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, 2020

 

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
N/A		N/A		N/A

 

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 November 11, 2020, there were 765,154 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.	38
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	44
Item 4. Controls and Procedures.	44
PART II. OTHER INFORMATION	45
Item 1. Legal Proceedings.	45
Item 1A. Risk Factors.	45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3. Defaults Upon Senior Securities.	45
Item 4. Mine Safety Disclosures.	45
Item 5. Other Information.	45
Item 6. Exhibits.	46

 

 

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 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, except as required by law.

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

Condensed Consolidated Financial Statements

 

Cardax, Inc., and Subsidiary

 

September 30, 2020 and 2019

 

Contents

 

	Page
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed consolidated balance sheets	5
Condensed consolidated statements of operations	6
Condensed consolidated statement of changes in stockholders’ deficit	7
Condensed consolidated statements of cash flows	9
Notes to the condensed consolidated financial statements	10

 

 

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

As of

 

		September 30,				December 31,
		2020				2019
			(Unaudited)
ASSETS
CURRENT ASSETS
Cash		$	107,185			$	19,303
Accounts receivable, net			-				205,768
Inventories			1,057,869				1,177,831
Deposits and other assets			3,063				2,066
Prepaid expenses			208,028				181,093
Total current assets			1,376,145				1,586,061
INTANGIBLE ASSETS, net			406,572				420,373
RIGHT TO USE LEASED ASSETS			3,843				12,488
TOTAL ASSETS		$	1,786,560			$	2,018,922
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accrued payroll and payroll related expenses, current portion		$	4,171,448			$	3,687,376
Accounts payable and accrued expenses			1,658,966				1,544,402
Fees payable to directors			418,546				418,546
Accrued separation costs, current portion			11,250				9,000
Current portion of related party notes payable			600,000				575,000
Current portion of note payable			128,338				-
Related party convertible notes payable, net of discount			1,298,689				651,721
Convertible notes payable, net of discount			1,217,207				358,289
Employee settlement			50,000				50,000
Lease liability, current portion			3,843				11,527
Derivative liability on convertible notes payable			649,417				827,314
Total current liabilities			10,207,704				8,133,175
NON-CURRENT LIABILITIES
Note payable, less of current portion			82,962				-
Related party notes payable, less of current portion			1,000,000				1,000,000
Accrued separation costs, less current portion			74,635				83,635
Lease liability, less current portion			-				961
Total non-current liabilities			1,157,597				1,084,596
COMMITMENTS AND CONTINGENCIES			-				-
Total liabilities			11,365,301				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, 2020, and December 31, 2019, respectively			-				-
Common stock - $0.001 par value; 400,000,000 shares authorized, 765,154 and 687,564 shares issued and outstanding as of September 30, 2020, and December 31, 2019, respectively			765				688
Additional paid-in-capital			61,514,390				59,836,818
Accumulated deficit			(71,093,896	)			(67,036,355	)
Total stockholders’ deficit			(9,578,741	)			(7,198,849	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	1,786,560			$	2,018,922

 

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

 

 

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

		For the three-months ended September 30,								For the nine-months ended September 30
		2020				2019				2020				2019
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
REVENUES, net		$	66,502			$	229,142			$	343,836			$	439,505
COST OF GOODS SOLD			27,516				120,818				129,381				254,479
GROSS PROFIT			38,986				108,324				214,455				185,026
OPERATING EXPENSES:
Salaries and wages			353,965				387,636				1,068,120				1,177,362
Professional fees			121,844				375,298				462,286				817,546
Selling, general, and administrative expenses			105,461				206,042				467,778				731,487
Stock based compensation			144,062				175,712				488,437				534,774
Research and development			10,681				145,273				102,457				250,141
Depreciation and amortization			8,733				10,074				26,200				29,102
Total operating expenses			744,746				1,300,035				2,615,278				3,540,412
Loss from operations			(705,760	)			(1,191,711	)			(2,400,823	)			(3,355,386	)
OTHER INCOME (EXPENSE):
Change in fair value of derivative liability			(268,711	)			(20,524	)			(191,545	)			(3,139	)
Gain on modification of debt instruments			40,133				-				394,924				-
Other income			-				-				10,000				-
Loss on abandonment of patents			-				(36,205	)			-				(36,205	)
Interest expense			(419,993	)			(185,186	)			(1,870,097	)			(256,010	)
Total other (expense) income, net			(648,571	)			(241,915	)			(1,656,718	)			(295,354	)
Loss before the provision for income taxes			(1,354,331	)			(1,433,626	)			(4,057,541	)			(3,650,740	)
PROVISION FOR INCOME TAXES			-				-				-				-
NET LOSS		$	(1,354,331	)		$	(1,433,626	)		$	(4,057,541	)		$	(3,650,740	)
NET LOSS PER SHARE
Basic		$	(1.79	)		$	(2.10	)		$	(5.51	)		$	(5.38	)
Diluted		$	(1.79	)		$	(2.10	)		$	(5.51	)		$	(5.38	)
SHARES USED IN CALCULATION OF NET LOSS PER SHARE
Basic			755,847				683,731				736,719				678,108
Diluted			755,847				683,731				736,719				678,108

 

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

 

 

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER DEFICIT

 

Nine-months ended September 30, 2019 and 2020

 

		Common Stock								Additional				Accumulated
		Shares				Amount				Paid-In-Capital				Deficit				Total
Balance at January 1, 2019			669,967			$	670			$	58,407,257			$	(61,943,318	)		$	(3,535,391	)
Common stock grants to independent directors			8,137				8				262,492				-				262,500
Common stock grants to service providers			562				1				14,399				-				14,400
Stock based compensation - options			-				-				257,875				-				257,875
Restricted stock issuance			8,169				8				244,992				-				245,000
Issuance of warrants attached to convertible notes			-				-				141,435				-				141,435
Net loss			-				-				-				(3,650,740	)			(3,650,740	)
Balance at September 30, 2019			686,835			$	687			$	59,328,450				(65,594,058	)		$	(6,264,921	)
Balance at January 1, 2020			687,564			$	688			$	59,836,818			$	(67,036,355	)		$	(7,198,849	)
Common stock grants to independent directors			17,708				18				56,232				-				56,250
Warrants granted to independent directors			-				-				225,000				-				225,000
Stock based compensation - options			-				-				207,187				-				207,187
Common stock grants to convertible note holders			81,409				81				532,131				-				532,212
Issuance of warrants attached to convertible notes			-				-				303,630				-				303,630
Beneficial conversion feature issued on convertible notes			-				-				141,391				-				141,391
Revaluation of notes payable discounts due to modification of conversion price			-				-				(271,998	)			-				(271,998	)
Extension fee for convertible note			6,250				6				24,994				-				25,000
Extinguishment of derivative liability upon repayment of convertible note			-				-				458,977				-				458,977
Stock retirement			(27,777	)			(28	)			28				-				-
Net loss			-				-				-				(4,057,541	)			(4,057,541	)
Balance at September 30, 2020			765,154			$	765			$	61,514,390			$	(71,093,896	)		$	(9,578,741	)

 

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

 

 

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER DEFICIT

(continued)

 

Three-months ended September 30, 2019 and 2020

 

		Common Stock								Additional				Accumulated
		Shares				Amount				Paid-In-Capital				Deficit				Total
Balance at July 1, 2019			683,731			$	684			$	59,044,605			$	(64,160,432	)		$	(5,115,143	)
Common stock grants to independent directors			2,917				3				87,497				-				87,500
Common stock grants to service providers			187				-				3,338				-				3,338
Stock based compensation - options			-				-				84,875				-				84,875
Issuance of warrants attached to convertible notes			-				-				108,135				-				108,135
Net loss			-				-				-				(1,433,626	)			(1,433,626	)
Balance at September 30, 2019			686,835			$	687			$	59,328,450			$	(65,594,058	)		$	(6,264,921	)
Balance at July 1, 2020			752,654			$	753			$	61,101,987			$	(69,739,565	)		$	(8,636,825	)
Common stock grants to independent directors			6,250				6				18,744				-				18,750
Warrants granted to independent directors			-				-				75,000				-				75,000
Stock based compensation - options			-				-				50,312				-				50,312
Issuance of warrants attached to convertible notes			-				-				300,853				-				300,853
Revaluation of notes payable discounts due to modification of conversion price			-				-				(57,500	)			-				(57,500	)
Extension fee for convertible note			6,250				6				24,994				-				25,000
Net loss			-				-				-				(1,354,331	)			(1,354,331	)
Balance at September 30, 2020			765,154			$	765			$	61,514,390			$	(71,093,896	)		$	(9,578,741	)

 

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

 

 

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

For the nine-months ended September 30,

 

		2020				2019
			(Unaudited)				(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(4,057,541	)		$	(3,650,740	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			26,200				29,102
Amortization of debt discount			1,414,808				129,256
Stock based compensation			488,437				534,775
Bad debt expense on accounts receivable			52,766				-
Loss on abandonment of patents			-				36,205
Change in fair value of derivative liability			191,545				3,139
Gain on modification of debt instruments			(394,924	)			-
Expense related to extension of debt instruments			35,000				-
Changes in assets and liabilities:
Accounts receivable			118,166				32,333
Inventories			119,962				172,653
Deposits and other assets			(997	)			-
Prepaid expenses			(26,935	)			(21,013	)
Accrued payroll and payroll related expenses			484,072				43,801
Accounts payable and accrued expenses			149,400				(350,650	)
Accrued separation costs			(6,750	)			(6,750	)
Net cash used in operating activities			(1,406,791	)			(3,047,889	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in intangible assets			(12,399	)			(58,394	)
Net cash used in investing activities			(12,399	)			(58,394	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of related party notes payable			25,000				1,575,000
Proceeds from the issuance of notes payable			236,300				-
Proceeds from the issuance of related party convertible notes payable			250,000				750,000
Proceeds from the issuance of convertible notes payable			1,590,000				300,000
Repayment of principal on related party notes payable			-				-
Repayment of principal on notes payable			(25,000	)			-
Repayment of principal on related party convertible notes payable			-				-
Repayment of principal on convertible notes payable			(529,228	)			-
Payment of debt issuance costs			(40,000	)			-
Proceeds from the issuance of common stock			-				245,000
Net cash provided by financing activities			1,507,072				2,870,000
NET INCREASE (DECREASE) IN CASH			87,882				(236,283	)
BEGINNING OF THE PERIOD			19,303				243,753
END OF THE PERIOD		$	107,185			$	7,470
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest		$	379,671			$	13,937
Cash paid for income taxes		$	-			$	-
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Settlement of receivables with payables		$	34,836			$	60,670
Right to use assets funded through leases		$	8,645			$	22,015
Retirement of issued stock		$	28			$	-
Discounts recognized on notes payable at issuance		$	977,233			$	384,710
Extinguishment of derivative liability upon repayment of convertible notes		$	458,977			$	-
Revaluation of notes payable discounts due to modification of conversion price		$	271,998			$	-

 

 

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

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

 

NOTE 1 – COMPANY BACKGROUND

 

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

 

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. 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 $1,354,331 and $4,057,541 for the three and nine-months ended September 30, 2020, respectively, and incurred net losses of $1,433,626 and $3,650,740 for the three and nine-months ended September 30, 2019, respectively. The Company has incurred losses since inception resulting in an accumulated deficit of $71,093,896 as of September 30, 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.

 

The Company needs to raise additional capital to carry out its business plan. During the nine-months ended September 30, 2020, the Company raised $2,101,300 in gross proceeds through the issuance of debt securities. 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; however, there can be no assurance that the proposed public offering will be consummated. The Company’s continued ability to raise capital through future equity and debt securities issuances is unknown, especially during the COVID-19 pandemic. If the Company is unable to 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.

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Unaudited interim financial information

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. In the opinion of the Company’s management, the accompanying condensed consolidated financial statements reflect all adjustments, consisting of normal, recurring adjustments, considered necessary for a fair presentation of the results for the interim periods ended September 30, 2020 and 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, 2019, filed with the SEC on March 30, 2020 (the “Annual Report”).

 

Revenue from contracts with customers

 

Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

 

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

 

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

 

						September 30,				September 30,
Geographical area		Source				2020				2019
						(Unaudited)				(Unaudited)
United States			Nutraceuticals			$	333,464			$	439,505
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.

 

 

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 $198,331 as of September 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.

 

 

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 September 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 $52,766 as of September 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-months ended September 30, 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 August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. ASU 2020-06 is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020 and adoption must be as of the beginning of the Company’s annual fiscal year. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

 

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. These reclassifications had no effect on the reported results of operations or cash flows.

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 3 – INVENTORIES

 

Inventories consist of the following as of:

 

		September 30, 2020				December 31, 2019
		(Unaudited)
Raw materials		$	759,400			$	763,800
Finished goods			298,469				414,031
Total inventories		$	1,057,869			$	1,177,831

 

As of September 30, 2020, and December 31, 2019, all raw materials were held at the manufacturer’s facility for future production. Additionally, as of September 30, 2020, and December 31, 2019, $281,791 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, 2020				December 31, 2019
		(Unaudited)
Patents		$	614,003			$	614,003
Less accumulated amortization			(358,281	)			(332,081	)
			255,722				281,922
Patents pending			150,850				138,451
Total intangible assets, net		$	406,572			$	420,373

 

Patents are amortized straight-line over a period of fifteen years. Amortization expense was $8,733 and $26,200 for the three and nine-months ended September 30, 2020, respectively. Amortization expense was $10,074 and $29,102 for the three and nine-months ended September 30, 2019, 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 has 29 issued patents, including 14 in the U.S. and 15 outside the U.S. and one patent pending outside the U.S. that will expire between 2023 and 2028, subject to patent term extensions. The Company also has four additional patents pending that if issued would extend patent coverage in the U.S. and outside the U.S. to 2039-2041.

 

NOTE 5 – 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 September 30, 2020, $85,885 remains outstanding of which $11,250 is due within one-year and is reflected as a current liability.

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 6 – RELATED PARTY NOTES PAYABLE

 

Related party notes payable consisted of the following as of:

 

		September 30, 2020				December 31, 2019
		(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 approved 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.		$	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, payable at maturity, 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, payable at maturity, is unsecured, and was originally due August 20, 2019, but the maturity date was extended to June 30, 2021.			500,000				500,000
Promissory note. On June 29, 2020, 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 accrued interest at the rate of 12% per annum, payable at maturity, was unsecured, and was originally due September 30, 2020, but the maturity date was extended to October 15, 2020. This note was subsequently repaid on October 8, 2020.			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

 

 

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 $46,848 and $45,925 during the three-months ended September 30, 2020 and 2019, respectively. The Company incurred interest charges on these related party notes payable of $138,051 and $101,385 during the nine-months ended September 30, 2020 and 2019, respectively. The aggregate amount of accrued and unpaid interest on these related party notes payable was $95,273 and $31,111 as of September 30, 2020 and 2019, respectively.

 

Maturities

 

Future maturities of these related party notes payable are as follows as of September 30:

 

2021		$	600,000
2022			1,000,000
		$	1,600,000

 

NOTE 7 – NOTES PAYABLE

 

On April 22, 2020, the Company received a Paycheck Protection Program (“PPP”) loan from a U.S. Small Business Administration (the “SBA”) lender 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.

 

On July 14, 2020, the Company issued a note payable in the amount of $25,000. This note accrued interest at 12% per annum, payable at maturity, and matured on July 31, 2020. On July 31, 2020, this note was repaid in full.

 

Interest expense

 

The Company incurred interest charges on these notes payable of $670 and $1,075 during the three and nine-months ended September 30, 2020, respectively. The aggregate amount of accrued and unpaid interest on this note payable was $935 as of September 30, 2020.

 

Maturity

 

Future maturity of this note payable is as follows as of September 30:

 

2021		$	128,338
2022			82,962
		$	211,300

 

The Company also applied for the Economic Injury Disaster Loan (“EIDL”) from the SBA, which remains pending as of the date hereof. The Company received an EIDL advance amount of $10,000 during the nine-months ended September 30, 2020. According to the terms set forth by the SBA, regardless of whether the loan application is approved or declined, the advance does not need to be repaid; accordingly, the Company recognized the advance as other income.

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 8 – RELATED PARTY CONVERTIBLE NOTES PAYABLE

 

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

 

		September 30, 2020				December 31, 2019
		(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, payable monthly, 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 September 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 September 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 September 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.		$	815,217			$	815,217

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 8 – RELATED PARTY CONVERTIBLE NOTES PAYABLE (continued)

 

		September 30, 2020				December 31, 2019
		(Unaudited)
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, payable monthly, 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 September 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 September 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 September 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.			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, payable monthly, 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.			100,000				100,000
Convertible note 2020-11. On September 17, 2020, the Company issued a convertible note payable in the amount $271,739, with an original issue discount of $21,739 in exchange for $250,000. This note accrues interest at 8% per annum, payable monthly, and has a maturity of June 30, 2021. 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 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. This note was also issued with a detachable warrant to purchase 13,333 shares of stock at $4.50 per share, which is subject to adjustment in accordance with any adjustment to the conversion price of this note. The valuation of the conversion feature and detachable warrant resulted in the recognition of discounts on this note equal to $88,950 as of September 30, 2020.			271,739				-

 

 

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:

 

		September 30, 2020				December 31, 2019
		(Unaudited)
Total related party convertible notes payable			1,404,348				1,132,608
Less original issue discounts			(104,348	)			(82,608	)
Related party convertible notes payable, net			1,300,000				1,050,000
Less discounts for conversion rights, beneficial conversion features, and detachable warrants			(386,310	)			(693,316	)
Plus amortization of discounts			384,999				295,037
Total related party convertible notes payable, net		$	1,298,689			$	651,721

 

Discounts

 

Total discounts (original issue discounts plus discounts for conversion rights, beneficial conversion features, and detachable warrants) of $490,658 are amortized using the interest method, which resulted in amortization recorded as interest expense of $5,030 and $348,865 for the three and nine-months ended September 30, 2020, with total accumulated amortization equal to $384,999 as of September 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 $25,116 and $13,222 during the three-months ended September 30, 2020 and 2019, respectively. The Company incurred interest charges on these related party convertible notes payable of $73,156 and $13,222 during the nine-months ended September 30, 2020, respectively. The aggregate amount of accrued and unpaid interest on these related party convertible notes payable was $8,750 and $5,360 as of September 30, 2020 and 2019, respectively.

 

Maturities

 

Future maturities of these related party convertible notes payable are as follows as of September 30:

 

2021		$	1,404,348
		$	1,404,348

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE

 

Convertible notes payable consisted of the following as of:

 

		September 30, 2020				December 31, 2019
		(Unaudited)
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, payable at maturity, 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, payable monthly, and was originally due June 30, 2020, but the maturity date was extended to December 31, 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 (30) 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.			108,696				108,696

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)

 

		September 30, 2020				December 31, 2019
		(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, payable monthly, 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.			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, payable monthly, 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.			27,174				27,174

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)

 

		September 30, 2020				December 31, 2019
		(Unaudited)
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, payable monthly, 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.			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, payable monthly, 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.			108,696				108,696

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)

 

		September 30, 2020				December 31, 2019
		(Unaudited)
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, payable monthly, 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.			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, payable monthly, 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.			16,304				16,304

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)

 

		September 30, 2020				December 31, 2019
		(Unaudited)
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, payable monthly, 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.			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 accrues interest at 10% per annum from and after July 1, 2020, and accrued a one-time fixed interest charge upon issuance equal to 10% of the principal amount. This note was originally due June 30, 2020, but the maturity date was extended to September 1, 2020, and subsequently to October 30, 2020, and then to December 15, 2020. The Company issued 6,250 shares of common stock as consideration for the initial extension to September 1, 2020. The Company paid an extension fee of $25,000 as consideration for the extension to December 15, 2020. 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. As amended, the before-mentioned conversion features shall not be permitted unless the note remains outstanding after the revised maturity date of October 30, 2020. 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. $200,000 was paid to the holder on September 18, 2020: $32,003 for accrued and unpaid interest to date, $129,228 for principal repayment, and $38,769 as a premium on the principal repayment. The remaining balance is to be paid to the holder on or before December 15, 2020. The amendment to this note on November 10, 2020, which extended the maturity date to December 15, 2020, was considered a material modification under ASC 470-50-40, and as a result, is considered an accounting extinguishment in the period the note was modified.			133,272				-

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)

 

		September 30, 2020				December 31, 2019
		(Unaudited)
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, payable monthly, 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.			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 accrued interest at 10% per annum, payable at maturity, 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.			-				-

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)

 

		September 30, 2020				December 31, 2019
		(Unaudited)
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, payable at maturity, and was originally due September 16, 2020, but the maturity date was extended to October 31, 2020, and subsequently to December 31, 2020. The principal amount was increased by $10,000 on August 10, 2020, as consideration for the extension to October 31, 2020. The Company agreed to pay an extension fee of $15,000 as consideration for the extension to December 31, 2020. 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, as amended, is fully repaid by December 31, 2020. $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. The amendment to this note on November 11, 2020, which extended the maturity date to December 31, 2020, was not considered a material modification under ASC 470-50-40, and as a result, is not considered an accounting extinguishment in the period the note was modified.			260,000				-
Convertible note 2020-06. 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, payable at maturity, 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; accordingly, the adjusted conversion price was equal to $4.50 per share as of September 30, 2020. 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 $230,158 based on the revaluation of such features upon adjustment of the conversion price in September 2020. The amendment to this note on November 4, 2020, which extended the period before the conversion price adjusts from a fixed price to a variable price at a discount to market and the period the Company may prepay the note without penalty or premium, was not considered a material modification under ASC 470-50-40, and as a result, is not considered an accounting extinguishment in the period the note was modified.			500,000				-
Convertible note 2020-07. On July 21, 2020, the Company issued a convertible note payable in the amount $100,000. This note accrues interest at 8% per annum, payable at maturity, and matures on June 30, 2021. This note and accrued interest may convert into shares of common stock (i) any time at the holder’s 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 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-six (36) months. This note also contains detachable warrants exercisable for 5 years 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. The valuation of the detachable warrants resulted in the recognition of a discount on this note equal to $105,800.			100,000				-
Convertible note 2020-08. On July 30, 2020, the Company issued a convertible note payable in the amount $25,000. This note accrues interest at 12% per annum, payable monthly, and was originally due September 30, 2020, but the maturity date was extended to December 31, 2020. This note and accrued interest may convert into shares of common stock any time at the holder’s option at a conversion price of $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 (30) months, as amended. This note also contains a detachable warrant exercisable for 5 years to purchase 250 shares of common stock at $5.00 per share. The valuation of the detachable warrant resulted in the recognition of a discount on this note equal to $953.			25,000				-
Convertible note 2020-09. On August 7, 2020, the Company issued a convertible note payable in the amount $100,000. This note accrues interest at 8% per annum, payable at maturity, and matures on July 31, 2021. This note and accrued interest may convert into shares of common stock any time at the holder’s option at a conversion price of $5.00 per share. 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. The valuation of the detachable warrants resulted in the recognition of a discount on this note equal to $106,000.			100,000				-
Convertible note 2020-10. On September 8, 2020, the Company issued a convertible note payable in the amount $15,000. This note accrues interest at 8% per annum, payable at maturity, and matures on June 30, 2021. This note and accrued interest may convert into shares of common stock any time at the holder’s option at a conversion price of $4.50 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-six (36) months. This note also contains detachable warrants exercisable for 5 years to purchase 2,000 shares of common stock at $7.50 per share. The valuation of the detachable warrant resulted in the recognition of a discount on this note equal to $5,300.			15,000				-
Convertible note 2020-12. On September 22, 2020, the Company issued a convertible note payable in the amount $25,000. This note accrues interest at 8% per annum, payable monthly, and matures on June 30, 2021. This note and accrued interest may convert into shares of common stock any time at the holder’s option at a conversion price of $4.50 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-six (36) months. This note also contains detachable warrants exercisable for 5 years to purchase 5,555 shares of common stock at $4.50 per share. The valuation of the detachable warrant resulted in the recognition of a discount on this note equal to $11,499.			25,000				-
Convertible note 2020-13. On September 28, 2020, 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, payable monthly, and matures on June 30, 2021. This note and accrued interest may convert into shares of common stock any time at the holder’s option at a conversion price of $4.50 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-six (36) months. This note also contains detachable warrants exercisable for 5 years to purchase 24,155 shares of common stock at $4.50 per share. The valuation of the detachable warrant resulted in the recognition of a discount on this note equal to $50,001.			108,696				-

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)

 

		September 30, 2020				December 31, 2019
		(Unaudited)
Total convertible notes payable			1,700,034				519,566
Less original issue discounts			(114,262	)			(29,566	)
Convertible notes payable, net			1,585,772				490,000
Less discounts for conversion rights, beneficial conversion features, debt issuance costs, and detachable warrants			(996,253	)			(253,675	)
Plus amortization of discounts			627,688				121,964
Total convertible notes payable, net		$	1,217,207			$	358,289

 

Discounts

 

Total discounts (original issue discounts plus discounts for conversion rights, beneficial conversion features, debt issuance costs, and detachable warrants) of $1,110,515 are amortized using the interest method, which resulted in amortization recorded as interest expense of $224,670 and $1,065,943 for the three and nine-months ended September 30, 2020, with total accumulated amortization equal to $627,688 as of September 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.

 

In September 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 $40,133.

 

Interest expense

 

The Company incurred interest charges on these convertible notes payable of $37,418 and $4,496 during the three-months ended September 30, 2020 and 2019, respectively. The Company incurred interest charges on these convertible notes payable of $101,850 and $7,537 during the nine-months ended September 30, 2020 and 2019, respectively. The aggregate amount of accrued and unpaid interest on these convertible notes payable was $39,392 and $7,537 as of September 30, 2020 and 2019, respectively.

 

Maturities

 

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

 

2021		$	1,700,034
		$	1,700,034

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 10 – DERIVATIVE FINANCIAL INSTRUMENTS

 

The Company has identified the embedded derivatives related to the convertible notes described in 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-months ended September 30, 2020, were as follows:

 

Dividend yield			0.0	%
Risk-free rate			0.12% - 1.43	%
Volatility			162% - 190	%
Expected term			1 year

 

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

 

For the nine-months ended September 30, 2020, the Company recognized total derivative liabilities and convertible note discounts based on their fair value at the convertible notes’ inception and/or adjustment dates. These derivative liabilities were subsequently revalued at $649,417 as of September 30, 2020, which resulted in a loss of $191,545 on the change in value of these derivative liabilities. During the nine-months ended September 30, 2020, derivative liabilities of $458,977 were eliminated 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				Change in fair value
December 31, 2019			$	-			$	-			$	827,314			$	(356,314	)
September 30, 2020			$	-			$	-			$	649,417			$	(191,545	)

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 11 – 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 year ended 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 $60 per unit. Each $60 unit consisted of 2 shares of restricted common stock (8,169 shares) and a five-year warrant to purchase 1 share of restricted common stock (4,085 warrant shares) at $40 per share.

 

Shares outstanding

 

As of September 30, 2020, and December 31, 2019, the Company had a total of 765,154 and 687,564 shares of common stock outstanding, respectively.

 

NOTE 12 – STOCK GRANTS

 

Stock grants to convertible note holders

 

During the nine-months ended September 30, 2020, the Company granted convertible note holders an aggregate of 81,409 shares of restricted common stock. 25,855 shares were issued as consideration for commitment fees, 27,777 shares issued are returnable if the note is fully repaid by maturity, and 27,777 shares issued were cancelled in accordance with the terms of issuance as the debt was repaid.

 

An additional 6,250 shares were issued as consideration for extension fees.

 

Director stock grants

 

During the nine-months ended September 30, 2020, the Company granted its independent directors an aggregate of 17,708 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 $56,250. 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 nine-months ended September 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.

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 13 – 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 152,101. On April 16, 2015, the majority stockholder of the Company approved an increase in the shares reserved under this plan by 75,000 shares. On December 4, 2018, the stockholders of the Company approved an increase in the shares reserved under this plan by an additional 25,000 shares and authorized the annual increase of the shares reserved under this plan on January 1st of each year, at the 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 of September 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, 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			(30,277	)
Outstanding September 30, 2020			171,969			$	84.80				3.30			$	-
Exercisable September 30, 2020			165,212			$	85.99				3.12			$	-

 

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, 2020, based on a valuation of the Company’s stock for that day.

 

 

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-months ended September 30, 2020, and year ended December 31, 2019, are presented below:

 

Non-vested at January 1, 2019			16,700
Granted			-
Vested			(6,271	)
Canceled			(291	)
Non-vested at December 31, 2019			10,138
Granted			-
Vested			(3,381	)
Canceled			-
Non-vested at September 30, 2020			6,757

 

Option valuation

 

The Company estimates the fair value of stock options granted on each grant date using the Black-Scholes valuation model and recognizes an expense ratably over the requisite service period. The expected dividend yield is zero, because the Company does not anticipate paying a dividend within the 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 stock options to be valued. The expected volatility is calculated based on the historical volatility of the Company. Due to a lack of historical information needed to estimate the 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 nine-months ended September 30, 2020, and the year ended December 31, 2019, no options were granted.

 

Stock-based compensation expense

 

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

 

		Nine-months ended September 30
		2020				2019
		Amount				Amount
Service provider compensation		$	88,125			$	133,125
Employee compensation			119,062				124,750
Total		$	207,187			$	257,875

 

Option expiration

 

During the nine-months ended September 30, 2020, options to purchase an aggregate of 30,777 shares of common stock expired. During the year ended December 31, 2019, no options expired.

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 14 – 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, 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			198,849
Exercised			-
Expired			(83,719	)
Outstanding September 30, 2020			631,878			$	18.33				3.08			$	25,686
Exercisable September 30, 2020			631,878			$	18.33				3.08			$	25,686

 

Warrant valuation

 

The Company estimates the fair value of warrants granted on each grant date using the Black-Scholes valuation model. The range of fair value assumptions related to warrants issued were as follows for the:

 

		Nine-months ended September 30, 2020				Year ended December 31, 2019
Dividend yield			0.0	%			0.0	%
Risk-free rate			0.13% – 1.55	%			1.34% – 2.37	%
Volatility			143% – 207	%			145% – 168	%
Expected term			2 – 5 years				2 – 2.5 years

 

The expected dividend yield is zero, because the Company does not anticipate paying a dividend within the 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 volatility is calculated based on the historical volatility of the Company. Due to a lack of historical information needed to estimate the Company’s expected term, it is estimated using the simplified method allowed.

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 14 – WARRANTS (continued)

 

Convertible note warrants

 

During the nine-months ended September 30, 2020, warrants to purchase 125,893 shares of common stock at $4.50 to $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. The value of the warrants was recorded as a discount on the convertible notes in the aggregate amount of $370,351 and $125,545 during the nine-months ended September 30, 2020, and the year ended December 31, 2019, respectively.

 

Director warrant grants

 

During the nine-months ended September 30, 2020, the Company granted 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
September 30, 2020			25,952			$	3.00

 

These warrants were immediately vested and expire in ten years. During the nine-months ended September 30, 2020, the Company recognized stock-based compensation expense related to these warrants in the aggregate amount of $225,000.

 

During the year ended December 31, 2019, the Company did not recognize any stock-based compensation expense related to warrants.

 

Warrant expiration

 

During the nine-months ended September 30, 2020, warrants to purchase an aggregate of 83,719 shares of common stock expired. During the year ended December 31, 2019, warrants to purchase an aggregate of 94,577 shares of common stock expired.

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 15 – 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, 2020 and 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 September 30, 2020, and December 31, 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.

 

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.

 

As of September 30, 2020, and December 31, 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.

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 16 – 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, 2020
		(Unaudited)
		Net Loss (Numerator)				Shares (Denominator)				Per share amount
Basic loss per share		$	(1,354,331	)			755,847			$	(1.79	)
Effect of dilutive securities—Common stock options, warrants, and convertible notes			-				-				-
Diluted loss per share		$	(1,354,331	)			755,847			$	(1.79	)

 

		Three-months ended September 30, 2019
		(Unaudited)
		Net Loss (Numerator)				Shares (Denominator)				Per share amount
Basic loss per share		$	(1,433,626	)			683,731			$	(2.10	)
Effect of dilutive securities—Common stock options, warrants, and convertible notes			-				-				-
Diluted loss per share		$	(1,433,626	)			683,731			$	(2.10	)

 

		Nine-months ended September 30, 2020
		(Unaudited)
		Net Loss (Numerator)				Shares (Denominator)				Per share amount
Basic loss per share		$	(4,057,541	)			736,719			$	(5.51	)
Effect of dilutive securities—Common stock options, warrants, and convertible notes			-				-				-
Diluted loss per share		$	(4,057,541	)			736,719			$	(5.51	)

 

		Nine-months ended September 30, 2019
		(Unaudited)
		Net Loss (Numerator)				Shares (Denominator)				Per share amount
Basic loss per share		$	(3,650,740	)			678,108			$	(5.38	)
Effect of dilutive securities—Common stock options, warrants, and convertible notes			-				-				-
Diluted loss per share		$	(3,650,740	)			678,108			$	(5.38	)

 

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, 2020				September 30, 2019
			(Unaudited)				(Unaudited)
Common stock underlying convertible notes			549,527				47,012
Common stock underlying options			171,969				202,246
Common stock underlying warrants			631,878				513,875
Total common stock equivalents			1,353,374				763,133

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 17 – LEASES

 

Office 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 $9,253 and $27,231 for the three and nine-months ended September 30, 2020, respectively, and $8,989 and $27,188 for the three and nine-months ended September 30, 2019, respectively.

 

Fleet lease

 

In January 2018, the Company entered into a vehicle lease arrangement with a rental company for three vehicles. The terms of the leases require 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 $3,710 and $11,237 for the three and nine-months ended September 30, 2020, respectively, and $4,964 and $16,520 for the three and nine-months ended September 30, 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 $3,843 as of September 30, 2020.

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 18 – SUBSEQUENT EVENTS

 

The Company evaluated all material events through the date the financials were ready for issuance and identified the following for additional disclosure.

 

Note payable

 

On October 8, 2020, the Company fully repaid the $25,000 promissory note issued June 29, 2020.

 

On November 6, 2020, the Company issued a related party note payable in the amount $94,000. The note holder is a current stockholder that beneficially owns more than 5% of the Company’s common stock. The note had an issuance fee of $4,000 and a one-time interest charge of $2,000, which are due and payable upon the maturity date of December 6, 2020.

 

Convertible notes payable

 

On October 8, 2020, the Company issued a convertible note payable in the amount $60,000. This note accrues interest at 8% per annum, payable monthly, and matures on September 30, 2021. This note and accrued interest may convert into shares of common stock any time at the holder’s option at a conversion price of $4.50 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-six (36) months. This note also contains a detachable warrant exercisable for 5 years to purchase 13,333 shares of common stock at $4.50 per share.

 

On October 8, 2020, the Company issued a convertible note payable in the amount $20,000. This note accrues interest at 8% per annum, payable monthly, and matures on September 30, 2021. This note and accrued interest may convert into shares of common stock any time at the holder’s option at a conversion price of $4.50 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-six (36) months. This note also contains a detachable warrant exercisable for 5 years to purchase 4,444 shares of common stock at $4.50 per share.

 

On November 4, 2020, an amendment to the convertible note payable issued May 14, 2020, in the original principal amount of $500,000, extended the period before the conversion price adjusts from a fixed price to a variable price at a discount to market and the period the Company may prepay the note without penalty or premium, to seven (7) months following issuance (December 14, 2020), with payment of an extension fee of $25,000 on November 9, 2020, and to eight (8) months following issuance (January 14, 2021), with payment of an additional extension fee of $25,000 by December 14, 2020. All other terms remain unchanged. The amendment to this note was not considered a material modification under ASC 470-50-40, and as a result, is not considered an accounting extinguishment in the period the note was modified.

 

On November 10, 2020, an amendment to the convertible note payable issued January 21, 2020, in the original principal amount of $262,500, extended the maturity date to December 15, 2020. The note holder also agreed not to exercise its conversion rights, provided the note is fully repaid by December 15, 2020. As consideration for the extension, the Company paid an extension fee of $25,000. All other terms remain unchanged. The amendment to this note was considered a material modification under ASC 470-50-40, and as a result, is considered an accounting extinguishment in the period the note was modified.

 

On November 11, 2020, an amendment to the convertible note payable issued March 16, 2020, in the original principal amount of $250,000, extended the maturity date to December 31, 2020. The amendment also provided that the 27,777 shares of common stock issued in connection with the purchase of the note shall be subject to return if the note is fully repaid by December 31, 2020. As consideration for the extension, the Company agreed to pay an extension fee of $15,000 ($7,500 by November 13, 2020, and $7,500 by December 1, 2020). All other terms remain unchanged. The amendment to this note was not considered a material modification under ASC 470-50-40, and as a result, is not considered an accounting extinguishment in the period the note was modified.

 

***

 

 

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. 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.

 

Impact of COVID-19

 

The COVID-19 pandemic is a worldwide health crisis that is adversely affecting the economies 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 global pandemic continues to evolve. Our sales, receivables, and access to financing, have been adversely affected during the pandemic.

 

 

Results of Operations

 

Results of Operations for the Three and Nine-Months Ended September 30, 2020 and 2019:

 

The following table reflects our operating results for the three and nine-months ended September 30, 2020 and 2019:

 

Operating Summary		Three-months ended September 30, 2020				Three-months ended September 30, 2019				Nine-months ended September 30, 2020				Nine-months ended September 30, 2019
Revenues, net		$	66,502			$	229,142			$	343,836			$	439,505
Cost of Goods Sold			(27,516	)			(120,818	)			(129,381	)			(254,479	)
Gross Profit			38,986				108,324				214,455				185,026
Operating Expenses			(744,746	)			(1,300,035	)			(2,615,278	)			(3,540,412	)
Net Operating Loss			(705,760	)			(1,191,711	)			(2,400,823	)			(3,355,386	)
Other Expenses, net			(648,571	)			(241,915	)			(1,656,718	)			(295,354	)
Net Loss		$	(1,354,331	)		$	(1,433,626	)		$	(4,057,541	)		$	(3,650,740	)

 

Operating Summary for the Three-Months Ended September 30, 2020 and 2019

 

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 available at GNC corporate stores nationwide. As a result, revenues were $66,502 and $229,142 for the three-months ended September 30, 2020 and 2019, respectively. Costs of goods sold were $27,516 and $120,818 for the three-months ended September 30, 2020 and 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 $38,986 and $108,324 for the three-months ended September 30, 2020 and 2019, respectively, which represented gross profit margins of approximately 59% and 47%, respectively. The decreases in revenues and gross profit were primarily attributed to decreased sales, which we believe were related to the COVID-19 pandemic and GNC’s Chapter 11 reorganization.

 

Operating expenses were $744,746 and $1,300,035 for the three-months ended September 30, 2020 and 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 $144,062 and $175,712 in stock-based compensation for the three-months ended September 30, 2020 and 2019, respectively. The decrease in operating expenses was primarily attributed to decreased professional fees, research and development, salaries and wages, and selling, general, and administrative expenses.

 

Other expenses, net, were $648,571 and $241,915 for the three-months ended September 30, 2020 and 2019, respectively. For the three-months ended September 30, 2020, other income (expenses), consisted of a change in fair value of derivative liability of $(268,711), gain on modification of debt instruments of $40,133, and interest expense of $(419,993). The interest expense was primarily attributed to amortization of non-cash discounts associated with debt issuances. For the three-months ended September 30, 2019, other income (expenses) consisted of the change in the fair value of a derivative liability of $(20,524), loss on abandonment of patents of $(36,205), and interest expense of $(185,186).

 

 

Operating Summary for the Nine-Months Ended September 30, 2020 and 2019

 

Our revenues were $343,836 and $439,505 for the nine-months ended September 30, 2020 and 2019, respectively. Costs of goods sold were $129,381 and $254,479 for the nine-months ended September 30, 2020 and 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 $214,455 and $185,026 for the nine-months ended September 30, 2020 and 2019, respectively, which represented gross profit margins of approximately 62% and 42%, respectively. The decrease in revenues was primarily attributed to decreased sales, which we believe were related to the COVID-19 pandemic and GNC’s Chapter 11 reorganization. The increase in gross profit was primarily attributed to decreased GNC promotional discounts, incentives, and returns.

 

Operating expenses were $2,615,278 and $3,540,412 for the nine-months ended September 30, 2020 and 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 $488,437 and $534,774 in stock-based compensation for the nine-months ended September 30, 2020 and 2019, respectively. The decrease in operating expenses was primarily attributed to decreased professional fees, research and development, salaries and wages, and selling, general, and administrative expenses.

 

Other expenses, net, were $1,656,718 and $295,354 for the nine-months ended September 30, 2020 and 2019, respectively. For the nine-months ended September 30, 2020, other income (expenses), consisted of a change in fair value of derivative liability of $(191,545), gain on modification of debt instruments of $394,924, other income of $10,000, and interest expense of $(1,870,097). The interest expense was primarily attributed to amortization of non-cash discounts associated with debt issuances. For the nine-months ended September 30, 2019, other income (expenses) consisted of the change in the fair value of a derivative liability of $(3,139), loss on abandonment of patents of $(36,205), and interest expense of $(256,010).

 

 

Liquidity and Capital Resources

 

Since our inception, we have sustained operating losses and have used cash raised by issuing securities. We expect to continue to operate with a net loss until we are able to develop and commercialize our pharmaceutical product candidates. During the nine-months ended September 30, 2020 and 2019, we used cash in operating activities in the amount of $1,406,791 and $3,047,889, respectively, and incurred net losses of $4,057,541 and $3,650,740, respectively. The decrease in cash used in operating activities for the nine-months ended September 30, 2020, primarily related to a combination of decreased operating expenses and increased accruals for accounts payable and accrued payroll.

 

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 September 30, 2020, we provided an allowance of $52,766 for our receivables from GNC. On October 7, 2020, GNC announced it had emerged from bankruptcy as GNC Holdings, LLC, a Delaware company, owned indirectly by Harbin Pharmaceutical Group Co., Ltd., a Chinese pharmaceutical company (“Harbin”), through its wholly-owned subsidiary, ZT Biopharmaceutical LLC, a Delaware company. Harbin was previously GNC’s largest stockholder and acquired the company for approximately $770 million according to public reports. GNC orders of ZanthoSyn® have resumed, but 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.

 

During the nine-months ended September 30, 2020 and 2019, we raised $2,101,300 and $2,870,000, respectively. During the nine-months ended September 30, 2020, the amounts were raised through the issuance of $1,590,000 in convertible notes payable, $250,000 in a related party convertible note payable, $211,300 in a forgivable note payable, $25,000 in a note payable, and $25,000 in a note payable to a related party. During the nine-months ended September 30, 2019, the amounts were raised through the issuance of $245,000 in common stock, $1,575,000 in notes payable to related parties, $750,000 in a convertible note payable to a related party, and $300,000 in convertible notes payable. In accordance with U.S. GAAP, derivative liabilities of $649,417 and $827,314 were recognized in connection with convertible notes outstanding as of September 30, 2020 and December 31, 2019, respectively; however, these are non-cash amounts and do not directly impact our liquidity or capital needs.

 

 

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 and the listing of our common stock and such warrants on the Nasdaq Capital Market (the “Proposed Public Offering”). We would use the proceeds from any Proposed Public Offering primarily to fund pharmaceutical development and our operations. After giving effect to the net proceeds that we would receive from the Proposed Public Offering, if closed, we expect to have sufficient cash resources to support 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 Offering will be consummated on acceptable terms, or at all. In addition, prior to any closing of the Proposed Public Offering, we will need to obtain additional financing, which 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 the 2020 calendar year in the aggregate principal amount of $526,968, of which the full amount has terms for conversion and/or repayment amortization, (ii) due in the 2021 calendar year in the aggregate principal amount of $3,232,414, of which $2,657,414 has terms for conversion and/or repayment amortization, and (iii) due in the 2022 calendar year 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, warrants to purchase our common stock, debt, and/or convertible securities prior to any closing of the Proposed Public Offering or as an alternative thereto may not be available to us on acceptable terms and conditions, or at all.

 

Our stockholders may be diluted upon the exercise or conversion of our outstanding warrants, options, and convertible notes, including as previously disclosed, certain of our outstanding notes that have rights to convert into shares of our common stock upon certain dates or events at prices that may cause substantial dilution.

 

In July 2020, we submitted a grant application to a federal government agency to fund a proposed clinical trial with one of our astaxanthin products in COVID-19 patients. In December 2020 or January 2021, we expect to submit an updated grant application to address the comments received from the agency’s reviewers. 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.

 

 

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, 2020				Nine-months ended September 30, 2019
Net Cash Used in Operating Activities		$	(1,406,791	)		$	(3,047,889	)
Net Cash Used in Investing Activities			(12,399	)			(58,394	)
Net Cash Provided by Financing Activities			1,507,072				2,870,000
Net Cash Increase (Decrease) for Period			87,882				(236,283	)
Cash at Beginning of Period			19,303				243,753
Cash at End of Period		$	107,185			$	7,470

 

Cash Flows from Operating Activities

 

During the nine-months ended September 30, 2020 and 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. The decrease in cash used in operating activities for the nine-months ended September 30, 2020, primarily related to a combination of decreased operating expenses and increased accruals for accounts payable and accrued payroll.

 

Cash Flows from Investing Activities

 

During the nine-months ended September 30, 2020 and 2019, our investing activities were related to expenditures on patents.

 

Cash Flows from Financing Activities

 

During the nine-months ended September 30, 2020 and 2019, our financing activities consisted of transactions in which we raised proceeds through the issuance of debt or equity securities. During the nine-months ended September 30, 2020, we raised proceeds from the issuance of convertible notes payable in the aggregate amount of $1,590,000, the issuance of a related party convertible note payable in the amount of $250,000, the issuance of a forgivable note payable in the amount of $211,300, the issuance of a note payable in the amount of $25,000, 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 $529,228 and an outstanding note payable in the amount of $25,000, and we paid debt issuance costs in the aggregate amount of $40,000. During the nine-months ended September 30, 2019, we raised proceeds from the issuance of common stock in the aggregate amount of $245,000, the issuance of related party notes payable in the aggregate amount of $1,575,000, the issuance of a convertible note payable to a related party in the amount of $750,000, and the issuance of convertible notes payable in the aggregate amount of $300,000.

 

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.

 

 

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 disclosure controls and procedures, as 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 is (a) recorded, processed, summarized, and reported, within the time periods specified in the Commission’s rules and forms; and (b) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as 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 September 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, as defined in Rule 15d-15(f) under the Exchange 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 our transactions and dispositions of 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 are being made only in accordance with authorizations of our management and directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our internal control over financial reporting using the framework in Internal 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 September 30, 2020.

 

Changes in Internal Control over Financial Reporting

 

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, any change in our internal control over financial reporting and identified no change during the quarter ended September 30, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

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.

 

None.

 

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)		Forms of the Securities Purchase Agreement, the Convertible Note, and the Warrant, each dated as of September 8, 2020
10.2(1)		Forms of the Securities Purchase Agreement, the Convertible Note, and the Warrant, each dated as of September 17, 2020
10.3(1)		Forms of the Securities Purchase Agreement, the Convertible Note, and the Warrant, each dated as of September 22, 2020
10.4(1)		Forms of the Securities Purchase Agreement, the Convertible Note, and the Warrant, each dated as of September 28, 2020
10.5(1)		Forms of the Securities Purchase Agreement, the Convertible Note, and the Warrant, each dated as of October 8, 2020
31.1(1)		Certification of the Chief Executive Officer pursuant to Exchange Act Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2(1)		Certification of the Chief Financial Officer pursuant to Exchange Act Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1(1)		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2(1)		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS(2)		XBRL Instance Document
101.SCH(2)		XBRL Taxonomy Extension Schema Document
101.CAL(2)		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF(2)		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB(2)		XBRL Taxonomy Extension Label Linkbase Document
101.PRE(2)		XBRL Taxonomy Extension Presentation Linkbase Document
(1)		Filed herewith.
(2)		Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under those sections.

 

 

SIGNATURES

 

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

 

Dated: November 13, 2020

 

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