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 June 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 August 14, 2020, there were 758,904 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

 

  2  

 

 

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

 

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

 

  3  

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

Condensed Consolidated Financial Statements

 

Cardax, Inc., and Subsidiary

 

June 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

 

  4  

 

 

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

As of

 

    June 30,     December 31,  
    2020     2019  
    (Unaudited)        
ASSETS              
                 
CURRENT ASSETS                
Cash   $ 30,349     $ 19,303  
Accounts receivable, net     -       205,768  
Inventories     1,083,248       1,177,831  
Deposits and other assets     3,063       2,066  
Prepaid expenses     177,074       181,093  
                 
Total current assets     1,293,734       1,586,061  
                 
INTANGIBLE ASSETS, net     410,583       420,373  
                 
RIGHT TO USE LEASED ASSETS     6,724       12,488  
                 
TOTAL ASSETS   $ 1,711,041     $ 2,018,922  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
CURRENT LIABILITIES                
Accrued payroll and payroll related expenses, current portion   $ 3,949,488     $ 3,687,376  
Accounts payable and accrued expenses     1,569,058       1,544,402  
Fees payable to directors     418,546       418,546  
Accrued separation costs, current portion     10,500       9,000  
Current portion of related party notes payable     600,000       575,000  

Current portion of note payable

 

92,933

      -  
Related party convertible notes payable     1,132,608       651,721  
Convertible notes payable, net of discount     984,939       358,289  
Employee settlement     50,000       50,000  
Lease liability, current portion     6,724       11,527  
Derivative liability on convertible notes payable     337,068       827,314  
                 
Total current liabilities    

9,151,864

      8,133,175  
                 
NON-CURRENT LIABILITIES                

Note payable, less current portion

   

118,367

      -  

Related party notes payable, less current portion

    1,000,000       1,000,000  
Accrued separation costs, less current portion     77,635       83,635  
Lease liability, less current portion     -       961  
                 
Total non-current liabilities    

1,196,002

      1,084,596  
                 
COMMITMENTS AND CONTINGENCIES     -       -  
                 
Total liabilities     10,347,866       9,217,771  
                 
STOCKHOLDERS’ DEFICIT                
Preferred Stock - $0.001 par value; 50,000,000 shares authorized, 0 shares issued and outstanding as of June 30, 2020, and December 31, 2019, respectively     -       -  
Common stock - $0.001 par value; 400,000,000 shares authorized, 752,654 and 687,564 shares issued and outstanding as of June 30, 2020, and December 31, 2019, respectively     753       688  
Additional paid-in-capital     61,101,987       59,836,818  
Accumulated deficit     (69,739,565 )     (67,036,355 )
                 
Total stockholders’ deficit     (8,636,825 )     (7,198,849 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT   $ 1,711,041     $ 2,018,922  

 

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

 

  5  

 

 

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

    For the three-months ended June 30,    

For the six-months ended June 30

 
    2020     2019     2020     2019  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
                         
REVENUES, net   $ 134,521     $ 45,391     $ 277,334     $ 210,363  
                                 
COST OF GOODS SOLD     38,870       29,481       101,865       133,661  
                                 
GROSS PROFIT     95,651       15,910       175,469       76,702  
                                 
OPERATING EXPENSES:                                
Salaries and wages     340,863       384,917       714,155       789,726  
Professional fees     118,126       200,880       340,442       442,248  
Selling, general, and administrative expenses     193,904       233,876       362,317       525,445  
Stock based compensation     166,562       178,687       344,375       359,062  
Research and development     56,494       59,196       91,776       104,868  
Depreciation and amortization     8,734       7,766       17,467       19,028  
                                 
Total operating expenses     884,683       1,065,322       1,870,532       2,240,377  
                                 
Loss from operations     (789,032 )     (1,049,412 )     (1,695,063 )     (2,163,675 )
                                 
OTHER INCOME (EXPENSE):                                
Change in fair value of derivative liability     80,833       17,385       77,166       17,385  
Gain on modification of debt instruments     -       -       354,791       -  
Other income     10,000       -       10,000       -  
Interest expense     (1,002,143 )     (49,667 )     (1,450,104 )     (70,824 )
                                 
Total other (expense) income, net     (911,310 )     (32,282 )     (1,008,147 )     (53,439 )
                                 
Loss before the provision for income taxes     (1,700,342 )     (1,081,694 )     (2,703,210 )     (2,217,114 )
                                 
PROVISION FOR INCOME TAXES     -       -       -       -  
                                 
NET LOSS   $ (1,700,342 )   $ (1,081,694 )   $ (2,703,210 )   $ (2,217,114 )
                                 
NET LOSS PER SHARE                                
Basic   $ (2.26 )   $ (1.59 )   $ (3.72 )   $ (3.28 )
Diluted   $ (2.26 )   $ (1.59 )   $ (3.72 )   $ (3.28 )
                                 
SHARES USED IN CALCULATION OF NET LOSS PER SHARE                                
Basic     753,222       680,186       727,050       675,250  
Diluted     753,222       680,186       727,050       675,250  

 

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

 

  6  

 

 

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER DEFICIT

 

Six-months ended June 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     5,220       5       174,995       -       175,000  
                                         
Common stock grants to service providers     375       -       11,062       -       11,062  
                                         
Stock based compensation - options     -       -       173,000       -       173,000  
                                         
Restricted stock issuance     8,169       8       244,992       -       245,000  
                                         
Issuance of warrants attached to a convertible note     -       -       33,300       -       33,300  
                                         
Net loss     -       -       -       (2,217,114 )     (2,217,114 )
                                         
Balance at June 30, 2019     683,731     $ 683     $ 59,044,606       (64,160,432 )   $ (5,115,143 )
                                         
Balance at January 1, 2020     687,564     $ 688     $ 59,836,818     $ (67,036,355 )   $ (7,198,849 )
                                         
Common stock grants to independent directors     11,458       11       37,489       -       37,500  
                                         
Warrants granted to independent directors     -       -       150,000       -       150,000  
                                         
Stock based compensation - options     -       -       156,875       -       156,875  
                                         
Common stock grant to convertible note holders     81,409       81       532,131       -       532,212  
                                         
Issuance of warrants attached to convertible notes     -       -       2,777       -       2,777  
                                         
Beneficial conversion feature issued on convertible notes     -       -       141,391       -       141,391  
                                         
Revaluation of notes payable discounts due to modification of conversion price     -       -       (214,498 )     -       (214,498 )
                                         
Extinguishment of derivative liability upon repayment of convertible note     -       -       458,977       -       458,977  
                                         
Stock retirement     (27,777 )     (27 )     27       -       -  
                                         
Net loss     -       -       -       (2,703,210 )     (2,703,210 )
                                         
Balance at June 30, 2020     752,654     $ 753     $ 61,101,987     $ (69,739,565 )   $ (8,636,825 )

 

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

 

  7  

 

 

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER DEFICIT

(continued)

 

Three-months ended June 30, 2019 and 2020

 

    Common Stock     Additional     Accumulated        
    Shares     Amount     Paid-In-Capital     Deficit     Total  
                               
Balance at April 1, 2019     673,958     $ 674     $ 58,632,628     $ (63,078,738 )   $ (4,445,436 )
                                         
Common stock grants to independent directors     2,917       3       87,497       -       87,500  
                                         
Common stock grants to service providers     188       -       4,687       -       4,687  
                                         
Stock based compensation - options     -       -       86,500       -       86,500  
                                         
Restricted stock issuances     6,668       7       199,993       -       200,000  
                                         
Issuance of warrants attached to a convertible note     -       -       33,300       -       33,300  
                                         
Net loss     -       -       -       (1,081,694 )     (1,081,694 )
                                         
Balance at June 30, 2019     683,731     $ 684     $ 59,044,605     $ (64,160,432 )   $ (5,115,143 )
                                         
Balance at April 1, 2020     762,098     $ 762     $ 60,457,139     $ (68,039,223 )   $ (7,581,322 )
                                         
Common stock grants to independent directors     8,333       8       18,742       -       18,750  
                                         
Warrants granted to independent directors     -       -       75,000       -       75,000  
                                         
Stock based compensation - options     -       -       72,812       -       72,812  
                                         
Common stock grant to convertible note holders     10,000       10       97,490       -       97,500  
                                         
Extinguishment of derivative liability upon repayment of convertible note     -       -       380,777       -       380,777  
                                         
Stock retirement     (27,777 )     (27 )     27       -       -  
                                         
Net loss     -       -       -       (1,700,342 )     (1,700,342 )
                                         
Balance at June 30, 2020     752,654     $ 753     $ 61,101,987     $ (69,739,565 )   $ (8,636,825 )

 

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

 

  8  

 

 

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

For the six-months ended June 30,

 

    2020     2019  
    (Unaudited)     (Unaudited)  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss   $ (2,703,210 )   $ (2,217,114 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     17,467       19,028  
Amortization of debt discount     1,185,108       9,459  
Stock based compensation     344,375       359,062  
Bad debt expense on note receivable and accrued interest     66,261       -  
Change in fair value of derivative liability     (77,166 )     (17,385 )
Gain on modification of debt instruments     (354,791 )        
Changes in assets and liabilities:                
Accounts receivable     109,412       170,225  
Inventories     94,583       55,579  
Deposits and other assets     (997 )     -  
Prepaid expenses     4,019       1,315  
Accrued payroll and payroll related expenses     262,112       9,072  
Accounts payable and accrued expenses     54,750       (452,689 )
Accrued separation costs     (4,500 )     (4,500 )
                 
Net cash used in operating activities     (1,002,577 )     (2,067,948 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Increase in intangible assets     (7,677 )     (14,354 )
                 
Net cash used in investing activities     (7,677 )     (14,354 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from the issuance of related party notes payable     25,000       1,475,000  
Proceeds from the issuance of notes payable     211,300       -  
Proceeds from the issuance of convertible notes payable    

1,225,000

      150,000  
Repayment of principal on convertible notes payable     (400,000 )     -  
Payment of debt issuance costs     (40,000 )     -  
Proceeds from the issuance of common stock     -       245,000  
                 
Net cash provided by financing activities     1,021,300       1,870,000  
                 
NET INCREASE (DECREASE) IN CASH     11,046       (212,302 )
                 
BEGINNING OF THE PERIOD     19,303       243,753  
                 
END OF THE PERIOD   $ 30,349     $ 31,451  
                 
SUPPLEMENTAL DISCLOSURES:                
Cash paid for interest   $ 203,861     $ 42,045  
Cash paid for income taxes   $ -     $ -  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:                
Settlement of receivables with payables   $ 30,095     $ 47,597  
Right to use assets funded through leases   $ 5,764     $  26,298  
Retirement of issued stock   $

27

    $  -  
Debt issuance costs withheld from proceeds   $

5,000

    $  -  
Discounts recognized on notes payable at issuance   $ 676,380     $ 83,300  
Extinguishment of derivative liability upon repayment of convertible notes   $ 458,977     $ -  
Revaluation of notes payable discounts due to modification of conversion price   $ 214,498     $ -  

 

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

 

  9  

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

 

NOTE 1 – COMPANY BACKGROUND

 

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

 

Cardax, Inc. (the “Company”) (OTCQB:CDXI) is a development stage biopharmaceutical company primarily focused on the development of pharmaceuticals for chronic diseases driven by inflammation. The Company also has a commercial business unit that markets dietary supplements for inflammatory health. CDX-101, the Company’s astaxanthin pharmaceutical candidate, is being developed for cardiovascular inflammation and dyslipidemia, with a target initial indication of severe hypertriglyceridemia. CDX-301, the Company’s zeaxanthin pharmaceutical candidate, is being developed for macular degeneration, with a target initial indication of Stargardt disease. The Company’s pharmaceutical candidates are currently in pre-clinical development, including the planning of IND enabling studies. ZanthoSyn® is a physician recommended astaxanthin dietary supplement for inflammatory health. The Company sells ZanthoSyn® primarily through wholesale and e-commerce channels. The safety and efficacy of the Company’s products have not been directly evaluated in clinical trials or confirmed by the FDA.

 

Going concern matters

 

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying condensed consolidated financial statements, the Company incurred net losses of $1,700,342 and $2,703,210 for the three and six-months ended June 30, 2020, respectively, and incurred net losses of $1,081,694 and $2,217,114 for the three and six-months ended June 30, 2019, respectively. The Company has incurred losses since inception resulting in an accumulated deficit of $69,739,565 as of June 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 six-months ended June 30, 2020, the Company raised $1,461,300 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.

 

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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 June 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 six-months ended:

 

          June 30, 2020     June 30, 2019  
Geographical area   Source     (Unaudited)     (Unaudited)  
United States     Nutraceuticals     $ 266,962     $ 210,363  
Hong Kong     Nutraceuticals     $ 10,372     $ -  

 

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

 

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Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Notes payable

 

The Company issued various notes payable to related and non-related parties. These notes payable included original issue discounts, detachable warrants, conversion features, beneficial conversion features, and debt issuance costs.

 

  ● Original issue discounts. The Company accounts for the original issue discounts in accordance with Accounting Standards Codification (“ASC”) No. 835-30, Interest and Imputation of Interest, which requires the Company to record the discount as a contra-liability and amortize it over the term of the underlying note using the interest method.
     
  ● Detachable warrants. The Company accounts for detachable warrants in accordance with ASC No. 470-20, Debt, which requires the Company to bifurcate and separately account for the detachable warrant as a separated debt instrument. The values are assigned to detachable warrant based on a relative fair allocation between the note, the warrants, and any other debt instrument issued with the note payable. The fair value used for the warrant in this allocation is calculated using the Black-Scholes valuation model.
     
  ● Conversion features. The Company accounts for the fair value of the conversion feature in accordance with ASC 815-15, Derivatives and Hedging; Embedded Derivatives, which requires the Company to bifurcate and separately account for the conversion feature as an embedded derivative contained in the Company’s convertible note. The Company is required to carry the embedded derivative on its balance sheet at fair value. The initial value of the embedded derivative is accounted for as a discount to the convertible note and a derivative liability. The liability is required to be remeasured at each reporting date and the change in fair value is recognized as a component in the results of operations. The Company values the embedded derivatives on the condensed consolidated balance sheet at fair value using the Black-Scholes valuation model.
     
  ● Beneficial conversion features. The Company accounts for beneficial conversion features in accordance with ASC No. 470-20, Debt, which requires the Company to recognize a discount and charge an amount to additional paid in capital equal to the intrinsic value of the beneficial conversion feature.
     
  ● Debt issuance costs. The Company accounts for debt issuance costs in accordance with ASC No. 470-20, Debt, which requires the Company to recognize a contra-liability for costs incurred with the issuance of debt instruments. These contra-liabilities are amortized over the term of the underlying note payable using the interest method.

 

Stock issuance costs

 

Stock issuance costs related to financing are accounted for as a reduction in stock proceeds in accordance with ASC No. 340-10, Other Assets and Deferred Costs. Such costs consist of underwriting and legal fees, as well as travel costs incurred. These costs were $182,811 as of June 30, 2020, and are being deferred as a component of prepaid expenses in the accompanying condensed consolidated balance sheet until completion of the proposed public offering.

 

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Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Accounts receivable

 

Accounts receivable, net, of $0 and $205,768 as of June 30, 2020, and December 31, 2019, respectively, consists of amounts due from sales of dietary supplements.

 

It is the Company’s policy to provide for an allowance for doubtful collections based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Normal receivables are due 60 days after the issuance of the invoice. Receivables past due more than 90 days are considered delinquent. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer. There was an allowance of $66,261 as of June 30, 2020, in connection with the Chapter 11 filing for reorganization under the U.S. Bankruptcy Code of General Nutrition Corporation (“GNC”), the Company’s largest customer, on June 23, 2020. There was no allowance necessary as of December 31, 2019.

 

Other significant accounting policies

 

There have been no other material changes to our significant accounting policies during the six-months ended June 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 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.

 

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Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 3 – INVENTORIES

 

Inventories consist of the following as of:

 

    June 30, 2020
(Unaudited) 		    December 31, 2019  
Raw materials   $ 759,400     $ 763,800  
Finished goods     323,848       414,031  
Total inventories   $ 1,083,248     $ 1,177,831  

 

As of June 30, 2020, and December 31, 2019, $759,400 and $763,800, respectively, in raw materials were held at the manufacturer’s facility for future production. Additionally, as of June 30, 2020, and December 31, 2019, $298,185 and $407,756, respectively, in finished goods were held at the manufacturer’s facility for shipment.

 

NOTE 4 – INTANGIBLE ASSETS, net

 

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

 

    June 30, 2020 (Unaudited)     December 31, 2019  
Patents   $ 614,003     $ 614,003  
Less accumulated amortization     (349,548 )     (332,081 )
      264,455       281,922  
Patents pending     146,128       138,451  
Total intangible assets, net   $ 410,583     $ 420,373  

 

Patents are amortized straight-line over a period of fifteen years. Amortization expense was $8,734 and $17,467 for the three and six-months ended June 30, 2020, respectively. Amortization expense was $7,766 and $19,028 for the three and six-months ended June 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 June 30, 2020, $88,135 remains outstanding of which $10,500 is due within one-year and is reflected as a current liability.

 

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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:

 

    June 30, 2020
(Unaudited) 		    December 31, 2019  
             
Inventory financing. On January 11, 2019, the Company entered into a $1,000,000 revolving inventory financing facility with a lender that is also a current stockholder that beneficially owns more than 5% of the Company’s common stock. Use of proceeds from this facility is limited to the purchase of inventory, including raw materials, intermediates, and finished goods, unless otherwise waived by the lender. This facility accrues interest at the rate of 12% per annum payable monthly, is unsecured, and matures in three years from origination. This facility requires monthly interest payments.   $ 1,000,000     $ 1,000,000  
                 
Officer loan. On June 26, 2019, the Company borrowed $75,000 from the Chief Executive Officer of the Company. This note accrues interest at the rate of 4.5% per annum, is unsecured, and was originally due August 26, 2019, but the maturity date was extended to June 30, 2021.     75,000       75,000  
                 
Promissory note 2019-01. On May 20, 2019, the Company entered into a $400,000 promissory note with a lender that is also a current stockholder that beneficially owns more than 5% of the Company’s common stock. On July 10, 2019, this note was amended to increase the principal sum by an additional $100,000. This note accrues interest at the rate of 12% per annum, is unsecured, and was originally due August 20, 2019, but the maturity date was extended to June 30, 2021. The principal and accrued interest are due on the maturity date.     500,000       500,000  
                 
Promissory note 2012-01. On June 29, 2019, the Company entered into a $25,000 promissory note with a lender that is also a current stockholder that beneficially owns more than 5% of the Company’s common stock. This note accrues interest at the rate of 12% per annum, is unsecured, and matures on September 30, 2020. The principal and accrued interest are due on the maturity date.     25,000       -  
                 
Total related party notes payable     1,600,000       1,575,000  
                 
Less current portion     (600,000 )     (575,000 )
                 
Long term related party notes payable   $ 1,000,000     $ 1,000,000  

 

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Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 6 – RELATED PARTY NOTES PAYABLE (continued)

 

Interest expense

 

The Company incurred interest charges on these related party notes payable of $45,610 and $35,487 during the three-months ended June 30, 2020 and 2019, respectively. The Company incurred interest charges on these related party notes payable of $91,203 and $55,460 during the six-months ended June 30, 2020 and 2019, respectively. The aggregate amount of accrued and unpaid interest on these related party notes payable was $78,588 and $15,433 as of June 30, 2020 and 2019, respectively.

 

Maturities

 

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

 

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

 

NOTE 7 – NOTE PAYABLE

 

On April 22, 2020, the Company received a Paycheck Protection Program (“PPP”) loan under the U.S. Small Business Administration (the “SBA”) for $211,300. Under the terms of the program, up to 100% of the loan amount may be forgiven if certain terms and conditions are met. The unforgiven amount, if any, matures in April 2022 and accrues interest at 1% per annum with principal and interest payments of $11,891 per month starting in November 2020.

 

Interest expense

 

The Company incurred interest charges on this note payable of $404 during the three and six-months ended June 30, 2020. The aggregate amount of accrued and unpaid interest on this note payable was $404 as of June 30, 2020.

 

Maturity

 

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

 

2021   $ 92,933  
2022     118,367  
    $ 211,300  

 

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

 

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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:

 

    June 30, 2020
(Unaudited) 		    December 31, 2019  
             
Convertible note 2019-02. On July 19, 2019, the Company issued a convertible note payable in the amount $815,217, with an original issue discount of $65,217 in exchange for $750,000. This note accrues interest at 8% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at the conversion price then in effect (initially $24 per share, subject to adjustment) any time at the holder’s option or automatically upon a qualified financing of at least $5 million at the lower of the conversion price then in effect or a 25% discount to the offering price. The conversion price is subject to adjustment upon the issuance of the Company’s common stock or securities convertible into common stock at a price per share less than the then prevailing conversion price, other than specified exempt issuances; accordingly, the adjusted conversion price was equal to $4.27 per share as of June 30, 2020, and $14 per share as of December 31, 2019. A beneficial conversion feature was recognized as a result of the conversion price upon issuance and adjustment being less than fair market value. This note was also issued with a detachable warrant to purchase 7,500 shares of stock at $24 per share, which is subject to adjustment in accordance with any adjustment to the conversion price of this note; accordingly, the adjusted exercise price was equal to $4.27 per share as of June 30, 2020, and $14 per share as of December 31, 2019. The valuation of the conversion feature and detachable warrant and intrinsic value of the beneficial conversion feature resulted in the recognition of discounts on this note equal to $234,300 and $582,533 as of June 30, 2020, and December 31, 2019, respectively, wherein the difference was due to the revaluation of such features upon adjustment of the conversion price in February 2020. This note requires monthly interest payments.   $ 815,217     $ 815,217  
                 

 

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Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 8 – RELATED PARTY CONVERTIBLE NOTES PAYABLE (continued)

 

    June 30, 2020
(Unaudited) 		    December 31, 2019  
             
Convertible note 2019-07. On October 16, 2019, the Company issued a convertible note payable in the amount $217,391, with an original issue discount of $17,391 in exchange for $200,000. This note accrues interest at 8% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at the conversion price then in effect (initially $24 per share, subject to adjustment) any time at the holder’s option or automatically upon a qualified financing of at least $5 million at the lower of the conversion price then in effect or a 25% discount to the offering price. The conversion price is subject to adjustment upon the issuance of the Company’s common stock or securities convertible into common stock at a price per share less than the then prevailing conversion price, other than specified exempt issuances; accordingly, the adjusted conversion price was equal to $4.27 per share as of June 30, 2020, and $14 per share as of December 31, 2019. A beneficial conversion feature was recognized as a result of the conversion price upon adjustment being less than fair market value. This note was also issued with a detachable warrant to purchase 2,000 shares of stock at $24 per share, which is subject to adjustment in accordance with any adjustment to the conversion price of this note; accordingly, the adjusted conversion price was equal to $4.27 per share as of June 30, 2020, and $14 per share as of December 31, 2019. The valuation of the conversion feature and detachable warrant and intrinsic value of the beneficial conversion feature resulted in the recognition of discounts on this note equal to $63,060 and $110,783 as of June 30, 2020, and December 31, 2019, respectively, wherein the difference was due to the revaluation of such features upon adjustment of the conversion price in February 2020. This note requires monthly interest payments.     217,391       217,391  
                 
Officer convertible note. On November 15, 2019, the Company issued a convertible note payable in the amount $100,000. This note accrues interest at 14% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at the conversion price of $20 per share. This note requires monthly interest payments.     100,000       100,000  

 

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Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 8 – RELATED PARTY CONVERTIBLE NOTES PAYABLE (continued)

 

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

 

    June 30, 2020
(Unaudited) 		    December 31, 2019  
             
Total related party convertible notes payable     1,132,608       1,132,608  
                 
Less original issue discounts     (82,608 )     (82,608 )
                 
Related party convertible notes payable, net     1,050,000       1,050,000  
                 
Less discounts for conversion rights, beneficial conversion features, and detachable warrants     (297,360 )     (693,316 )
                 
Plus amortization of discounts     379,968       295,037  
                 
Total related party convertible notes payable, net   $ 1,132,608     $ 651,721  

 

Discounts

 

Total discounts (original issue discounts plus discounts for conversion rights, beneficial conversion features, and detachable warrants) of $379,968 are amortized using the interest method, which resulted in amortization recorded as interest expense of $231,389 and $343,835 for the three and six-months ended June 30, 2020, with total accumulated amortization equal to $379,968 as of June 30, 2020.

 

Modifications

 

In February 2020, the Company adjusted the conversion price of certain related party convertible notes payable in accordance with their terms, which triggered modification accounting and resulted in a gain of $258,903.

 

On June 30, 2020, the Company extended the maturity dates of the related party convertible notes payable as described in the table above. In conjunction with these extensions, management compared the present values of these notes prior to the extension and after the extension in accordance with FASB ASC No. 470-50, Debt Modifications and Extinguishments, noting that the change in present value was less than 10%. As such, these notes were determined to not be substantially different and no changes in values were recognized.

 

Interest expense

 

The Company incurred interest charges on these related party convertible notes payable of $24,020 and $48,040 during the three and six-months ended June 30, 2020, respectively. The aggregate amount of accrued and unpaid interest on these related party convertible notes payable was $7,919 as of June 30, 2020.

 

Maturities

 

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

 

2021   $  1,132,608  
    $ 1,132,608  

 

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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:

 

    June 30, 2020
(Unaudited) 		    December 31, 2019  
             
Convertible note 2019-01. On April 18, 2019, the Company issued a convertible note payable in the amount $150,000. This note accrued interest at 10% per annum and was originally due December 31, 2019, but the maturity date was extended to March 31, 2020. This note was fully repaid as of March 17, 2020. Prior to repayment, this note and accrued interest were convertible into shares of common stock at the conversion price then in effect (initially $24 per share, subject to adjustment) any time at the holder’s option. The conversion price was subject to adjustment upon the issuance of the Company’s common stock or securities convertible into common stock at a price per share less than the then prevailing conversion price, other than specified exempt issuances; accordingly, the adjusted conversion price was equal to $4.27 per share as of March 17, 2020, and $14 per share as of December 31, 2019. A beneficial conversion feature was recognized as a result of the conversion price upon issuance and adjustment being less than fair market value. This note was also issued with a detachable warrant to purchase 2,500 shares of stock at $40 per share. The valuation of the conversion feature and detachable warrant and intrinsic value of the beneficial conversion feature resulted in the recognition of discounts on this note equal to $199,012 as of December 31, 2019. The discounts on this note and accumulated amortization of such discounts were eliminated upon repayment.   $ -     $ 150,000  
                 
Convertible note 2019-03. On September 4, 2019, the Company issued a convertible note payable in the amount $108,696, with an original issue discount of $8,696 in exchange for $100,000. This note accrues interest at 8% per annum and was originally due June 30, 2020, but the maturity date was extended to September 30, 2020. This note and accrued interest may convert into shares of common stock at $24 per share any time at the holder’s option. A beneficial conversion feature was recognized as a result of the conversion price upon issuance being less than fair market value. If this note, or any portion thereof, has not been repaid or converted in full on or prior to the maturity date, then repayment of the unpaid principal balance plus any accrued and unpaid interest thereon, shall be amortized over the following thirty-three (33) months, as amended. This note was also issued with a detachable warrant to purchase 1,000 shares of stock at $24 per share. The valuation of the detachable warrant and intrinsic value of the beneficial conversion feature resulted in the recognition of discounts on this note equal to $18,326. This note requires monthly interest payments.     108,696       108,696  

 

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Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)

 

   

June 30, 2020

(Unaudited)

    December 31, 2019  
             
Convertible note 2019-04. On September 25, 2019, the Company issued a convertible note payable in the amount $54,348, with an original issue discount of $4,348 in exchange for $50,000. This note accrues interest at 8% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at $24 per share any time at the holder’s option. If this note, or any portion thereof, has not been repaid or converted in full on or prior to the maturity date, then repayment of the unpaid principal balance plus any accrued and unpaid interest thereon, shall be amortized over the following thirty-six (36) months. This note was also issued with a detachable warrant to purchase 500 shares of stock at $24 per share. The valuation of the detachable warrant resulted in the recognition of a discount on this note equal to $4,190. This note requires monthly interest payments.     54,348       54,348  
                 
Convertible note 2019-05. On October 3, 2019, the Company issued a convertible note payable in the amount $27,174, with an original issue discount of $2,174 in exchange for $25,000. This note accrues interest at 8% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at $24 per share any time at the holder’s option. If this note, or any portion thereof, has not been repaid or converted in full on or prior to the maturity date, then repayment of the unpaid principal balance plus any accrued and unpaid interest thereon, shall be amortized over the following thirty-six (36) months. This note was also issued with a detachable warrant to purchase 250 shares of stock at $24 per share. The valuation of the detachable warrant resulted in the recognition of a discount on this note equal to $2,705. This note requires monthly interest payments.     27,174       27,174  

 

  21  

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)

 

   

June 30, 2020

(Unaudited)

    December 31, 2019  
             
Convertible note 2019-06. On October 10, 2019, the Company issued a convertible note payable in the amount $27,174, with an original issue discount of $2,174 in exchange for $25,000. This note accrues interest at 8% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at $24 per share any time at the holder’s option. If this note, or any portion thereof, has not been repaid or converted in full on or prior to the maturity date, then repayment of the unpaid principal balance plus any accrued and unpaid interest thereon, shall be amortized over the following thirty-six (36) months. This note was also issued with a detachable warrant to purchase 250 shares of stock at $24 per share. The valuation of the detachable warrant resulted in the recognition of a discount on this note equal to $2,505. This note requires monthly interest payments.     27,174       27,174  
                 
Convertible note 2019-08. On October 23, 2019, the Company issued a convertible note payable in the amount $108,696, with an original issue discount of $8,696 in exchange for $100,000. This note accrues interest at 8% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at $24 per share any time at the holder’s option. If this note, or any portion thereof, has not been repaid or converted in full on or prior to the maturity date, then repayment of the unpaid principal balance plus any accrued and unpaid interest thereon, shall be amortized over the following thirty-six (36) months. This note was also issued with detachable warrants to purchase 1,250 shares of stock at $30 per share and 1,250 shares of stock at $40 per share. The valuation of the detachable warrants resulted in the recognition of a discount on this note equal to $21,363. This note requires monthly interest payments.     108,696       108,696  

 

  22  

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)

 

   

June 30, 2020

(Unaudited)

    December 31, 2019  
             
Convertible note 2019-09. On October 29, 2019, the Company issued a convertible note payable in the amount $27,174, with an original issue discount of $2,174 in exchange for $25,000. This note accrues interest at 8% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at $24 per share any time at the holder’s option. If this note, or any portion thereof, has not been repaid or converted in full on or prior to the maturity date, then repayment of the unpaid principal balance plus any accrued and unpaid interest thereon, shall be amortized over the following thirty-six (36) months. This note was also issued with a detachable warrant to purchase 250 shares of stock at $24 per share. The valuation of the detachable warrant resulted in the recognition of a discount on this note equal to $2,295. This note requires monthly interest payments.     27,174       27,174  
                 
Convertible note 2019-10. On November 8, 2019, the Company issued a convertible note payable in the amount $16,304, with an original issue discount of $1,304 in exchange for $15,000. This note accrues interest at 8% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at $14 per share any time at the holder’s option. A beneficial conversion feature was recognized as a result of the conversion price upon issuance being less than fair market value. If this note, or any portion thereof, has not been repaid or converted in full on or prior to the maturity date, then repayment of the unpaid principal balance plus any accrued and unpaid interest thereon, shall be amortized over the following thirty-six (36) months. This note was also issued with a detachable warrant to purchase 150 shares of stock at $14 per share. The valuation of the detachable warrant and intrinsic value of the beneficial conversion feature resulted in the recognition of discounts on this note equal to $3,279. This note requires monthly interest payments.     16,304       16,304  

 

  23  

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)

 

   

June 30, 2020

(Unaudited)

    December 31, 2019  
             
Convertible note 2020-01. On January 6, 2020, the Company issued a convertible note payable in the amount $10,870, with an original issue discount of $870 in exchange for $10,000. This note accrues interest at 8% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at $10 per share any time at the holder’s option. If this note, or any portion thereof, has not been repaid or converted in full on or prior to the maturity date, then repayment of the unpaid principal balance plus any accrued and unpaid interest thereon, shall be amortized over the following thirty-six (36) months. This note was also issued with a detachable warrant to purchase 100 shares of stock at $10 per share. The valuation of the detachable warrant resulted in the recognition of a discount on this note equal to $793. This note requires monthly interest payments.     10,870       -  
                 
Convertible note 2020-02. On January 21, 2020, the Company issued a convertible note payable in the amount $262,500, with an original issue discount of $12,500 in exchange for $250,000. This note had a one-time fixed interest charge equal to 10% of the principal amount and was originally due June 30, 2020. As a subsequent event, the maturity date of this note was extended to September 1, 2020, and 6,250 shares of common stock were issued as consideration for the extension. This note and accrued interest may convert into shares of common stock at $4.27 per share (as adjusted on February 21, 2020) any time at the holder’s option. A beneficial conversion feature was recognized as a result of the conversion price upon adjustment being less than fair market value. 5,855 shares of common stock were issued as a commitment fee in connection with the purchase of this note and recognized as a debt issuance cost. The debt issuance costs and intrinsic value of the beneficial conversion feature resulted in the recognition of discounts on this note equal to $85,247. This note is secured by finished goods inventory.     262,500       -  

 

  24  

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)

 

   

June 30, 2020

(Unaudited)

    December 31, 2019  
             
Convertible note 2020-03. On February 25, 2020, the Company issued a convertible note payable in the amount $52,631, with an original issue discount of $2,632 in exchange for $50,000. This note accrues interest at 8% per annum and was originally due June 30, 2020, but the maturity date was extended to June 30, 2021. This note and accrued interest may convert into shares of common stock at $7.50 per share any time at the holder’s option or automatically upon a qualified financing of at least $5 million at the lower of the conversion price then in effect or a 25% discount to the offering price. If this note, or any portion thereof, has not been repaid or converted in full on or prior to the maturity date, then repayment of the unpaid principal balance plus any accrued and unpaid interest thereon, shall be amortized over the following thirty-six (36) months. This note was also issued with a detachable warrant to purchase 500 shares of stock at $7.50 per share. The valuation of the detachable warrant resulted in the recognition of a discount on this note equal to $1,985. This note requires monthly interest payments.     52,631       -  
                 
Convertible note 2020-04. On March 16, 2020, the Company issued a convertible note payable in the amount $250,000, with an original issue discount of $20,000 in exchange for $230,000. This note accrues interest at 10% per annum and was originally due September 16, 2020. This note was fully repaid as of May 14, 2020. Prior to repayment, this note and accrued interest were convertible into shares of common stock at the conversion price then in effect (initially $4.50 per share, subject to adjustment) any time at the holder’s option. A beneficial conversion feature was recognized as a result of the conversion price upon issuance being less than fair market value. The conversion price was subject to adjustment upon the issuance of the Company’s common stock or securities convertible into common stock at a price per share less than the then prevailing conversion price, other than specified exempt issuances. 5,000 shares of common stock were issued as a commitment fee in connection with the purchase of this note and recognized as a debt issuance cost. 27,777 shares of common stock were also issued in connection with the purchase of this note and recognized as a debt issuance cost; however, these shares were subject to return if the note was fully repaid within 6 months of issuance and were therefore returned upon repayment. $5,000 was paid for the holder’s legal expenses in connection with the transaction and recognized as a debt issuance cost. The valuation of the conversion feature, debt issuance costs, and intrinsic value of the beneficial conversion feature resulted in the recognition of discounts on this note equal to $343,854 upon issuance. The discounts on this note and accumulated amortization of such discounts were eliminated upon repayment.     -       -  

 

  25  

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)

 

   

June 30, 2020

(Unaudited)

    December 31, 2019  
             
Convertible note 2020-05. On March 16, 2020, the Company issued a convertible note payable in the amount $250,000, with an original issue discount of $20,000 in exchange for $230,000. This note accrues interest at 10% per annum and was originally due September 16, 2020. As a subsequent event, the maturity date of this note was extended to October 31, 2020, and the principal amount was increased by $10,000 as consideration for the extension. This note and accrued interest may convert into shares of common stock at the conversion price then in effect (initially $4.50 per share, subject to adjustment) any time at the holder’s option. A beneficial conversion feature was recognized as a result of the conversion price upon issuance being less than fair market value. The conversion price is subject to adjustment upon the issuance of the Company’s common stock or securities convertible into common stock at a price per share less than the then prevailing conversion price, other than specified exempt issuances. 5,000 shares of common stock were issued as a commitment fee in connection with the purchase of this note and recognized as a debt issuance cost. 27,777 shares of common stock were also issued in connection with the purchase of this note and recognized as a debt issuance cost; however, these shares are subject to return if the note is fully repaid within 6 months of issuance. $5,000 was withheld from the proceeds for the holder’s legal expenses in connection with the transaction and recognized as a debt issuance cost. The valuation of the conversion feature, debt issuance costs, and intrinsic value of the beneficial conversion feature resulted in the recognition of discounts on this note equal to $343,854.     250,000       -  
                 
Convertible note 2020-05. On May 14, 2020, the Company issued a convertible note payable in the amount $500,000, with an original issue discount of $40,000 in exchange for $460,000. This note accrues interest at 10% per annum and matures on May 14, 2021. This note and accrued interest may convert into shares of common stock at the conversion price then in effect (initially $9.75 per share, subject to adjustment) any time at the holder’s option. The conversion price is subject to adjustment upon the issuance of the Company’s common stock or securities convertible into common stock at a price per share less than the then prevailing conversion price, other than specified exempt issuances. 10,000 shares of common stock were issued as a commitment fee in connection with the purchase of this note and recognized as a debt issuance cost. $10,000 was paid for the holder’s legal expenses in connection with the transaction and recognized as a debt issuance cost. The valuation of the conversion feature and debt issuance costs resulted in the recognition of discounts on this note equal to $311,670.     500,000       -  

 

  26  

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE (continued)

 

    June 30, 2020
(Unaudited) 		    December 31, 2019  
             
Total convertible notes payable     1,445,568       519,566  
                 
Less original issue discounts     (105,568 )     (29,566 )
                 
Convertible notes payable, net     1,340,000       490,000  
                 
Less discounts for conversion rights, beneficial conversion features, debt issuance costs, and detachable warrants     (798,212 )     (253,675 )
                 
Plus amortization of discounts     443,151       121,964  
                 
Total convertible notes payable, net   $ 984,939     $ 358,289  

 

Discounts

 

Total discounts (original issue discounts plus discounts for conversion rights, beneficial conversion features, debt issuance costs, and detachable warrants) of $903,780 are amortized using the interest method, which resulted in amortization recorded as interest expense of $656,063 and $841,273 for the three and six-months ended June 30, 2020, with total accumulated amortization equal to $443,151 as of June 30, 2020.

 

Modifications

 

In February 2020, the Company adjusted the conversion price of a convertible note payable in accordance with its terms, which triggered modification accounting and resulted in a gain of $95,888.

 

On June 30, 2020, the Company extended the maturity dates of certain convertible notes payable as described in the table above. In conjunction with these extensions, management compared the present values of these notes prior to the extension and after the extension in accordance with FASB ASC No. 470-50, Debt Modifications and Extinguishments, noting that the change in present value was less than 10%. As such, these notes were determined to not be substantially different and no changes in values were recognized.

 

Interest expense

 

The Company incurred interest charges on these convertible notes payable of $25,006 and $3,041 during the three-months ended June 30, 2020 and 2019, respectively. The Company incurred interest charges on these convertible notes payable of $64,432 and $3,041 during the six-months ended June 30, 2020 and 2019, respectively. The aggregate amount of accrued and unpaid interest on these convertible notes payable was $42,956 and $3,041 as of June 30, 2020 and 2019, respectively.

 

Maturities

 

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

 

2021   $ 

1,445,568

 
    $ 1,445,568  

 

  27  

 

 

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 six-months ended June 30, 2020, were as follows:

 

Dividend yield     0.0 %
Risk-free rate     0.15% - 1.43 %
Volatility     175% - 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 six-months ended June 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 $337,068 as of June 30, 2020, which resulted in a loss of $77,166 on the change in value of these derivative liabilities. During the six months ended June 30, 2020, there were derivative liabilities of $458,977 that expired upon repayment of outstanding convertible notes, which were recorded as adjustments to additional paid in capital.

 

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

 

    Level 1     Level 2     Level 3  
                         
June 30, 2020   $ -     $ -     $ 337,068  

 

  28  

 

 

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 June 30, 2020, and December 31, 2019, the Company had a total of 752,654 and 687,564 shares of common stock outstanding, respectively.

 

NOTE 12 – STOCK GRANTS

 

Director stock grants

 

During the six-months ended June 30, 2020, the Company granted its independent directors an aggregate of 11,458 shares of restricted common stock, which were fully vested upon issuance. The expense recognized for these grants based on the fair value on the grant date was $37,500. Effective as of the quarter ended March 31, 2020, certain independent directors elected to receive compensation in the form of warrants rather than stock.

 

During the year ended December 31, 2019, the Company granted its independent directors an aggregate of 11,054 shares of restricted common stock, which were fully vested upon issuance. The expense recognized for these grants based on the fair value on the grant date was $350,000.

 

Consultant stock grants

 

During the six-months ended June 30, 2020, the Company did not grant consultants any stock and accordingly did not recognize any related expense.

 

During the year ended December 31, 2019, the Company granted consultants an aggregate of 750 shares of restricted common stock, which were fully vested upon issuance. The expense recognized for these grants based on the fair value on the grant date was $16,650.

 

  29  

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 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 June 30, 2020.

 

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

 

A summary of stock option activity is as follows:

 

    Options     Weighted
average
exercise price 		    Weighted
average
remaining
contractual
term in years 		    Aggregate
intrinsic value 		 
Outstanding January 1, 2019     202,537     $ 80.13       4.52     $ 987,064  
Exercisable January 1, 2019     185,837     $ 82.13       4.10     $ 967,064  
Canceled     (291 )                        
Granted     -                          
Exercised     -                          
Expired     -                          
Outstanding December 31, 2019     202,246     $ 80.14       3.52     $ -  
Exercisable December 31, 2019     192,108     $ 81.32       3.26     $ -  
Canceled     -                          
Granted     -                          
Exercised     -                          
Expired     26,702                          
Outstanding June 30, 2020     175,544     $ 85.07       3.48     $ -  
Exercisable June 30, 2020     168,011     $ 86.33       3.28     $ -  

 

The aggregate intrinsic value in the table above is before applicable income taxes and represents the excess amount over the exercise price option recipients would have received if all options had been exercised on June 30, 2020, based on a valuation of the Company’s stock for that day.

 

  30  

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 13 – STOCK OPTION PLANS (continued)

 

A summary of the Company’s non-vested options for the six-months ended June 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     (2,605 )
Canceled     -  
Non-vested at June 30, 2020     7,533  

 

Option valuation

 

The Company estimates the fair value of stock options granted on each grant date using the Black-Scholes 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 six-months ended June 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:

 

    Six-months ended June 30  
    2020     2019  
    Amount     Amount  
Service provider compensation   $ 77,500     $ 88,750  
Employee compensation     79,375       84,250  
Total   $ 156,875     $ 173,000  

 

Option expiration

 

During the six-months ended June 30, 2020, options to purchase an aggregate of 26,702 shares of common stock expired. During the year ended December 31, 2019, no options expired.

 

  31  

 

 

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     47,604                          
Exercised     -                          
Expired     (83,604 )                        
Outstanding June 30, 2020     480,748     $ 22.08       2.48     $ -  
Exercisable June 30, 2020     480,748     $ 22.08       2.48     $ -  

 

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:

 

    Six-months ended
June 30, 2020 		    Year ended
December 31, 2019 		 
Dividend yield     0.0 %     0.0 %
Risk-free rate     0.29% – 1.55 %     1.34% – 2.37 %
Volatility     152% – 207 %     145% – 168 %
Expected term     2 – 5 years       2 – 2.5 years  

 

The expected dividend yield is 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.

 

  32  

 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 14 – WARRANTS (continued)

 

Convertible note warrants

 

During the six-months ended June 30, 2020, warrants to purchase 600 shares of common stock at $7.50 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 $69,498 and $125,545 during the six-months ended June 30, 2020, and the year ended December 31, 2019, respectively.

 

Director warrant grants

 

During the six-months ended June 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  

 

These warrants were immediately vested and expire in ten years. During the six-months ended June 30, 2020, the Company recognized stock-based compensation expense related to these warrants in the aggregate amount of $150,000.

 

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

 

Warrant expiration

 

During the six-months ended June 30, 2020, warrants to purchase an aggregate of 83,604 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.

 

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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 six-months ended June 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 June 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 June 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.

 

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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 June 30, 2020 (Unaudited)  
    Net Loss (Numerator)     Shares (Denominator)     Per share
amount 		 
Basic loss per share   $ (1,700,342 )     753,222     $ (2.26 )
Effect of dilutive securities—Common stock options, warrants, and convertible notes     -       -       -  
Diluted loss per share   $ (1,700,342 )     753,222     $ (2.26 )

 

    Three-months ended June 30, 2019 (Unaudited)  
    Net Loss (Numerator)     Shares (Denominator)     Per share
amount 		 
Basic loss per share   $ (1,081,694 )     680,186     $ (1.59 )
Effect of dilutive securities—Common stock options, warrants, and convertible notes     -       -       -  
Diluted loss per share   $ (1,081,694 )     680,186     $ (1.59 )

 

    Six-months ended June 30, 2020 (Unaudited)  
    Net Loss (Numerator)     Shares (Denominator)     Per share
amount 		 
Basic loss per share   $ (2,703,210 )     727,050     $ (3.72 )
Effect of dilutive securities—Common stock options, warrants, and convertible notes     -       -       -  
Diluted loss per share   $ (2,703,210 )     727,050     $ (3.72 )

 

    Six-months ended June 30, 2019 (Unaudited)  
    Net Loss (Numerator)     Shares (Denominator)     Per share
amount 		 
Basic loss per share   $ (2,217,114 )     675,250     $ (3.28 )
Effect of dilutive securities—Common stock options, warrants, and convertible notes     -       -       -  
Diluted loss per share   $ (2,217,114 )     675,250     $ (3.28 )

 

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

 

    June 30, 2020     June 30, 2019  
      (Unaudited)       (Unaudited)  
Common stock underlying convertible notes     439,137       6,250  
Common stock underlying options     175,544       202,537  
Common stock underlying warrants     480,748       504,875  
Total common stock equivalents     1,095,429       713,662  

 

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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 $8,989 and $17,978 for the three and six-months ended June 30, 2020, respectively, and $9,100 and $18,199 for the three and six-months ended June 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 $3,773 and $7,527 for the three and six-months ended June 30, 2020, respectively, and $5,597 and $11,556 for the three and six-months ended June 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 $6,724 as of June 30, 2020.

 

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

 

Convertible notes payable

 

On July 21, 2020, the Company issued a convertible note payable in the amount $100,000. This note accrues interest at 8% per annum 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.

 

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 matures on September 30, 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-three (33) months. This note also contains a detachable warrant exercisable for 5 years to purchase 250 shares of common stock at $5.00 per share.

 

On August 7, 2020, the Company issued a convertible note payable in the amount $100,000. This note accrues interest at 8% per annum and matures on July 31, 2021. This note and accrued interest may convert into shares of 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.

 

On August 10, 2020, an amendment to the $250,000 convertible note payable dated March 16, 2020, extended the maturity date to October 31, 2020, increased the principal amount by $10,000 (as consideration for the extension), and provided that the 27,777 shares of common stock issued in connection with the purchase of the note shall be subject to return if the note is fully repaid by October 31, 2020. All other terms remain unchanged.

 

On August 14, 2020, an amendment to the $262,500 convertible note payable dated January 21, 2020, extended the maturity date to September 1, 2020. As consideration for the extension, the Company issued 6,250 shares of common stock to the holder, subject to a true-up provision at 180 days following August 14, 2020, if the average of the volume weighted average prices of common stock on the principal trading market during the three trading days prior to such date is less than a specified price; provided, however, that the Company has the right to redeem the 6,250 shares and cancel its obligation to issue any true-up shares by payment to the holder of $25,000. In addition, this note shall bear interest at 10% per annum from and after July 1, 2020. All other terms remain unchanged.

 

***

 

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

 

Explanatory Note

 

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

 

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

 

Corporate Overview and History

 

We are a development stage biopharmaceutical company primarily focused on the development of pharmaceuticals for chronic diseases driven by inflammation. We also have a commercial business unit that markets dietary supplements for inflammatory health. CDX-101, our astaxanthin pharmaceutical candidate, is being developed for cardiovascular inflammation and dyslipidemia, with a target initial indication of severe hypertriglyceridemia. CDX-301, our zeaxanthin pharmaceutical candidate, is being developed for macular degeneration, with a target initial indication of Stargardt disease. Our pharmaceutical candidates are currently in pre-clinical development, including the planning of IND enabling studies. ZanthoSyn® is a physician recommended astaxanthin dietary supplement for inflammatory health. We sell ZanthoSyn® primarily through wholesale and e-commerce channels. The safety and efficacy of our products have not been directly evaluated in clinical trials or confirmed by the FDA.

 

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

 

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.

 

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Results of Operations

 

Results of Operations for the Three and Six-Months Ended June 30, 2020 and 2019:

 

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

 

Operating Summary   Three-months ended
June 30, 2020 		    Three-months ended
June 30, 2019 		    Six-months ended
June 30, 2020 		    Six-months ended
June 30, 2019 		 
Revenues, net   $ 134,521     $ 45,391     $ 277,334     $ 210,363  
Cost of Goods Sold     (38,870 )     (29,481 )     (101,865 )     (133,661 )
Gross Profit     95,651       15,910       175,469       76,702  
Operating Expenses     (884,683 )     (1,065,322 )     (1,870,532 )     (2,240,377 )
Net Operating Loss     (789,032 )     (1,049,412 )     (1,695,063 )     (2,163,675 )
Other Expenses, net     (911,310 )     (32,282 )     (1,008,147 )     (53,439 ) 
Net Loss   $ (1,700,342 )   $ (1,081,694 )   $ (2,703,210 )   $ (2,217,114 )

 

Operating Summary for the Three-Months Ended June 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 $134,521 and $45,391 for the three-months ended June 30, 2020 and 2019, respectively. Costs of goods sold were $38,870 and $29,481 for the three-months ended June 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 $95,651 and $15,910 for the three-months ended June 30, 2020 and 2019, respectively, which represented gross profit margins of approximately 71% and 35%, respectively. The increases in revenues and gross profit were primarily attributed to differences in GNC promotional incentives and ordering patterns related to ZanthoSyn®.

 

Operating expenses were $884,683 and $1,065,322 for the three-months ended June 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 $166,562 and $178,687 in stock-based compensation for the three-months ended June 30, 2020 and 2019, respectively. The decrease in operating expenses was primarily attributed to decreased professional fees, salaries and wages, and selling, general, and administrative expenses.

 

Other expenses, net, were $911,310 and $32,282 for the three-months ended June 30, 2020 and 2019, respectively. For the three-months ended June 30, 2020, other income (expenses), consisted of a change in fair value of derivative liability of $80,833, other income of $10,000, and interest expense of $(1,002,143). The interest expense was primarily attributed to amortization of non-cash discounts associated with debt issuances. For the three-months ended June 30, 2019, other income (expenses), consisted of a change in fair value of derivative liability of $17,385 and interest expense of $(49,667).

 

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Operating Summary for the Six-Months Ended June 30, 2020 and 2019

 

Our revenues were $277,334 and $210,363 for the six-months ended June 30, 2020 and 2019, respectively. Costs of goods sold were $101,865 and $133,661 for the six-months ended June 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 $175,469 and $76,702 for the six-months ended June 30, 2020 and 2019, respectively, which represented gross profit margins of approximately 63% and 36%, respectively. The increases in revenues and gross profit were primarily attributed to differences in GNC promotional incentives and ordering patterns related to ZanthoSyn®.

 

Operating expenses were $1,870,532 and $2,240,377 for the six-months ended June 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 $344,375 and $359,062 in stock-based compensation for the six-months ended June 30, 2020 and 2019, respectively. The decrease in operating expenses was primarily attributed to decreased professional fees, salaries and wages, and selling, general, and administrative expenses.

 

Other expenses, net, were $1,008,147 and $53,439 for the six-months ended June 30, 2020 and 2019, respectively. For the six-months ended June 30, 2020, other income (expenses), consisted of a change in fair value of derivative liability of $77,166, gain on modification of debt instruments of $354,791, other income of $10,000, and interest expense of $(1,450,104). The interest expense was primarily attributed to amortization of non-cash discounts associated with debt issuances. For the six-months ended June 30, 2019, other income (expenses), consisted of a change in fair value of derivative liability of $17,385 and interest expense of $(70,824).

 

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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 six-months ended June 30, 2020 and 2019, we used cash in operating activities in the amount of $1,002,577 and $2,067,948, respectively, and incurred net losses of $2,703,210 and $2,217,114, respectively.

 

Our existing liquidity is not sufficient to fund our operations, including payroll, anticipated capital expenditures, working capital, and other financing requirements for the foreseeable future. We may require more financing than anticipated, especially if we experience downturns or cyclical fluctuations in our business that are more severe or longer than anticipated, or if we experience significant increases in the cost of manufacturing, research and development, or sales and marketing activities, or increases in our expense levels resulting from being a publicly-traded company.

 

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

 

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

 

Our largest customer, GNC, filed for Chapter 11 reorganization under the U.S. Bankruptcy Code on June 23, 2020. As of June 30, 2020, we provided an allowance of $66,261 for our receivables from GNC. We cannot predict the extent of the impact that GNC’s reorganization will have on our future sales and receivables.

 

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

 

We will incur ongoing recurring expenses associated with professional fees for accounting, legal, and other expenses for annual reports, quarterly reports, proxy statements, and other filings under the Exchange Act. We estimate that these costs will likely be in excess of $250,000 per year. These obligations will reduce our ability and resources to fund other aspects of our business. We hope to be able to use our status as a public company to increase our ability to use non-cash means of settling obligations and compensate certain independent contractors who provide professional services to us, although there can be no assurances that we will be successful in any of those efforts.

 

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

 

During the six-months ended June 30, 2020 and 2019, we raised financing of $1,461,300 and $1,870,000, respectively. During the six-months ended June 30, 2020, our financing was through the issuance of $1,225,000 in convertible notes payable, $211,300 in a forgivable note payable, and $25,000 in a note payable to a related party. During the six-months ended June 30, 2019, our financing was through the issuance of $245,000 in common stock, $1,475,000 in notes payable to related parties, and $150,000 in a convertible note payable. In accordance with U.S. GAAP, derivative liabilities of $337,068 and $32,615 were recognized in connection with convertible notes outstanding as of June 30, 2020 and 2019, respectively; however, these are non-cash amounts and do not directly impact our liquidity or capital needs.

 

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We filed a registration statement on Form S-1 on August 14, 2019, as amended September 27, 2019, and November 22, 2019, for a proposed $15 million public offering of our common stock and warrants 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 2020 in the aggregate principal amount of $681,196, of which $656,196 have terms for conversion and/or repayment amortization, (ii) due in 2021 in the aggregate principal amount of $2,731,980, of which $2,156,980 have terms for conversion and/or repayment amortization, and (iii) due in 2022 in the aggregate principal amount of $1,211,300, of which $211,300 has terms for forgiveness and otherwise for repayment amortization starting in November 2020. Our ability to repay any and all of these notes as they become due if not otherwise repaid or converted on or prior to the maturity dates described above is uncertain and will be based on our ability to raise additional capital, generate additional revenues, and/or modify the terms of such debt instruments to the extent necessary.

 

We need additional capital to fund our operations and pay our current and future obligations, including without limitation our outstanding promissory notes; however, our ability to access the capital markets or otherwise raise such capital is unknown during the COVID-19 pandemic and there can be no assurance that we will be able to obtain sufficient amounts of capital as and when needed. Any additional financing in one or more transactions through the private placement of our common stock, 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.

 

In July 2020, we submitted a grant application to a federal government agency, which is under review as of the date hereof, to fund a proposed clinical trial with one of our astaxanthin products in COVID-19 patients. We are also pursuing other governmental and non-governmental sources of funding for COVID-19 clinical trials. If awarded, any such grant funding would provide non-dilutive capital, but we cannot give any assurance that we will receive any grant funding or the amount or timing or extent of restrictions thereof or our obligations related thereto.

 

Any inability to obtain additional financing will materially and adversely affect us, including requiring us to significantly curtail or cease business operations altogether. We cannot give any assurance that we will in the future be able to achieve a level of profitability from the sale of existing or future products or otherwise to sustain our operations. These conditions raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on recoverability and reclassification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

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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   Six-months ended
June 30, 2020 		    Six-months ended
June 30, 2019 		 
Net Cash Used in Operating Activities   $ (1,002,577 )   $ (2,067,948 )
Net Cash Used in Investing Activities     (7,677 )     (14,354 )
Net Cash Provided by Financing Activities     1,021,300       1,870,000  
Net Cash Increase (Decrease) for Period     11,046       (212,302 )
Cash at Beginning of Period     19,303       243,753  
Cash at End of Period   $ 30,349     $ 31,451  

 

Cash Flows from Operating Activities

 

During the six-months ended June 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.

 

Cash Flows from Investing Activities

 

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

 

Cash Flows from Financing Activities

 

During the six-months ended June 31, 2020 and 2019, our financing activities consisted of transactions in which we raised proceeds through the issuance of debt or equity securities. During the six-months ended June 30, 2020, we raised proceeds from the issuance of convertible notes payable in the aggregate amount of $1,225,000, the issuance of a forgivable note payable in the amount of $211,300, and the issuance of a related party note payable in the amount of $25,000, we repaid outstanding convertible notes payable in the aggregate amount of $400,000, and we paid debt issuance costs in the aggregate amount of $40,000. During the six-months ended June 30, 2019, we raised proceeds from the issuance of common stock in the aggregate amount of $245,000, the issuance of related party notes payable in the aggregate amount of $1,475,000, and the issuance of a convertible note payable in the amount of $150,000.

 

Off-Balance Sheet Arrangements

 

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

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

Our management is responsible for establishing and maintaining adequate 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 June 30, 2020.

 

Internal Control over Financial Reporting

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, 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 June 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 June 30, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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

 

Item 1A. Risk Factors.

 

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

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

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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 July 21, 2020
     
10.2(1)   Forms of the Securities Purchase Agreement, the Convertible Note, and the Warrant, each dated as of July 30, 2020
     
10.3(1)   Forms of the Securities Purchase Agreement, the Convertible Note, and the Warrant, each dated as of August 7, 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.

 

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SIGNATURES

 

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

 

Dated: August 14, 2020

 

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

 

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