UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

 

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

 

For the quarterly period ended September 30, 2017

 

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]

 

As of November 14, 2017, there were 122,299,516 shares of common stock, $0.001 par value per share (“Common Stock”), of the registrant outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements. 4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 8
Item 4. Controls and Procedures. 8
     
PART II. OTHER INFORMATION 9
Item 1. Legal Proceedings. 9
Item 1A. Risk Factors. 9
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 9
Item 3. Defaults Upon Senior Securities. 10
Item 4. Mine Safety Disclosures. 10
Item 5. Other Information. 10
Item 6. Exhibits. 10

 

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 funding sufficient to implement our strategy. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. In light of these numerous risks and uncertainties, we cannot provide any assurance that the results and events contemplated by our forward-looking statements contained in this quarterly report will in fact transpire. These forward-looking statements are not guarantees of future performance. You are cautioned to not place undue reliance on these forward-looking statements, which speak only as of their dates. We do not undertake any obligation to update or revise any forward-looking statements.

 

3

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Condensed Consolidated Financial Statements

 

Cardax, Inc., and Subsidiary

 

September 30, 2017 and 2016

 

Contents

 

  Page
   
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:  
   
Condensed consolidated balance sheets F-1
   
Condensed consolidated statements of operations F-2
   
Condensed consolidated statements of cash flows F-3
   
Notes to the condensed consolidated financial statements F-4

 

4

 

 

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   As of 
   September 30, 2017   December 31, 2016 
   (Unaudited)     
ASSETS         
           
CURRENT ASSETS          
Cash  $2,798,320   $158,433 
Accounts receivable   276,303    - 
Inventories   54,790    10,827 
Deposits and other assets   197,726    122,876 
Prepaid expenses   20,148    19,919 
           
Total current assets   3,347,287    312,055 
           
PROPERTY AND EQUIPMENT, net   3,242    7,755 
           
INTANGIBLE ASSETS, net   429,231    430,770 
           
TOTAL ASSETS  $3,779,760   $750,580 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
CURRENT LIABILITIES          
Accrued payroll and payroll related expenses  $3,484,744   $3,510,464 
Accounts payable and accrued expenses   668,373    657,094 
Fees payable to directors   418,546    418,546 
Employee settlement   50,000    50,000 
           
Total current liabilities   4,621,663    4,636,104 
           
COMMITMENTS AND CONTINGENCIES   -    - 
           
Total liabilities   4,621,663    4,636,104 
           
STOCKHOLDERS' DEFICIT          
Preferred Stock - $0.001 par value; 50,000,000 shares authorized, 0 shares issued and outstanding as of September 30, 2017 and December 31, 2016   -    - 
Common stock - $0.001 par value; 400,000,000 shares authorized, 121,345,130 and 85,068,709 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively   121,345    85,069 
Additional paid-in-capital   56,187,899    51,963,269 
Deferred compensation   (20,250)   - 
Accumulated deficit   (57,130,897)   (55,933,862)
           
Total stockholders' deficit   (841,903)   (3,885,524)
           
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT  $3,779,760   $750,580 

 

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

 

F-1

 

 

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   For the three-months   For the nine-months 
   ended September 30,   ended September 30, 
   2017   2016   2017   2016 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
                 
REVENUES, net  $321,861   $11,160   $496,088   $11,160 
                     
COST OF GOODS SOLD   149,207    5,717    222,056    5,717 
                     
GROSS PROFIT   172,654    5,443    274,032    5,443 
                     
OPERATING EXPENSES:                    
General and administrative expenses   192,533    213,275    695,691    595,757 
Research and development   112,494    87,735    316,861    260,413 
Sales and marketing   164,748    63,375    305,478    63,375 
Stock based compensation   58,250    116,583    142,500    498,312 
Depreciation and amortization   7,388    6,619    22,189    22,055 
                     
Total operating expenses   535,413    487,587    1,482,719    1,439,912 
                     
Loss from operations   (362,759)   (482,144)   (1,208,687)   (1,434,469)
                     
OTHER INCOME (EXPENSES):                    
Other income   -    -    12,598    47,082 
Interest income   676    594    1,844    1,768 
Interest expense   (1,073)   (888)   (2,790)   (2,307)
                     
Total other (expenses) income, net   (397)   (294)   11,652    46,543 
                     
Loss before the provision for income taxes   (363,156)   (482,438)   (1,197,035)   (1,387,926)
                     
PROVISION FOR INCOME TAXES   -    -    -    - 
                     
NET LOSS  $(363,156)  $(482,438)  $(1,197,035)  $(1,387,926)
                     
NET LOSS PER SHARE                    
Basic  $(0.00)  $(0.01)  $(0.01)  $(0.02)
Diluted  $(0.00)  $(0.01)  $(0.01)  $(0.02)
                     
SHARES USED IN CALCULATION OF NET LOSS PER SHARE                    
Basic   100,587,843    79,581,511    92,513,317    73,949,386 
Diluted   100,587,843    79,581,511    92,513,317    73,949,386 

 

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

 

F-2

 

 

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the nine-months ended September 30, 
   2017   2016 
   (Unaudited)   (Unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(1,197,035)  $(1,387,926)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   22,189    22,055 
Stock based compensation   142,500    204,083 
Changes in assets and liabilities:          
Accounts receivable   (276,303)   - 
Inventories   (43,963)   (25,275)
Deposits and other assets   (74,850)   (1,767)
Prepaid expenses   (229)   (19,084)
Accrued payroll and payroll related expenses   (25,720)   270,763 
Accounts payable and accrued expenses   55,979    78,770 
           
Net cash used in operating activities   (1,397,432)   (858,381)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Increase in patents   (16,137)   (24,131)
           
Net cash used in investing activities   (16,137)   (24,131)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from the issuance of common stock   4,013,456    800,000 
Proceeds from the exercise of warrants   40,000    - 
           
Net cash provided by financing activities   4,053,456    800,000 
           
NET INCREASE (DECREASE) IN CASH   2,639,887    (82,512)
           
CASH AT THE BEGINNING OF THE PERIOD   158,433    323,410 
           
CASH AT THE END OF THE PERIOD  $2,798,320   $240,898 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES:          
           
Conversion of accrued payroll and payroll related expenses into stock options  $-   $227,784 
Conversion of accounts payable into stock options  $-   $66,445 
Conversion of accounts payable into restricted stock  $44,700   $- 
           
SUPPLEMENTAL DISCLOSURES:          
           
Cash paid for interest  $2,790   $2,249 
Cash paid for income taxes  $-   $- 

 

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

 

F-3

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 1 – COMPANY BACKGROUND

 

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

 

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

 

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

 

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

 

On February 7, 2014, Holdings completed its merger with Koffee Korner, which was renamed to Cardax, Inc. (the “Company”) (OTCQB:CDXI). Concurrent with the merger: (i) the Company received aggregate gross cash proceeds of $3,923,100 in exchange for the issuance and sale of an aggregate 6,276,960 of shares of the Company’s common stock, together with five year warrants to purchase an aggregate of 6,276,960 shares of the Company’s common stock at $0.625 per share, (ii) the notes issued on January 3, 2014, in the outstanding principal amount of $2,076,000 and all accrued interest thereon, automatically converted into 3,353,437 shares of the Company’s common stock upon the reverse merger at $0.625 per share, together with five year warrants to purchase 3,321,600 shares of common stock at $0.625 per share, (iii) the notes issued in 2013, in the outstanding principal amount of $8,489,036 and all accrued interest thereon, automatically converted into 14,446,777 shares of the Company’s common stock upon the reverse merger at $0.625 per share, together with five year warrants to purchase 14,446,777 shares of common stock at $0.625 per share, (iv) stock options to purchase 15,290,486 shares of Holdings common stock at $0.07 per share were cancelled and substituted with stock options to purchase 6,889,555 shares of the Company’s common stock at $0.155 per share, (v) additional stock options to purchase 20,867,266 shares of the Company’s common stock at $0.625 per share were issued, and (vi) the notes issued in 2008 and 2009, in the outstanding principal amounts of $55,000 and $500,000, respectively, and all accrued interest thereon, were repaid in full. The assets and liabilities of Koffee Korner were distributed in accordance with the terms of a spin-off agreement on the closing date.

 

F-4

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 1 – COMPANY BACKGROUND (continued)

 

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

 

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

 

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

 

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

 

The Company is engaged in the development, marketing, and distribution of consumer health products in the United States. The Company’s first commercial product, ZanthoSyn®, is a physician recommended anti-inflammatory supplement for health and longevity that features astaxanthin with optimal absorption and purity. The Company sells ZanthoSyn® primarily through e-commerce and wholesale channels. As a second generation product, the Company is developing CDX-085, its patented astaxanthin derivative for highly concentrated astaxanthin product applications. The Company also plans to pursue pharmaceutical applications of astaxanthin and related compounds. The safety and efficacy of the Company’s products have not been directly evaluated in clinical trials or confirmed by the FDA.

 

F-5

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 1 – COMPANY BACKGROUND (continued)

 

Going concern matters

 

The accompanying 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 a net loss of $363,156 and $1,197,035 for the three and nine months ended September 30, 2017, respectively, and a net loss of $482,438 and $1,387,926 for the three and nine-months ended September 30, 2016, respectively. The Company has incurred losses since inception resulting in an accumulated deficit of $57,130,897 as of September 30, 2017, 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 business. As a result of these and other factors, management has determined there is substantial doubt about the Company’s ability to continue as a going concern.

 

In addition to the $4,053,456 raised in the nine-months ended September 30, 2017, the Company plans to raise additional capital to carry out its business plan. The Company’s ability to raise additional capital through future equity and debt securities issuances is unknown. Obtaining additional financing, the successful development of the Company’s contemplated plan of operations, and its transition, ultimately, to profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raises substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these uncertainties.

 

Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. In the opinion of the Company’s management, the accompanying condensed consolidated financial statements reflect all adjustments, consisting of normal, recurring adjustments, considered necessary for a fair presentation of the results for the interim periods ended September 30, 2017 and 2016. 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.

 

The condensed consolidated financial statements include the accounts of Cardax, Inc., and its wholly owned subsidiary, Cardax Pharma, Inc., and its predecessor, Cardax Pharmaceuticals, Inc., which was merged with and into Cardax, Inc., on December 30, 2015. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Accounts receivable

 

Accounts receivable of $276,303 and $0 for as of September 30, 2017 and December 31, 2016, respectively, consists of amounts due from sales of consumer health products.

 

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 no allowance as of September 30, 2017 and December 31, 2016.

 

F-6

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Inventories

 

Inventories are stated at the lower of cost or market. Cost is determined using the average cost method. Market is defined as sales price less cost to dispose and a normal profit margin. Inventory costs include third party costs for finished goods. The Company utilizes contract manufacturers and receives inventory in finished form.

 

The Company provides a reserve against inventory for known or expected inventory obsolescence. The reserve is determined by specific review of inventory items for product age and quality that may affect salability. There were no reserves for inventory as of September 30, 2017 and December 31, 2016.

 

Revenue recognition

 

The Company recognizes revenue from the sale of its products through e-commerce and wholesale channels when the transfer of title and risk of loss occurs. For shipments with terms of FOB Shipping Point, revenue is recognized upon shipment. For shipments with terms of FOB Destination, revenue is recognized upon delivery.

 

Sales 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.

 

Cost of goods sold

 

Cost of goods sold is comprised of costs to manufacture or acquire products sold to customers, direct and indirect distribution costs, and other costs incurred in the sale of goods.

 

Shipping and handling costs

 

Shipping and handling costs are included in cost of goods sold. Shipping and handling costs were $1,053 and $7,436 for the three and nine-months ended September 30, 2017, respectively, and $630 for the three and nine-months ended September 30, 2016.

 

Sales and use tax

 

Revenues, as presented on the accompanying income statement, include taxes collected from customers and remitted to governmental authorities. Such taxes were $1,535 and $4,170 for the three and nine-months ended September 30, 2017, respectively, and $378 for the three and nine-months ended September 30, 2016.

 

F-7

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recent accounting pronouncements

 

The Financial Accounting Standards Board (“FASB”) issued three Accounting Standards Updates (“ASUs”) in 2016 that affect the guidance in ASU 2014-09, Revenue from Contracts with Customers, and are effective upon adoption of ASU No. 2014-09. The Company is currently evaluating the impact the new revenue recognition guidance will have on its Financial Statements, including the following ASUs:

 

  In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This ASU clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers.
     
  In April 2016, the FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing. This ASU clarifies the following two aspects of ASU No. 2014-09: identifying performance obligations and licensing implementation guidance. The amendment requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration that a company expects to be entitled to in exchange for the goods or services. To achieve this principle, a company must apply five steps including identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) the company satisfies the performance obligations. Additional quantitative and qualitative disclosures to enhance the understanding about the nature, amount, timing, and uncertainty of revenue and cash flows are also required.
     
  In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This ASU makes narrow-scope amendments to ASU No. 2014-09, Revenue from Contracts with Customers, and provides practical expedients to simplify the transition to the new standard and to clarify certain aspects of the standard.

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 leases guidance. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model, the effect of leases in the statement of comprehensive income and the statement of cash flows is largely unchanged from previous U.S. GAAP. The guidance in ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation. This ASU was issued as part of the FASB’s simplification initiative focused on improving areas of U.S. GAAP for which cost and complexity may be reduced while maintaining or improving the usefulness of information disclosed within the financial statements. The amendments focused on simplification specifically with regard to share-based payment transactions, including income tax consequences, classification of awards as equity or liabilities, and classification on the statement of cash flows. The guidance in ASU No. 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the impact of this updated standard. The Company does not believe this update will have a significant impact on its consolidated financial statements.

 

F-8

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recent accounting pronouncements (continued)

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 23). The amendments of ASU No. 2016-18 require that a statement of cash flow explain the change during a period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The guidance of ASU No. 2016-18 is effective for the Company’s fiscal years beginning after December 15, 2017, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact the new statement of cash flow guidance will have on its 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 consolidated financial statements.

 

Reclassifications

 

The Company has made certain reclassifications to conform its prior periods’ data to the current presentation. These reclassifications had no effect on the reported results of operations or cash flows.

 

NOTE 3 – INVENTORIES

 

Inventories consist of the following as of:

 

   September 30, 2017   December 31, 2016 
   (Unaudited)     
Finished goods  $54,790   $10,827 
Total inventories  $54,790   $10,827 

 

NOTE 4 – PROPERTY AND EQUIPMENT, net

 

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

 

   September 30, 2017   December 31, 2016 
   (Unaudited)     
Information technology equipment  $31,892   $31,892 
Less accumulated depreciation   (28,650)   (24,137)
Total property and equipment, net  $3,242   $7,755 

 

Depreciation expense was $1,496 and $4,513, for the three and nine-months ended September 30, 2017, respectively, and $1,508 and $4,660 for the three and nine-months ended September 30, 2016, respectively.

 

F-9

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 5 – INTANGIBLE ASSETS, net

 

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

 

   September 30, 2017   December 31, 2016 
   (Unaudited)     
Patents  $432,985   $432,985 
Less accumulated amortization   (257,951)   (240,275)
    175,034    192,710 
Patents pending   254,197    238,060 
Total intangible assets, net  $429,231   $430,770 

 

Patents are amortized straight-line over a period of fifteen years. Amortization expense was $5,892 and $17,676 for the three and nine-months ended September 30, 2017, respectively, and $5,111 and $17,395, for the three and nine-months ended September 30, 2016, respectively.

 

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.

 

The Company owns 21 issued patents, including 14 in the United States and 7 others in China, India, Japan, and Hong Kong. These patents will expire during the years of 2023 to 2028, subject to any patent term extensions of the individual patent. The Company has 5 foreign patent applications pending in Europe, Canada, and Brazil.

 

NOTE 6 – STOCKHOLDERS’ DEFICIT

 

Self-directed stock issuance

 

During the year ended December 31, 2016, the Company sold securities in a self-directed offering in the aggregate amount of $1,121,000 at $0.08 per unit. Each unit consisted of 1 share of restricted common stock (14,012,500 shares), a five-year warrant to purchase 1 share of restricted common stock (14,012,500 warrant shares) at $0.08 per share, a five-year warrant to purchase 1 share of restricted common stock (14,012,500 warrant shares) at $0.12 per share, and a five-year warrant to purchase 1 share of restricted common stock (14,012,500 warrant shares) at $0.16 per share.

 

During the nine-months ended September 30, 2017, the Company sold securities in a self-directed offering in the aggregate amount of $179,000 and $3,744,456 at $0.08 and $0.12, respectively, per unit. Each $0.08 unit consisted of 1 share of restricted common stock (2,237,500 shares), a five-year warrant to purchase 1 share of restricted common stock (2,237,500 warrant shares) at $0.08 per share, a five-year warrant to purchase 1 share of restricted common stock (2,237,500 warrant shares) at $0.12 per share, and a five-year warrant to purchase 1 share of restricted common stock (2,237,500 warrant shares) at $0.16 per share. Each $0.12 unit consisted of 1 share of restricted common stock (31,453,788 shares) and a five-year warrant to purchase 1 share of restricted common stock (31,453,788 warrant shares) at $0.12 per share.

 

Equity purchase agreement

 

On July 13, 2016, the Company entered into an equity purchase agreement (the “EPA”) and a registration rights agreement with an investor. Pursuant to the terms of the EPA, the Company has the right, but not the obligation, to sell shares of its common stock to the investor on the terms specified in the EPA. On the date of the EPA, the Company issued 1,500,000 shares to the investor. The total fair value of this stock on the date of grant was $106,500. These shares were fully vested upon issuance.

 

F-10

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 6 – STOCKHOLDERS’ DEFICIT (continued)

 

Equity purchase agreement (continued)

 

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

 

Payable settlement

 

On May 3, 2017, the Company settled a payable in the amount of $44,700 with a previously engaged broker dealer through the issuance of securities at $0.08 per unit. Each unit consisted of 1 share of restricted common stock (558,750 shares), a five-year warrant to purchase 1 share of restricted common stock (558,750 warrant shares) at $0.08 per share, a five-year warrant to purchase 1 share of restricted common stock (558,750 warrant shares) at $0.12 per share, and a five-year warrant to purchase 1 share of restricted common stock (558,750 warrant shares) at $0.16 per share.

 

NOTE 7 – STOCK GRANTS

 

Director stock grants

 

In 2016, the Company granted its independent directors an aggregate of 468,254 shares of restricted common stock in the Company. The total fair value of this stock on the date of grant was $41,666. These shares were fully vested upon issuance.

 

During the three and nine-months ended September 30, 2017, the Company granted its independent directors an aggregate of 95,109 and 418,025, shares of restricted common stock in the Company respectively. The total fair value of this stock on the date of grant was $43,750 and $93,750 for the three and nine-months ended September 30, 2017, respectively. These shares were fully vested upon issuance.

 

The Company recognizes the expense related to these grants ratably over the requisite service period. Total stock compensation expense recognized as a result of these grants were $43,750 and $93,750 for the three and nine-months ended September 30, 2017, respectively, and $4,166 and $29,166 for the three and nine-months ended September 30, 2016, respectively.

 

Consultant stock grant

 

On April 10, 2017, the Company granted a consultant 100,000 shares of restricted common stock valued at $0.23 per share. These shares are subject to a risk of forfeiture and vest quarterly in arrears commencing on April 1, 2017. The Company recognized $5,750 and $11,500 in stock based compensation related to this grant during the three and nine-months ended September 30, 2017, 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 are subject to a risk of forfeiture and vest 25% upon grant and quarterly in arrears thereafter commencing on September 1, 2017. The Company recognized $8,750 in stock based compensation related to this grant during the three and nine-months ended September 30, 2017.

 

F-11

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 8 – STOCK OPTION PLANS

 

On February 7, 2014, the Company adopted the 2014 Equity Compensation Plan. Under this plan, the Company may issue options to purchase shares of common stock to employees, directors, advisors, and consultants. The aggregate number of shares that may be issued under this plan is 30,420,148. On April 16, 2015, the majority stockholder of the Company approved an increase in the Company’s 2014 Equity Compensation Plan by 15 million shares.

 

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, 2016   34,167,354   $0.47    6.57   $974,066 
Exercisable January 1, 2016   34,167,354   $0.47    6.57   $974,066 
Canceled   -                  
Granted   6,156,580                
Exercised   -                  
Forfeited   (3,501,965)               
Outstanding December 31, 2016   36,821,969   $0.41    5.94   $301,273 
Exercisable December 31, 2016   36,771,969   $  0.41    5.94   $299,273 
Canceled   -                  
Granted   961,458                
Exercised   (145,000)                
Forfeited   -                  
Outstanding September 30, 2017   37,638,427   $0.41    5.30   $5,168,809 
Exercisable September 30, 2017   36,838,427   $0.41    5.20   $5,168,809 

 

The aggregate intrinsic value in the table above is before applicable income taxes and represents the excess amount over the exercise price option recipients would have received if all options had been exercised on September 30, 2017, based on a valuation of the Company’s stock for that day.

 

F-12

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 8 – STOCK OPTION PLANS (continued)

 

A summary of the Company’s non-vested options for the nine-months ended September 30, 2017 and year ended December 31, 2016 are presented below:

 

Non-vested at January 1, 2016  - 
Granted   6,156,580 
Vested   (6,106,580)
Forfeited   -   
Non-vested at December 31, 2016   50,000 
Granted   961,458 
Vested   (161,458)
Forfeited   -   
Non-vested at September 30, 2017   800,000 

 

 

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 periods ended:

 

   September 30, 2017   December 31, 2016 
   (Unaudited)     
Dividend yield   0.0%    0.0%
Risk-free rate   1.89% - 2.07%    0.80% - 1.03% 
Expected volatility   221% - 232%    141% - 225% 
Expected term   5 - 7 years    5 years 

 

The expected volatility was calculated based on the historical volatilities of publicly traded peer companies, determined by the Company, and the historical volatility of the Company. The risk-free interest rate used was based on the U.S. Treasury constant maturity rate in effect at the time of grant for the expected term of the stock options to be valued. The expected dividend yield was zero, as the Company does not anticipate paying a dividend within the relevant timeframe. Due to a lack of historical information needed to estimate the Company’s expected term, it was estimated using the simplified method allowed. In calculating the number of options issued in lieu of pay during the year ended December 31, 2016, the Company used assumptions comparable to December 31, 2015, with a 20-day weighted average stock price.

 

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

 

Stock option exercise

 

During the three and nine-months ended September 30, 2017, the Company issued 107,497 shares of common stock in connection with the cashless exercise of stock options for 100,000 and 45,000 shares of common stock at $0.155 and $0.06, respectively, per share with 37,503 shares of common stock withheld with an aggregate fair market value equal to the aggregate exercise price.

 

F-13

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 8 – STOCK OPTION PLANS (continued)

 

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

 

   Three-months ended September 30 
   2017   2016 
   Number   Amount   Number   Amount 
                 
In lieu of accrued salaries   -   $-    -   $- 
In lieu of accrued fees for services   -    -    -    - 
Compensation for services   -    -    25,000    1,750 
Director compensation      -       -    27,778    4,167 
                     
Total   -   $-    52,778   $5,917 

 

   Nine-months ended September 30 
   2017   2016 
   Number   Amount   Number   Amount 
                 
In lieu of accrued salaries   -   $-    3,796,385   $227,784 
In lieu of accrued fees for services   -    -    1,107,417    66,445 
Compensation for services   50,000    3,500    25,000    1,750 
Director compensation   161,458    25,000    1,069,445    66,667 
                     
Total   211,458   $28,500    5,998,247   $362,646 

 

F-14

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 9 – 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, 2016   47,003,962   $0.46    3.49   $2,579,541 
Exercisable January 1, 2016   47,003,962   $0.46    3.49   $2,579,541 
Canceled   -                
Granted   42,037,500                
Exercised   -                
Forfeited   (676,426)               
Outstanding December 31, 2016   88,365,036   $0.30    3.50   $543,770 
Exercisable December 31, 2016   88,365,036   $0.30    3.50   $543,770 
Canceled   -               
Granted   39,842,538                
Exercised   (798,000)               
Forfeited   (391,028)               
Outstanding September 30, 2017   127,018,546   $0.24    3.40   $33,412,459 
Exercisable September 30, 2017   127,018,546   $0.24    3.40   $33,412,459 

 

The Company estimates the fair value of warrants granted on each grant date using the Black-Scholes option valuation model. The fair value of warrants issued with debt is recorded as a debt discount and amortized over the life of the debt. The expected volatility was calculated based on the historical volatilities of publicly traded peer companies, determined by the Company. The risk-free interest rate used was based on the U.S. Treasury constant maturity rate in effect at the time of grant for the expected term of the warrants to be valued. The expected dividend yield was zero, as the Company does not anticipate paying a dividend within the relevant timeframe. The expected warrant term is the life of the warrant.

 

The Company did not recognize any stock based compensation expense related to warrants for the three and nine-months ended September 30, 2017 and 2016, respectively.

 

F-15

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 9 – WARRANTS (continued)

 

Warrant exercise

 

During the three and nine-months ended September 30, 2017, the Company issued 233,217 shares of common stock in connection with the cashless exercise of warrants for 298,000 shares of common stock at $0.10per share with 64,783 shares of common stock withheld with an aggregate fair market value equal to the aggregate exercise price.

 

During the three and nine-months ended September 30, 2017, the Company issued 500,000 shares of common stock in connection with the exercise of warrants for 500,000 shares of common stock at $0.08 per share in exchange for $40,000.

 

Warrant expiration

 

During the three and nine-months ended September 30, 2017, warrants to purchase an aggregate of 101,883 and 391,028 shares of restricted common stock expired.

 

NOTE 10 – RELATED PARTY TRANSACTIONS

 

Executive chairman agreement

 

As part of an executive chairman agreement, a director provided services to the Company. This agreement was amended on April 1, 2015. Under the terms of this amendment, the director received $37,500 in equity instruments issued quarterly in arrears as compensation. Effective April 1, 2016, the director agreed to suspend any additional equity compensation, until otherwise agreed by the Company. Effective August 12, 2016, the Company accepted the request for a leave of absence and resignation by the director as Executive Chairman and member of the Board of Directors.

 

The Company incurred $0 and $37,500 in stock based compensation to this director during the three and nine-months ended September 30, 2016, respectively.

 

The amount payable to this director was $293,546 as of September 30, 2017 and December 31, 2016.

 

NOTE 11 – INCOME TAXES

 

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

 

The effective tax rate for the three and nine-months ended September 30, 2017 and 2016, differs from the statutory rate of 34% as a result of the state taxes (net of Federal benefit) and permanent differences.

 

The Company’s valuation allowance was primarily related to the operating losses. The valuation allowance is determined in accordance with the provisions of ASC No. 740, Income Taxes, which requires an assessment of both negative and positive evidence when measuring the need for a valuation allowance. Based on the available objective evidence and the Company’s history of losses, management provides no assurance that the net deferred tax assets will be realized. As of September 30, 2017 and December 31, 2016, 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.

 

F-16

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 11 – INCOME TAXES (continued)

 

The Company is subject to taxation in the United States and two 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.

 

As of September 30, 2017 and 2016, 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 consolidated statements of operations, which is consistent with the recognition of these items in prior reporting periods.

 

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

 

NOTE 12 – 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 the:

 

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

 

   Three-months ended September 30, 2016 (Unaudited) 
   Net Loss
(Numerator)
   Shares
(Denominator)
   Per share
amount
 
Basic loss per share  $(482,438)   79,581,511   $(0.01)
Effect of dilutive securities—Common stock options and warrants   -    -    - 
Diluted loss per share  $(482,438)   79,581,511   $(0.01)

 

F-17

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 12 – BASIC AND DILUTED NET LOSS PER SHARE (continued)

 

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

 

   Nine-months ended September 30, 2016 (Unaudited)
   Net Loss
(Numerator)
  Shares
(Denominator)
  Per share
amount
Basic loss per share  $(1,387,926)   73,949,386   $(0.02)
Effect of dilutive securities—Common stock options and warrants   -      -      -   
Diluted loss per share  $(1,387,926)   73,949,386   $(0.02)

 

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

 

   September 30, 2017  September 30, 2016
   (Unaudited)  (Unaudited)
Common stock options   36,838,427    36,738,636 
Common stock warrants   127,018,546    75,842,649 
Total common stock equivalents   163,856,973    112,581,285 

 

F-18

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 13 – LEASES

 

Manoa Innovation Center

 

The Company entered into an automatically renewable month-to-month lease for office space on August 13, 2010. Under the terms of this lease, the Company must provide a written notice 45 days prior to vacating the premises. Total rent expense under this agreement as amended was $8,164 and $23,935, for the three and nine-months ended September 30, 2017, respectively, and $7,929 and $23,784 for the three and nine-months ended September 30, 2016, respectively.

 

NOTE 14 – SUBSEQUENT EVENTS

 

The Company evaluated all material events through the date the financials were ready for issuance and noted the following non-recognized events for disclosure.

 

In October 2017, the Company sold securities in a self-directed offering in the aggregate amount of $124,979 at $0.30 per unit. Each $0.30 unit consisted of 1 share of restricted common stock (416,595 shares) and a five-year warrant to purchase 1 share of restricted common stock (416,595 warrant shares) at $0.30 per share.

 

In October 2017, the Company issued 537,791 shares of common stock in connection with the cashless exercise of stock options for 625,000 shares of common stock at $0.06 per share with 87,209 shares of common stock forfeited for the cashless exercise.

 

On November 1, 2017, the Company issued options to purchase 1,000,000 shares of common stock at $0.44 per share to an employee. These shares vest over a four-year period and expire ten years after the date of grant.

 

 

***

 

F-19

 

 

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

 

Explanatory Note

 

Unless otherwise noted, references in this 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.

 

Corporate Overview and History

 

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

 

We are devoting substantially all of our present efforts to establishing our business related to the development and commercialization of safe anti-inflammatory dietary supplements and drugs. Our first commercial product, ZanthoSyn®, is a physician recommended anti-inflammatory supplement for health and longevity that features astaxanthin with optimal absorption and purity. The form of astaxanthin utilized in ZanthoSyn® has demonstrated excellent safety in peer-reviewed published studies and is designated as GRAS (Generally Recognized as Safe) according to FDA regulations. We sell ZanthoSyn® primarily through e-commerce and wholesale channels and expect that our marketing program will continue to focus on education of physicians, healthcare professionals, retail personnel, and consumers. As a second generation product candidate, we are developing CDX-085, our patented astaxanthin derivative for highly concentrated astaxanthin product applications. We also plan to pursue pharmaceutical applications of astaxanthin and related compounds. The safety and efficacy of our products have not been directly evaluated in clinical trials or confirmed by the FDA.

 

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.

 

5

 

 

Results of Operations

 

Results of Operations for the Three and Nine Months Ended September 30, 2017 and 2016:

 

The following table reflects our operating results for the three and nine-months ended September 30, 2017 and 2016:

 

Operating Summary  Three-months ended
September 30, 2017
   Three-months ended
September 30, 2016
   Nine-months ended
September 30, 2017
   Nine-months ended
September 30, 2016
 
Revenues  $321,861   $11,160   $496,088   $11,160 
Cost of Goods Sold   (149,207)   (5,717)   (222,056)   (5,717)
Gross Profit   172,654    5,443    274,032    5,443 
Operating Expenses   (535,413)   (487,587)   (1,482,719)   (1,439,912)
Net Operating Loss   (362,759)   (482,144)   (1,208,687)   (1,434,469)
Other (Expenses) Income, net   (397)   (294)   11,652    46,543 
Net Loss  $(363,156)  $(482,438)  $(1,197,035)  $(1,387,926)

 

Operating Summary for the Three-Months Ended September 30, 2017 and 2016

 

We sell ZanthoSyn® primarily through e-commerce and wholesale channels. We launched our e-commerce channel in August 2016 and began wholesaling to GNC stores in Hawaii on January 25, 2017 and GNC corporate stores across the United States on August 10, 2017. As a result, revenues were $321,861 and $11,160 for the three-months ended September 30, 2017 and 2016, respectively. Costs of goods sold were $149,207 and $5,717 for the three-months ended September 30, 2017 and 2016, 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 $172,654 and $5,443 for the three-months ended September 30, 2017 and 2016, respectively, which represented gross profit margins of approximately 54% and 49%, respectively.

 

Operating expenses were $535,413 and $487,587 for the three-months ended September 30, 2017 and 2016, respectively. Operating expenses primarily consisted of expenses for services provided to the Company, including payroll and consultation, for research and development, administration, and sales and marketing. These expenses were paid in accordance with agreements entered into with each employee, consultant, or service provider. Included in operating expenses were $58,250 and $116,583 in stock based compensation for the three-months ended September 30, 2017 and 2016, respectively.

 

Other income (expenses), net, were $(397) and $(294) for the three-months ended September 30, 2017 and 2016, respectively. For the three-months ended September 30, 2017 and 2016, other income (expenses), net, primarily consisted of interest expense $(1,037) and $(888), respectively.

 

Operating Summary for the Nine-Months Ended September 30, 2017 and 2016

 

We sell ZanthoSyn® primarily through e-commerce and wholesale channels. We launched our e-commerce channel in August 2016 and began wholesaling to GNC stores in Hawaii on January 25, 2017 and GNC corporate stores across the United States on August 10, 2017. As a result, revenues were $496,088 and $11,160 for the nine-months ended September 30, 2017 and 2016, respectively. Costs of goods sold were $222,056 and $5,717 for the nine-months ended September 30, 2017 and 2016, 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 $274,032 and $5,443 for the nine-months ended September 30, 2017 and 2016, respectively, which represented gross profit margins of approximately 55% and 49%, respectively.

 

Operating expenses were $1,482,719 and $1,439,912 for the nine-months ended September 30, 2017 and 2016, respectively. Operating expenses primarily consisted of expenses for services provided to the Company, including payroll and consultation, for research and development, administration, and sales and marketing. These expenses were paid in accordance with agreements entered into with each employee, consultant, or service provider. Included in operating expenses were $142,500 and $498,312 in stock based compensation for the nine-months ended September 30, 2017 and 2016, respectively.

 

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Other income (expenses), net, were $11,652 and $46,543 for the nine-months ended September 30, 2017 and 2016, respectively. For the nine-months ended September 30, 2017 and 2016, other income primarily consisted of a state refundable tax credit of $12,598 and $47,082, respectively.

 

Liquidity and Capital Resources

 

Since our inception, we have sustained operating losses and have used cash raised by issuing securities in our operations. During the nine-months ended September 30, 2017 and 2016, we used cash in operating activities in the amount of $1,442,132 and $858,381, respectively, and incurred a net loss of $1,197,035 and $1,387,926, respectively.

 

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

 

In addition to the $4,053,456 raised in the nine-months ended September 30, 2017, we intend to raise additional capital that would fund our operations through at least December 31, 2017. We may continue to obtain additional financing from investors through the private placement of our Common Stock and warrants to purchase our Common Stock. Any financing transaction could also, or in the alternative, include the issuance of our debt or convertible debt securities. There can be no assurance that a financing transaction would be available to us on terms and conditions that we determined are acceptable. We also may access capital under the previously reported equity purchase agreement, pursuant to which we have the right, but not the obligation, to sell shares of our Common Stock, as described in our Registration Statement on Form S-1 (333-214049) filed on February 8, 2017.

 

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

 

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

 

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

 

the progress of research and development programs;
the level of resources that we devote to the development of our technologies, patents, marketing and sales capabilities; and
revenues from the sale of any products or license revenues and the cost of any production or other operating expenses.

 

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

 

Cash Flow Summary  Nine-months ended
September 30, 2017
   Nine-months ended
September 30, 2016
 
Net Cash Used in Operating Activities  $(1,397,432)  $(858,381)
Net Cash Used in Investing Activities   (16,137)   (24,131)
Net Cash Provided by Financing Activities   4,053,456    800,000 
Net Cash Increase (Decrease) for Period   2,639,887    (82,512)
Cash at Beginning of Period   158,433    323,410 
Cash at End of Period  $2,798,320   $240,898 

 

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Cash Flows from Operating Activities

 

During the nine-months ended September 30, 2017 and 2016, our operating activities primarily consisted of payments or accruals for employees, directors, and consultants for services related to research and development, administration, and sales and marketing.

 

Cash Flows from Investing Activities

 

During the nine-months ended September 30, 2017 and 2016, and our investing activities were primarily related to expenditures on patents.

 

Cash Flows from Financing Activities

 

During the nine-months ended September 30, 2017 and 2016, our financing activities consisted of transactions in which we raised proceeds through the issuance of our Common Stock.

 

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

 

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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (b) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of the our management and directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of September 30, 2017.

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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

 

Item 1A. Risk Factors.

 

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

 

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

 

We issued shares of our Common Stock in the following transactions:

 

2017 Unit Offering (1)

 

We sold securities under separate subscription agreements (each, a “2017(1)-Subscription Agreement”), by and between the Company and investors (each a “2017(1)-Purchaser” and collectively, the “2017(1)-Purchasers”) pursuant to which we issued and sold to the 2017(1)-Purchasers units (each a “2017(1)-Unit” and collectively the “2017(1)-Units”) consisting of shares of our Common Stock and warrants to purchase shares of our Common Stock.

 

From July 1, 2017 through September 30, 2017, we sold 28,595,459 of the 2017(1)-Units for an aggregate purchase price of $3,431,456. Each of the 2017(1)-Unit consisted of: (i) one (1) share of our Common Stock, and (ii) a five-year warrant to purchase one (1) share of our Common Stock at $0.12. No placement agent or broker dealer was used or participated in any offering or sale of the of the 2017(1)-Units.

 

The foregoing summary of the of the 2017(1)-Subscription Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of such agreement, which was filed with our Annual Report on Form 10-K on March 31, 2017.

 

2017 Unit Offering (2)

 

We sold securities under separate subscription agreements (each, a “2017(2)-Subscription Agreement”), by and between the Company and investors (each a “2017(2)-Purchaser” and collectively, the “2017(2)-Purchasers”) pursuant to which we issued and sold to the 2017(2)-Purchasers units (each a “2017(2)-Unit” and collectively the “2017(2)-Units”) consisting of shares of our Common Stock and warrants to purchase shares of our Common Stock.

 

From October 1, 2017 through November 14, 2017, we sold 416,595 of the 2017(2)-Units for an aggregate purchase price of $124,979. Each 2017(2)-Unit consisted of: (i) one (1) share of our Common Stock, and (ii) a five-year warrant to purchase one (1) share of our Common Stock at $0.30. No placement agent or broker dealer was used or participated in any offering or sale of the 2017(2)-Units.

 

The foregoing summary of the 2017(2)-Subscription Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of such agreement, which is attached as Exhibit 10.2 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.

 

The securities were issued in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) and the rules and regulations promulgated thereunder.

 

We may continue to offer securities and may use a placement agent or broker dealer in any such offering. Any future offering of securities may be on the same terms described in this Quarterly Report on Form 10-Q or on other terms. This Quarterly Report on Form 10-Q does not constitute an offer to sell, or a solicitation to purchase, any of our securities.

 

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Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

  Exhibit No.   Description
  10.1(1)   Form of Subscription Agreement
       
  10.2(2)   Form of Subscription Agreement
       
  10.3(3)   Exclusivity Agreement, dated as of October 16, 2017, by and between Cardax, Inc. and General Nutrition Corporation 
       
  31.1(2)   Certification of the Chief Executive Officer pursuant to Exchange Act Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
  31.2(2)   Certification of the Chief Financial Officer pursuant to Exchange Act Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
  32.1(2)   Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
  32.2(2)   Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
  101.INS(4)   XBRL Instance Document
       
  101.SCH(4)   XBRL Taxonomy Extension Schema Document
       
  101.CAL(4)   XBRL Taxonomy Extension Calculation Linkbase Document
       
  101.DEF(4)   XBRL Taxonomy Extension Definition Linkbase Document
       
  101.LAB(4)   XBRL Taxonomy Extension Label Linkbase Document
       
  101.PRE(4)   XBRL Taxonomy Extension Presentation Linkbase Document
       
 

(1)

(2)

(3)

(4)

 

 

Filed as an exhibit to the Annual Report on Form 10-K of the Company filed March 31, 2017.

Filed herewith.

Filed as an exhibit to the Current Report on Form 8-K of the Company filed October 20, 2017.

Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under those sections.

 

 

 

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SIGNATURES

 

Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: November 14, 2017

 

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

 

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