Quarterly Report (10-q)

Date : 08/13/2018 @ 10:04PM
Source : Edgar (US Regulatory)
Stock : Cardax, Inc. (QB) (CDXI)
Quote : 0.1  0.0 (0.00%) @ 12:55PM

Quarterly Report (10-q)

 

 

 

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, 2018

 

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 [X]    

 

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

 

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

 

As of August 13, 2018, there were 132,901,073 shares of common stock, $0.001 par value per share (“ Common Stock ”), of the registrant outstanding.

 

 

 

 
 

 

TABLE OF CONTENTS

 

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

 

2
 

 

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

 

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

 

3
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

Condensed Consolidated Financial Statements

 

Cardax, Inc., and Subsidiary

 

June 30, 2018 and 2017

 

Contents

 

 

Page 

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

 

  4  
 

 

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    As of  
    June 30, 2018     December 31, 2017  
    (Unaudited)          
ASSETS                
                 
CURRENT ASSETS                
Cash   $ 327,183     $ 2,236,837  
Accounts receivable     34,042       37,243  
Inventories     399,062       340,425  
Deposits and other assets     119,066       90,831  
Prepaid expenses     101,214       22,838  
                 
Total current assets     980,567       2,728,174  
                 
PROPERTY AND EQUIPMENT, net     -       1,901  
                 
INTANGIBLE ASSETS, net     431,704       426,610  
                 
TOTAL ASSETS   $ 1,412,271     $ 3,156,685  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
CURRENT LIABILITIES                
Accrued payroll and payroll related expenses   $ 3,506,207     $ 3,490,225  
Accounts payable and accrued expenses     728,293       603,391  
Fees payable to directors     418,546       418,546  
Employee settlement     50,000       50,000  
                 
Total current liabilities     4,703,046       4,562,162  
                 
COMMITMENTS AND CONTINGENCIES     -       -  
                 
Total liabilities     4,703,046       4,562,162  
                 
STOCKHOLDERS’ DEFICIT                
Preferred Stock - $0.001 par value; 50,000,000 shares authorized, 0 shares issued and outstanding as of June 30, 2018, and December 31, 2017, respectively     -       -  
Common stock - $0.001 par value; 400,000,000 shares authorized, 123,300,787 and 122,674,516 shares issued and outstanding as of June 30, 2018, and December 31, 2017, respectively     123,301       122,675  
Additional paid-in-capital     56,653,005       56,401,069  
Deferred compensation     -       (10,125 )
Accumulated deficit     (60,067,081 )     (57,919,096 )
                 
Total stockholders’ deficit     (3,290,775 )     (1,405,477 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT   $ 1,412,271     $ 3,156,685  

   

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

 

  F- 1  
 

 

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

   

For the three-months ended

June 30,

   

For the six-months ended

June 30,

 
    2018     2017     2018     2017  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
                         
REVENUES, net   $ 272,049     $ 66,237     $ 585,359     $ 174,227  
                                 
COST OF GOODS SOLD     145,669       30,287       281,201       72,849  
                                 
GROSS PROFIT     126,380       35,950       304,158       101,378  
                                 
OPERATING EXPENSES:                                
Selling, general, and administrative expenses     391,250       134,461       818,117       279,357  
Salaries and wages     397,239       157,535       815,457       321,681  
Professional fees     229,278       64,330       411,167       174,800  
Stock based compensation     133,062       45,000       262,687       84,250  
Research and development     67,747       22,442       127,978       72,417  
Depreciation and amortization     7,530       7,400       17,135       14,801  
                                 
Total operating expenses     1,226,106       431,168       2,452,541       947,306  
                                 
Loss from operations     (1,099,726 )     (395,218 )     (2,148,383 )     (845,928 )
                                 
OTHER INCOME (EXPENSES):                                
Other income     -       12,598       556       12,598  
Interest income     815       587       1,934       1,168  
Interest expense     (1,211 )     (1,010 )     (2,092 )     (1,717 )
                                 
Total other income (expenses)     (396 )     12,175       398       12,049  
                                 
Loss before the provision for income taxes     (1,100,122 )     (383,043 )     (2,147,985 )     (833,879 )
                                 
PROVISION FOR INCOME TAXES     -       -       -       -  
                                 
NET LOSS   $ (1,100,122 )   $ (383,043 )   $ (2,147,985 )   $ (833,879 )
                                 
NET LOSS PER SHARE                                
Basic   $ (0.01 )   $ (0.00 )   $ (0.02 )   $ (0.01 )
Diluted   $ (0.01 )   $ (0.00 )   $ (0.02 )   $ (0.01 )
                                 
SHARES USED IN CALCULATION OF NET LOSS PER SHARE                                
Basic     122,975,014       90,305,824       122,825,595       88,409,138  
Diluted     122,975,014       90,305,824       122,825,595       88,409,138  

 

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

 

  F- 2  
 

 

Cardax, Inc., and Subsidiary

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    For the six-months ended June 30,  
    2018     2017  
    (Unaudited)     (Unaudited)  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss   $ (2,147,985 )   $ (833,879 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     17,135       14,801  
Stock based compensation     262,687       84,250  
Bad debt expense on note receivable and accrued interest     89,933       -  
Changes in assets and liabilities:                
Accounts receivable     83,201       (7,554 )
Inventories     (58,637 )     1,044  
Deposits and other assets     (118,168 )     31,632  
Prepaid expenses     (78,376 )     1,026  
Accrued payroll and payroll related expenses     15,982       14,604  
Accounts payable and accrued expenses     44,902       39,777  
                 
Net cash used in operating activities     (1,889,326 )     (654,299 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Increase in intangible assets     (20,328 )     (7,618 )
                 
Net cash used in investing activities     (20,328 )     (7,618 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from the issuance of common stock     -       582,000  
                 
Net cash provided by financing activities     -       582,000  
                 
NET DECREASE IN CASH     (1,909,654 )     (79,917 )
                 
CASH AT THE BEGINNING OF THE PERIOD     2,236,837       158,433  
                 
CASH AT THE END OF THE PERIOD   $ 327,183     $ 78,516  
                 
SUPPLEMENTAL DISCLOSURES:                
Cash paid for interest   $ 2,092     $ 1,717  
Cash paid for income taxes   $ -     $ -  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:                
Conversion of accounts payable into restricted stock   $ -     $ 44,700  
Settlement of receivables with payables   $ 80,000     $ -  

  

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

 

  F- 3  
 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

 

NOTE 1 – COMPANY BACKGROUND

 

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

 

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

 

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

 

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

 

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

 

  F- 4  
 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 1 – COMPANY BACKGROUND (continued)

 

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

 

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

 

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

 

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

 

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

 

  F- 5  
 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 1 – COMPANY BACKGROUND (continued)

 

Going concern matters

 

The accompanying 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 consolidated financial statements, the Company incurred a net loss of $1,100,122 and $2,147,985, for the three and six months ended June 30, 2018, respectively, and a net loss of $383,043 and $833,879 for the three and six months ended June 30, 2017, respectively. The Company has incurred losses since inception resulting in an accumulated deficit of $60,067,081 as of June 30, 2018, and has had negative cash flows from operating activities since inception. The Company expects that its marketing program for ZanthoSyn® will continue to focus on outreach to physicians, healthcare professionals, retail personnel, and consumers, and anticipates further losses in the development of its business. As a result of these and other factors, management has determined there is substantial doubt about the Company’s ability to continue as a going concern.

 

The Company plans to raise additional capital to carry out its business plan. As part of the Company’s efforts, it raised an additional $1.44 million in gross proceeds through the exchange of 9.6 million warrants during a warrant exchange offering that closed on July 27, 2018. The Company’s continued ability to raise additional capital through future equity and debt securities issuances is unknown. Obtaining additional financing, the successful development of the Company’s contemplated plan of operations, and its transition, ultimately, to profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raises substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these uncertainties.

 

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, 2018 and 2017. Although management believes that the disclosures in these unaudited condensed consolidated financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements that have been prepared in accordance U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC.

 

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

 

  F- 6  
 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Revenue from contracts with customers

 

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

 

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

 

The Company recognizes revenues from its contracts with customers for its products through e-commerce and wholesale 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, 2018     June 30, 2017  
Geographical area   Source   (Unaudited)     (Unaudited)  
United States   Nutraceuticals   $ 568,946     $ 174,227  
Hong Kong   Nutraceuticals   $ 16,413     $ -  

 

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

 

Other significant accounting policies

 

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

 

Recently issued accounting pronouncements not yet adopted

 

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

 

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

 

  F- 7  
 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recently adopted accounting pronouncements

 

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

 

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

 

The Company 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.

 

NOTE 3 – INVENTORIES

 

Inventories consist of the following as of:

 

    June 30, 2018
(Unaudited)
    December 31, 2017  
Raw materials   $ 250,855     $ 98,937  
Finished goods     148,207       240,917  
Packing supplies and materials     -       571  
Total inventories   $ 399,062     $ 340,425  

 

  F- 8  
 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 4 – PROPERTY AND EQUIPMENT, net

 

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

 

   

June 30, 2018

  (Unaudited)

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

 

Depreciation expense was $420 and $1,901, for the three and six-months ended June 30, 2018, respectively, and $1,508 and $3,017, for the three and six-months ended June 30, 2017, respectively.

 

NOTE 5 – INTANGIBLE ASSETS, net

 

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

 

   

June 30, 2018

(Unaudited)

    December 31, 2017  
Patents   $ 493,027     $ 493,027  
Less accumulated amortization     (279,078 )     (263,843 )
      213,949       229,184  
Patents pending     217,755       197,426  
Total intangible assets, net   $ 431,704     $ 426,610  

 

Patents are amortized straight-line over a period of fifteen years. Amortization expense was $6,717 and $15,235 for the three and six-months ended June 30, 2018, respectively, and $6,142 and $12,284, for the three and six-months ended June 30, 2017, respectively.

 

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

 

The Company owns 22 issued patents, including 14 in the United States and 8 others in China, India, Japan, and Hong Kong. These patents will expire beginning in 2023 through 2028, subject to any patent term extensions of the individual patent. The Company has 4 foreign patent applications pending in Europe, Canada, and Brazil.

  

NOTE 6 – STOCKHOLDERS’ DEFICIT

 

Self-directed stock issuance

 

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

 

  F- 9  
 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 6 – STOCKHOLDERS’ DEFICIT (continued)

 

Equity purchase agreement

 

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

 

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

 

Payable settlement

 

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

 

Shares outstanding

 

As of June 30, 2018 and December 31, 2017, the Company had a total of 123,300,787 and 122,674,516, respectively, shares of common stock outstanding.

 

NOTE 7 – STOCK GRANTS

 

Director stock grants

 

During the six-months ended June 30, 2018, the Company granted its independent directors an aggregate of 469,274 shares of restricted common stock in the Company. As a result of the increase in Board Members by three members, the total fair value of this stock on the date of grant was $112,500 for the six-months ended June 30, 2018. These shares were fully vested upon issuance.

 

During the six-months ended June 30, 2017, the Company granted its independent directors an aggregate of 322,916 shares of restricted common stock in the Company. The total fair value of this stock on the date of grant was $50,000 for the six-months ended June 30, 2017. These shares were fully vested upon issuance.

 

Consultant stock grants

 

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

 

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

 

  F- 10  
 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 8 – STOCK OPTION PLANS

 

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

 

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

 

A summary of stock option activity is as follows:

 

    Options     Weighted average exercise price     Weighted average remaining contractual term in years     Aggregate intrinsic value  
Outstanding January 1, 2017     36,821,969     $ 0.41       5.94     $ 301,273  
Exercisable January 1, 2017     36,771,969     $ 0.41       5.94     $ 299,273  
Canceled     -                          
Granted     2,161,458                          
Exercised     (770,000 )     -                  
Forfeited     -                          
Outstanding December 31, 2017     38,213,427     $ 0.41       5.23     $ 562,456  
Exercisable December 31, 2017     36,213,427     $ 0.41       4.98     $ 562,456  
Canceled     (350,000 )                        
Granted     1,833,334                          
Exercised     (156,997 )     -                  
Forfeited     (43,003                        
Outstanding June 30, 2018     39,496,761     $ 0.41       4.89     $ 1,265,084  
Exercisable June 30, 2018     36,271,762     $ 0.41       4.50     $ 1,225,084  

 

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, 2018, based on a valuation of the Company’s stock for that day.

 

  F- 11  
 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 8 – STOCK OPTION PLANS (continued)

 

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

 

Non-vested at January 1, 2017     50,000  
Granted     2,161,458  
Vested     (211,458 )
Forfeited     -  
Non-vested at December 31, 2017     2,000,000  
Granted     1,833,334  
Vested     (258,335 )
Canceled     (350,000 )
Non-vested at June 30, 2018     3,224,999  

 

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

 

   

Six-months ended

June 30, 2018

   

Year ended

December 31, 2017

 
Dividend yield     0.0 %     0.0 %
Risk-free rate     2.38 %     1.89% - 2.26 %  
Expected volatility     226 %     221% - 232 %  
Expected term     3 - 7 years       5 - 7 years  

 

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

 

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

 

Stock option exercise

 

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

 

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

 

  F- 12  
 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 8 – STOCK OPTION PLANS (continued)

 

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

 

    Six-months ended June 30  
    2018     2017  
    Number     Amount     Number     Amount  
                         
Employee compensation     133,334     $ 108,500       -     $ -  
Compensation for outside services     125,001       31,562       50,000       3,500  
Director compensation     -       -       161,458       25,000  
                                 
Total     258,335     $ 140,062       211,458     $ 28,500  

 

NOTE 9 – WARRANTS

 

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

 

    Warrants     Weighted average exercise price     Weighted average remaining contractual term in years     Aggregate intrinsic value  
Outstanding January 1, 2017     88,365,036     $ 0.30       3.50     $ 543,770  
Exercisable January 1, 2017     88,365,036     $ 0.30       3.50     $ 543,770  
Canceled     -                          
Granted     40,259,133                          
Exercised     (798,000 )                        
Forfeited     (392,047 )                        
Outstanding December 31, 2017     127,434,122     $ 0.24       3.15     $ 3,957,689  
Exercisable December 31, 2017     127,434,122     $ 0.24       3.15     $ 3,957,689  
Canceled     -                          
Granted     -                          
Exercised     -                          
Forfeited     -                          
Outstanding June 30, 2018     127,434,122     $ 0.24       2.65     $ 9,809,613  
Exercisable June 30, 2018     127,434,122     $ 0.24       2.65     $ 9,809,613  

 

  F- 13  
 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 9 – WARRANTS (continued)

 

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

 

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

 

Warrant exercise

 

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

 

During the year ended December 31, 2017, the Company issued 500,000 shares of common stock in connection with the exercise of a warrant for 500,000 shares of common stock at $0.08 per share in exchange for $40,000.

 

Warrant expiration

 

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

 

Warrant exchange

 

On May 2, 2018, the Company filed a Form S-4 Registration Statement to register 27,705,782 shares of common stock with a par value of $0.001. These shares of common stock would be issued to warrant holders in exchange for (i) their outstanding warrants to purchase shares of common stock at $0.625 per share, and (ii) cash payment of $0.15 per share. This offering closed on July 27, 2018 and resulted in an exchange of 9.6 million warrants for $1.44 million in gross proceeds. These amounts were held in escrow as of June 30, 2018, and are not reflected in the June 30, 2018, financial statements.

 

NOTE 10 – 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, 2018 and 2017, 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, 2018 and December 31, 2017, the Company has applied a valuation allowance against its deferred tax assets net of the expected income from the reversal of the deferred tax liabilities.

 

Recent tax legislation

 

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

 

  F- 14  
 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 10 – INCOME TAXES (continued)

 

Uncertain tax positions

 

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

 

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

 

As of June 30, 2018 and December 31, 2017, 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.

 

  F- 15  
 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 11 – 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, 2018 (Unaudited)  
    Net Loss
(Numerator)
    Shares
(Denominator)
    Per share
amount
 
Basic loss per share   $ (1,100,122 )     122,975,014     $ (0.01 )
Effect of dilutive securities—Common stock options and warrants     -       -       -  
Diluted loss per share   $ (1,100,122 )     122,975,014     $ (0.01 )

 

    Three-months ended June 30, 2017(Unaudited)  
    Net Loss
(Numerator)
    Shares
(Denominator)
    Per share
amount
 
Basic loss per share   $ (383,043 )     90,305,824     $ (0.00 )
Effect of dilutive securities—Common stock options and warrants     -       -       -  
Diluted loss per share   $ (383,043 )     90,305,824     $ (0.00 )

 

    Six-months ended June 30, 2018 (Unaudited)  
    Net Loss
(Numerator)
    Shares
(Denominator)
    Per share
amount
 
Basic loss per share   $ (2,147,985 )     122,825,595     $ (0.02 )
Effect of dilutive securities—Common stock options and warrants     -       -       -  
Diluted loss per share   $ (2,147,985 )     122,825,595     $ (0.02 )

 

    Six-months ended June 30, 2017 (Unaudited)  
    Net Loss
(Numerator)
    Shares
(Denominator)
    Per share
amount
 
Basic loss per share   $ (833,879 )     88,409,138     $ (0.01 )
Effect of dilutive securities—Common stock options and warrants     -       -       -  
Diluted loss per share   $ (833,879 )     88,409,138     $ (0.01 )

 

  F- 16  
 

 

Cardax, Inc., and Subsidiary

 

NOTES TO THE CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (continued)

 

NOTE 11 – BASIC AND DILUTED NET LOSS PER SHARE (continued)

 

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, 2018     June 30, 2017  
    (Unaudited)     (Unaudited)  
Common stock options     39,496,761       36,983,427  
Common stock warrants     127,434,122       99,322,970  
Total common stock equivalents     166,930,883       136,306,397  

 

NOTE 12 – LEASES

 

Manoa Innovation Center

 

The Company entered into an automatically renewable month-to-month lease for office space on August 13, 2010. Under the terms of this lease, the Company must provide a written notice 45 days prior to vacating the premises. Total rent expense under this agreement as amended was $13,701 and $20,902, for the three and six-months ended June 30, 2018, respectively, and $7,842 and $15,771, for the three and six-months ended June 30, 2017, respectively.

 

Fleet Lease

 

In January 2018, the Company entered into a vehicle lease arrangement with a rental company for three vehicles. The terms of the leases require total monthly payments of $1,619 is for three-years. These leases convert to month-to-month leases in January 2021 unless terminated. Total rent expense under this agreement was $5,621 and $9,351, for the three and six-months ended June 30, 2018, respectively, and $0 for the three and six-months ended June 30, 2017.

 

NOTE 13 – SUBSEQUENT EVENTS

 

The Company evaluated all material events through the date the financials were ready for issuance. Management identified the below subsequent event for additional disclosure in the financial statements.

 

On May 2, 2018, the Company filed a Form S-4 Registration Statement to register 27,705,782 shares of common stock with a par value of $0.001. These shares of common stock would be issued to warrant holders in exchange for (i) their outstanding warrants to purchase shares of common stock at $0.625 per share, and (ii) cash payment of $0.15 per share. This offering closed on July 27, 2018 and resulted in an exchange of 9.6 million warrants for $1.44 million in gross proceeds. These amounts were held in escrow as of June 30, 2018, and are not reflected in the June 30, 2018, financial statements.

 

***

 

  F- 17  
 

 

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

 

Explanatory Note

 

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

 

Corporate Overview and History

 

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

 

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

 

Our financial statements have been prepared assuming that we will continue as a going concern; however, given our recurring losses from operations, our independent registered public accounting firm has determined there is substantial doubt about our ability to continue as a going concern.

 

  5  
 

 

Subsequent Events

 

On May 2, 2018, the Company filed a Form S-4 Registration Statement to register 27,705,782 shares of common stock with a par value of $0.001. These shares of common stock would be issued to warrant holders in exchange for (i) their outstanding warrants to purchase shares of common stock at $0.625 per share, and (ii) cash payment of $0.15 per share. This offering closed on July 27, 2018 and resulted in an exchange of 9.6 million warrants for $1.44 million in gross proceeds. These amounts were held in escrow as of June 30, 2018, and are not reflected in the June 30, 2018, financial statements.

 

Results of Operations

 

Results of Operations for the Three and Six-Months Ended June 30, 2018 and 2017:

 

The following table reflects our operating results for the three and six-months ended June 30, 2018 and 2017:

 

Operating Summary   Three-months ended June 30, 2018     Three-months ended June 30, 2017     Six-months ended
June 30, 2018
    Six-months ended
June 30, 2017
 
Revenues   $ 272,049     $ 66,237     $ 585,359     $ 174,227  
Cost of Goods Sold     (145,669 )     (30,287 )     (281,201 )     (72,849 )
Gross Profit     126,380       35,950       304,158       101,378  
Operating Expenses     (1,226,106 )     (431,168 )     (2,452,541 )     (947,306 )
Net Operating Loss     (1,099,726 )     (395,218 )     (2,148,383 )     (845,928 )
Other (Loss) Income     (396 )     12,175       398       12,049  
Net Loss   $ (1,100,122 )   $ (383,043 )   $ (2,147,985 )   $ (833,879 )

 

Operating Summary for the Three-Months Ended June 30, 2018 and 2017

 

We sell ZanthoSyn® primarily through e-commerce and wholesale channels. We launched our e-commerce channel in August 2016 and began selling to GNC stores in Hawaii on January 25, 2017 and GNC corporate stores across the United States on August 10, 2017. As a result, revenues were $272,049 and $66,237 for the three-months ended June 30, 2018 and 2017, respectively. Costs of goods sold were $145,669 and $30,287 for the three-months ended June 30, 2018 and 2017, 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 $126,380 and $35,950 for the three-months ended June 30, 2018 and 2017, respectively, which represented gross profit margins of approximately 46% and 54%, respectively.

 

Operating expenses were $1,226,106 and $431,168 for the three-months ended June 30, 2018 and 2017, respectively. Operating expenses primarily consisted of expenses for services provided to the Company, including payroll and consultation, for research and development, administration, and sales and marketing. These expenses were paid in accordance with employee, consultant, or service provider agreements. Included in operating expenses were $133,062 and $45,000 in stock-based compensation for the three-months ended June 30, 2018 and 2017, respectively.

 

Other income (expenses), net, were $(396) and $12,175 for the three-months ended June 30, 2018 and 2017, respectively and primarily consisted of interest income and expense. For the three-months ended June 30, 2017, other income also consisted of a state refundable tax credit of $12,598.

 

Operating Summary for the Six-Months Ended June 30, 2018 and 2017

 

We sell ZanthoSyn® primarily through e-commerce and wholesale channels. We launched our e-commerce channel in August 2016 and began selling to GNC stores in Hawaii on January 25, 2017 and GNC corporate stores across the United States on August 10, 2017. As a result, revenues were $585,359 and $174,227 for the six-months ended June 30, 2018 and 2017, respectively. Costs of goods sold were $281,201 and $72,849 for the six-months ended June 30, 2018 and 2017, 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 $304,158 and $101,378 for the three-months ended June 30, 2018 and 2017, respectively, which represented gross profit margins of approximately 52% and 58%, respectively.

 

Operating expenses were $2,452,541 and $947,306 for the three-months ended June 30, 2018 and 2017, respectively. Operating expenses primarily consisted of expenses for services provided to the Company, including payroll and consultation, for research and development, administration, and sales and marketing. These expenses were paid in accordance with employee, consultant, or service provider agreements. Included in operating expenses were $262,687 and $84,250 in stock-based compensation for the six-months ended June 30, 2018 and 2017, respectively.

 

Other income (expenses), net, were $398 and $12,049 for the six-months ended June 30, 2018 and 2017, respectively and primarily consisted of interest income and expense. For the six-months ended June 30, 2017, other income also consisted of a state refundable tax credit of $12,598.

 

  6  
 

 

Liquidity and Capital Resources

 

Since our inception, we have sustained operating losses and have used cash raised by issuing securities in our operations. During the six-months ended June 30, 2018 and 2017, we used cash in operating activities in the amount of $1,889,326 and $654,299, respectively, and incurred a net loss of $2,147,985 and $833,879, respectively.

 

We require additional financing in order to continue to fund our operations and pay existing and future liabilities and other obligations. We raised an additional $1.44 million in gross proceeds through the exchange of 9.6 million warrants during a warrant exchange offering that closed on July 27, 2018.

 

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

 

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

 

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

 

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

 

  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 technologies.

 

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

 

Cash Flow Summary   Six-months ended
June 30, 2018
    Six-months ended
June 30, 2017
 
Net Cash Used in Operating Activities   $ (1,889,326 )   $ (654,299 )
Net Cash Used in Investing Activities     (20,328 )     (7,618 )
Net Cash Provided by Financing Activities     -       582,000  
Net Cash (Decrease) for Period     (1,909,654 )     (79,917 )
Cash at Beginning of Period     2,236,837       158,433  
Cash at End of Period   $ 327,183     $ 78,516  

 

  7  
 

 

Cash Flows from Operating Activities

 

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

 

Cash Flows from Investing Activities

 

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

 

Cash Flows from Financing Activities

 

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

 

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

 

Off-Balance Sheet Arrangements

 

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

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (b) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of the our management and directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of June 30, 2018.

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

  8  
 

 

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.

 

On April 16, 2018, we issued 76,924 shares of our Common Stock in connection with the cashless exercise of stock options for 100,0000 shares of our Common Stock at $0.06 per share with 23,076 shares of our Common Stock withheld with an aggregate fair market value equal to the aggregate exercise price.

 

On May 2, 2018, we issued 80,073 shares of our Common Stock in connection with the cashless exercise of stock options for 100,0000 shares of our Common Stock at $0.06 per share with 19,927 shares of our Common Stock withheld with an aggregate fair market value equal to the aggregate exercise price.

 

  9  
 

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

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

 

  10  
 

 

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 13, 2018

 

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

 

  11  
 

 

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