on July 31, 2021. This note and accrued interest may convert into shares of this warrant shall be adjusted in accordance withcommon stock any adjustment totime at the holder’s option at a conversion price of this note; accordingly, on November 8, 2019, the exercise price was adjusted to $0.07$5.00 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 The Company may not prepay this note without the prior written consent of the holder. If this note has not been repaid or converted in full on or prior to the maturity date, then repayment of the unpaid principal balance shall be amortized over the following twenty-four (24) months. This note also contains detachable warrants exercisable for 5 years on a cash or cashless basis to purchase 20,000 shares of common stock at $7.50 per share and 20,000 shares of common stock at $10.00 per share.
On August 10, 2020, an amendment to the $250,000 convertible note payable dated March 16, 2020, extended the maturity date to October 16, 2019,31, 2020, increased the exclusivity provisionprincipal amount by $10,000 (as consideration for the extension), and provided that the 27,777 shares of common stock issued in connection with the purchase of the Company’s purchasing agreement with GNC expired, however, allnote shall be subject to return if the note is fully repaid by October 31, 2020. All other provisionsterms remain unchanged.
On August 14, 2020, an amendment to the $262,500 convertible note payable dated January 21, 2020, extended the maturity date to September 1, 2020. As consideration for the extension, the Company issued 6,250 shares of common stock to the holder, subject to a true-up provision at 180 days following August 14, 2020, if the average of the Company’s purchasing agreement with GNCvolume weighted average prices of common stock on the principal trading market during the three trading days prior to such date is less than a specified price; provided, however, that the Company has the right to redeem the 6,250 shares and cancel its obligation to issue any true-up shares by payment to the holder of $25,000. In addition, this note shall bear interest at 10% per annum from and after July 1, 2020. All other terms 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.unchanged.
***
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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,” 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 are a development stage biopharmaceutical company primarily focused on the development of pharmaceuticals for chronic diseases driven by inflammation. We also have a commercial business unit that markets dietary supplements for inflammatory health. CDX-101, our astaxanthin pharmaceutical candidate, is being developed for cardiovascular inflammation and 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 pharmaceutical candidates are currently in pre-clinical development, including the planning of IND enabling studies. ZanthoSyn® is a physician recommended astaxanthin dietary supplement for inflammatory health. We sell ZanthoSyn® primarily through wholesale and e-commerce 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 NotesImpact of COVID-19
OnThe COVID-19 pandemic is a worldwide health crisis that is adversely affecting the dates set forth ineconomies and financial markets of many countries and may have short-term and long-term adverse effects on our business, financial condition, and results of operations that cannot be predicted as the table below, we entered into convertible notes with lenders, who are also current stockholders, forglobal pandemic continues to evolve. Our sales, receivables, and access to financing, have been adversely affected during 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 our 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. We have 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 our common stock as set forth in the table below.pandemic.
| 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 | |||||||||||||
| 38 |
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-MonthsSix-Months Ended SeptemberJune 30, 20192020 and 2018:2019:
The following table reflects our operating results for the three and nine-monthssix-months ended SeptemberJune 30, 20192020 and 2018:2019:
| 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 | Three-months ended June 30, 2020 | Three-months ended June 30, 2019 | Six-months ended June 30, 2020 | Six-months ended June 30, 2019 | ||||||||||||
| Revenues, net | $ | 134,521 | $ | 45,391 | $ | 277,334 | $ | 210,363 | ||||||||
| Cost of Goods Sold | (38,870 | ) | (29,481 | ) | (101,865 | ) | (133,661 | ) | ||||||||
| Gross Profit | 95,651 | 15,910 | 175,469 | 76,702 | ||||||||||||
| Operating Expenses | (884,683 | ) | (1,065,322 | ) | (1,870,532 | ) | (2,240,377 | ) | ||||||||
| Net Operating Loss | (789,032 | ) | (1,049,412 | ) | (1,695,063 | ) | (2,163,675 | ) | ||||||||
| Other Expenses, net | (911,310 | ) | (32,282 | ) | (1,008,147 | ) | (53,439 | ) | ||||||||
| Net Loss | $ | (1,700,342 | ) | $ | (1,081,694 | ) | $ | (2,703,210 | ) | $ | (2,217,114 | ) | ||||
Operating Summary for the Three-Months Ended SeptemberJune 30, 20192020 and 20182019
Our 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 2016 and began selling to GNC stores in 2017. ZanthoSyn® is currently available at over three thousand GNC corporate stores in the United States.nationwide. As a result, revenues were $229,142$134,521 and $549,540$45,391 for the three-months ended SeptemberJune 30, 2020 and 2019, and 2018, respectively. The decrease in revenues for the three-months ended September 30, 2019 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$38,870 and $240,152$29,481 for the three-months ended SeptemberJune 30, 20192020 and 2018,2019, 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 $108,324$95,651 and $309,388$15,910 for the three-months ended SeptemberJune 30, 20192020 and 2018,2019, respectively, which represented gross profit margins of approximately 47%71% and 56%35%, respectively. The decreaseincreases in revenues and gross profit margin for the three-months ended September 30, 2019, waswere primarily attributed to increaseddifferences in GNC promotional activities at GNC stores, which increased the sales discounts passed throughincentives and ordering patterns related to us during the current period.ZanthoSyn®.
Operating expenses were $1,300,035$884,683 and $1,237,019$1,065,322 for the three-months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. Operating expenses primarily consisted of services provided to the Company, including payroll, consultation, and contract services, for research and development, including our clinical trial and pharmaceutical development programs, sales and marketing, and administration. These expenses were paid in accordance with agreements entered with each employee or service provider. Included in operating expenses were $175,712$166,562 and $180,562$178,687 in stock-based compensation for the three-months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. The increasedecrease in operating expenses for the period from the same period in the prior year was primarily relatedattributed to an increase indecreased professional fees, as a result of clinical trialssalaries and debtwages, and equity issuancesselling, general, and filings.administrative expenses.
Other expenses, net, were $241,915$911,310 and $1,257$32,282 for the three-months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. For the three-months ended SeptemberJune 30, 2019,2020, other expenses, net,income (expenses), consisted of thea change in the fair value of a derivative liability loss on abandonment of patents,$80,833, other income of $10,000, and interest expense of $20,524, $36,205, and $185,189, respectively. These expenses were partially offset by$(1,002,143). The interest incomeexpense was primarily attributed to amortization of $3 realized during the nine-months ended September 30, 2019.non-cash discounts associated with debt issuances. For the three-months ended SeptemberJune 30, 2018,2019, other expenses, net,income (expenses), consisted of interest incomea change in fair value of derivative liability of $17,385 and interest expense of $7 and $(1,264), respectively.$(49,667).
| 39 |
Operating Summary for the Nine-MonthsSix-Months Ended SeptemberJune 30, 20192020 and 20182019
Our revenues were $439,505$277,334 and $1,134,899$210,363 for the nine-monthssix-months ended SeptemberJune 30, 2020 and 2019, and 2018, respectively. The decrease in revenues for the nine-months ended September 30, 2019 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 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$101,865 and $521,353$133,661 for the nine-monthssix-months ended SeptemberJune 30, 20192020 and 2018,2019, 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 $185,026$175,469 and $613,546$76,702 for the nine-monthssix-months ended SeptemberJune 30, 20192020 and 2018,2019, respectively, which represented gross profit margins of approximately 42%63% and 54%36%, respectively. The decreaseincreases in revenues and gross profit margin for the nine-months ended September 30, 2019 waswere primarily attributed to increaseddifferences in GNC promotional activities at GNC stores, which increased the sales discounts passed throughincentives and ordering patterns related to us during the current period.ZanthoSyn®.
Operating expenses were $3,540,412$1,870,532 and $3,689,560$2,240,377 for the nine-monthssix-months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. Operating expenses primarily consisted of services provided to the Company, including payroll, consultation, and contract services, for research and development, including our clinical trial and pharmaceutical development programs, sales and marketing, and administration. These expenses were paid in accordance with agreements entered with each employee or service provider. Included in operating expenses were $534,774$344,375 and $443,249$359,062 in stock-based compensation for the nine-monthssix-months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. The decrease in operating expenses for the period from the same period in the prior year was primarily relatedattributed to a salesdecreased professional fees, salaries and marketing conferencewages, and related expenses that occurred in 2018 but not in 2019.selling, general, and administrative expenses.
Other expenses, net, were $295,354$1,008,147 and $859$53,439 for the nine-monthssix-months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. For the nine-monthssix-months ended SeptemberJune 30, 2019,2020, other expenses, net,income (expenses), consisted of thea change in the fair value of a derivative liability lossof $77,166, gain on abandonmentmodification of patents,debt instruments of $354,791, other income of $10,000, and interest expense of $3,139, $36,205, and $256,015, respectively. These expenses were partially offset by$(1,450,104). The interest incomeexpense was primarily attributed to amortization of $5 realized during the nine-months ended September 30, 2019.non-cash discounts associated with debt issuances. For the nine-monthssix-months ended SeptemberJune 30, 2018,2019, other expenses, net,income (expenses), consisted of interest incomea change in fair value of $1,941, other incomederivative liability of $556,$17,385 and interest expense of $(3,356)$(70,824).
Liquidity and Capital Resources
Since our inception, we have sustained operating losses and have used cash raised by issuing securities insecurities. We expect to continue to operate with a net loss until we are able to develop and commercialize our operations.pharmaceutical product candidates. During the nine-monthssix-months ended SeptemberJune 30, 20192020 and 2018,2019, we used cash in operating activities in the amount of $3,047,889$1,002,577 and $2,712,155,$2,067,948, respectively, and incurred net losses of $3,650,740$2,703,210 and $3,076,873,$2,217,114, respectively.
Our existing liquidity is not sufficient to fund our operations, including payroll, anticipated capital expenditures, working capital, and other financing requirements for the foreseeable future. We may require more financing than anticipated, 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 manufacturing, research and development, or sales and marketing activities, or increases in our expense levels resulting from being a publicly-traded company.
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. |
Our largest customer, GNC, filed for Chapter 11 reorganization under the U.S. Bankruptcy Code on June 23, 2020. As of June 30, 2020, we provided an allowance of $66,261 for our receivables from GNC. We cannot predict the extent of the impact that GNC’s reorganization will have on our future sales and receivables.
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 will incur ongoing recurring expenses associated with professional fees for accounting, legal, and other expenses for annual reports, quarterly reports, proxy statements, and other filings under the Exchange Act. We estimate that these costs will likely be in excess of $250,000 per year. These obligations will reduce our ability and resources to fund other aspects of our business. We hope to be able to use our status as a public company to increase our ability to use non-cash means of settling obligations and compensate certain independent contractors who provide professional services to us, although there can be no assurances that we will be successful in any of those efforts.
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,During the six-months ended June 30, 2020 and 2019, we raised financing of $1,461,300 and $1,870,000, respectively. During the six-months ended June 30, 2020, our financing was through the issuance of $1,225,000 in convertible notes payable, $211,300 in a forgivable note payable, and $25,000 in a note payable to a related party. During the six-months ended June 30, 2019, our financing was through the issuance of $245,000 in common stock, $1,475,000 in notes payable to related parties, and $150,000 in a convertible note payable. In accordance with U.S. GAAP, derivative liabilities of $337,068 and $32,615 were recognized in connection with convertible notes outstanding as of June 30, 2020 and 2019, respectively; however, these are non-cash amounts and do not directly impact our liquidity or capital needs.
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We filed a registration statement on Form S-1 on August 14, 2019, as amended September 27, 2019, and November 22, 2019, for a proposed $15 million public offering of our common stock and warrants.warrants and the listing of our common stock and such warrants on the Nasdaq Capital Market (the “Proposed Public Offering”). We intend towould use the proceeds from the proposed public offeringany Proposed Public Offering primarily to fund pharmaceutical development and our operations. After giving effect to the net proceeds that we willwould receive from the proposed public offering,Proposed Public Offering, if closed, we expect to have sufficient cash resources to fund the budgeted expenditures forsupport our expected operations for at least one year. Notwithstanding the uncertain market conditions related to COVID-19, we plan to continue to pursue the Proposed Public Offering. We cannot give any assurance that the proposed public offeringProposed Public Offering will be consummated.
We also may continueconsummated on acceptable terms, or at all. In addition, prior to any closing of the Proposed Public Offering, we will need to obtain additional financing, from investorswhich may not be available on acceptable terms and conditions, or at all.
As of the date hereof, we have outstanding promissory notes that are (i) due in 2020 in the aggregate principal amount of $681,196, of which $656,196 have terms for conversion and/or repayment amortization, (ii) due in 2021 in the aggregate principal amount of $2,731,980, of which $2,156,980 have terms for conversion and/or repayment amortization, and (iii) due in 2022 in the aggregate principal amount of $1,211,300, of which $211,300 has terms for forgiveness and otherwise for repayment amortization starting in November 2020. Our ability to repay any and all of these notes as they become due if not otherwise repaid or converted on or prior to the maturity dates described above is uncertain and will be based on our ability to raise additional capital, generate additional revenues, and/or modify the terms of such debt instruments to the extent necessary.
We need additional capital to fund our operations and pay our current and future obligations, including without limitation our outstanding promissory notes; however, our ability to access the capital markets or otherwise raise such capital is unknown during the COVID-19 pandemic and there can be no assurance that we will be able to obtain sufficient amounts of capital as and when needed. Any additional financing in one or more transactions through the private placement of our common stock, and warrants to purchase our common stock, or through the issuance of debt, and/or convertible debt securities and plan to do so prior to theany closing of the proposed public offering. There can be no assurance that a financing transaction willProposed Public Offering or as an alternative thereto may not be available to us on acceptable terms and conditions, that we determined are acceptable.or at all.
In July 2020, we submitted a grant application to a federal government agency, which is under review as of the date hereof, to fund a proposed clinical trial with one of our astaxanthin products in COVID-19 patients. We are also pursuing other governmental and non-governmental sources of funding for COVID-19 clinical trials. If awarded, any such grant funding would provide non-dilutive capital, but we cannot give any assurance that we will receive any grant funding or the amount or timing or extent of restrictions thereof or our obligations related thereto.
Any inability to obtain additional financing will materially and adversely affect us, including requiring us to significantly curtail or cease business operations altogether. 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 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:
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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, 2019 | Nine-months ended September 30, 2018 | Six-months ended June 30, 2020 | Six-months ended June 30, 2019 | ||||||||||||
| Net Cash Used in Operating Activities | $ | (3,047,889 | ) | $ | (2,712,155 | ) | $ | (1,002,577 | ) | $ | (2,067,948 | ) | ||||
| Net Cash Used in Investing Activities | (58,394 | ) | (30,483 | ) | (7,677 | ) | (14,354 | ) | ||||||||
| Net Cash Provided by Financing Activities | 2,870,000 | 704,375 | 1,021,300 | 1,870,000 | ||||||||||||
| Net Cash (Decrease) for Period | (236,283 | ) | (2,038,263 | ) | ||||||||||||
| Net Cash Increase (Decrease) for Period | 11,046 | (212,302 | ) | |||||||||||||
| Cash at Beginning of Period | 243,753 | 2,236,837 | 19,303 | 243,753 | ||||||||||||
| Cash at End of Period | $ | 7,470 | $ | 198,574 | $ | 30,349 | $ | 31,451 | ||||||||
Cash Flows from Operating Activities
During the nine-monthssix-months ended SeptemberJune 30, 20192020 and 2018,2019, 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, and research and development, and inventory deposits.development.
Cash Flows from Investing Activities
During the nine-monthssix-months ended SeptemberJune 30, 20192020 and 2018,2019, our investing activities were related to expenditures on patents.
Cash Flows from Financing Activities
During the nine-monthssix-months ended September 30,June 31, 2020 and 2019, our financing activities consisted of transactions in which we raised proceeds through the issuance of ourdebt or equity securities. During the six-months ended June 30, 2020, we raised proceeds from the issuance of convertible notes payable in the aggregate amount of $1,225,000, the issuance of a forgivable note payable in the amount of $211,300, and the issuance of a related party note payable in the amount of $25,000, we repaid outstanding convertible notes payable in the aggregate amount of $400,000, and we paid debt issuance costs in the aggregate amount of $40,000. During the six-months ended June 30, 2019, we raised proceeds from the issuance of common stock and convertible and other notes payable. Thein the aggregate amount of $245,000, the issuance of related party notes payable in the aggregate amount of $1,475,000, and the issuance of a convertible notes resultednote payable in a derivative liabilitythe amount of $246,414 as of September 30, 2019.$150,000.
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.
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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,disclosure controls and procedures, as such term is defined in Rule 15d-15(e) under the Exchange Act. Our disclosure controls and procedures are designed to ensure that information we are required to disclose in reports we file or submit under the Exchange Act Rule 15d-15(f). Underis (a) recorded, processed, summarized, and reported, within the supervisiontime periods specified in the Commission’s rules and with the participation offorms; and (b) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluationas appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2020.
Internal Control over Financial Reporting
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, based onas defined in Rule 15d-15(f) under the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. InternalExchange Act. Our 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 theour transactions and dispositions of the assets of the Company;our assets; (b) provide reasonable assurance that our transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles and that our 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’sour assets that could have a material effect on the financial statements. Based onOur management evaluated, with the participation of our evaluation underChief Executive Officer and Chief Financial Officer, the effectiveness of our internal control over financial reporting using the framework in Internal Control—Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of SeptemberJune 30, 2019.2020.
Changes in Internal ControlsControl over Financial Reporting
There were no changesOur management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, any change in the Company’sour internal control over financial reporting and identified no change during the quarter ended SeptemberJune 30, 2019,2020, that havehas materially affected, or areis reasonably likely to materially affect, the Company’sour internal control over financial reporting.
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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.
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.
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. We used the net proceeds for our general working capital and to fund our research, development, and clinical programs.None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
None.
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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: NovemberAugust 14, 20192020
| CARDAX, INC. | ||
| By: | /s/ David G. Watumull | |
| Name: | David G. Watumull | |
| Title: | Chief Executive Officer and President | |