Securities Registration Statement (s-1/a)

Date : 11/22/2019 @ 9:05PM
Source : Edgar (US Regulatory)
Stock : Cardax, Inc. (QB) (CDXI)
Quote : 6.0  0.0 (0.00%) @ 2:09PM

Securities Registration Statement (s-1/a)

 

As filed with the Securities and Exchange Commission on November 22, 2019

Registration No. 333-233281

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

AMENDMENT NO. 2

TO

 

FORM S-1

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

CARDAX, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   2834   45-4484428

(State of

incorporation)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

2800 Woodlawn Drive, Suite 129

Honolulu, Hawaii 96822

(808) 457-1400

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

David G. Watumull

President and Chief Executive Officer

Cardax, Inc.

2800 Woodlawn Drive, Suite 129

Honolulu, Hawaii 96822

(808) 457-1400

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Richard M. Morris, Esq.

Allegaert Berger & Vogel LLP

111 Broadway, 20th Floor

New York, New York 10006

(212) 571-0550

 

 

Barry I. Grossman, Esq.

Sarah E. Williams, Esq.

Ellenoff, Grossman & Schole LLP

1345 Avenue of the Americas,

New York, NY 10105

(212) 370-1300

 

Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X]

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.

 

  Large accelerated filer [  ] Accelerated filer [  ]
  Non-accelerated filer [X] 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 7(a)(2)(B) of the Securities Act [  ]

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of securities to be registered   Proposed maximum aggregate offering price(1)     Amount of registration fee(2)  
Units consisting of shares of Common Stock, par value $0.001 per share, and warrants to purchase shares of Common Stock, par value $0.001 per share   $ 17,250,000 (3)   $ 2,090.70
Common stock included as part of the Units     -       -  
Warrants to purchase common stock included as part of the Units(4)     -       -  
Common stock underlying Warrants   $ 17,250,000     $ 2,090.70  
Representative’s Warrants(5)     -       -  
Common stock underlying Representative’s Warrants(5)   $

970,312.50

    $ 206.98  
Total   $ 35,470,312.50     $ 4,388.38  

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate public offering price. The registration fee has been previously paid.
(3) Equal to $15,000,000 of securities to be offered by us plus the underwriter’s option to purchase up to an additional 15% of the total number of shares offered by us, or up to an additional $2,250,000 of securities, at the public offering price, less underwriting discounts, to cover over-allotments, if any, within 45 days after the date of this prospectus.
(4) No separate registration fee is required pursuant to Rule 457(g) under the Securities Act.
(5) We have agreed to issue upon the closing of this offering, warrants to Maxim Group LLC entitling it to purchase up to 4.5% of the aggregate securities sold in this offering. The exercise price of the warrants is equal to 125% of the public offering price of the common stock offered hereby. The warrants are exercisable commencing six (6) months after the date of effectiveness of this Registration Statement and will terminate five (5) years after the date of effectiveness of this Registration Statement

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 
 

 

The information in this preliminary prospectus is not complete and may be changed. We may not offer these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus November 22, 2019

 

P R O S P E C T U S

 

A PICTURE CONTAINING WEAPON, CLIPART, BRASS KNUCKS

DESCRIPTION AUTOMATICALLY GENERATED

 

_______ Units

Each Unit Consisting of _______ Shares of Common Stock and

_______ Warrants to Purchase _______ Shares of Common Stock

 

This prospectus relates to our offering of ______ units of Cardax, Inc., a Delaware Corporation (the “Units”). Each unit consists of ______ shares of our common stock and ______ warrants (a “Purchase Warrant”) to purchase ______ shares of our common stock at an exercise price of $______ per share and will expire five years from the date of issuance. The Units will be sold at this fixed price per Unit for the duration of this offering. The public offering price for the Units was determined through negotiations with the underwriters. The Units will not be certificated and the shares of common stock and the Purchase Warrants are immediately separable and will be issued separately in this offering.

 

Our common stock is quoted for trading on the OTCQB Marketplace (the “OTCQB”) under the symbol “CDXI.” As of November 20, 2019, the last reported sales price for our common stock as quoted on the OTCQB was $0.07 per share. There is no established trading market for the Purchase Warrants. Quotes of stock trading prices on an over-the-counter marketplace may not be indicative of the market price on a national securities exchange. We have applied to have our common stock and Purchase Warrants listed on the Nasdaq Capital Market (the “Nasdaq”) under the symbols “CDXI” and “CDXIW,” respectively. We believe that upon the completion of the offering contemplated by this prospectus, we will meet the standards for listing on the Nasdaq Capital Market. We cannot guarantee that we will be successful in listing our common stock or our Purchase Warrants on Nasdaq, or, if successful, that an active trading market for our common stock or Purchase Warrants will develop or be sustained.

 

The share and per share information in this prospectus does not reflect the proposed reverse stock split of the issued and outstanding shares of our common stock of ____-for-1 to occur on or prior to the effective date of the offering. The number of shares of common stock will be determined primarily on the basis of the pricing of our Units in this offering. This prospectus will be amended by an amendment to this registration statement to reflect such number and the effect of such reverse stock split, except that we will not reflect the reverse stock split in our Financial Statements and the Notes thereto.

__________________________

 

An investment in our securities involves a high degree of risk. Before buying any securities you should carefully read the discussion of the material risks of investing in our securities in “Risk Factors” beginning on page 12 of this prospectus.

__________________________

 

Neither the Securities and Exchange Commission nor any other state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

    Per Unit    

Total

(Not Including

Over-Allotment)

   

Total

(Including

Over-Allotment)

 
Public offering price                                                       
Underwriting discounts(1)                        

Proceeds to us, before fees and expenses

                       

 

(1) We refer you to “Underwriting” beginning on page 65 for additional information regarding total underwriting compensation.

 

The underwriters may also purchase up to an additional _________ shares of common stock and/or Purchase Warrants from us at the public offering price, less the underwriting discounts payable by us, to cover over-allotments, if any, within forty-five (45) days from the date of this prospectus (the “Over-Allotment Option”).

 

The underwriters expect to deliver the shares of common stock and Purchase Warrants to investors on or about         , 2019.

 

__________________________

 

Sole Book-Running Manager

 

Maxim Group LLC

 

The date of this prospectus is_________ , 2019.

 

 
 

 

TABLE OF CONTENTS

 

Prospectus Summary 1
Risk Factors 12
Use of Proceeds 25
Market Price and Dividends On Our Common Equity and Related Stockholder Matters 25

Capitalization

27
Dilution 28
Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
Our Business 35
Directors, Executive Officers, and Corporate Governance 46
Compensation of Executive Officers and Directors 51
Security Ownership of Certain Beneficial Owners and Management 54
Certain Relationships and Related Transactions 58
Description of Securities 58

Description of the Securities We Are Offering

63
Shares Eligible for Future Sale 64
Underwriting 65
Legal Matters 68
Experts 68
Where You Can Find Additional Information 68
Index to Financial Statements F-1

 

This prospectus is part of a registration statement that we filed with the Securities and Exchange Commission. You should rely only on the information contained in this prospectus or to which we have referred you. Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the securities offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

Through and including             (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

For investors outside the U.S.: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the U.S. You are required to inform yourselves about, and to observe any restrictions relating to, this offering and the distribution of this prospectus.

 

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

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FORWARD-LOOKING STATEMENTS

 

There are statements in this prospectus 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, including those summarized in this prospectus, such as our ability to develop and commercialize or otherwise monetize our pharmaceutical product candidates as planned, the impact of changes in healthcare regulation, and our ability to raise additional capital to fund our pharmaceutical development activities. For a discussion of these risks, you should read this entire prospectus carefully, especially the risks discussed in the section entitled “Risk Factors.” 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 prospectus 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, except as required by law.

 

CAUTIONARY NOTE REGARDING INDUSTRY DATA

 

Unless otherwise indicated, information contained in this prospectus concerning our company, our business, the services we provide and intend to provide, our industry and our general expectations concerning our industry are based on management estimates. Such estimates are derived from publicly available information released by third party sources, as well as data from our internal research, and reflect assumptions made by us based on such data and our knowledge of the industry, which we believe to be reasonable.

 

ii
 

 

Prospectus Summary

 

This summary highlights selected information contained elsewhere in this prospectus and does not contain all the information that you should consider before making your investment decision. Before investing in our common stock and warrants to purchase common stock, you should carefully read this entire prospectus, including the information set forth in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus and our consolidated financial statements and the accompanying notes included in this prospectus. Except as otherwise indicated herein or as the context otherwise requires, references in this prospectus to “Cardax,” the “Company,” “we,” “us,” and “our” refer to Cardax, Inc. 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 (the “Holdings Merger”). Unless otherwise noted, references in this prospectus to our “product” or “products” includes our pharmaceutical candidates, dietary supplements, and any of our other current or future products, product candidates, and technologies, to the extent applicable.

 

Our Business

 

Overview

 

We are a development stage biopharmaceutical company focused primarily on the development of pharmaceuticals to safely address one of the major underlying causes of many chronic diseases – inflammation – including cardiovascular disease, metabolic disease, liver disease, arthritis, and aging. We also have a commercial business unit that markets dietary supplements for inflammatory health. We believe we are well positioned for growth through the utilization of astaxanthin and zeaxanthin for chronic pharmaceutical applications by safely reducing chronic inflammation at the cellular and mitochondrial level – without inhibiting normal function. Similar mechanisms also support the use of our dietary supplement for inflammatory health.

 

We believe that our pharmaceutical product candidates and our dietary supplements have competitive advantages, primarily relating to a unique combination of the following benefits:

 

  An excellent safety profile that supports chronic use
  Broad anti-inflammatory activity and pleiotropic effects with potential application to several chronic diseases as pharmaceuticals and various areas of health as dietary supplements
  Oral dosing convenience
  Scalable manufacturing
  Economical pricing

 

Market Overview

 

There is broad acceptance in the scientific, medical, and financial communities that chronic inflammation is a significant factor in many chronic diseases, particularly cardiovascular disease. The double-blind, randomized, placebo-controlled CANTOS clinical trial (10,061 patients; Novartis, 2017) and REDUCE-IT clinical trial (8,179 patients; Amarin Corporation, 2018), both published in the New England Journal of Medicine, helped to catalyze and support this consensus. Commonly used anti-inflammatory drugs such as aspirin, ibuprofen, naproxen, COX-2 inhibitors, corticosteroids, and various biologics may reduce inflammation, but they have risks of significant side effects that limit their utility in chronic disease.

 

We believe that a safe anti-inflammatory is the solution. Our lead pharmaceutical candidate CDX-101, a proprietary prodrug of the naturally occurring marine molecule astaxanthin, may provide the needed combination of an excellent safety profile, anti-inflammatory activity, and economic pricing to become widely used for the prevention and treatment of chronic diseases driven by inflammation.

 

We are pursuing an initial indication of severe hypertriglyceridemia (triglycerides ≥ 500 mg/dL) for CDX-101. Severe hypertriglyceridemia is associated with chronic inflammation and patients with the disorder have increased cardiovascular disease risk and incidence of pancreatitis. We believe the clinical pathway to U.S. Food and Drug Administration (“FDA”) drug approval for severe hypertriglyceridemia, which relies on biomarker endpoints (i.e., measuring triglycerides in blood tests over a period of several months), will be more efficient than other potential indications that require clinical outcomes studies (e.g., evaluating heart attacks, strokes, and deaths over a period of several years), and is thus better suited as our initial indication for CDX-101.

 

An estimated 3.4 million Americans have severe hypertriglyceridemia according to peer-reviewed research published in the American Journal of Cardiology in 2011. Statins, fibrates, and prescription fish oils are all used to manage hypertriglyceridemia. 21% (42 million) of U.S. adults have mixed dyslipidemia (high levels of low-density lipoprotein “LDL” cholesterol with low levels of high-density lipoprotein “HDL” cholesterol and/or high levels of triglycerides), with nearly 6% (11.6 million people) having all three lipid abnormalities. Lovaza, Vascepa, and other prescription fish oils approved for severe hypertriglyceridemia are also used off-label in mixed dyslipidemia patients to reduce moderately elevated triglycerides and aggregate sales of these products for on and off-label use are estimated to be approaching $2 billion annually.

 

We believe CDX-101 will have several competitive advantages compared to prescription fish oils: (i) ease of administration: oral dosing of large fish oil capsules is problematic, whereas we expect CDX-101 tablets should be far smaller; (ii) scalability: prescription fish oil manufacturing is limited by the declining global fish supply, whereas we believe the synthetic production of CDX-101 is scalable; and (iii) safety: prescription fish oils have certain safety risks, whereas we believe that astaxanthin, the active moiety of CDX-101, has an excellent safety profile.

 

The REDUCE-IT clinical trial demonstrated that administration of Vascepa resulted in a significant reduction of major adverse cardiovascular events (“MACE”) in patients with mixed dyslipidemia on standard of care, specifically statins, and we believe is the primary basis of Amarin’s request to the FDA to expand Vascepa’s label. The reduction of triglycerides in the REDUCE-IT clinical trial was modest however, and the study’s authors concluded that Vascepa’s ability to reduce other markers of cardiovascular disease, including inflammation and oxidized LDL (as demonstrated in the MARINE and ANCHOR clinical trials), provided the pleiotropic effects that led to reduction of MACE in REDUCE-IT. In human proof-of-concept “pilot” studies conducted by third parties and animal models conducted by third parties and us, astaxanthin, the active moiety of CDX-101, has demonstrated similar pleiotropic effects, which are derived from its broad anti-inflammatory activity, but without the limitations of Vascepa or other prescription fish oils. As a result, we believe this market also presents a major opportunity as a potential second indication for CDX-101.

 

  1  
 

 

Beyond cardiovascular disease, we believe CDX-101 could be developed to address other chronic diseases driven by inflammation, including metabolic disease, liver disease, arthritis, and aging, each with potential annual sales exceeding a billion dollars.

 

We are also developing CDX-301, our zeaxanthin pharmaceutical candidate, for macular degeneration. Our target initial indication for CDX-301 is Stargardt disease, a juvenile form of macular degeneration and potential orphan drug indication. Zeaxanthin has a mechanism of action and excellent safety profile similar to astaxanthin, however, it accumulates in the human eye through uptake by a unique retinal receptor, providing protection against blue light, oxidative damage, and related inflammation that occurs in macular degeneration. Pre-clinical and clinical studies with zeaxanthin have demonstrated proof-of-concept for the treatment of macular disorders. Based on multiple academic and NIH sources, we believe there are no more than 42,000 persons in the United States with Stargardt disease, and therefore we believe a treatment for Stargardt disease may qualify for orphan drug designation. (By statute, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition that affects less than 200,000 persons in the United States.) If CDX-301 receives FDA orphan drug designation for Stargardt disease and obtains FDA drug approval, we expect CDX-301 may benefit from certain advantages as an orphan drug, including orphan drug exclusivity, which means the FDA may not approve any other application, including a full new drug application (“NDA”), to market the same drug for the same indication for a period of seven years, except in limited circumstances. We also believe that age related macular degeneration, a larger market estimated to afflict more than three million people in the U.S. alone, presents a major opportunity as a potential second indication for CDX-301. We do not expect to use the proceeds of this offering to pursue the development of CDX-301.

 

Astaxanthin

 

Astaxanthin Safety

 

Astaxanthin is a naturally occurring marine carotenoid found in salmon, microalgae, krill, lobster, and crab. Carotenoids are natural pigments that impart coloration and support animal health and vitality, especially in harsh marine environments. Astaxanthin is responsible for the characteristic red or pink color of salmon and shellfish. Salmon without astaxanthin are smaller, more susceptible to infection, have reproductive problems, and are not strong enough to swim upstream.

 

Astaxanthin is Generally Recognized as Safe (“GRAS”) as a food substance according to FDA regulations and has undergone extensive toxicity testing by third parties and us with no clinically meaningful issues even at the extremely high doses summarized in the table below:

 

Type of Study   Maximum Dosing
     
Acute Toxicity   >8,000 mg/kg (mouse, rat), 2,000 mg/kg (non-human primates)
     
Sub-Chronic Toxicity   1,240 mg/kg (rat), 160 mg/kg (dog)
     
1 Year Chronic Toxicity/Carcinogenicity   1,000 mg/kg (rat), 1,400 mg/kg (mouse), 200 mg/kg (dog)
     
2 Year Carcinogenicity   1,000 mg/kg (rat)
     
Genotoxicity/Mutagenicity   2,000 mg/kg (mouse)
     
Teratogenicity   1,000 mg/kg (rat), 400 mg/kg (rabbit)

 

Commonly used anti-inflammatory drugs such as aspirin, ibuprofen, naproxen, COX-2 inhibitors, corticosteroids, and various biologics have risks of side effects including gastrointestinal bleeding, heart attacks, strokes, and severe infections. Prescription fish oil drugs, while safer than common anti-inflammatory drugs, also have risks of certain side effects. Lovaza and other DHA, EPA combination fish oil drugs, have risks of side effects including back pain, eructation, dysgeusia, and increases in LDL cholesterol. Vascepa has risks of side effects including arthralgia, atrial fibrillation, and increased bleeding. Fenofibrates have risks of side effects including stomach pain, nausea, and back pain.

 

In contrast, astaxanthin has no known side effects of clinical significance. We believe astaxanthin’s excellent safety profile will be a key competitive advantage compared to other drugs targeting inflammation and lipids.

 

Astaxanthin Mechanism of Action

 

The mechanism of action of astaxanthin, the active moiety in CDX-101, is quite different than most drugs, and we believe is responsible for its excellent safety profile. Most drugs target single receptors or enzymes in complex pathways, which can lead to side effects with chronic use. Astaxanthin is distributed systemically, including to the liver and heart, where it localizes in cellular and mitochondrial membranes and reduces the oxidative stress that causes chronic inflammation, without affecting the normal function of inflammatory/metabolic signaling pathways. And unlike other antioxidants such as beta-carotene, Vitamin C, and Vitamin E, astaxanthin spans and stabilizes cellular and mitochondrial membranes (biological lipid bilayers) to function as an aqueous and lipid phase antioxidant without membrane disruption, as proven by X-ray diffraction studies:

 

  2  
 

 

 

As a result, astaxanthin demonstrates positive and quantifiable pleiotropic effects on many inflammatory cytokines and drug targets.

 

In human proof-of-concept “pilot” studies conducted by third parties, astaxanthin statistically significantly decreased inflammation and oxidative stress:

 

  TNF-α decreased (-30%, p=0.0022)
  C-Reactive Protein (“CRP”) decreased (-20%, p<0.05; two studies)
 

Oxidative stress decreased (MDA, IsoP, SOD, TAC increased)

 

In animal studies conducted by third parties, astaxanthin statistically significantly decreased inflammation and oxidative stress:

 

  Inflammatory markers decreased in various model systems:

    TNF-α, IL-1β, IL-6, CRP, NF-kB, PGE-2, iNOS, MCP-1, MPO, ERK, JNK, COX-2
   

TNF-α decreased equivalent to an equal dose of prednisolone

  Oxidative stress decreased in mitochondria

 

Astaxanthin Research Results

 

There are more than 2,000 published peer reviewed papers related to astaxanthin, including more than 50 peer reviewed papers published by Cardax and its collaborators (referred to herein as “us”) and more than 50 “pilot” human clinical trials with astaxanthin supplements, more than 20 of which were randomized, double-blind, placebo-controlled human proof-of-concept studies. As discussed in greater detail under “Business – Astaxanthin Research Results” on page 37 of this prospectus, highlights of astaxanthin’s pleiotropic effects, which were demonstrated in studies utilizing astaxanthin from natural and synthetic sources, include:

 

  Astaxanthin and Cardiovascular Disease: In human proof-of-concept “pilot” studies conducted by third parties, astaxanthin statistically significantly decreased inflammation, triglycerides, LDL cholesterol, and blood pressure. In animal studies conducted by third parties and us, astaxanthin demonstrated statistically significant improvements in models of cardiovascular disease.
     
  Astaxanthin and Metabolic Disease: In human proof-of-concept “pilot” studies conducted by third parties, astaxanthin statistically significantly increased adiponectin and decreased TNF-α and oxidative stress. In animal studies conducted by third parties, astaxanthin demonstrated statistically significant improvements in models of metabolic disease.
     
  Astaxanthin and Liver Disease: In human proof-of-concept “pilot” studies conducted by third parties, astaxanthin statistically significantly decreased fat accumulation in biopsy-diagnosed nonalcoholic steatohepatitis (“NASH”) patients, decreased TNF-α, improved lipid profile parameters, and decreased oxidative stress. In animal studies conducted by third parties and us, astaxanthin statistically significantly decreased elevated liver enzymes, lipids, insulin resistance, steatosis, and fibrosis.
     
  Astaxanthin and Arthritis: In human proof-of-concept “pilot” non-arthritis studies conducted by third parties, astaxanthin statistically significantly decreased markers of inflammation of relevance to arthritis, including TNF-α and CRP. In animal studies conducted by third parties, astaxanthin decreased inflammation, oxidative stress, and joint degeneration.
     
  Astaxanthin and Aging: In human studies conducted by third parties, activation of the FOXO3 gene has been linked to decreased inflammation and aging. In animal studies conducted by third parties and us, astaxanthin activated the FOXO3 gene and extended lifespan.

 

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Our Products and Business Strategy

 

Our product platform consists of our development stage pharmaceutical candidates and our commercially available dietary supplement:

 

  CDX-101, our lead pharmaceutical candidate, is in pre-clinical development for cardiovascular inflammation and dyslipidemia, with a target initial indication of severe hypertriglyceridemia.
  CDX-301 is in pre-clinical development for macular degeneration, with a target initial indication of Stargardt disease.
  ZanthoSyn® is a physician recommended astaxanthin dietary supplement for inflammatory health.

 

Lead Pharmaceutical Candidate: CDX-101

 

Our lead pharmaceutical candidate, CDX-101, is a proprietary astaxanthin prodrug that cleaves following oral administration and delivers astaxanthin to the bloodstream. CDX-101 is being developed initially for cardiovascular inflammation and mixed dyslipidemia, with a target initial indication of severe hypertriglyceridemia.

 

We believe that the results from two major cardiovascular clinical trials—the 10,061 patient CANTOS study by Novartis in 2017 and the 8,179 patient REDUCE-IT study by Amarin in 2018—clearly demonstrated the clinical significance of reducing chronic inflammation, validating the cardiovascular inflammation hypothesis we have supported for more than a decade. We believe that astaxanthin’s unique mechanism of action—reduction of oxidative stress driven inflammation at the cellular and mitochondrial level without inhibiting normal function—results in an impact on key inflammatory drug targets and pathways, and importantly, an excellent safety profile that supports chronic administration. In addition to the safety advantages described in this prospectus, we believe that production of CDX-101, unlike Vascepa and other prescription fish oil drugs, will be highly scalable to address these large mass markets for chronic diseases driven by inflammation.

 

Clinical and non-clinical studies with astaxanthin have provided proof-of-concept for the treatment of cardiovascular risk factors including inflammation and triglycerides as described in this prospectus. In addition, interim results from our Cardiovascular Health Astaxanthin Supplement Evaluation (“CHASE”) clinical trial demonstrate beneficial changes in markers of cardiovascular health, including CRP, LDL cholesterol, total cholesterol, triglycerides, oxidized LDL, and blood pressure, and also underscore astaxanthin’s safety profile with no adverse safety signals observed. We believe these findings provide further mechanistic support for our pharmaceutical development program. We refer you to “CHASE Clinical Trial” on page 5 of this prospectus for additional information regarding the CHASE clinical trial.

 

We believe that an initial indication of severe hypertriglyceridemia provides an efficient clinical pathway to drug approval for CDX-101 and will be similar to the pathway as reported by Amarin for the development of Vascepa, its prescription fish oil. CDX-101 is currently in pre-clinical development, including the planning of Investigational New Drug (“IND”) enabling studies. We plan to use proceeds from this offering to complete IND enabling studies and to engage third party contract development and manufacturing organizations (CDMOs) to manufacture drug substance and drug product for such studies, with the goal of filing an IND approximately one year from the closing of this offering.

 

We have retained Paresh N. Soni, M.D., Ph.D., the former Senior Vice President and Head of Development at Amarin, to guide our clinical and regulatory strategy, interact with the FDA, and advise us on a full range of development issues. While at Amarin, Dr. Soni led the design of Amarin’s clinical trials, development strategy, and interaction with the FDA, including for Vascepa, which was approved for treatment of severe hypertriglyceridemia in 2012. Dr. Soni played a key role in the design and conduct of the MARINE, ANCHOR, and REDUCE-IT clinical trials with Vascepa. Dr. Soni is also a member of our Scientific Advisory Board.

 

In addition to Dr. Soni, our Scientific Advisory Board includes Deepak L. Bhatt, M.D., M.P.H. and R. Preston Mason, Ph.D.

 

Deepak L. Bhatt, M.D., M.P.H., is the Chairman of our Scientific Advisory Board. Dr. Bhatt is also the Chair of the REDUCE-IT clinical trial with Vascepa, Executive Director of Interventional Cardiovascular Programs at Harvard Medical School affiliated Brigham and Women’s Hospital, and Professor at Harvard Medical School. He is also the Editor of the peer-reviewed Journal of Invasive Cardiology and Editor-in-Chief of the Harvard Heart Letter for patients.

 

R. Preston Mason, Ph.D. is on the faculty of the Department of Medicine, Division of Cardiology at Harvard Medical School affiliated Brigham and Women’s Hospital. He has published more than 250 peer reviewed papers, including papers published in collaboration with Cardax, and is a recognized expert on the mechanism of action of astaxanthin and fish oils, particularly Vascepa.

 

CDX-101 vs. ZanthoSyn®

 

CDX-101 is a synthetic astaxanthin prodrug (new chemical entity) for pharmaceutical applications and ZanthoSyn® is a formulation of synthetic nature-identical astaxanthin for dietary supplement applications. While both deliver astaxanthin to the bloodstream, we believe the unique molecular structure of CDX-101 and its pharmaceutical pathway will provide substantial differentiation. In particular, we believe that:

 

  CDX-101 will be approved by the FDA as a drug for one or more disease indications, whereas ZanthoSyn® is marketed as a dietary supplement for health applications;
     
  CDX-101 will be prescribed by doctors and covered by health insurance, whereas ZanthoSyn® is sold through retail and e-commerce channels;
     
  CDX-101 will be administered at a higher dose and in different oral dosage form; and
     
  CDX-101 will have superior intellectual property protection.

 

  4  
 

 

Pharmaceutical Candidate: CDX-301

 

Our zeaxanthin pharmaceutical candidate, CDX-301, has a mechanism of action and excellent safety profile similar to astaxanthin, however, it is being developed for macular degeneration because zeaxanthin accumulates in the human eye through uptake by a unique retinal receptor, providing protection against blue light, oxidative damage, and related inflammation that occurs in macular degeneration. Pre-clinical and clinical studies with zeaxanthin have demonstrated proof-of-concept for the treatment of macular disorders. We believe that an initial indication of Stargardt disease, a juvenile form of macular degeneration, provides an efficient clinical pathway to drug approval for CDX-301. On November 30, 2018, we submitted a request for orphan drug designation to the FDA for zeaxanthin as a treatment of Stargardt disease, and we are currently in communications with the FDA regarding this matter. Additional financing beyond that contemplated in this offering will be needed to fund IND enabling studies and clinical development of CDX-301.

 

Dietary Supplement: ZanthoSyn®

 

ZanthoSyn® is our commercially available physician recommended astaxanthin dietary supplement. Astaxanthin is a naturally occurring molecule with safe anti-inflammatory activity that supports cardiovascular health, metabolic health, liver health, joint health, and longevity. The form of astaxanthin utilized in ZanthoSyn® has demonstrated an excellent safety profile in peer-reviewed published studies and is GRAS according to FDA regulations.

 

We sell ZanthoSyn® primarily through wholesale and e-commerce channels. We launched our e-commerce channel in 2016 and began selling to General Nutrition Corporation (“GNC”) stores in 2017. ZanthoSyn® is currently available at GNC corporate stores nationwide in the United States.

 

ZanthoSyn® is the top selling product at GNC stores in Hawaii and the top selling product in the anti-oxidant category at GNC stores nationwide.

 

We market ZanthoSyn® primarily through a multi-pronged approach:

 

  Physician outreach and education, where ZanthoSyn® is positioned as the first safe, physician friendly, anti-inflammatory dietary supplement for health and longevity, with retail locations and e-commerce serving as convenient and credible distribution channels for physicians recommending ZanthoSyn®
  Retail store outreach, education, and in-store sales support, building on the ability to utilize ZanthoSyn® as a foundation of health and wellness regimens
  E-commerce platforms

 

We believe ZanthoSyn® is physician friendly for several reasons:

 

  ZanthoSyn® delivers the safety, purity, manufacturing rigor, bioavailability, and scientific support that provides physicians comfort in the quality and utility of the product, which is often not present in other dietary supplements.
  ZanthoSyn® is well-accepted at medical conferences where crowds of physicians and other healthcare professionals stand in line to receive ZanthoSyn® samples and product information after attending educational seminars.

 

Our sales and marketing program was initially launched in Hawaii, where we believe that robust physician outreach and education coupled with GNC retail store outreach, education, and in-store sales support increased consumer awareness and catalyzed strong sales growth. We also launched this program in major markets on the West Coast and East Coast in the U.S. beginning in 2017. To support these efforts, we have hired additional sales and marketing personnel. We are currently evaluating our strategy related to further expansion.

 

We sell ZanthoSyn® to GNC under a purchasing agreement. The exclusivity provision under such agreement related to distribution of ZanthoSyn® by GNC in the “brick and mortar” retail channel in the United States expired on October 16, 2019. GNC remains our only distributor of ZanthoSyn® in such channel, but we may expand retail distribution to mass market retailers, other specialty nutrition stores, pharmacies, and other retailers. We also plan to increase our sales and marketing efforts through e-commerce.

 

CHASE Clinical Trial

 

In September 2018, we initiated a human clinical trial entitled, Cardiovascular Health Astaxanthin Supplement Evaluation (“CHASE”), targeting cardiovascular inflammatory health. The randomized, double-blind, placebo-controlled clinical trial is evaluating the effect of low-dose and high-dose ZanthoSyn® on cardiovascular health as measured by CRP levels over 12 weeks in up to 120 subjects with documented cardiovascular risk factors. The study also includes an optional open label extension through 48 weeks.

 

Interim results from an initial cohort of subjects were announced on September 23, 2019. The interim results were based on data from 40 subjects administered high-dose ZanthoSyn® (96 mg/day astaxanthin – 48 mg twice a day), low-dose ZanthoSyn® (24 mg/day astaxanthin – 12 mg twice a day), or placebo.

 

Highlights from the interim review shown below are median percentage changes from baseline to week 12 unless otherwise stated. While the interim review was not powered for statistical significance, p-values less than 0.05 compared to placebo are provided. The p-values reported below (*p<0.05, **p<0.01) are nominal p-values from non-parametric comparisons of the median between each group and placebo and no adjustments for multiple comparisons were made.

 

Interim Results   High Dose   Low Dose   Placebo
CRP     -28%       -32%       -5%  
LDL-C     -12%  **     -7%       +5%  
Total cholesterol     -8%  *     -5%       +4%  
Triglycerides     -16%       -13%       +6%  
Oxidized LDL     -10%  *     +3%       +4%  
Blood pressure     -5%  *     -4%  *     +6%  
Median astaxanthin blood levels at 12 weeks     2,184 ng/mL     790 ng/mL     <10 ng/mL

 

We believe these findings provide:

 

  Further mechanistic support for our astaxanthin pharmaceutical development program
  Basis for additional patent filings
  Support for the cardiovascular health benefits of ZanthoSyn®

 

The interim results also underscore astaxanthin’s safety profile with no adverse safety signals observed. The CHASE Data Safety Review Board, which is comprised of a majority of independent clinical trial professionals, recommended that the clinical trial continue enrollment.

 

The FDA does not require human clinical trials for dietary supplements, but we believe that positive results from the CHASE trial may help promote scientific and consumer awareness of astaxanthin’s health and longevity applications and serve as further mechanistic support for our pharmaceutical development program.

 

We refer to you the “Risk Factors” section of this prospectus for a summary of certain risks related to clinical trial results.

 

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REPZ Clinical Study

 

We are also exploring the effect of ZanthoSyn® on recovery, endurance, and performance in a clinical study (the Recovery, Endurance, and Performance with ZanthoSyn® or “REPZ” study) with 40 subjects by measuring sprint times and heart rates in connection with high intensity interval training on stationary air bikes. The results of the REPZ study, if successful, may be used to support ZanthoSyn® marketing efforts for sports and fitness applications.

 

The REPZ study was recently completed, and final data analysis is underway.

 

Benefits of Synthetic Astaxanthin vs. Natural Astaxanthin

 

Dietary supplements containing astaxanthin typically derive astaxanthin from microalgae, krill, or other natural sources, whereas ZanthoSyn® astaxanthin is made through total synthesis. While multiple studies demonstrate that astaxanthin from either natural or synthetic sources is efficacious and both are Generally Recognized as Safe according to FDA regulations, we believe synthetic astaxanthin offers significant advantages compared to astaxanthin from microalgae, krill, or other natural sources:

 

  Synthetic astaxanthin can be formulated for superior bioavailability. In a human crossover study comparing ZanthoSyn® to a leading microalgal astaxanthin dietary supplement, the astaxanthin blood levels following administration of ZanthoSyn® were nearly three times higher than the microalgal astaxanthin product at the same dose:

 

A SCREENSHOT OF A CELL PHONE

DESCRIPTION AUTOMATICALLY GENERATED

 

  AUC (area under curve, astaxanthin blood levels) = 2.85-fold greater (p=0.013)
  Cmax (maximum concentration, astaxanthin blood levels) = 3.0-fold greater (p=0.013)
  Coefficient of variation (variation between subjects of astaxanthin blood levels)

  o ZanthoSyn® = 27%
  o Microalgal astaxanthin = 62%

  Tmax (time of maximum concentration) = 6 hours
  No adverse events observed

 

The superior bioavailability described in this prospectus means that three times more astaxanthin from ZanthoSyn® is absorbed into the body from each dose, which provides a superior value proposition compared to other astaxanthin dietary supplements.

 

  Synthetic astaxanthin has been extensively tested in a wide range of toxicity studies, including acute, sub-acute, sub-chronic, and chronic toxicity studies, carcinogenicity studies, genotoxicity/mutagenicity studies, and developmental and reproductive toxicity studies; whereas to our knowledge microalgal or other sources of astaxanthin have not undergone the same amount of safety testing in such toxicity studies.
     
  Synthetic astaxanthin is manufactured with superior purity and precision, whereas astaxanthin extracted from microalgae and krill oil is obtained in a complex mixture, which may include many unknown marine byproducts.
     
  Synthetic manufacture of astaxanthin is scalable, whereas we believe the ability to readily scale the production and extraction of astaxanthin from microalgae or other sources will be limited as demand for astaxanthin grows.
     
  Synthetic manufacture of astaxanthin emits fewer greenhouse gases and consumes less energy, raw material, and land than traditional microalgal astaxanthin production.

 

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Intellectual Property

 

We have obtained and are continuing to seek patent protection for compositions of matter, pharmaceutical compositions, and pharmaceutical uses, in certain disease areas, of our various carotenoid analogs and derivatives. Such carotenoids include astaxanthin, zeaxanthin, lutein, and/or lycophyll, and esters and other analogs and derivatives of these compounds. More specifically, we seek to protect: (i) the composition of matter of novel carotenoid analogs and derivatives, (ii) pharmaceutical compositions comprising synthetic or natural preparations of novel or natural occurring carotenoid analogs and derivatives, and (iii) the pharmaceutical use of synthetic preparations of novel or naturally occurring carotenoid analogs and derivatives in specific disease areas, including, but not limited to, the treatment of inflammation and related tissue damage, liver disease, and reperfusion injury, as well as the pharmaceutical use of synthetic or natural preparations of novel or natural occurring carotenoid analogs and derivatives for the reduction of platelet aggregation. We intend to enforce and defend our intellectual property rights consistent with our strategic business objectives.

 

We have 29 issued patents and two pending patents related to the composition of matter, pharmaceutical compositions, and pharmaceutical uses of our drugs candidates as well as many other related molecules that will expire between 2023 and 2028, subject to patent term extensions. We also have filed additional patents to extend patent coverage in the U.S. and worldwide to 2039-2040, with such applications including coverage related to certain cardiovascular uses on the basis of the CHASE clinical trial results as well as coverage related to the composition of matter of CDX-101.

 

The Company’s patents are summarized in the table below.

 

    United States     Foreign     Expiration  
                   
Issued Patents     14       15       2023-2028  
                         
Pending Patents     0       1       2023-2028  
                         
Pending Patents     2       1       2039-2040  

 

Reverse Stock Split

 

On October 2, 2019, our stockholders authorized a reverse stock split of our common stock (the “Reverse Stock Split”) within the range that is considered appropriate and necessary for our common stock to have a targeted trading price per share that meets the listing requirements of the Nasdaq Capital Market, at a minimum, and such other price determined appropriate by our Board of Directors (the “Board”), and authorized the Board, in its sole discretion, to determine the final ratio of shares for the Reverse Stock Split on the effective date and to file a certificate of amendment to our amended and restated certificate of incorporation in connection with the Reverse Stock Split.

 

On ______, the Board established a ratio for the Reverse Stock Split of the issued and outstanding shares of our common stock of ____-for-1 and the Reverse Stock Split was effective at 12:01 a.m. on ______. Trading of our common stock on a post-Reverse Stock Split basis began at market open on ______. No fractional shares were issued in the Reverse Stock Split and any remaining share fractions were rounded up to the next whole share. 

 

In connection with the Reverse Stock Split, the issued and outstanding shares of our common stock were combined by the ______-for-1 ratio. Also, all shares of our common stock subject to outstanding equity awards and the exercise price of any such award (if applicable) and the number of shares remaining available for issuance under the Cardax, Inc. 2014 Equity Compensation Plan as amended, and all shares underlying outstanding warrants, convertible notes, and other derivative securities of the Company, including exercise prices and conversion prices (if applicable) were proportionately adjusted for the Reverse Stock Split.

 

Corporate Information

 

We are a development stage biopharmaceutical company engaged in the development and commercialization of pharmaceuticals and dietary supplements. We are a smaller reporting company as defined by applicable federal securities regulations. Our common stock is traded on the OTCQB under the trading symbol “CDXI”. On the effective date of this prospectus, we expect that trading on Nasdaq will be under the same symbol. We also intend to seek a listing for the Purchase Warrants on Nasdaq under the symbol “CDXIW.”

 

Our executive offices are located at 2800 Woodlawn Drive, Suite 129, Honolulu, Hawaii 96822. Our telephone number is (808) 457-1400. Our website is located at www.cardaxpharma.com. The information on our website or that can be accessed through our website does not constitute a part of this prospectus.

 

Summary of Risk Factors

 

Investing in our common stock and warrants to purchase common stock involves substantial risk. You should carefully consider all of the information in this prospectus before investing in our common stock and warrants to purchase common stock, including the risks related to this offering and our common stock, our business and industry, our intellectual property, our financial results, and our need for financing, each as described in the section entitled “Risk Factors” and elsewhere in this prospectus.

 

  7  
 

 

Our business is subject to numerous risks, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary. You should read these risks before you invest in our common stock. In particular, our risks include, but are not limited to, the following:

 

  We have a history of operating losses, have received a going concern opinion from our auditors, and may not have sufficient funds to complete the development and commercialization of our pharmaceutical candidates.
  Our management will have broad discretion as to the use of proceeds from this offering, and we may not use the proceeds effectively.
  An active, liquid, and orderly market for our common stock or Purchase Warrants may not develop.
  The Purchase Warrants may not have any value.
  A number of different factors could prevent us from developing or commercializing our products on a timely basis, or at all.
  We operate in highly competitive industries, and our failure to compete effectively could adversely affect our market share, financial condition and growth prospects. If competitors are better able to develop and market products that are more effective, or gain greater acceptance in the marketplace than our products, our commercial opportunities may be reduced or eliminated.
  The pharmaceutical and dietary supplement industries are subject to extensive and complex healthcare regulation. Any determination that we have violated federal or state laws applicable to us that regulate healthcare would have a material adverse effect on our business, prospects, and financial condition.
  If we fail to comply with FDA regulations our business could suffer.
  Orphan drug designation for our products may not confer marketing exclusivity or other expected benefits.
  We rely on third parties to supply and manufacture our products. If these third parties do not perform as expected or if our agreements with them are terminated, our business, prospects, financial condition, and results of operations would be materially adversely affected.
  Our ability to market our products may be impaired by the intellectual property rights of third parties.
  We may be involved in lawsuits or proceedings to protect or enforce our intellectual property rights or to defend against infringement claims, which could be expensive and time consuming.
  Our ability to grow and compete in the future will be adversely affected if adequate capital is not available to us or not available on terms favorable to us.
  Provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management.

 

  8  
 

 

The Offering

 

Securities offered by us:   ________ units, with each unit consisting of ______ shares of our common stock and ______ Purchase Warrants to purchase ______ shares of our common stock at an exercise price of $______ per share. The Units will not be certificated and the shares of common stock and the Purchase Warrants are immediately separable and will be issued separately in this offering.
     
Common stock offered by us:   ______ shares.
     
Purchase Warrants offered by us:   ______ Purchase Warrants, each providing the right to purchase ______ shares of our common stock. Each Purchase Warrant will have an exercise price per share of ______, will be exercisable on the original issuance date, and will expire on the fifth anniversary of the original issuance date. Each holder of Purchase Warrants will be prohibited from exercising its Purchase Warrant for shares of our common stock if, as a result of such exercise, the holder, together with its affiliates, would own more than 4.99% of the total number of shares of our common stock then issued and outstanding. However, any holder may increase such percentage to any other percentage not in excess of 9.99%, provided that any increase in such percentage shall not be effective until 61 days after such notice to us. This prospectus also relates to the offering of the shares of common stock issuable upon exercise of the Purchase Warrants.
     
Common stock to be outstanding after this offering(1):   ______ shares.
     
Option to purchase additional shares of our common stock and/or Purchase Warrants:   The underwriters have an option within 45 days of the date of this prospectus to purchase up to ______ additional shares of our common stock and/or Purchase Warrants at the public offering price, less the underwriting discount.
     
The Nasdaq symbol for our common stock:   Our common stock is currently traded on the OTCQB. In connection with this offering, we expect to have our shares of our common stock listed for trading on the Nasdaq Capital Market under the symbol “CDXI”.
     
Proposed Nasdaq listing for Purchase Warrants:  

There is no established public trading market for the Purchase Warrants. We intend to seek a listing for the Purchase Warrants on Nasdaq under the symbol “CDXIW,” however we cannot assure you that we will be successful listing the Purchase Warrants on Nasdaq or, if successful, that an active trading market for the Purchase Warrants will develop or be sustained.

     
Use of proceeds:  

We estimate the net proceeds to us from the sale of ______ Units at an assumed combined public offering price of $______ per Unit will be approximately $_________ million after deducting underwriting discounts and estimated offering fees and expenses payable by us. If the underwriters exercise their option to purchase additional shares of our common stock and/or Purchase Warrants in full, we estimate that our net proceeds will be approximately $_________ million after deducting underwriting discounts and estimated offering fees and expenses payable by us.

     
   

We intend to use the net proceeds from the sale of the Units to fund our research, development, and clinical programs, including the funding of our budgeted expenditures to develop our CDX-101 pharmaceutical candidate through IND and to complete our CHASE clinical trial targeting cardiovascular inflammatory health with our ZanthoSyn® astaxanthin dietary supplement, as well as for other general corporate purposes, including working capital and repayment of certain indebtedness. See “Use of Proceeds” on page 25 of this prospectus.

     
Lock-ups:   We, our officers and directors, and certain holders of our capital stock will enter into lock-ups restricting the transfer of shares of or relating to our capital stock for six (6) months after the date of this prospectus.

 

  9  
 

 

Reverse Stock Split:   On October 2, 2019, our stockholders authorized a Reverse Stock Split within the range that is considered appropriate and necessary for our common stock to have a targeted trading price per share that meets the listing requirements of the Nasdaq Capital Market, at a minimum, and such other price determined appropriate by our Board, and authorized the Board, in its sole discretion, to determine the final ratio of shares for the Reverse Stock Split on the effective date and to file a certificate of amendment to our amended and restated certificate of incorporation in connection with the Reverse Stock Split.
     
   

On ______, the Board established a ratio for the Reverse Stock Split of the issued and outstanding shares of our common stock of ____-for-1 and the Reverse Stock Split was effective at 12:01 a.m. on ______. Trading of our common stock on a post-Reverse Stock Split basis began at market open on ______. No fractional shares were issued in the Reverse Stock Split and any remaining share fractions were rounded up to the next whole share.

     
    In connection with the Reverse Stock Split, the Company’s issued and outstanding shares were combined by the ______-for-1 ratio. Also, all shares of our common stock subject to outstanding equity awards and the exercise price of any such award (if applicable) and the number of shares remaining available for issuance under the Cardax, Inc. 2014 Equity Compensation Plan, as amended, and all shares underlying outstanding preferred stock and other derivative securities of the Company, including exercise prices and conversion rates (if applicable) were proportionately adjusted for the Reverse Stock Split.
     
Risk factors:   You should read the “Risk Factors” section beginning on page 12 and other information included in this prospectus for a discussion of factors to consider carefully before deciding to invest in our securities.

 

(1)

The number of shares of our common stock outstanding immediately after this offering is based on ______ shares of our common stock outstanding as of September 30, 2019, after giving effect to the Reverse Stock Split, and excludes:

 

  ______ shares of our common stock issuable upon the exercise of outstanding warrants;
  ______ shares of our common stock issuable upon the exercise of outstanding options; and
  ______ shares of our common stock issuable upon the conversion of notes and other evidence of indebtedness.

 

  10  
 

 

SUMMARY FINANCIAL DATA

 

The following tables summarize our financial data for the periods presented and should be read together with the sections of this prospectus entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our financial statements and related notes thereto appearing elsewhere in this prospectus. The following summary statements of operations data for the years ended December 31, 2018 and 2017 and the nine-months ended September 30, 2019 and 2018 have been derived from our financial statements and footnotes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results we expect in the future.

 

Operating Summary   Year ended
December 31, 2018
    Year ended
December 31, 2017
    Nine-months ended
September 30, 2019 (unaudited)
    Nine-months ended
September 30, 2018 (unaudited)
 
Revenues, net   $ 1,510,875     $ 610,323     $ 439,505     $ 1,134,899  
Cost of Goods Sold     (699,852 )     (274,707 )     (254,479 )     (521,353 )
Gross Profit     811,023       335,616       185,026       613,546  
Operating Expenses     (4,833,518 )     (2,337,886 )     (3,540,412 )     (3,689,560 )
Net Operating Loss     (4,022,495 )     (2,002,270 )     (3,355,386 )     (3,076,014 )
Other Income (Expense)     (1,727 )     17,036       (295,354 )     (859 )
Net Loss   $ (4,024,222 )   $ (1,985,234 )   $ (3,650,740 )   $ (3,076,873 )

 

The following table sets forth:

 

 

our summary balance sheet data as of September 30, 2019; and

     
 

our pro forma summary balance sheet data assuming this offering was effective on September 30, 2019.

 

The pro forma summary balance sheet data is for informational purposes only and does not purport to indicate balance sheet information as of any future date.

 

    As of September 30, 2019  
    Actual     Pro Forma(1,2)  
    (Unaudited)  
Balance Sheet data:                
Cash   $ 7,470     $                 
Total assets     2,114,414          
Total liabilities     8,379,335          
Accumulated deficit     (65,594,058 )        
Total stockholders’ equity (deficit)   $ (6,264,921 )   $     

 

  (1) The pro forma information presented above gives effect to the sale of $______ of our common stock in this offering after deducting underwriting discounts and estimated offering fees and expenses of approximately $______ that are payable by us. The pro forma information presented above also gives effect to the automatic conversion of the $815,217 senior convertible note issued July 19, 2019 into shares of our common stock upon the closing of this offering. The pro forma information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.
     
  (2) The pro forma information presented above does not include convertible notes issued after September 30, 2019 and prior to the effective date of this prospectus in the amount of $423,913, of which $217,391 shall automatically convert into shares of our common stock upon the closing of this offering.

 

  11  
 

 

Risk Factors

 

An investment in our common stock, any warrants to purchase our common stock, or any other security that may be issued by us involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included elsewhere in this prospectus, before making an investment decision. If any of the following risks actually occur, our business, financial condition, or results of operations could suffer. In that case, the trading price of our shares of our common stock could decline, and you may lose all or part of your investment. You should read the section entitled “Forward-Looking Statements” above for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this prospectus.

 

Our management will have broad discretion as to the use of proceeds from this offering, and we may not use the proceeds effectively.

 

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. You will not have the opportunity, as part of your investment decision, to assess whether these proceeds are being used appropriately. Our failure to apply these funds effectively could have a material adverse effect on our business and cause the price of our common stock to decline.

 

We are highly dependent on our senior management and certain consultants or other advisors, and if we are not able to retain them or to recruit and retain additional qualified personnel, our business will suffer.

 

We are highly dependent upon our senior management and certain consultants or other advisors, including David G. Watumull, our President and Chief Executive Officer, David M. Watumull, our Chief Operating Officer, Paresh N. Soni, our Chief Clinical and Regulatory Strategist, Gilbert M. Rishton, our Chief Science Officer, Jon L. Ruckle, our Chief Medical Officer, Timothy J. King, our Vice President, Research, and John B. Russell, our Chief Financial Officer. The loss of services of David G. Watumull or any other member of our senior management could have a material adverse effect on our business, prospects, financial condition, and results of operations. We carry $1 million “key person” life insurance policies on David G. Watumull and David M. Watumull, but we do not carry similar insurance for any of our other senior executives.

 

We may choose to increase our management personnel. For example, we will need to obtain certain additional functional capability, including regulatory, sales, quality assurance and control, either by hiring additional personnel or by outsourcing these functions to qualified third parties. We may not be able to engage these third parties on terms favorable to us. Also, we may not be able to attract and retain qualified personnel on acceptable terms given the competition for such personnel among companies that operate in our markets. The trend in the pharmaceutical industry of requiring sales and other personnel to enter into non-competition agreements prior to starting employment exacerbates this problem, since personnel who have made such a commitment to their current employers are more difficult to recruit. If we fail to identify, attract, retain, and motivate these highly skilled personnel, or if we lose current employees, our business, prospects, financial conditions, and results of operations could be adversely affected.

 

Our ability to grow and compete in the future will be adversely affected if adequate capital is not available to us or not available on terms favorable to us.

 

The ability of our business to grow and compete depends on the availability of adequate capital, which in turn depends in large part on our cash flow from operations and the availability of equity and debt financing. We cannot assure you that our cash flow from operations will be sufficient or that we will be able to obtain equity or debt financing on acceptable terms or at all to implement our growth strategy. As a result, we cannot assure you that adequate capital will be available to finance our current growth plans, take advantage of business opportunities, or respond to competitive pressures, any of which could harm our business. Additionally, if adequate additional financing is not available on acceptable terms, we may not be able to continue our business operations. Any additional capital, investment or financing of our business may result in dilution of our stockholders or be on terms and conditions that impair our ability to profitably conduct our business.

 

We are dependent upon the success of our products and technologies, which may not be successfully developed or commercialized.

 

While the FDA does not require clinical trials for dietary supplements, we have conducted and may continue to conduct clinical trials with our dietary supplements to promote scientific and consumer awareness. We also expect to conduct clinical trials with our pharmaceutical candidates. A failure of any clinical trial can occur at any stage of testing. The results of initial clinical testing may not necessarily indicate the results that will be obtained from later or more extensive testing. Additionally, any observations made with respect to blinded clinical data are inherently uncertain as we cannot know which set of data come from subjects treated with active versus placebo. Investors are cautioned not to rely on observations coming from blinded data and not to rely on initial clinical trial results as necessarily indicative of results that will be obtained in subsequent clinical trials or clinical practice.

 

Additionally, our products are subject to a variety of FDA and other applicable regulatory authorities. The extent of regulations applicable to our products, and the approvals or designations our products may receive from regulatory authorities, such as the FDA, are dependent upon the nature and development of our products and how such products are ultimately commercialized and marketed.

 

A number of different factors could prevent us from developing or commercializing our products on a timely basis, or at all.

 

We, the FDA, other applicable regulatory authorities, or an institutional review board (“IRB”), may suspend clinical trials of a product at any time for various reasons, including if we or they believe the subjects participating in such trials are being exposed to unacceptable health risks. Among other reasons, adverse side effects of a product on subjects in a clinical trial could result in the FDA or other regulatory authorities suspending or terminating the trial and refusing to approve or allow continued marketing of a particular product for any or all indications or applications of use.

 

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Clinical trials require the enrollment of a sufficient number of subjects who meet certain eligibility criteria. Rates of subject enrollment are affected by many factors, and delays in subject enrollment can result in increased costs and longer development times.

 

Clinical trials also require the review and oversight of IRBs, which approve and continually review clinical investigations and protect the rights and welfare of human subjects. An inability or delay in obtaining IRB approval could prevent or delay the initiation and completion of clinical trials, and the FDA may decide not to consider any data or information derived from a clinical investigation not subject to initial and continuing IRB review and approval.

 

Numerous factors could affect the timing, cost, or outcome of our development and commercialization efforts, including the following:

 

  delays in filing or acceptance of IND applications for our pharmaceutical candidates;
  difficulty in securing centers to conduct clinical trials;
  conditions imposed on us by the FDA or other regulatory authorities that are applicable to our business regarding the scope or design of our clinical trials or the method or scope of our sales and marketing practices;
  problems in engaging IRBs to oversee trials or problems in obtaining or maintaining IRB approval of studies;
  difficulty in enrolling subjects in conformity with required protocols or projected timelines;
  third-party contractors failing to comply with regulatory requirements or to meet their contractual obligations to us in a timely manner;
  our products having unexpected and different chemical and pharmacological properties in humans than in laboratory testing and interacting with human biological systems in unforeseen, ineffective or harmful ways;
  the need to suspend or terminate clinical trials if the subjects are being exposed to unacceptable health risks;
  insufficient or inadequate supply or quality of our products or other materials necessary to conduct our clinical trials;
  our products not having the desired effects or having undesirable side effects or other unexpected characteristics;
  the cost of our clinical trials being greater than we anticipate;
  negative or inconclusive results from our clinical trials or the clinical trials of others for similar products or inability to generate statistically significant data confirming the efficacy or safety of the product being tested;
 

interim or preliminary results of our clinical trials may not be indicative of the final results for such clinical trials or other clinical trials;

 

interim or preliminary results of our clinical trials do not ensure that the final results such clinical trial or other clinical trials will be positive or statistically significant or clinically meaningful;

 

results of our clinical trials may not be replicated by other clinical trials;

  changes in the FDA’s other applicable regulatory authorities’ requirements for testing during the course of testing;
  reallocation of our limited financial and other resources to other programs; and
  adverse results obtained by other companies developing similar products.

 

It is possible that none of the products we may develop will obtain the appropriate regulatory approvals necessary to begin selling them or that any regulatory approval to market a product may be subject to limitations on the indicated uses for which we may market the product. The time required to obtain FDA and other approvals is unpredictable, but often can take years following the commencement of clinical trials, depending upon the complexity of the product. Any analysis we perform of data from clinical activities is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. Any delay or failure in obtaining required approvals could have a material adverse effect on our ability to generate revenue from the particular product.

 

We also must comply with clinical trial and post-approval safety and adverse event reporting requirements. Adverse events related to our products must be reported to the FDA in accordance with regulatory timelines based on their severity and expectedness. Failure to make timely safety reports and to establish and maintain related records could result in withdrawal of marketing authorization.

 

We may also become subject to numerous foreign regulatory requirements governing the conduct of clinical trials, manufacturing and marketing authorization, pricing, and third-party reimbursement. The foreign regulatory approval process includes all of the risks associated with the FDA approval described above as well as risks attributable to the satisfaction of local regulations in foreign jurisdictions. Approval by the FDA does not assure approval by regulatory authorities outside of the United States.

 

If we fail to comply with FDA regulations our business could suffer.

 

The manufacture and marketing of pharmaceuticals and dietary supplements are subject to extensive regulation by the FDA and foreign and state regulatory authorities. In the United States, pharmaceutical and dietary supplement companies such as ours must comply with laws and regulations promulgated by the FDA. These laws and regulations require various authorizations prior to a product being marketed in the United States. Manufacturing facilities and practices are also subject to FDA regulations. The FDA regulates the clinical testing, manufacture, labeling, sale, distribution, and promotion of pharmaceuticals and dietary supplements in the United States. Our failure to comply with regulatory requirements, including any future changes to such requirements, could have a material adverse effect on our business, prospects, financial condition, and results of operations.

 

Even after clearance or approval of a product, we are subject to continuing regulation by the FDA, including the requirements of registering our facilities and listing our products with the FDA. We are subject to reporting regulations. These regulations require us to report to the FDA if any of our products may have caused or contributed to a death or serious injury and such product or a similar product that we market would likely cause or contribute to a death or serious injury. Unless an exemption applies, we must report corrections and removals to the FDA where the correction or removal was initiated to reduce a risk to health posed by the product or to remedy a violation of the Food, Drug, and Cosmetic Act. The FDA also requires that we maintain records of corrections or removals, regardless of whether such corrections and removals are required to be reported to the FDA. In addition, the FDA closely regulates promotion and advertising, and our promotional and advertising activities could come under scrutiny by the FDA.

 

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The FDA also requires that manufacturing be in compliance with its Quality System Regulation, or QSR. The QSR covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage, and shipping of our products. Our failure to maintain compliance with the QSR requirements could result in the shutdown of, or restrictions on, our manufacturing operations, to the extent we have any, and the recall or seizure of our products, which would have a material adverse effect on our business. In the event that one of our suppliers fails to maintain compliance with our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result.

 

The FDA has broad enforcement powers. If we violate applicable regulatory requirements, the FDA may bring enforcement actions against us, which could have a material adverse effect on our business, prospects, financial condition, and results of operations. Violations of regulatory requirements, at any stage, including after approval, may result in various adverse consequences, including the delay by a regulatory agency in approving or refusal to approve a product, withdrawal or recall of an approved product from the market, other voluntary agency-initiated action that could delay further development or marketing, as well as the imposition of criminal penalties against the manufacturer and NDA holder.

 

The extent of FDA regulations applicable to us, and whether our products are ultimately designated as drugs (including active pharmaceutical ingredients) or dietary supplements (including dietary ingredients), will depend upon how our products are ultimately commercialized. Furthermore, our products may be commercialized by us or by other parties through licensing arrangements, joint ventures, or other alliances, and our burden of complying with any regulations applicable to our products will depend upon the nature and extent of any relationships with such partners. While dietary supplements are not as extensively regulated as pharmaceuticals, the extent of any regulations to which we may be subject will depend upon the specific products we ultimately produce.

 

We have limited experience in managing communications with regulatory authorities, including filing IND applications, filing new drug applications, submitting promotional materials, and generally directing the regulatory processes in all territories.

 

We may be responsible for managing communications with regulatory authorities, including filing INDs, filing NDAs, submitting promotional materials, and generally directing the regulatory processes in all territories. We have limited experience directing such activities and may not be successful with our planned development strategies, on the planned timelines, or at all. Even if any of our products are designated for “fast track” or “priority review” status or if we seek approval under accelerated approval (Subpart H) regulations, such designation or approval pathway does not necessarily mean a faster development process or regulatory review process or necessarily confer any advantage with respect to approval compared to conventional FDA procedures. Accelerated development and approval procedures will only be available if the indications for which we are developing products remain unmet medical needs and if our clinical trial results support use of surrogate endpoints, respectively. Even if these accelerated development or approval mechanisms are available to us, depending on the results of clinical trials, we may elect to follow the more traditional approval processes for strategic and marketing reasons, since drugs approved under accelerated approval procedures are more likely to be subjected to post-approval requirements for clinical studies to provide confirmatory evidence that the drugs are safe and effective. If we fail to conduct any such required post-approval studies or if the studies fail to verify that any of our products are safe and effective, our FDA approval could be revoked. It can be difficult, time-consuming, and expensive to enroll patients in such clinical trials because physicians and patients are less likely to participate in a clinical trial to receive a drug that is already commercially available. Drugs approved under accelerated approval procedures also require regulatory pre-approval of promotional materials that may delay or otherwise hinder commercialization efforts.

 

We expect to continue to incur significant research and development expenses, which may make it difficult for us to attain profitability.

 

We expend substantial funds to develop our products, and additional substantial funds will be required for further research and development, including preclinical and clinical testing, and to manufacture and market any products that are approved for commercial sale. Because the successful development of our products is uncertain, we are unable to precisely estimate the actual funds we will require to develop and potentially commercialize them. In addition, we may not be able to generate enough revenue, even if we are able to commercialize any of our products, to become profitable.

 

We operate in highly competitive industries, and our failure to compete effectively could adversely affect our market share, financial condition and growth prospects. If competitors are better able to develop and market products that are more effective, or gain greater acceptance in the marketplace than our products, our commercial opportunities may be reduced or eliminated.

 

The dietary supplement and pharmaceutical industries are constantly evolving, and scientific advances are expected to continue at a rapid pace. This results in intense competition among companies operating in the industry. Other, larger companies may have, or may be developing, products that compete with our products and may significantly limit the market acceptance of our products or render them obsolete. Our technical and/or business competitors would include major pharmaceutical companies, biotechnology companies, consumer health companies, universities, and nonprofit research institutions and foundations. Most of these competitors have significantly greater research and development capabilities than we have, as well as substantial marketing, financial, and managerial resources. ZanthoSyn®, our lead product, primarily competes against products that provide anti-inflammatory health benefits. In addition, there are several other companies, both public and private, that service the same markets as we do, all of which compete to some degree with us.

 

The primary competitive factors facing us include safety, efficacy, price, quality, breadth of product line, manufacturing quality and capacity, service, marketing, and distribution capabilities. Our current and future competitors may have greater resources, more widely accepted and innovative products and stronger name recognition than we do. Our ability to compete is affected by our ability to:

 

  develop or acquire new products and innovative technologies;
  obtain regulatory clearance and compliance for our products;
  manufacture and sell our products cost-effectively;
  meet all relevant quality standards for our products in their particular markets;
  respond to competitive pressures specific to each of our geographic and product markets;
  protect the proprietary technology of our products and avoid infringement of the proprietary rights of others;
  market our products;
  attract and retain skilled employees, including sales representatives;
  maintain and establish distribution relationships; and
  engage in acquisitions, joint ventures, or other collaborations.

 

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Competitors could develop products that are more effective, achieve favorable reimbursement status from third-party payors, cost less, or are ready for commercial introduction before our products. If our competitors are better able to develop and patent products earlier than we can, or develop more effective and/or less expensive products that render our products obsolete or non-competitive, our business will be harmed and our commercial opportunities will be reduced or eliminated.

 

In addition, competitors and other parties may also seek to impact regulatory status of our products through the filing of citizen petitions or other similar documents.

 

We believe that the market in which we compete in is also highly sensitive to the introduction of new products, including various prescription drugs, which may rapidly capture a significant share of the market. In the United States, we expect to also compete for sales with heavily advertised national brands manufactured by large pharmaceutical, biotechnology, and consumer health companies, as well as other retailers.

 

As some products gain market acceptance, we may experience increased competition for those products as more participants enter the market. Currently, we are not a manufacturer. To the extent that we engage third-party manufacturers or use strategic alliances to produce our products, our manufacturing capabilities may not be adequate or sufficient to compete with large scale, direct, or third-party manufacturers. Certain of our potential competitors are larger than us and have longer operating histories, customer bases, greater brand recognition, and greater resources for marketing, advertising, and product promotion. They may be able to secure inventory from vendors on more favorable terms, operate with a lower cost structure, or adopt more aggressive pricing policies. In addition, our potential competitors may be more effective and efficient in introducing new products. We may not be able to compete effectively, and our attempt to do so may require us to increase marketing and/or reduce our prices, which may result in lower margins. Failure to effectively compete could adversely affect our market share, financial condition, and growth prospects.

 

The pharmaceutical and dietary supplement industries are subject to extensive and complex healthcare regulation. Any determination that we have violated federal or state laws applicable to us that regulate healthcare would have a material adverse effect on our business, prospects, and financial condition.

 

Federal and state laws regulating healthcare are extensive and complex. The laws applicable to our business are subject to evolving interpretations, and therefore we cannot be sure that a review of our operations by federal or state courts or regulatory authorities will not result in a determination that we have violated one or more provisions of federal or state law. Any such determination could have a material adverse effect on our business, prospects, and financial condition.

 

Healthcare and insurance legislation may increase the difficulty and cost for us to commercialize our products and affect the prices we may obtain.

 

The United States and many foreign jurisdictions have enacted or proposed legislative and regulatory changes affecting the healthcare system that could prevent or delay marketing approval of our products, restrict or regulate post-approval activities, and affect our ability to profitably sell any product for which we obtain marketing approval.

 

In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or Medicare Modernization Act, changed the way Medicare covers and pays for pharmaceuticals. The legislation expanded Medicare coverage for drug purchases by the elderly by establishing Medicare Part D and introduced a new reimbursement methodology based on average sales prices for physician-administered drugs under Medicare Part B. In addition, this legislation provided authority for limiting the number of drugs that Medicare will cover in any therapeutic class under the new Medicare Part D program. Cost reduction initiatives and other provisions of this legislation could decrease the coverage and reimbursement rate that we receive for any of our approved products. While the Medicare Modernization Act applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the Medicare Modernization Act may result in a similar reduction in payments from private payors.

 

In March 2010, former President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or, collectively, the Affordable Care Act, a law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against healthcare fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers, and impose additional health policy reforms. Among other things, the Affordable Care Act expanded manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate for both branded and generic drugs, effective the first quarter of 2010, and revising the definition of “average manufacturer price,” or AMP, for reporting purposes, which could increase the amount of Medicaid drug rebates manufacturers are required to pay to states. The legislation also extended Medicaid drug rebates, previously due only on fee-for-service utilization, to Medicaid managed care utilization, and created an alternative rebate formula for certain new formulations of certain existing products that is intended to increase the amount of rebates due on those drugs.

 

The Centers for Medicare and Medicaid Services, which administers the Medicaid Drug Rebate Program, also has proposed to expand Medicaid drug rebates to the utilization that occurs in the United States territories, such as Puerto Rico and the Virgin Islands. Also effective in 2010, the Affordable Care Act expanded the types of entities eligible to receive discounted 340B pricing, although, with the exception of children’s hospitals, these newly eligible entities will not be eligible to receive discounted 340B pricing on orphan drugs. In addition, because 340B pricing is determined based on AMP and Medicaid drug rebate data, the revisions to the Medicaid rebate formula and AMP definition described above could cause the required 340B discounts to increase. Furthermore, as of 2011, the new law imposes a significant annual fee on companies that manufacture or import branded prescription drugs and requires manufacturers to provide a 50% discount off the negotiated price of prescriptions filled by beneficiaries in the Medicare Part D coverage gap, referred to as the “donut hole.” Substantial new provisions affecting compliance have also been enacted, which may affect our business practices with healthcare practitioners. Notably, a significant number of provisions are not yet, or have only recently become, effective. Although it is too early to determine the full effect of the Affordable Care Act, the new law appears likely to continue the downward pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.

 

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In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. In August 2011, the former President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee on Deficit Reduction did not achieve a targeted deficit reduction of at least $1.2 trillion for fiscal years 2012 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year.

 

We expect that the Affordable Care Act, as well as other healthcare reform measures that have and may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved product, and could seriously harm our future revenues. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our products.

 

The impact of continued health care reform efforts with respect to the Affordable Care Act is currently unknown, and may adversely affect our business model.

 

Since its enactment, there have been judicial and Congressional challenges to numerous provisions of the Affordable Care Act. In January 2017, Congress voted to adopt a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repeal portions of the Affordable Care Act. The Budget Resolution is not a law, but it is widely viewed as the first step toward the passage of legislation that would repeal certain aspects of the Affordable Care Act. On January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the Affordable Care Act to waive, defer, grant exemptions from, or delay the implementation of any provision of the Affordable Care Act that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. Additionally, on October 12, 2017, President Trump issued another executive order requiring the Secretaries of the Departments of Health and Human Services (“HHS”), Labor, and the Treasury to consider proposing regulations or revising existing guidance to allow more employers to form association health plans that would be allowed to provide coverage across state lines, increase the availability of short-term, limited duration health insurance plans, which are generally not subject to the requirements of the Affordable Care Act, and increase the availability and permitted use of health reimbursement arrangements. On October 13, 2017, the Department of Justice announced that HHS was immediately stopping its cost sharing reduction payments to insurance companies based on the determination that those payments had not been appropriated by Congress. Furthermore, on December 22, 2017, President Trump signed tax reform legislation into law that, in addition to overhauling the federal tax system, also, effective as of January 1, 2019, repeals the penalties associated with the individual mandate. Congress or the President of the United States may also consider subsequent legislation or executive action to replace or eliminate elements of the Affordable Care Act. We will continue to evaluate the effect that the Affordable Care Act and any future measures to modify, repeal or replace the Affordable Care Act have on our business. We are not able to provide any assurance that the continued healthcare reform debate will not result in legislation, regulation, or executive action by the President of the United States that is adverse to our business. We expect continued development in health care reform and cannot provide any assurance that any changes will not be adverse to us our products or strategies.

 

Orphan drug designation for our products may not confer marketing exclusivity or other expected benefits.

 

Under the Orphan Drug Act of 1983 (the “Orphan Drug Act”), the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition that (i) affects less than 200,000 persons in the United States, or (ii) affects more than 200,000 in the United States and for which there is no reasonable expectation that the cost of developing and making available in the United States a drug for such disease or condition will be recovered from sales in the United States of such drug. The Orphan Drug Act mainly provides incentives intended to make the development of orphan drugs financially viable but does not provide for separate regulatory standards for orphan drugs. Drugs that receive an orphan drug designation do not require prescription drug user fees at the time of marketing application, may qualify the drug development sponsor for certain tax credits, and can be marketed without generic competition for seven years.

 

We are seeking orphan drug designation for certain products that we believe may qualify for orphan drug designation; however, there can be no assurance that we will request an orphan drug designation for any product, or if requested, that we will receive such orphan drug designation. If we are unable to secure orphan drug designation, our regulatory and commercial prospects may be negatively impacted. Even if we obtain orphan drug designation for a product, we may not be able to obtain marketing approval or maintain orphan drug exclusivity for that product. We may not be the first to obtain marketing approval of any product for which we have obtained orphan drug designation for the orphan-designated indication due to the uncertainties associated with developing pharmaceuticals. In addition, exclusive marketing rights in the United States may be limited if we seek approval for an indication broader than the orphan-designated indication or may be lost if the FDA later determines that the request for designation was materially defective or if we are unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition. Further, even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugs with different active moieties may be approved for the same condition. Even after an orphan drug is approved, the FDA can subsequently approve the same drug with the same active moiety for the same condition if the FDA concludes that the later drug is clinically superior in that it is shown to be safer, more effective, or makes a major contribution to patient care, or the manufacturer of the product with orphan exclusivity is unable to maintain sufficient product quantity. Orphan drug designation may not shorten the development time or regulatory review time of a drug or give the drug any advantage in the regulatory review or approval process, nor does it prevent competitors from obtaining approval of the same drug for indications other than those in which we have been granted orphan drug designation.

 

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If we are unable to obtain and maintain protection of our intellectual property, the value of our products may be adversely affected.

 

Our business is dependent in part upon our ability to use intellectual property rights to protect our products from competition. To protect our products, we rely on a combination of patent and other intellectual property laws, employment, confidentiality, and invention assignment agreements with our employees and contractors, and confidentiality agreements and protective contractual provisions with our partners, licensors, and other third parties. These methods, however, afford us only limited protection against competition from other products.

 

We attempt to protect our intellectual property position, in part, by filing patent applications and obtaining patents related to our proprietary technology, inventions, and improvements that are important to our business. However, our patent position is not likely by itself to prevent others from commercializing products that compete directly with our products. Moreover, we do not have patent protection for certain components of our products and our patent applications can be challenged. In addition, we may fail to receive any patent for which we have applied, and any patent owned by us or issued to us could be challenged, invalidated, or held to be unenforceable. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability of a patent, we would lose at least part, and perhaps all, of the patent protection on a product. Even if a defendant does not prevail on a legal assertion of invalidity and/or unenforceability, our patent claims may be construed in a manner that would limit our ability to enforce such claims against the defendant and others.

 

We also note that any patent granted may not provide a competitive advantage to us. Our competitors may independently develop technologies that are substantially similar or superior to our technologies. Further, third parties may design around our patented or proprietary products and technologies.

 

We rely on certain trade secrets and we may not be able to adequately protect our trade secrets even with contracts with our personnel and third parties. Also, any third party could independently develop and have the right to use, our trade secret, know-how, and other proprietary information. If we are unable to protect our intellectual property rights, our business, prospects, financial condition, and results of operations could suffer materially.

 

Our ability to market our products may be impaired by the intellectual property rights of third parties.

 

Our success depends in part on our products not infringing on the patents and proprietary rights of other parties. For instance, in the United States, patent applications filed in recent years are confidential for 18 months, while older applications are not published until the patent issues. As a result, there may be patents and patent applications of which we are unaware, and avoiding patent infringement may be difficult.

 

Our industry is characterized by a large number of patents, patent applications, and frequent litigation based on allegations of patent infringement. Competitors may own patents or proprietary rights, or have filed patent applications, related to products that are similar to ours. We may not be aware of all of the patents and pending applications potentially adverse to our interests that may have been issued to others. Moreover, since there may be unpublished patent applications that could result in patents with claims relating to our products, we cannot be sure that our current products will not infringe any patents that might be issued or filed in the future. Based on the litigious nature of our industry and the fact that we may pose a competitive threat to some companies who own or control various patents, we believe it is possible that one or more third parties may assert a patent infringement claim seeking damages or enjoining us from the manufacture or marketing of one or more of our products. Such a lawsuit may have already been filed against us without our knowledge or may be filed in the future. If any future claim of infringement against us was successful, we may be required to pay substantial damages, cease the infringing activity, or obtain the requisite licenses or rights to use the technology, which may not be available to us on acceptable terms, if at all. Even if we were able to obtain rights to a third party’s intellectual property rights, these rights may be non-exclusive, thereby giving our competitors potential access to the same rights and weakening our market position. Moreover, regardless of the outcome, patent litigation could significantly disrupt our business, divert our management’s attention and consume our financial resources. We cannot predict if or when any third-party patent holder will file suit for patent infringement.

 

We may be involved in lawsuits or proceedings to protect or enforce our intellectual property rights or to defend against infringement claims, which could be expensive and time consuming.

 

Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets, or determine the validity and scope of the proprietary rights of others. Interference proceedings conducted by a patent and trademark office may be necessary to determine the priority of inventions with respect to our patent applications. Litigation or interference proceedings, including the defense against infringement or invalidity claims, would be expensive and could result in substantial costs and diversion of resources and management attention. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology or the product. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing. In addition, we may be enjoined from marketing one or more of our products if a court finds that such products infringe the intellectual property rights of a third party.

 

During litigation, we may not be able to prevent the confidentiality of certain of our proprietary rights because of the substantial amount of discovery required in connection with intellectual property litigation. In addition, during the course of litigation, there could be public announcements of the results of hearings, motions, or other interim proceedings or developments. If investors or customers perceive these results to be negative, it could have a material adverse effect on our business, prospects, financial condition, and results of operations.

 

Commercialization of our products requires sophisticated sales and marketing teams.

 

We have limited prior experience with commercializing our products. To successfully continue to commercialize our dietary supplement products and to commercialize any pharmaceutical products, we need to establish and maintain sophisticated sales and marketing teams and/or utilize the resources of any licensee, contractor, or other third party. While we intend to use current Company employees and service providers to lead our marketing efforts, we may choose to expand our marketing and sales team. Experienced sales representatives may be difficult to locate and retain, and all new sales representatives will need to undergo extensive training. There is no assurance that we will be able to recruit and retain sufficiently skilled sales representatives, or that any new sales representatives will ultimately become productive. If we are unable to recruit and retain qualified and productive sales personnel, our ability to commercialize our products and to generate revenues will be impaired, and our business will be harmed.

 

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We have limited experience as a commercial company.

 

In 2016, we launched our first commercial product, ZanthoSyn®, and we have limited sales to date. As such, we have limited historical financial data upon which to base our projected revenue, planned operating expenses or upon which to evaluate our company and our commercial prospects. Based on our limited experience in developing and marketing new products, we may not be able to effectively:

 

  drive adoption of our current and future products, including ZanthoSyn®;
  attract and retain customers for our products;
  provide appropriate levels of customer support for our products;
  implement effective marketing strategies to promote awareness of our products;
  develop, manufacture, and commercialize new products or achieve an acceptable return on our research and development efforts and expenses;
  comply with regulatory requirements applicable to our products;
  anticipate and adapt to changes in our market;
  maintain and develop strategic relationships with vendors and manufacturers to acquire necessary materials for the production of our existing or future products;
  scale our manufacturing activities to meet potential demand at a reasonable cost;
  avoid infringement and misappropriation of third-party intellectual property;
  obtain any necessary licenses to third-party intellectual property on commercially reasonable terms;
  obtain valid and enforceable patents that give us a competitive advantage;
  protect our proprietary technology; and
  attract, retain, and motivate qualified personnel.

 

In addition, a high percentage of our expenses is and will continue to be fixed. Accordingly, if we do not generate revenue as and when anticipated, our losses may be greater than expected and our operating results will suffer.

 

Market acceptance of ZanthoSyn® and any future products are vital to our future success.

 

The commercial success of ZanthoSyn® and any future products is dependent upon the acceptance of such products. ZanthoSyn® and any future products may not gain and maintain any significant degree of market acceptance among potential consumers, retailers, healthcare providers, or acceptance by third-party payors, such as health insurance companies. The health applications for ZanthoSyn® and any future products can also be addressed by other products or techniques. The medical community widely accepts alternative treatments, and certain of these other treatments have a long history of use. We cannot be certain that our proposed products and the procedures in which they are used will be able to replace those established treatments or that users will accept and utilize our products or any other medical products that we may market.

 

Market acceptance will depend upon numerous factors, many of which are not under our control, including:

 

  the safety and efficacy of our products;
  favorable regulatory approval and product labeling;
  the availability, safety, efficacy, and ease of use of alternative products or treatments;
  our ability to educate potential users on the advantages of our products;
  the price of our products relative to alternative technologies;
  the availability of third-party reimbursement; and
  our distribution channels and any support by retailers.

 

If our proposed products do not achieve significant market acceptance, our future revenues and profitability would be adversely affected.

 

We have limited experience in marketing our products.

 

We have undertaken limited marketing efforts for ZanthoSyn® and any future products. Our sales and marketing teams compete against the experienced and well-funded sales organizations of competitors. Our future revenues and ability to achieve profitability will depend largely on the effectiveness of our sales and marketing team, and we will face significant challenges and risks related to marketing our services, including, but not limited to, the following:

 

  the ability of sales representatives to obtain access to or persuade adequate numbers of healthcare providers to recommend and/or purchase and/or use our products;
  the ability to recruit, properly motivate, retain, and train adequate numbers of qualified sales and marketing personnel;
  the costs associated with hiring, training, maintaining, and expanding an effective sales and marketing team; and
  assuring compliance with government regulatory requirements affecting the healthcare industry in general and our products in particular.

 

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We may seek to establish a network of distributors in selected markets to market, sell, and distribute our products. If we fail to select or use appropriate distributors, or if the sales and marketing strategies of such distributors prove ineffective in generating sales of our products, our future revenues would be adversely affected, and we might never become profitable.

 

The loss of our largest customer would substantially reduce revenues.

 

Our customers are material to our success. If we are unable to maintain good relationships with our existing customers, our business could suffer. We sell ZanthoSyn® to GNC under a purchasing agreement. The exclusivity provision under such agreement related to distribution of ZanthoSyn® by GNC in the “brick and mortar” retail channel in the United States expired on October 16, 2019. GNC remains our only distributor of ZanthoSyn® in such channel, but we may expand retail distribution to mass market retailers, other specialty nutrition stores, pharmacies, and other retailers. We cannot provide assurance that GNC will continue to sell ZanthoSyn® at the same levels, or at all.

 

Commercialization of our products requires sophisticated sales and marketing teams.

 

We have limited prior experience with commercializing our products. To successfully continue to commercialize our dietary supplement products and to commercialize any pharmaceutical products, we need to establish and maintain sophisticated sales and marketing teams and/or utilize the resources of any licensee, contractor, or other third party. While we intend to use current Company employees and service providers to lead our marketing efforts, we may choose to expand our marketing and sales team. Experienced sales representatives may be difficult to locate and retain, and all new sales representatives will need to undergo extensive training. There is no assurance that we will be able to recruit and retain sufficiently skilled sales representatives, or that any new sales representatives will ultimately become productive. If we are unable to recruit and retain qualified and productive sales personnel, our ability to commercialize our products and to generate revenues will be impaired, and our business will be harmed.

 

An unexpected interruption or shortage in the supply or significant increase in the cost of components could limit our ability to manufacture any products, which could reduce our sales and margins.

 

To the extent we engage in relationships with contract manufacturers in the future, an unexpected interruption of supply or a significant increase in the cost of components, whether to us or to our contract manufacturers for any reason, such as regulatory requirements, import restrictions, loss of certifications, disruption of distribution channels as a result of weather, terrorism or acts of war, or other events, could result in significant cost increases and/or shortages of our products. Our inability to obtain sufficient amounts of our products or to pass through higher cost of products we offer could have a material adverse effect on our business, financial condition, or results of operations.

 

We rely on third parties to supply and manufacture our products. If these third parties do not perform as expected or if our agreements with them are terminated, our business, prospects, financial condition, and results of operations would be materially adversely affected.

 

We outsource our manufacturing to third parties. Our reliance on contract manufacturers and suppliers exposes us to risks, including the following:

 

  We rely on our suppliers and manufacturers to provide us with the needed products or components in a timely fashion and of an acceptable quality. An uncorrected defect or supplier’s variation in a component could harm our or our third-party manufacturers’ ability to manufacture, and our ability to sell, products and may subject us to product liability claims.
  The facilities of our third-party manufacturers must satisfy production and quality standards set by applicable regulatory authorities. Regulatory authorities periodically inspect manufacturing facilities to determine compliance with these standards. If we or our third-party manufacturers fail to satisfy these requirements, the facilities could be shut down.
  These manufacturing operations could also be disrupted or delayed by fire, earthquake or other natural disaster, a work stoppage or other labor-related disruption, failure in supply or other logistical channels, electrical outages, or other reasons. If there was any such disruption to any of these manufacturing facilities, our third-party manufacturers would potentially be unable to manufacture our products.
  A third-party manufacturer or supplier could decide to terminate our manufacturing or supply arrangement, including due to a disagreement between us and such third-party manufacturer, if the third-party manufacturer determines not to further manufacture our products, or if we fail to comply with our obligations under such arrangements.
  If any third-party manufacturer makes improvements in the manufacturing process for our products, we may not own, or may have to share, the intellectual property rights to the innovation.

 

We currently rely on a limited number of suppliers to provide key components for our products. If these or other suppliers become unable to provide components in the volumes needed or at an acceptable price or quality, we would have to identify and qualify acceptable replacements from alternative suppliers. We may experience stoppages in the future. We may not be able to find a sufficient alternative supplier in a reasonable time period, or on commercially reasonable terms, if at all, and our ability to produce and supply our products could be impaired.

 

To the extent we are able to identify alternative suppliers, qualifying suppliers is a lengthy process. There are a limited number of manufacturers and suppliers that may satisfy applicable requirements. In addition, FDA regulations may require additional testing of any components from new suppliers prior to our use of these materials or components, which testing could delay or prevent the supply of components. Moreover, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our products, which could take a significant period of time.

 

Each of these risks could delay the development or commercialization of our products or result in higher costs or deprive us of potential product revenues. Furthermore, delays or interruptions in the manufacturing process could limit or curtail our ability to meet demand for our products and/or make commercial sales, unless and until the manufacturing capability at the facilities are restored and re-qualified or alternative manufacturing facilities are developed or brought on-line and “scaled up.” Any such delay or interruption could have a material adverse effect on our business, prospects, financial condition, and results of operations.

 

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We may rely on third-party distributors for sales, marketing, and distribution activities.

 

We may rely on third-party distributors to sell, market, and distribute ZanthoSyn® and any future products. Because we may rely on third-party distributors for sales, marketing, and distribution activities, we may be subject to a number of risks associated with our dependence on these third-party distributors, including:

 

  lack of day-to-day control over the activities of third-party distributors;
  third-party distributors may not fulfill their obligations to us or otherwise meet our expectations;
  third-party distributors may terminate their arrangements with us on limited or no notice or may change the terms of these arrangements in a manner unfavorable to us for reasons outside of our control; and
  disagreements with our distributors could require or result in costly and time-consuming litigation or arbitration.

 

If we fail to establish and maintain satisfactory relationships with third-party distributors, we may be unable to sell, market, and distribute our products, our future revenues and market share may not grow as anticipated, and we could be subject to unexpected costs which would harm our results of operations and financial condition. There is no assurance that our sales through retail stores will be on terms that are favorable to us or at all.

 

We may not be able to establish or maintain the third-party relationships that are necessary to develop or potentially commercialize some or all of our products.

 

We expect to depend on collaborators, partners, licensees, contract research organizations, contract manufacturing organizations, clinical research organizations, and other third parties to support our discovery efforts, to manufacture our products and to conduct clinical trials for some or all of our products. We cannot guarantee that we will be able to successfully negotiate agreements for or maintain relationships with collaborators, partners, licensees, contractors, clinical investigators, vendors, and other third parties on favorable terms, if at all. Our ability to successfully negotiate such agreements will depend on, among other things, potential partners’ evaluation of the superiority of our technology over competing technologies, the quality of the preclinical and clinical data that we have generated and the perceived risks specific to developing our products. If we are unable to obtain or maintain these agreements, we may not be able to develop, manufacture, obtain regulatory approvals for, or commercialize our products. We cannot necessarily control the amount or timing of resources that our contract partners will devote to our research and development programs, products or potential products, and we cannot guarantee that these parties will fulfill their obligations to us under these arrangements in a timely fashion. We may not be able to readily terminate any such agreements with contract partners even if such contract partners do not fulfill their obligations to us. We may experience stoppages in the future. We may not be able to find a sufficient alternative provider in a reasonable time period, or on commercially reasonable terms, if at all, and our ability to produce and supply our products could be impaired.

 

We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.

 

We have never declared or paid any cash dividends on our common stock or preferred stock. We currently anticipate that we will retain future earnings for the development, operation, and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to common or preferred stockholders will therefore be limited to the appreciation of their stock.

 

We have a history of operating losses, have received a going concern opinion from our auditors, and may not have sufficient funds to complete the development and commercialization of our pharmaceutical candidates.

 

We have incurred substantial net losses since our inception and may continue to incur losses for the foreseeable future, as we continue our product development activities. As a result of our limited operating history, we have limited historical financial data that can be used in evaluating our business and our prospects and in projecting our future operating results. Through September 30, 2019, we have accumulated a total deficit of $65,594,058.

 

Additionally, we have received a “going concern” opinion from our independent registered public accounting firm. We expect that our marketing program for ZanthoSyn® will continue to focus on outreach to physicians, healthcare professionals, retail personnel, and consumers, and anticipate further losses in the development of our consumer business. We also plan to advance the research and development of our pharmaceutical candidates and anticipate further losses in the development of our pharmaceutical 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. Our ability to continue as a going concern is dependent upon our ability to raise additional capital and implement our business plan. If we are unable to achieve or sustain profitability or to secure additional financing on acceptable terms, we may not be able to meet our obligations as they come due, raising substantial doubts as to our ability to continue as a going concern. Any such inability to continue as a going concern may result in our common stock holders losing their entire investment. There is no guarantee that we will become profitable or secure additional financing on acceptable terms. Our consolidated financial statements contemplate that we will continue as a going concern and do not contain any adjustments that might result if we were unable to continue as a going concern. Changes in our operating plans, our existing and anticipated working capital needs, the acceleration or modification of our expansion plans, increased expenses, potential acquisitions or other events will all affect our ability to continue as a going concern.

 

We expect to use the net proceeds of this offering to fund our research, development, and clinical programs, including the development of our pharmaceutical candidates and for other general corporate purposes. We expect to continue to operate our business at a net loss and will need additional investment to complete such research, development and clinical programs and to commercialize any products that may be successfully developed. We cannot provide assurance that such additional investment or other sources of funding would be available on acceptable terms or at all.

 

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Our Reverse Stock Split may not result in a proportional increase in the per share price of our common stock

 

The effect of the Reverse Stock Split on the market price for our common stock cannot be accurately predicted. In particular, we cannot assure you that the prices for shares of the common stock after the Reverse Stock Split will increase proportionately to prices for shares of our common stock immediately before the Reverse Stock Split. The market price of our common stock may also be affected by other factors which may be unrelated to the Reverse Stock Split or the number of shares outstanding.

 

Furthermore, even if the market price of our common stock does rise following the Reverse Stock Split, we cannot assure you that the market price of our common stock immediately after the proposed Reverse Stock Split will be maintained for any period of time. Moreover, because some investors may view the Reverse Stock Split negatively, we cannot assure you that the Reverse Stock Split will not adversely impact the market price of our common stock. Accordingly, our total market capitalization after the Reverse Stock Split may be lower than the market capitalization before the Reverse Stock Split.

 

Investors in this offering will experience immediate and substantial dilution in net tangible book value.

 

The public offering price will be substantially higher than the net tangible book value per share of our outstanding shares of our common stock. As a result, investors in this offering will incur immediate dilution of $______ per share, based on the assumed public offering price of $______ per share. Investors in this offering will pay a price per share that substantially exceeds the book value of our assets after subtracting our liabilities. See “Dilution” for a more complete description of how the value of your investment will be diluted upon the completion of this offering.

 

We have outstanding securities and the warrants issued in connection with this offering provide for recognition of derivative liabilities under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), which in the future may become significant and would reduce our shareholders’ equity balance that results in adverse consequences.

 

We have securities that are issued and outstanding after the closing of this offering, and the warrants issued to investors and our underwriters in this offering, require us to recognize derivative liabilities under U.S. GAAP. This derivative liability is described in the footnotes to our financial statements that included in this prospectus, including footnote 2 and footnote 9 to our financial statements as of and for the period ending September 30, 2019. The amount of this derivative liability as of September 30, 2019 was $246,414. The amount of this liability is determined as of each reporting date (that is, the end of each fiscal quarter). Because we estimate the fair value of the conversion feature in its issued convertible note as derivative financial instrument at issuance and at each subsequent reporting date using the Black-Scholes valuation model, the amount of this derivative liability may increase during future reporting periods based on the components of such valuation model, which we do not control, and the amount of the derivative liability may be material in future periods. An increase in this derivative liability results in a decrease of our stockholders’ equity. Any such decrease in our stockholders’ equity resulting from an increase of derivative liabilities may adversely impact our ability to maintain the minimum amount of stockholders’ liability required for us to maintain the listing of our common stock on the Nasdaq Capital Market.

 

We may be subject to product liability claims. Our insurance may not be sufficient to cover these claims, or we may be required to recall our products.

 

Our business is to develop and commercialize, among other things, pharmaceuticals and dietary supplements. As a result, we will face an inherent risk of product liability claims. The pharmaceutical and dietary supplement industries have been historically litigious. Since our products are to be used in the human body, manufacturing errors, design defects, or packaging defects could result in injury or death to the patient or consumer. This could result in a recall of one or more of our products and substantial monetary damages. Any product liability claim brought against us, with or without merit, could result in a diversion of our resources, an increase in our product liability insurance premiums, and/or an inability to secure coverage in the future. We may also have to pay any amount awarded by a court in excess of our policy limits. In addition, any recall of our products, whether initiated by us or by a regulatory authority, may result in adverse publicity for us that could have a material adverse effect on our business, prospects, financial condition, and results of operations. Our product liability insurance policies have various exclusions; therefore, we may be subject to a product liability claim or recall for which we have no insurance coverage. In such a case, we may have to pay the entire amount of the award or costs of the recall. Finally, product liability insurance supplements or renewals may be expensive and may not be available in the future on acceptable terms, or at all.

 

If we experience product recalls, we may incur significant and unexpected costs and damage to our reputation and, therefore, could have a material adverse effect on our business, financial condition, or results of operations.

 

We may be subject to product recalls, withdrawals, or seizures if any of our products are believed to cause injury or illness or if we are alleged to have violated governmental regulations in the manufacture, labeling, promotion, sale, or distribution of our products. A recall, withdrawal, or seizure of any of our products could materially and adversely affect consumer confidence in our brands and lead to decreased demand for our products. In addition, a recall, withdrawal, or seizure of any of our products would require significant management attention, would likely result in substantial and unexpected expenditures and could materially and adversely affect our business, financial condition, or results of operations.

 

Our insurance liability coverage is limited and may not be adequate to cover potential losses.

 

In the ordinary course of business, we purchase insurance coverage (e.g., liability coverage) to protect us against claims made by third parties and employees for product liability, property damage, or personal injuries. However, the protection provided by such insurance is limited in significant respects and, in some instances, we have no coverage and certain of our insurance policies have substantial “deductibles” or have limits on the maximum amounts that may be recovered. Insurers also have exclusions or limitations of coverage for claims related to certain perils including, but not limited to, product liability, mold, and terrorism. If a series of losses occurred, such as from a series of lawsuits, each of which were subject to the deductible amount, or if the maximum limit of the available insurance was substantially exceeded, we could incur losses in amounts that would have a material adverse effect on our results of operations and financial condition.

 

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If we are unable to manage our expected growth, our future revenue and operating results may be adversely affected.

 

Our anticipated growth is expected to place a significant strain on our management, operational and financial resources. Our current and planned personnel, systems, procedures and controls may not be adequate to support our anticipated growth. To manage our growth, we will be required to improve existing, and implement new, operational and financial systems, procedures, and controls, and to expand, train, and manage our growing employee base. We expect that we may need to increase our management personnel to oversee our expanding operations. Recruiting and retaining qualified individuals can be difficult. If we are unable to manage our growth effectively, or are unsuccessful in recruiting qualified management personnel, our business, prospects, financial condition, and results of operations could be harmed.

 

An active, liquid, and orderly market for our common stock or Purchase Warrants may not develop.

 

Our common stock is expected to trade on Nasdaq as and we intend to seek a listing on Nasdaq for our Purchase Warrants. An active trading market for our common stock or Purchase Warrants may never develop or be sustained. If an active market for our common stock or Purchase Warrants does not continue to develop or is not sustained, it may be difficult for investors to sell shares of our common stock or Purchase Warrants without depressing the market price and investors may not be able to sell the shares of our common stock or Purchase Warrants at all. An inactive market may also impair our ability to raise capital by selling our common stock or Purchase Warrants and may impair our ability to acquire other businesses, applications, or technologies using our common stock or Purchase Warrants as consideration, which, in turn, could materially adversely affect our business.

 

While we are seeking to list our Purchase Warrants on Nasdaq, there is no assurance that our Purchase Warrants will be listed on Nasdaq or any stock exchange.

 

While we are seeking to list our Purchase Warrants on Nasdaq, we cannot ensure that our Purchase Warrants will be accepted for listing on Nasdaq or any exchange. Should our Purchase Warrants be rejected for listing, we will seek to have our Purchase Warrants quoted on the OTC Markets, in which event the trading price of our Purchase Warrants could suffer, the trading market for our Purchase Warrants may be less liquid, and our Purchase Warrant price may be subject to increased volatility. If we fail to list our Purchase Warrants on the OTC Markets, there will be no public market for our Purchase Warrants.

 

The Purchase Warrants may not have any value.

 

Each Purchase Warrant will have an exercise price of not less than 100% of the last reported sale price of our common stock as of the close of the trading day immediately preceding the pricing of this offering and will expire on the fifth anniversary of the date they first become exercisable. In the event our common stock price does not exceed the exercise price of the Purchase Warrants during the period when the warrants are exercisable, the Purchase Warrants may not have any value.

 

We have a substantial number of outstanding options, warrants and other convertible securities which may cause significant dilution in our shares of common stock.

 

As described in “Description of Securities – Options”, “Description of Securities – Warrants” and “Description of Securities – Convertible Promissory Notes”, we have a substantial number of outstanding options, warrants, and convertible notes that are outstanding. As described in such section, certain of these securities include anti-dilution provisions which reduces the exercise or conversion price per share of our common stock if we issue shares of common stock at a price that is lower than the then exercise or conversion price. These options, warrants, convertible securities and the Purchase Warrants that are being issued in this offering provide the right to purchase additional shares of common stock at a price that may be less than the then prevailing market price per share of common stock which may cause significant dilution of our shares of common stock. Further, the anti-dilution provisions may adversely affect our ability to raise additional equity capital.

 

The market price of our common stock may be volatile and may be affected by market conditions beyond our control, and you may not be able to sell our securities.

 

Companies trading in the stock market in general have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our securities, regardless of our actual operating performance.

 

The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, our shares of common stock are sporadically and thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of shares of our common stock are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Second, we are a speculative or “risky” investment due to our limited operating history and lack of profits to date, and uncertainty of future market acceptance for our potential products. As a consequence of this enhanced risk, more risk-averse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease the market price of our common stock, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common stock will be at any time, including as to whether our common stock will sustain its current market price, or as to what effect the sale of shares or the availability of common stock for sale at any time will have on the prevailing market price.

 

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The market price of our common stock is subject to significant fluctuations in response to, among other factors:

 

  The significant downward pressure on our common stock price caused by the sale of a significant number of shares could cause our common stock price to decline, thus allowing short sellers of our common stock an opportunity to take advantage of any decrease in the value of our common stock;
  The presence and action of short sellers in our common stock;
  market acceptance of our existing products, as well as products in development;
  the timing of regulatory approvals;
  our ability or the ability of third-party distributors to sell, market, and distribute our products;
  our ability or the ability of our contract manufacturers to manufacture our products efficiently;
  changes in our financial performance or a change in financial estimates or recommendations by securities analysts;
  our ability to raise additional funds to complete development of our pharmaceutical product candidates;
  announcements of innovations or new products or services by us or our competitors;
  the emergence of new competitors or success of our existing competitors;
  operating and market price performance of other companies that investors deem comparable;
  sales or purchases of our common stock by insiders;
  commencement of, or involvement in, litigation;
  changes in governmental regulations; and
  general economic conditions and slow or negative growth of related markets.

 

In addition, if the market for stock in our industry, or the stock market in general, experiences a loss of investor confidence, the market price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations.

 

If any of the foregoing occurs, it could cause the price of our common stock to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and distract our Board of Directors and management.

 

We could be subject to securities class action litigation following a market price decline of our common stock.

 

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because pharmaceutical companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

 

We are currently subject to penny stock regulations and restrictions and if we continue to be subject to such regulations and restrictions you may have difficulty selling shares of our common stock.

 

The Commission has adopted regulations which generally define so-called “penny stocks” as an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock is a “penny stock”, and we are subject to Rule 15g-9 under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to sale. As a result, this rule affects the ability of broker-dealers to sell our securities and affects the ability of purchasers to sell any of our securities in the secondary market.

 

For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the Commission relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

 

After giving effect to this Offering and the Reverse Stock Split and our listing on the Nasdaq Capital Market, our common stock will not be a “penny stock”. There can be no assurance that our shares of common stock will continue to not be a “penny stock” because of its price or qualification for exemption from the Penny Stock Rule. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the Commission the authority to restrict any person from participating in a distribution of penny stock if the Commission finds that such a restriction would be in the public interest.

 

In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (“FINRA”) has adopted similar rules that may also limit a stockholder’s ability to buy and sell our common stock. FINRA rules require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for such customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

 

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We may issue shares of preferred stock that subordinate your rights and dilute your equity interests.

 

We believe that for us to successfully execute our business strategy we will need to raise investment capital and it may be preferable or necessary to issue preferred stock to investors. Preferred stock may grant the holders certain preferential rights in voting, dividends, liquidation, or other rights in preference over a company’s common stock.

 

The issuance by us of preferred stock could dilute both the equity interests and the earnings per share of existing holders of our common stock. Such dilution may be substantial, depending upon the number of shares issued. The newly authorized shares of preferred stock could also have voting rights superior to our common stock, and in such event, would have a dilutive effect on the voting power of our existing stockholders.

 

Any issuance of preferred stock with voting rights could, under certain circumstances, have the effect of delaying or preventing a change in control of us by increasing the number of outstanding shares entitled to vote and by increasing the number of votes required to approve a change in control of us. Shares of voting or convertible preferred stock could be issued, or rights to purchase such shares could be issued, to render more difficult or discourage an attempt to obtain control of us by means of a tender offer, proxy contest, merger or otherwise. Such issuances could therefore deprive our stockholders of benefits that could result from such an attempt, such as the realization of a premium over the market price that such an attempt could cause. Moreover, the issuance of such shares of preferred stock to persons friendly to our Board of Directors could make it more difficult to remove incumbent managers and directors from office even if such change were to be favorable to stockholders generally.

 

Provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management.

 

Provisions in our corporate charter and our bylaws may discourage, delay, or prevent a merger, acquisition, or other change in control of us that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors. Because our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. Among others, these provisions include the following:

 

  our Board of Directors will have the right to elect directors to fill a vacancy created by the expansion of our Board of Directors or the resignation, death, or removal of a director, which will prevent stockholders from being able to fill vacancies on our Board of Directors;
  our stockholders will not be able to act by written consent or call special stockholders’ meetings; as a result, a holder, or holders, controlling a majority of our capital stock would not be able to take certain actions other than at annual stockholders’ meetings or special stockholders’ meetings called by our Board of Directors, the chairman of our board, the chief executive officer, or the president;
  our certificate of incorporation will prohibit cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
  our stockholders will be required to provide advance notice and additional disclosures in order to nominate individuals for election to our Board of Directors or to propose matters that can be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company; and
  our Board of Directors will be able to issue, without stockholder approval, shares of undesignated preferred stock, which makes it possible for our Board of Directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.

 

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

 

We cannot predict the effect the recent U.S. tax reform will have on us.

 

On December 22, 2017, President Trump signed the Tax Act into law, resulting in sweeping changes to the tax code. The Tax Act, inter alia, reduced the corporate tax rate to 21%, reduced interest expense deductibility, increased capitalization amounts for deferred acquisition costs, eliminated the corporate alternative minimum tax, and reduced the dividend received deduction. Most of the changes in the Tax Act are effective as of January 1, 2018. We are currently unable to predict whether this legislation would have a cumulative positive or negative impact on us.

 

The terms of this offering may limit our ability to use and benefit from our net operating losses to offset any future taxable income.

 

Our net operating losses (“NOLs”) may be available to offset our future taxable income to the extent permitted under the Internal Revenue Code (the “IRC”). Under IRC Section 382, the use of NOL carryforwards, capital loss carryforwards, and other tax credit carryforwards may be significantly limited if a change in ownership of a company occurs. A change in ownership under IRC Section 382 is defined, generally, as a cumulative change of 50 percentage points or more in the ownership positions of certain stockholders owning 5% or more of a company’s common stock over a three-year rolling period. If we were to have a change of ownership within the meaning of IRC Section 382, then under certain conditions, our annual federal NOL utilization could be limited to an amount equal to our market capitalization (valued at the time of the ownership change) multiplied by the federal long-term tax exempt rate.

 

US trade policy could adversely affect our costs.

 

The future of U.S. trade policies is not certain and has had an effect on the global economy as well as our ability to source product or components from certain countries. The response to current U.S. trade policy by sovereign nations is dynamic and cannot be predicted by us. Other nations may reciprocate in trade tariffs or take other actions that could have an adverse effect on the U.S. economy in general and our ability to acquire raw materials or inventory at acceptable prices.

 

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USE OF PROCEEDS

 

We estimate the net proceeds to us from the sale of ______ Units at an assumed combined public offering price of $______ per Unit will be approximately $________ after deducting underwriting discounts and estimated offering fees and expenses payable by us. If the underwriters exercise their option to purchase additional shares of our common stock and/or Purchase Warrants in full, we estimate that our net proceeds will be approximately $________ after deducting underwriting discounts and estimated offering fees and expenses payable by us.

 

We intend to use the net proceeds from the sale of the Units to fund our research, development, and clinical programs, including the funding of our budgeted expenditures to develop our CDX-101 pharmaceutical candidate through IND and to complete our CHASE clinical trial targeting cardiovascular inflammatory health with our ZanthoSyn® astaxanthin dietary supplement, for repayment of approximately $500,000 of current payables owed to our officers or employees, and for other general corporate and working capital purposes, including the repayment of outstanding debt securities as these obligations become due and payable (as described in “Capitalization”), except to the extent that such notes convert into shares of our common stock in accordance with the terms thereof.

 

The amounts and timing of our use of proceeds will vary depending on a number of factors, including the amount of cash generated or used by our operations. As a result, we will retain broad discretion in the allocation of the net proceeds of this offering. In addition, while we have not entered into any agreements, commitments or understandings relating to any significant transaction as of the date of this prospectus supplement, we may use a portion of the net proceeds to pursue acquisitions, joint ventures, and other strategic transactions. If we obtain additional financing through the issuance of debt or convertible debt securities, then we may use the net proceeds of this offering to repay any such indebtedness.

 

MARKET PRICE AND DIVIDENDS ON OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market Information

 

Our shares of our common stock are quoted on the OTCQB under the symbol “CDXI.” On the effective date of this prospectus, we expect that trading on Nasdaq will be under the same symbol. The high and low bid quotations for our shares of our common stock for each full quarterly period within the two most recent fiscal years and the first and second fiscal quarters of our current fiscal year are:

 

The prices set forth below are NOT adjusted for the effect of the Reverse Stock Split.

 

Quarter Ended   High     Low  
             
March 31, 2017   $ 0.27     $ 0.09  
June 30, 2017   $ 0.23     $ 0.12  
September 30, 2017   $ 0.59     $ 0.16  
December 31, 2017   $ 0.49     $ 0.07  
                 
March 31, 2018   $ 0.44     $ 0.13  
June 30, 2018   $ 0.34     $ 0.20  
September 30, 2018   $ 0.24     $ 0.17  
December 31, 2018   $ 0.22     $ 0.17  
                 
March 31, 2019   $ 0.22     $ 0.17  
June 30, 2019   $ 0.20     $ 0.07  

September 30, 2019

  $

0.15

    $

0.06

 

 

Such quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and do not necessarily represent actual transactions.

 

As of November 20, 2019, there were approximately 475 stockholders of record of our common stock. The number of stockholders does not include beneficial owners holding shares through nominee names.

 

As of November 20, 2019, the last reported sale price of our common stock on the OTCQB was $0.07 per share.

 

Dividends

 

We have never paid any cash dividends and intend, for the foreseeable future, to retain any future earnings for the development of our business. Our future dividend policy will be determined by our Board of Directors on the basis of various factors, including our results of operations, financial condition, capital requirements, and investment opportunities.

 

  25  
 

 

Securities Authorized for Issuance under Equity Compensation Plans

 

We adopted, and our stockholders approved, the Cardax, Inc. 2014 Equity Compensation Plan, as amended (the “2014 Plan”), effective as of February 7, 2014. Under such plan, we may grant equity-based incentive awards, including options, restricted stock, and other stock-based awards, to any directors, employees, advisors, and consultants that provide services to us or any of our subsidiaries on terms and conditions that are from time to time determined by us. An aggregate of 50,420,148 shares of our common stock are reserved for issuance under the 2014 Plan (the “Plan Shares”). On December 4, 2018, our stockholders and our Board of Directors authorized the annual increase of the Plan Shares on January 1st of each year, at the discretion of our Board of Directors, by up to such number of shares that is equal to four percent (4%) of the shares of our common stock issued and outstanding as of December 31st of the previous calendar year. Options for the purchase of 45,365,083 shares of our common stock have been granted, options for the purchase of 1,016,357 shares of our common stock have been exercised, and options for the purchase of 3,910,301 shares of our common stock have been forfeited; options for the purchase of 40,438,425 shares of our common stock are outstanding as of the date of this prospectus. In addition, an aggregate of 5,892,667 shares of our common stock have been granted under the 2014 Plan. The purpose of the 2014 Plan is to provide financial incentives for selected directors, employees, advisors, and consultants of Cardax and/or its subsidiaries, thereby promoting the long-term growth and financial success of the Company.

 

Equity Compensation Plan Information

 

The following table summarizes information as of the date of this prospectus about our outstanding stock options and shares of our common stock reserved for future issuance under our existing equity compensation plans.

 

Plan category   Number of securities to be issued upon exercise of outstanding options, warrants, and rights     Weighted-average exercise price of outstanding options, warrants, and rights     Number of securities remaining available for future issuance under equity compensation plans  
Equity compensation plans approved by security holders     40,438,425     $ 0.40       3,256,709  
Equity compensation plans not approved by security holders     -       -       -  
Total     40,438,425     $ 0.40       3,256,709  

 

Penny Stock Regulations

 

The Commission has adopted regulations which generally define so-called “penny stocks” as an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock is a “penny stock”, and we are subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to sale. As a result, this rule affects the ability of broker-dealers to sell our securities and affects the ability of purchasers to sell any of our securities in the secondary market.

 

For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the Commission relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

 

After giving effect to this Offering and the Reverse Stock Split and our listing on the Nasdaq Capital Market, our common stock will not be a “penny stock”. There can be no assurance that our shares of common stock will continue to not be a “penny stock” because of its price or qualification for exemption from the Penny Stock Rule. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the Commission the authority to restrict any person from participating in a distribution of penny stock if the Commission finds that such a restriction would be in the public interest.

 

In addition to the “penny stock” rules described above, the FINRA has adopted similar rules that may also limit a stockholder’s ability to buy and sell our common stock. FINRA rules require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for such customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit the ability of our stockholders to sell their shares and have an adverse effect on the market for our shares.

 

  26  
 

 

CAPITALIZATION

 

The following table sets forth:

 

  our capitalization as of September 30, 2019; and
     
  our pro forma capitalization assuming this offering was effective on September 30, 2019.

 

Our capitalization following the closing of this offering will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. You should read this information together with our financial statements and the related notes thereto included elsewhere in this prospectus and the information set forth under the headings “Summary Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

    As of September 30, 2019  
    Actual     Pro Forma(1,2)  
    (Unaudited)  
Debt:                
Short-term debt:                
Convertible promissory note, due December 31, 2019   $ 150,000     $ 150,000  
Promissory note, due December 31, 2019 (as amended)     75,000       75,000  
Promissory note, due June 30, 2020 (as amended)     500,000       500,000  
Senior convertible promissory note, due June 30, 2020(3)     815,217       -  
Convertible promissory notes, due June 30, 2020     163,044       163,044  
Total short-term debt     1,703,261       888,044  
Long-term debt:                
Revolving inventory financing facility, due January 11, 2022     1,000,000       1,000,000  
Total long-term debt     1,000,000       1,000,000  
Total debt     2,703,261       1,888,044  
Stockholders’ equity (deficit):                
Preferred stock, $0.001 par value; 50,000,000 shares authorized, 0 shares issued and outstanding     -       -  
Common stock, $0.001 par value; 400,000,000 shares authorized, 137,261,594 shares issued and outstanding, actual; 400,000,000 shares authorized, _______ shares issued and outstanding, pro forma(4)     137,262          
Additional paid-in capital     59,191,875          
Accumulated deficit     (65,594,058 )     (65,594,058 )
Total stockholders’ equity (deficit)     (6,264,921 )        
Total capitalization   $ (3,561,660 )   $    

 

(1)

The pro forma information presented above gives effect to the sale of $______ of our common stock in this offering after deducting underwriting discounts and estimated offering fees and expenses of approximately $______ that are payable by us. The pro forma information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

   
(2)

The pro forma information presented above does not include convertible notes issued after September 30, 2019 and prior to the effective date of this prospectus in the amount of $423,913, of which $217,391 shall automatically convert into shares of our common stock upon the closing of this offering.

   
(3) The senior convertible note shall, in accordance with its terms, automatically convert into shares of our common stock upon the closing of this offering.
   
(4) The number of shares of our common stock outstanding immediately after this offering is based on ______ shares of our common stock outstanding as of September 30, 2019, after giving effect to the Reverse Stock Split, and excludes:

 

  ______ shares of our common stock issuable upon the exercise of outstanding warrants;
  ______ shares of our common stock issuable upon the exercise of outstanding options; and
  ______ shares of our common stock issuable upon the conversion of notes and other evidence of indebtedness.
     
 

Additionally, the table set forth above does not include any securities or transactions after September 30, 2019, including without limitation, the subsequent issuances of our securities that are described in this Registration Statement.

 

  27  
 

 

DILUTION

 

If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the public offering price per share of our common stock and the as adjusted net tangible book value per share of our common stock immediately after this offering.

 

As of September 30, 2019, our historical net tangible book value was approximately $(6.7) million or $______ per share of common stock after giving effect to the Reverse Stock Split. Historical net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by ______, the number of shares of common stock outstanding on September 30, 2019 after giving effect to the Reverse Stock Split.

 

After giving effect to the Reverse Stock Split and the sale of ______ shares of our common stock in this offering at an assumed public offering price of $______ per share (ascribing no value to the warrants), after deducting underwriting discounts and estimated offering fees and expenses payable by us, our net tangible book value as of September 30, 2019 would have been approximately $______ million, or $______ per share. This amount represents an immediate increase in net tangible book value of $______ per share to our existing stockholders and an immediate dilution in net tangible book value of $______ per share to new investors purchasing shares of our common stock in this offering. We determine dilution by subtracting the net tangible book value per share after the offering from the amount of cash that a new investor paid for a share of common stock.

 

The following table illustrates this dilution on a per share basis, after giving effect to the Reverse Stock Split:

 

Assumed public offering price per share           $  
Historical net tangible book value per share as of September 30, 2019   $          
Increase in net tangible book value per share attributable to new investors                
Pro forma net tangible book value per share after the offering                
Dilution per share to new investors           $  

 

Each $1.00 increase (decrease) in the assumed public offering price of $______ per share would increase (decrease) our pro forma net tangible book value after this offering by approximately $______ million, or approximately $______ per share, and increase (decrease) the dilution per share to new investors by approximately $______ per share, after deducting underwriting discounts and estimated offering fees and expenses payable by us, and assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 100,000 shares in the number of shares offered by us would increase (decrease) our pro forma net tangible book value after this offering by approximately $______ million, or $______ per share, and increase (decrease) the dilution per share to new investors by approximately $______ per share, after deducting underwriting discounts and estimated offering fees and expenses payable by us, and assuming that the assumed public offering price remains the same. The pro forma information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

If the underwriters exercise their option to purchase additional shares of common stock and/or Purchase Warrants in full, our pro forma net tangible book value per share after this offering would be $______ per share. This amount represents an immediate increase in net tangible book value of $______ per share to our existing stockholders and an immediate dilution in net tangible book value of $______ per share to new investors purchasing shares of our common stock in this offering.

 

The following table sets forth as of September 30, 2019, on the pro forma basis described above, the differences between the number of shares of common stock purchased from us, the total consideration paid, and the weighted average price per share paid by existing stockholders and by investors purchasing shares of our common stock in this offering, after deducting underwriting discounts and estimated offering fees and expenses, at an assumed public offering price of $______ per share:

 

    Shares Purchased     Total Consideration     Weighted Average  
    Number     Percent     Amount     Percent     Price per Share  
Existing stockholders             (1)     %   $ 59,329,137 (2)     %   $          
New investors             %             %        
Total             100.0 %   $       100.0 %   $  

 

(1) The number of shares of our common stock held by existing stockholders immediately after this offering is based on ______ shares of our common stock outstanding as of September 30, 2019, after giving effect to the Reverse Stock Split, and excludes:

 

  ______ shares of our common stock issuable upon the exercise of outstanding warrants;
  ______ shares of our common stock issuable upon the exercise of outstanding options; and
  ______ shares of our common stock issuable upon the conversion of notes and other evidence of indebtedness.

 

(2) Represents:      
  Common Stock – par value   $  
  Additional paid-in capital        
      $ 59,329,137  

 

  28  
 

 

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and notes thereto appearing elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this prospectus, including those set forth under “Risk Factors” and “Forward-Looking Statements.”

 

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. After giving effect to the net proceeds that we will receive from this offering, we expect to have sufficient cash resources to fund our expected operations for at least one year.

 

Subsequent Events

 

Convertible Promissory Notes

 

On November 15, 2019, we entered into a convertible note payable with our Chief Executive Officer, as a lender to the Company, in the amount of $100,000. This note accrues interest payable monthly at the rate of 14% per annum and matures on June 30, 2020. This note and accrued interest thereon may convert into shares of our common stock at $0.10 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. We have the right to prepay this note without penalty or premium. 

 

On the dates set forth in the table below, we entered into convertible notes payable with lenders, who are also current stockholders, in the amounts set forth in the table below. Each of these notes accrues interest payable monthly at the rate of 8% per annum and matures on June 30, 2020. Each of these notes and accrued interest thereon may convert into shares of our common stock at the conversion price set forth in the table below any time at the holder’s option. If any of these notes, or any portion thereof, has not been repaid or converted in full on or prior to the maturity date, then repayment of the unpaid principal balance plus any accrued and unpaid interest thereon, shall be amortized over the following thirty-six (36) months. We have the right to prepay each of these notes without penalty or premium. Each of these notes were issued with detachable five-year warrants to purchase shares of our common stock as set forth in the table below.

 

Issuance Date   Principal Amount     Original Issue Discount     Gross Proceeds    

Note

Conversion

Price Per

Share

    Number of Shares Underlying Warrants    

Warrant

Exercise

Price Per

Share

 
October 3, 2019   $ 27,174     $ 2,174     $ 25,000     $ 0.12       50,000     $ 0.12  
October 10, 2019     27,174       2,174       25,000       0.12       50,000       0.12  
October 23, 2019     108,696        8,696        100,000        0.12        250,000       0.15  
                            250,000       0.20  
October 29, 2019     27,174       2,174       25,000       0.12       50,000       0.12  
November 8, 2019     16,304       1,304       15,000       0.07       30,000       0.07  
Total   $ 206,522     $ 16,522     $ 190,000     $ 0.07-0.12       680,000     $ 0.07-0.20  

 

On the date set forth in the table below, we entered into a senior convertible note payable with a lender, who is also a current stockholder and beneficial owner of more than 5% of our common stock, in the amount set forth in the table below. This note accrues interest payable monthly at the rate of 8% per annum and matures on June 30, 2020. This note and accrued interest thereon may convert into shares of our common stock at the conversion price then in effect (initially $0.12 per share, subject to adjustment) any time at the holder’s option or automatically upon a qualified financing of at least $5 million at the lower of the conversion price then in effect or a 25% discount to the offering price. The conversion price is subject to adjustment upon the issuance of our common stock or securities convertible into our common stock at a price per share less than the then prevailing conversion price, other than specified exempt issuances; accordingly, on November 8, 2019, the conversion price was adjusted to $0.07 per share. We have the right to prepay this note without penalty or premium. This note was issued with a detachable five-year warrant to purchase shares of our common stock as set forth in the table below. The exercise price of this warrant shall be adjusted in accordance with any adjustment to the conversion price of this note; accordingly, on November 8, 2019, the exercise price was adjusted to $0.07 per share. 

 

Issuance Date   Principal Amount     Original Issue Discount     Gross Proceeds     Note Conversion Price Per Share     Number of Shares Underlying Warrants     Warrant Exercise Price Per Share  
October 16, 2019   $ 217,391     $ 17,391     $ 200,000     $ 0.07       400,000     $ 0.07  

 

General Nutrition Corporation

 

On October 16, 2019, the exclusivity provision of our purchasing agreement with GNC expired, however, all other provisions of our purchasing agreement with GNC remain in effect. We may expand ZanthoSyn® distribution to mass market retailers, other specialty nutrition stores, pharmacies, and other retailers. We also plan to increase our sales and marketing efforts through e-commerce.

 

  29  
 

 

Results of Operations

 

Results of Operations for the Three and Nine-Months Ended September 30, 2019 and 2018

 

The following table reflects our operating results for the three and nine-months ended September 30, 2019 and 2018:

 

Operating Summary   Three-months ended September 30, 2019     Three-months ended September 30, 2018     Nine-months ended
September 30, 2019
    Nine-months ended
September 30, 2018
 
Revenues   $ 229,142     $ 549,540     $ 439,505     $ 1,134,899  
Cost of Goods Sold     (120,818 )     (240,152 )     (254,479 )     (521,353 )
Gross Profit     108,324       309,388       185,026       613,546  
Operating Expenses     (1,300,035 )     (1,237,019 )     (3,540,412 )     (3,689,560 )
Net Operating Loss     (1,191,711 )     (927,631 )     (3,355,386 )     (3,076,014 )
Other (Expense) Income     (241,915 )     (1,257 )     (295,354 )     (859 )
Net Loss   $ (1,433,626 )   $ (928,888 )   $ (3,650,740 )   $ (3,076,873 )

 

Operating Summary for the Three-Months Ended September 30, 2019 and 2018

 

Our revenues presently derive from the sale of ZanthoSyn® primarily through wholesale and, to a lesser extent, e-commerce channels. We launched our e-commerce channel in 2016 and began selling to GNC stores in 2017. ZanthoSyn® is currently available at over three thousand GNC corporate stores in the United States. As a result, revenues were $229,142 and $549,540 for the three-months ended September 30, 2019 and 2018, respectively. The decrease in revenues for the three-months ended September 30, 2019 was primarily attributed to decreased replenishment orders by GNC during the current period compared to the previous year. Costs of goods sold were $120,818 and $240,152 for the three-months ended September 30, 2019 and 2018, respectively, and included costs of the product, shipping and handling, sales taxes, merchant fees, and other costs incurred on the sale of goods. Gross profits were $108,324 and $309,388 for the three-months ended September 30, 2019 and 2018, respectively, which represented gross profit margins of approximately 47% and 56%, respectively. The decrease in gross profit margin for the three-months ended September 30, 2019, was primarily attributed to increased promotional activities at GNC stores, which increased the sales discounts passed through to us during the current period.

 

Operating expenses were $1,300,035 and $1,237,019 for the three-months ended September 30, 2019 and 2018, respectively. Operating expenses primarily consisted of services provided to the Company, including payroll, consultation, and contract services, for research and development, including our clinical trial and pharmaceutical development programs, sales and marketing, and administration. These expenses were paid in accordance with agreements entered with each employee or service provider. Included in operating expenses were $175,712 and $180,562 in stock-based compensation for the three-months ended September 30, 2019 and 2018, respectively. The increase in operating expenses for the period from the same period in the prior year was primarily related to an increase in professional fees as a result of clinical trials and debt and equity issuances and filings.

 

Other expenses, net, were $241,915 and $1,257 for the three-months ended September 30, 2019 and 2018, respectively. For the three-months ended September 30, 2019, other expenses, net, consisted of the change in the fair value of a derivative liability, loss on abandonment of patents, and interest expense of $20,524, $36,205, and $185,189, respectively. These expenses were partially offset by interest income of $3 realized during the nine-months ended September 30, 2019. For the three-months ended September 30, 2018, other expenses, net, consisted of interest income and interest expense of $7 and $(1,264), respectively.

 

  30  
 

 

Operating Summary for the Nine-Months Ended September 30, 2019 and 2018

 

Our revenues were $439,505 and $1,134,899 for the nine-months ended September 30, 2019 and 2018, respectively. The decrease in revenues for the nine-months ended September 30, 2019 was primarily attributed to a combination of (i) GNC selling through existing ZanthoSyn® inventory we sold to GNC during the prior year, which impacted the timing and amounts of replenishment orders during the current period, (ii) increased promotional activities at GNC stores, which increased the sales discounts passed through to us during the current period, and (iii) GNC inventory adjustments to focus on ZanthoSyn 60 count and 90 count bottles, which are the top performing ZanthoSyn variants at GNC, resulting in a one-time return of remaining ZanthoSyn 30 count bottles from GNC inventory to us. Costs of goods sold were $254,479 and $521,353 for the nine-months ended September 30, 2019 and 2018, respectively, and included costs of the product, shipping and handling, sales taxes, merchant fees, and other costs incurred on the sale of goods. Gross profits were $185,026 and $613,546 for the nine-months ended September 30, 2019 and 2018, respectively, which represented gross profit margins of approximately 42% and 54%, respectively. The decrease in gross profit margin for the nine-months ended September 30, 2019 was primarily attributed to increased promotional activities at GNC stores, which increased the sales discounts passed through to us during the current period.

 

Operating expenses were $3,540,412 and $3,689,560 for the nine-months ended September 30, 2019 and 2018, respectively. Operating expenses primarily consisted of services provided to the Company, including payroll, consultation, and contract services, for research and development, including our clinical trial and pharmaceutical development programs, sales and marketing, and administration. These expenses were paid in accordance with agreements entered with each employee or service provider. Included in operating expenses were $534,774 and $443,249 in stock-based compensation for the nine-months ended September 30, 2019 and 2018, respectively. The decrease in operating expenses for the period from the same period in the prior year was primarily related to a sales and marketing conference and related expenses that occurred in 2018 but not in 2019.

 

Other expenses, net, were $295,354 and $859 for the nine-months ended September 30, 2019 and 2018, respectively. For the nine-months ended September 30, 2019, other expenses, net, consisted of the change in the fair value of a derivative liability, loss on abandonment of patents, and interest expense of $3,139, $36,205, and $256,015, respectively. These expenses were partially offset by interest income of $5 realized during the nine-months ended September 30, 2019. For the nine-months ended September 30, 2018, other expenses, net, consisted of interest income of $1,941, other income of $556, and interest expense of $(3,356).

 

Results of Operations for the Years Ended December 31, 2018 and 2017

 

The following table reflects our operating results for the years ended December 31, 2018 and 2017:

 

Operating Summary   Year ended
December 31, 2018
    Year ended
December 31, 2017
    Change  
Revenues, net   $ 1,510,875     $ 610,323     $ 900,552  
Cost of Goods Sold     (699,852 )     (274,707 )     (425,145 )
Gross Profit     811,023       335,616       475,407  
Operating Expenses     (4,833,518 )     (2,337,886 )     (2,495,632 )
Net Operating Loss     (4,022,495 )     (2,002,270 )     (2,020,225 )
Other Income (Expense)     (1,727 )     17,036       (18,763 )
Net Loss   $ (4,024,222 )   $ (1,985,234 )   $ (2,038,988 )

 

Operating Summary for the Years Ended December 31, 2018 and 2017

 

Our revenues were $1,510,875 and $610,323 for the years ended December 31, 2018 and 2017, respectively. Cost of goods sold were $699,852 and $274,707 for the years ended December 31, 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 $811,023 and $335,616 for the years ended December 31, 2018 and 2017, which represented gross profit margins of 54% and 55%, respectively.

 

Operating expenses were $4,833,518 and $2,337,886, for the years ended December 31, 2018 and 2017, respectively. Operating expenses primarily consisted of services provided to the Company, including payroll and consultation, for research and development, sales and marketing, and administration. These expenses were paid in accordance with agreements entered into with each employee or service provider. Included in operating expenses were $650,271 and $242,146 in stock-based compensation for the years ended December 31, 2018 and 2017, respectively.

 

Other income (expense) was $(1,727) and $17,036, for the years ended December 31, 2018 and 2017, respectively. For the year ended December 31, 2018, other expense primarily consisted of interest expense of $4,227, which was offset by interest and other income of $2,500. For the year ended December 31, 2017, other income primarily consisted of a State of Hawaii refundable research and development credit of $17,253.

 

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Assets and Liabilities

 

Assets were $2,114,414 and $2,458,898 as of September 30, 2019 and December 31, 2018, respectively. The decrease was primarily due to a decrease in cash. At September 30, 2019 and December 31, 2018, cash totaled $7,470 and $243,753, respectively. Negative working capital was $5,623,786 and $3,877,290 as of September 30, 2019 and December 31, 2018, respectively, and was primarily due to accrued payroll and paid time off of $3,480,812 and $3,437,011, accrued Board of Director fees and related consultation of $418,546, and accounts payable of $1,706,117 and $1,996,097, less current assets of $1,664,778 and $2,024,364, respectively.

 

Assets were $2,458,898 and $3,156,685 as of December 31, 2018 and 2017, respectively. The decrease was primarily due to a decrease in cash offset by an increase in inventory. At December 31, 2018 and 2017, cash totaled $243,753 and $2,236,837, respectively. Negative working capital was $3,877,290 and $1,748,373 as of December 31, 2018 and 2017, respectively, and was primarily due to accrued payroll and paid time off of $3,437,011 and $3,404,610, accrued Board of Director fees and related consultation of $418,546, and accounts payable of $1,996,097 and $603,391, less current assets of $2,024,364 and $2,728,174, respectively.

 

The accrual of payroll and Board of Director fees and related consultation, which occurred from January 2008 to December 2013, was due to significant capital constraints, and was selected in favor of layoffs or furloughs in order to maximize employee and director retention. In 2013 and 2014, the Company initiated repayment on these accrued amounts, utilizing approximately 5% to 10% of proceeds from various financings and plans to continue a structured repayment of the outstanding amounts over time as resources permit.

 

The issuance of convertible notes resulted in a derivative liability of $246,414 as of September 30, 2019.

 

Liquidity and Capital Resources

 

Since our inception, we have sustained operating losses and have used cash raised by issuing securities. We expect to continue to operate with a net loss until we are able to develop and commercialize our pharmaceutical product candidates.

 

During the nine-months ended September 30, 2019 and 2018, we used cash in operating activities of $3,047,889 and $2,712,155, respectively, and incurred net losses of $3,650,740 and $3,076,873, respectively. During the years ended December 31, 2018 and 2017, we used cash in operating activities of $3,200,528 and $2,080,623, respectively, and incurred net losses of $4,024,222 and $1,985,234, respectively.

 

As of December 31, 2018, we had a U.S. federal income tax net operating loss (“NOL”) carryforward of approximately $37 million. These NOLs may be available to offset our future taxable income to the extent permitted under the Internal Revenue Code (the “IRC”). Under IRC Section 382, the use of NOL carryforwards, capital loss carryforwards, and other tax credit carryforwards may be significantly limited if a change in ownership of a company occurs. A change in ownership under IRC Section 382 is defined, generally, as a cumulative change of 50 percentage points or more in the ownership positions of certain stockholders owning 5% or more of a company’s common stock over a three-year rolling period. If we were to have a change of ownership within the meaning of IRC Section 382, then under certain conditions, our annual federal NOL utilization could be limited to an amount equal to our market capitalization (valued at the time of the ownership change) multiplied by the federal long-term tax exempt rate.

 

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

 

We intend to use the proceeds from this offering primarily to fund our research, development, and clinical programs, as well as for other general corporate purposes, including working capital and repayment of certain indebtedness (as described in “Use of Proceeds”). After giving effect to the net proceeds that we will receive from this offering, we expect to have sufficient cash resources to fund the budgeted expenditures for our expected operations for at least one year.

 

We also may obtain additional financing from investors through the private placement of our common stock and warrants to purchase our common stock or through the issuance of debt or convertible debt securities and plan to do so prior to the closing of this offering. There can be no assurance that a financing transaction will be available to us on terms and conditions that we determine are acceptable.

 

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

 

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

 

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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.

 

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.

 

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

 

Cash Flow Summary   Nine-months ended
September 30, 2019
    Nine-months ended
September 30, 2018
 
Net Cash from Operating Activities   $ (3,047,889 )   $ (2,712,155 )
Net Cash from Investing Activities     (58,394 )     (30,483 )
Net Cash from Financing Activities     2,870,000       704,375  
Net Cash Decrease for Period     (236,283 )     (2,038,263 )
Cash at Beginning of Period     243,753       2,236,837  
Cash at End of Period   $ 7,470     $ 198,574  

 

Cash Flows from Operating Activities

 

During the nine-months ended September 30, 2019 and 2018, our operating activities primarily consisted of receipts and receivables from sales, 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 nine-months ended September 30, 2019 and 2018, our investing activities were related to expenditures on patents.

 

Cash Flows from Financing Activities

 

During the nine-months ended September 30, 2019, our financing activities consisted of transactions in which we raised proceeds through the issuance of our common stock and convertible and other notes payable. The issuance of the convertible notes resulted in a derivative liability of $246,414 as of September 30, 2019.

 

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   Year ended
December 31, 2018
    Year ended
December 31, 2017
 
Net Cash from Operating Activities   $ (3,200,528 )   $ (2,080,623 )
Net Cash from Investing Activities     (36,593 )     (19,408 )
Net Cash from Financing Activities     1,244,037       4,178,435  
Net Cash (Decrease) Increase     (1,993,084 )     2,078,404  
Cash at Beginning of Year     2,236,837       158,433  
Cash at End of Year   $ 243,753     $ 2,236,837  

 

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Cash Flows from Operating Activities

 

During the years ended December 31, 2018 and 2017, our operating activities primarily consisted of receipts and receivables from sales, payments or accruals for employees, directors, and consultants for services related to research and development, sales and marketing, and administration, and deposits for future inventory.

 

Cash Flows from Investing Activities

 

During the years ended December 31, 2018 and 2017, our investing activities were primarily related to expenditures on patents.

 

Cash Flows from Financing Activities

 

During the years ended December 31, 2018 and 2017, our financing activities primarily consisted of transactions in which we raised proceeds through the issuance of our common stock.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the Financial Accountings Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases. This ASU requires management to recognize lease assets and lease liabilities for all leases. ASU No. 2016-02 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous lease guidance. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model, the effect of leases in the statement of comprehensive income and the statement of cash flows is largely unchanged from previous U.S. GAAP. The guidance in ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company applied the modified retrospective approach in adopting this standard. The modified retrospective approach includes a number of optional practical expedients that the Company elected to apply; primarily the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. As part of this adoption, the Company will, in effect, continue to account for leases that commence before the effective date in accordance with previous U.S. GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous U.S. GAAP. This adoption of this standard on January 1, 2019, resulted in the Company recognizing a right-to-use asset and lease liability. The Company elected to not recognize any right-to-use assets or liabilities for leases that are twelve months or less. Lease costs are recognized straight-line over the term of the lease. The adoption of this standard did not impact retained earnings of cash flows of the Company.

 

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. The guidance in ASU No. 2018-07 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 consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the FASB’s Concepts Statement, including the consideration of costs and benefits. The guidance in ASU No. 2018-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of the adoption of this ASU on its consolidated financial statements.

 

The Company does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the consolidated financial statements.

 

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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Our Business

 

Overview

 

We are a development stage biopharmaceutical company focused primarily on the development of pharmaceuticals to safely address one of the major underlying causes of many chronic diseases – inflammation – including cardiovascular disease, metabolic disease, liver disease, arthritis, and aging. We also have a commercial business unit that markets dietary supplements for inflammatory health. We believe we are well positioned for growth through the utilization of astaxanthin and zeaxanthin for chronic pharmaceutical applications by safely reducing chronic inflammation at the cellular and mitochondrial level – without inhibiting normal function. Similar mechanisms also support the use of our dietary supplement for inflammatory health.

 

We believe that our pharmaceutical product candidates and our dietary supplements have competitive advantages primarily relating to a unique combination of the following benefits:

 

  An excellent safety profile that supports chronic use
  Broad anti-inflammatory activity and pleiotropic effects with potential application to several chronic diseases as pharmaceuticals and various areas of health as dietary supplements
  Oral dosing convenience
  Scalable manufacturing
  Economical pricing

 

Market Overview

 

There is broad acceptance in the scientific, medical, and financial communities that chronic inflammation is a significant factor in many chronic diseases, particularly cardiovascular disease. The double-blind, randomized, placebo-controlled CANTOS clinical trial (10,061 patients; Novartis, 2017) and REDUCE-IT clinical trial (8,179 patients; Amarin Corporation, 2018), both published in the New England Journal of Medicine, helped to catalyze and support this consensus. Commonly used anti-inflammatory drugs such as aspirin, ibuprofen, naproxen, COX-2 inhibitors, corticosteroids, and various biologics may reduce inflammation, but they have risks of significant side effects that limit their utility in chronic disease.

 

We believe that a safe anti-inflammatory is the solution. Our lead pharmaceutical candidate CDX-101, a proprietary prodrug of the naturally occurring marine molecule astaxanthin, may provide the needed combination of an excellent safety profile, anti-inflammatory activity, and economic pricing to become widely used for the prevention and treatment of chronic diseases driven by inflammation.

 

We are pursuing an initial indication of severe hypertriglyceridemia (triglycerides ≥ 500 mg/dL) for CDX-101. Severe hypertriglyceridemia is associated with chronic inflammation and patients with the disorder have increased cardiovascular disease risk and incidence of pancreatitis. We believe the clinical pathway to FDA drug approval for severe hypertriglyceridemia, which relies on biomarker endpoints (i.e., measuring triglycerides in blood tests over a period of several months), will be more efficient than other potential indications that require clinical outcomes studies (e.g., evaluating heart attacks, strokes, and deaths over a period of several years), and is thus better suited as our initial indication for CDX-101.

 

An estimated 3.4 million Americans have severe hypertriglyceridemia according to peer-reviewed research published in the American Journal of Cardiology in 2011. Statins, fibrates, and prescription fish oils are all used to manage hypertriglyceridemia. 21% (42 million) of U.S. adults have mixed dyslipidemia (high levels of low-density lipoprotein “LDL” cholesterol with low levels of high-density lipoprotein “HDL” cholesterol and/or high levels of triglycerides), with nearly 6% (11.6 million people) having all three lipid abnormalities. Lovaza, Vascepa, and other prescription fish oils approved for severe hypertriglyceridemia are also used off-label in mixed dyslipidemia patients to reduce moderately elevated triglycerides and aggregate sales of these products for on and off-label use are estimated to be approaching $2 billion annually.

 

We believe CDX-101 will have several competitive advantages compared to prescription fish oils: (i) ease of administration: oral dosing of large fish oil capsules is problematic, whereas we expect CDX-101 tablets should be far smaller; (ii) scalability: prescription fish oil manufacturing is limited by the declining global fish supply, whereas we believe the synthetic production of CDX-101 is scalable; and (iii) safety: prescription fish oils have certain safety risks, whereas we believe that astaxanthin, the active moiety of CDX-101, has an excellent safety profile.

 

The REDUCE-IT clinical trial demonstrated that administration of Vascepa resulted in a significant reduction of major adverse cardiovascular events (“MACE”) in patients with mixed dyslipidemia on standard of care, specifically statins, and we believe is the primary basis of Amarin’s request to the FDA to expand Vascepa’s label. The reduction of triglycerides in the REDUCE-IT clinical trial was modest however, and the study’s authors concluded that Vascepa’s ability to reduce other markers of cardiovascular disease, including inflammation and oxidized LDL (as demonstrated in the MARINE and ANCHOR clinical trials), provided the pleiotropic effects that led to reduction of MACE in REDUCE-IT. In human proof-of-concept “pilot” studies conducted by third parties and animal models conducted by third parties and us, astaxanthin, the active moiety of CDX-101, has demonstrated similar pleiotropic effects, which are derived from its broad anti-inflammatory activity, but without the limitations of Vascepa or other prescription fish oils. As a result, we believe this market also presents a major opportunity as a potential second indication for CDX-101.

 

Beyond cardiovascular disease, we believe CDX-101 could be developed to address other chronic diseases driven by inflammation, including metabolic disease, liver disease, arthritis, and aging, each with potential annual sales exceeding a billion dollars.

 

We are also developing CDX-301, our zeaxanthin pharmaceutical candidate, for macular degeneration. Our target initial indication for CDX-301 is Stargardt disease, a juvenile form of macular degeneration and potential orphan drug indication. Zeaxanthin has a mechanism of action and excellent safety profile similar to astaxanthin, however, it accumulates in the human eye through uptake by a unique retinal receptor, providing protection against blue light, oxidative damage, and related inflammation that occurs in macular degeneration. Pre-clinical and clinical studies with zeaxanthin have demonstrated proof-of-concept for the treatment of macular disorders. Based on multiple academic and NIH sources, we believe there are no more than 42,000 persons in the United States with Stargardt disease, and therefore we believe a treatment for Stargardt disease may qualify for orphan drug designation. (By statute, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition that affects less than 200,000 persons in the United States.) If CDX-301 receives FDA orphan drug designation for Stargardt disease and obtains FDA drug approval, we expect CDX-301 may benefit from certain advantages as an orphan drug, including orphan drug exclusivity, which means the FDA may not approve any other application, including a full NDA, to market the same drug for the same indication for a period of seven years, except in limited circumstances. We also believe that age related macular degeneration, a larger market estimated to afflict more than three million people in the U.S. alone, presents a major opportunity as a potential second indication for CDX-301. We do not expect to use the proceeds of this offering to pursue the development of CDX-301.

 

Astaxanthin

 

Astaxanthin Safety

 

Astaxanthin is a naturally occurring marine carotenoid found in salmon, microalgae, krill, lobster, and crab. Carotenoids are natural pigments that impart coloration and support animal health and vitality, especially in harsh marine environments. Astaxanthin is responsible for the characteristic red or pink color of salmon and shellfish. Salmon without astaxanthin are smaller, more susceptible to infection, have reproductive problems, and are not strong enough to swim upstream.

 

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Astaxanthin is GRAS as a food substance according to FDA regulations and has undergone extensive toxicity testing by third parties and us with no clinically meaningful issues even at the extremely high doses summarized in the table below:

 

Type of Study   Maximum Dosing
     
Acute Toxicity   >8,000 mg/kg (mouse, rat), 2,000 mg/kg (non-human primates)
     
Sub-Chronic Toxicity   1,240 mg/kg (rat), 160 mg/kg (dog)
     
1 Year Chronic Toxicity/Carcinogenicity   1,000 mg/kg (rat), 1,400 mg/kg (mouse), 200 mg/kg (dog)
     
2 Year Carcinogenicity   1,000 mg/kg (rat)
     
Genotoxicity/Mutagenicity   2,000 mg/kg (mouse)
     
Teratogenicity   1,000 mg/kg (rat), 400 mg/kg (rabbit)

 

Commonly used anti-inflammatory drugs such as aspirin, ibuprofen, naproxen, COX-2 inhibitors, corticosteroids, and various biologics have risks of side effects including gastrointestinal bleeding, heart attacks, strokes, and severe infections. Prescription fish oil drugs, while safer than common anti-inflammatory drugs, also have risks of certain side effects. Lovaza and other DHA, EPA combination fish oil drugs, have risks of side effects including back pain, eructation, dysgeusia, and increases in LDL cholesterol. Vascepa has risks of side effects including arthralgia, atrial fibrillation, and increased bleeding. Fenofibrates have risks of side effects including stomach pain, nausea, and back pain.

 

In contrast, astaxanthin has no known side effects of clinical significance. We believe astaxanthin’s excellent safety profile will be a key competitive advantage compared to other drugs targeting inflammation and lipids.

 

Astaxanthin Mechanism of Action

 

The mechanism of action of astaxanthin, the active moiety in CDX-101, is quite different than most drugs, and we believe is responsible for its excellent safety profile. Most drugs target single receptors or enzymes in complex pathways, which can lead to side effects with chronic use. Astaxanthin is distributed systemically, including to the liver and heart, where it localizes in cellular and mitochondrial membranes and reduces the oxidative stress that causes chronic inflammation, without affecting the normal function of inflammatory/metabolic signaling pathways. And unlike other antioxidants such as beta-carotene, Vitamin C, and Vitamin E, astaxanthin spans and stabilizes cellular and mitochondrial membranes (biological lipid bilayers) to function as an aqueous and lipid phase antioxidant without membrane disruption, as proven by X-ray diffraction studies:

 

 

As a result, astaxanthin demonstrates positive and quantifiable pleiotropic effects on many inflammatory cytokines and drug targets.

 

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In human proof-of-concept “pilot” studies conducted by third parties, astaxanthin statistically significantly decreased inflammation and oxidative stress:

 

  TNF-α decreased (-30%, p=0.0022)
  CRP decreased (-20%, p<0.05; two studies)
  Oxidative stress decreased (MDA, IsoP, SOD, TAC increased)

 

In animal studies conducted by third parties, astaxanthin statistically significantly decreased inflammation and oxidative stress:

 

  Inflammatory markers decreased in various model systems:

  TNF-α, IL-1β, IL-6, CRP, NF-kB, PGE-2, iNOS, MCP-1, MPO, ERK, JNK, COX-2
  TNF-α decreased equivalent to an equal dose of prednisolone

  Oxidative stress decreased in mitochondria

 

Astaxanthin Research Results

 

There are more than 2,000 published peer reviewed papers related to astaxanthin, including more than 50 peer reviewed papers published by Cardax and its collaborators (referred to herein as “us”) and more than 50 “pilot” human clinical trials with astaxanthin supplements, more than 20 of which were randomized, double-blind, placebo-controlled human proof-of-concept studies. Highlights of astaxanthin’s pleiotropic effects, which were demonstrated in studies utilizing astaxanthin from natural and synthetic sources, include:

 

Astaxanthin and Cardiovascular Disease

 

In human proof-of-concept “pilot” studies conducted by third parties, astaxanthin statistically significantly decreased inflammation, triglycerides, LDL cholesterol, and blood pressure:

 

  CRP decreased (-20%, p<0.05; two studies)
  Triglycerides decreased (-25.8%, p<0.05)
  LDL-C decreased (-10.4%, p<0.05)
  HDL-C increased (+14.5%, p<0.01)
  Apolipoprotein B decreased (-7.5%, p<0.01)
  Adiponectin increased (+26%, p<0.01; +14%, p=0.0053; +30%, p=0.01; three studies)
  Blood pressure decreased (systolic blood pressure -4.6%, p=0.021; diastolic blood pressure -6.9%, p<0.001; two studies)
  Blood flow velocity increased (choroidal, p=0.018, blood transit time, p<0.01)

 

In animal studies conducted by third parties and us, astaxanthin demonstrated statistically significant improvements in models of cardiovascular disease:

 

  CRP and IL-6 decreased
  Triglycerides decreased (plasma, hepatic)
  Re-thrombosis decreased
  Atherosclerosis decreased (aortic arch plaque)
  Cholesterol decreased
  Blood pressure decreased
  Nitric oxide production increased

 

Astaxanthin and Metabolic Disease

 

In human proof-of-concept “pilot” studies conducted by third parties, astaxanthin statistically significantly increased adiponectin and decreased TNF-α and oxidative stress:

 

  Adiponectin increased (+26%, p<0.01; +14%, p=0.0053; +30%, p=0.01; three studies)
  TNF-α decreased (-30%, p=0.0022)
  Oxidative stress decreased (MDA, IsoP, SOD, TAC increased)

 

In animal studies conducted by third parties, astaxanthin demonstrated statistically significant improvements in models of metabolic disease:

 

  Fasting blood glucose levels decreased
  Insulin levels & sensitivity (HOMA-IR, QUICK) increased
  Insulin signaling (PI3K-AKT, IRS-1p) increased
  Adiponectin levels increased
  Insulin response and glucose tolerance (ipGTT) increased
  GLUT-4 translocation increased
  JNK, ERK-1 levels decreased
  Nitric oxide production increased

 

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Astaxanthin and Liver Disease

 

In human proof-of-concept “pilot” studies conducted by third parties, astaxanthin statistically significantly decreased fat accumulation in biopsy-diagnosed NASH patients, decreased TNF-α, improved lipid profile parameters, and decreased oxidative stress:

 

  NASH disease markers decreased in patients:

  Steatosis: p<0.05
  Nonalcoholic fatty liver disease (“NAFLD”) Activity Score (“NAS”): p<0.08
  Lobular inflammation decreased: trend

  TNF-α decreased (-30%, p=0.0022)
  Lipid profile parameters improved (LDL, HDL, ApoB, TG)
  Oxidative stress decreased (MDA, IsoP, SOD, TAC increased)

 

In animal studies conducted by third parties and us, astaxanthin statistically significantly decreased elevated liver enzymes, lipids, insulin resistance, steatosis, and fibrosis:

 

  Elevated liver enzyme levels decreased
  Steatosis decreased
  Fibrosis and induced acute hepatitis decreased
  Insulin levels & sensitivity (HOMA-IR, QUICK) increased
  Insulin signaling (PI3K-AKT, IRS-1p) increased
  Adiponectin levels increased

 

Astaxanthin and Arthritis

 

In human proof-of-concept “pilot” non-arthritis studies conducted by third parties, astaxanthin statistically significantly decreased markers of inflammation of relevance to arthritis, including TNF-α and CRP:

 

  TNF-α decreased (-30%, p=0.0022)
  CRP decreased (-20%, p<0.05; two studies)
  Adiponectin increased (+26%, p<0.01; +14%, p=0.0053; +30%, p=0.01; three studies)
  Oxidative stress decreased (MDA, IsoP, SOD, TAC increased)

 

In animal studies conducted by third parties, astaxanthin statistically significantly decreased inflammation, oxidative stress, and joint degeneration:

 

  Inflammatory markers decreased in various model systems:

  TNF-α, IL-1β, IL-6, CRP, NF-kB, PGE-2, iNOS, MCP-1, MPO, ERK, JNK, COX-2
  TNF-α decreased equivalent to an equal dose of prednisolone

 

Oxidative stress decreased in mitochondria

 

Cartilage degradation decreased (Mankin score) in surgically-induced model of OA (ACLT, rabbit)

 

Astaxanthin and Aging

 

In human studies conducted by third parties, activation of the FOXO3 gene has been linked to decreased inflammation and aging.

 

  Activation of anti-inflammatory, anti-aging gene FOXO3 promotes longevity in humans:

  Replicated in >20 independent studies
  Confers CVD protective benefit (p=0.001)
 

Decreases inflammation (CRP, trend; TNF-α, p=0.018)

 

In animal studies conducted by third parties and us, astaxanthin statistically significantly decreased activated the FOXO3 gene and extended lifespan:

 

 

FOXO3 mRNA levels increased in mice by 90% (p=0.024)

 

Lifespan extended by up to 30% via FOXO3 ortholog DAF16 in roundworms

 

Our Products and Business Strategy

 

Our product platform consists of our development stage pharmaceutical candidates and our commercially available dietary supplement:

 

  CDX-101, our lead pharmaceutical candidate, is in pre-clinical development for cardiovascular inflammation and dyslipidemia, with a target initial indication of severe hypertriglyceridemia.
  CDX-301 is in pre-clinical development for macular degeneration, with a target initial indication of Stargardt disease.
  ZanthoSyn® is a physician recommended astaxanthin dietary supplement for inflammatory health.

 

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Lead Pharmaceutical Candidate: CDX-101

 

Our lead pharmaceutical candidate, CDX-101, is a proprietary astaxanthin prodrug that cleaves following oral administration and delivers astaxanthin to the bloodstream. CDX-101 is being developed initially for cardiovascular inflammation and mixed dyslipidemia, with a target initial indication of severe hypertriglyceridemia.

 

We believe that the results from two major cardiovascular clinical trials—the 10,061 patient CANTOS study by Novartis in 2017 and the 8,179 patient REDUCE-IT study by Amarin in 2018—clearly demonstrated the clinical significance of reducing chronic inflammation, validating the cardiovascular inflammation hypothesis we have supported for more than a decade. We believe that astaxanthin’s unique mechanism of action—reduction of oxidative stress driven inflammation at the cellular and mitochondrial level without inhibiting normal function—results in an impact on key inflammatory drug targets and pathways, and importantly, an excellent safety profile that supports chronic administration. In addition to the safety advantages described in this prospectus, we believe that production of CDX-101, unlike Vascepa and other prescription fish oil drugs, will be highly scalable to address these large mass markets for chronic diseases driven by inflammation.

 

Clinical and non-clinical studies with astaxanthin have provided proof-of-concept for the treatment of cardiovascular risk factors including inflammation and triglycerides as described in this prospectus. In addition, interim results from our Cardiovascular Health Astaxanthin Supplement Evaluation (“CHASE”) clinical trial demonstrate beneficial changes in markers of cardiovascular health, including CRP, LDL cholesterol, total cholesterol, triglycerides, oxidized LDL, and blood pressure, and also underscore astaxanthin’s safety profile with no adverse safety signals observed. We believe these findings provide further mechanistic support for our pharmaceutical development program. We refer you to “CHASE Clinical Trial” on page 40 of this prospectus for additional information regarding the CHASE clinical trial.

 

We believe that an initial indication of severe hypertriglyceridemia provides an efficient clinical pathway to drug approval for CDX-101 and will be similar to the pathway as reported by Amarin for the development of Vascepa, its prescription fish oil. CDX-101 is currently in pre-clinical development, including the planning of IND enabling studies. We plan to use proceeds from this offering to complete IND enabling studies and to engage third party contract development and manufacturing organizations (CDMOs) to manufacture drug substance and drug product for such studies, with the goal of filing an IND approximately one year from the closing of this offering.

 

We have retained Paresh N. Soni, M.D., Ph.D., the former Senior Vice President and Head of Development at Amarin, to guide our clinical and regulatory strategy, interact with the FDA, and advise us on a full range of development issues. While at Amarin, Dr. Soni led the design of Amarin’s clinical trials, development strategy, and interaction with the FDA, including for Vascepa, which was approved for treatment of severe hypertriglyceridemia in 2012. Dr. Soni played a key role in the design and conduct of the MARINE, ANCHOR and REDUCE-IT clinical trials with Vascepa. In addition, Dr. Soni has held several senior R&D executive roles over the past 2 decades at Pfizer, Alexion, and Albireo. Dr. Soni is also a member of our Scientific Advisory Board.

 

In addition to Dr. Soni, our Scientific Advisory Board includes Deepak L. Bhatt, M.D., M.P.H. and R. Preston Mason, Ph.D.

 

Deepak L. Bhatt, M.D., M.P.H., is the Chairman of our Scientific Advisory Board. Dr. Bhatt is also the Chair of the REDUCE-IT clinical trial with Vascepa, Executive Director of Interventional Cardiovascular Programs at Harvard Medical School affiliated Brigham and Women’s Hospital, and Professor at Harvard Medical School. He is also the Editor of the peer-reviewed Journal of Invasive Cardiology and Editor-in-Chief of the Harvard Heart Letter for patients.

 

R. Preston Mason, Ph.D. is on the faculty of the Department of Medicine, Division of Cardiology at Harvard Medical School affiliated Brigham and Women’s Hospital. He has published more than 250 peer reviewed papers, including papers published in collaboration with Cardax, and is a recognized expert on the mechanism of action of astaxanthin and fish oils, particularly Vascepa.

 

CDX-101 vs. ZanthoSyn®

 

CDX-101 is a synthetic astaxanthin prodrug (new chemical entity) for pharmaceutical applications and ZanthoSyn® is a formulation of synthetic nature-identical astaxanthin for dietary supplement applications. While both deliver astaxanthin to the bloodstream, we believe the unique molecular structure of CDX-101 and its pharmaceutical pathway will provide substantial differentiation. In particular, we believe that:

 

  CDX-101 will be approved by the FDA as a drug for one or more disease indications, whereas ZanthoSyn® is marketed as a dietary supplement for health applications;
     
  CDX-101 will be prescribed by doctors and covered by health insurance, whereas ZanthoSyn® is sold through retail and e-commerce channels;
     
  CDX-101 will be administered at a higher dose and in different oral dosage form; and
     
  CDX-101 will have superior intellectual property protection.

 

Pharmaceutical Candidate: CDX-301

 

Our zeaxanthin pharmaceutical candidate, CDX-301, has a mechanism of action and excellent safety profile similar to astaxanthin, however, it is being developed for macular degeneration because zeaxanthin accumulates in the human eye through uptake by a unique retinal receptor, providing protection against blue light, oxidative damage, and related inflammation that occurs in macular degeneration. Pre-clinical and clinical studies with zeaxanthin have demonstrated proof-of-concept for the treatment of macular disorders. We believe that an initial indication of Stargardt disease, a juvenile form of macular degeneration, provides an efficient clinical pathway to drug approval for CDX-301. On November 30, 2018, we submitted a request for orphan drug designation to the FDA for zeaxanthin as a treatment of Stargardt disease, and we are currently in communications with the FDA regarding this matter. Additional financing beyond that contemplated in this offering will be needed to fund IND enabling studies and clinical development of CDX-301.

 

Dietary Supplement: ZanthoSyn®

 

ZanthoSyn® is our commercially available physician recommended astaxanthin dietary supplement. Astaxanthin is a naturally occurring molecule with safe anti-inflammatory activity that supports cardiovascular health, metabolic health, liver health, joint health, and longevity. The form of astaxanthin utilized in ZanthoSyn® has demonstrated an excellent safety profile in peer-reviewed published studies and is GRAS according to FDA regulations.

 

We sell ZanthoSyn® primarily through wholesale and e-commerce channels. We launched our e-commerce channel in 2016 and began selling to GNC stores in 2017. ZanthoSyn® is currently available at GNC corporate stores nationwide in the United States.

 

ZanthoSyn® is the top selling product at GNC stores in Hawaii and the top selling product in the anti-oxidant category at GNC stores nationwide.

 

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We market ZanthoSyn® primarily through a multi-pronged approach:

 

  Physician outreach and education, where ZanthoSyn® is positioned as the first safe, physician friendly, anti-inflammatory dietary supplement for health and longevity, with retail locations and e-commerce serving as convenient and credible distribution channels for physicians recommending ZanthoSyn®
  Retail store outreach, education, and in-store sales support, building on the ability to utilize ZanthoSyn® as a foundation of health and wellness regimens
  E-commerce platforms

 

We believe ZanthoSyn® is physician friendly for several reasons:

 

  ZanthoSyn® delivers the safety, purity, manufacturing rigor, bioavailability, and scientific support that provides physicians comfort in the quality and utility of the product, which is often not present in other dietary supplements.
  ZanthoSyn® is well-accepted at medical conferences where crowds of physicians and other healthcare professionals stand in line to receive ZanthoSyn® samples and product information after attending educational seminars.

 

Our sales and marketing program was initially launched in Hawaii, where we believe that robust physician outreach and education coupled with GNC retail store outreach, education, and in-store sales support increased consumer awareness and catalyzed strong sales growth. We also launched this program in major markets on the West Coast and East Coast in the U.S. beginning in 2017. To support these efforts, we have hired additional sales and marketing personnel. We are currently evaluating our strategy related to further expansion.

 

We sell ZanthoSyn® to GNC under a purchasing agreement. The exclusivity provision under such agreement related to distribution of ZanthoSyn® by GNC in the “brick and mortar” retail channel in the United States expired on October 16, 2019. GNC remains our only distributor of ZanthoSyn® in such channel, but we may expand retail distribution to mass market retailers, other specialty nutrition stores, pharmacies, and other retailers. We also plan to increase our sales and marketing efforts through e-commerce.

 

To date, our sales and marketing efforts of ZanthoSyn® have primarily been through GNC retail store outreach, education, and in-store sales support together with physician outreach and education. We plan to increase our sales and marketing efforts through e-commerce by capitalizing on one of the most important lessons learned from our sales and marketing program: “Conversations Create Customers.” Whether at GNC stores, directly with Cardax personnel, or at conferences with healthcare professionals, thousands of ZanthoSyn® customers have been created by understanding and experiencing the benefits of ZanthoSyn® firsthand. Cardax plans to implement strategies that it believes may create a similar customer experience more broadly, with fulfillment online, where margins may be greater than retail stores.

 

CHASE Clinical Trial

 

In September 2018, we initiated a human clinical trial entitled, Cardiovascular Health Astaxanthin Supplement Evaluation (“CHASE”), targeting cardiovascular inflammatory health. The randomized, double-blind, placebo-controlled clinical trial is evaluating the effect of low-dose and high-dose ZanthoSyn® on cardiovascular health as measured by CRP levels over 12 weeks in up to 120 subjects with documented cardiovascular risk factors. The study also includes an optional open label extension through 48 weeks.

 

Interim results from an initial cohort of subjects were announced on September 23, 2019. The interim results were based on data from 40 subjects administered high-dose ZanthoSyn® (96 mg/day astaxanthin – 48 mg twice a day), low-dose ZanthoSyn® (24 mg/day astaxanthin – 12 mg twice a day), or placebo.

 

Highlights from the interim review shown below are median percentage changes from baseline to week 12 unless otherwise stated. While the interim review was not powered for statistical significance, p-values less than 0.05 compared to placebo are provided. The p-values reported below (*p<0.05, **p<0.01) are nominal p-values from non-parametric comparisons of the median between each group and placebo and no adjustments for multiple comparisons were made.

 

Interim Results   High Dose   Low Dose   Placebo
CRP     -28%       -32%       -5%  
LDL-C     -12%  **     -7%       +5%  
Total cholesterol     -8%  *     -5%       +4%  
Triglycerides     -16%       -13%       +6%  
Oxidized LDL     -10%  *     +3%       +4%  
Blood pressure     -5%  *     -4%  *     +6%  
Median astaxanthin blood levels at 12 weeks     2,184 ng/mL     790 ng/mL     <10 ng/mL

 

We believe these findings provide:

 

  Further mechanistic support for our astaxanthin pharmaceutical development program
  Basis for additional patent filings
  Support for the cardiovascular health benefits of ZanthoSyn®

 

The interim results also underscore astaxanthin’s safety profile with no adverse safety signals observed. The CHASE Data Safety Review Board, which is comprised of a majority of independent clinical trial professionals, recommended that the clinical trial continue enrollment.

 

The FDA does not require human clinical trials for dietary supplements, but we believe that positive results from the CHASE trial may help promote scientific and consumer awareness of astaxanthin’s health and longevity applications and serve as further mechanistic support for our pharmaceutical development program.

 

We refer to you the “Risk Factors” section of this prospectus for a summary of certain risks related to clinical trial results.

 

REPZ Clinical Study

 

We are also exploring the effect of ZanthoSyn® on recovery, endurance, and performance in a clinical study (the Recovery, Endurance, and Performance with ZanthoSyn® or “REPZ” study) with 40 subjects by measuring sprint times and heart rates in connection with high intensity interval training on stationary air bikes. The results of the REPZ study, if successful, may be used to support ZanthoSyn® marketing efforts for sports and fitness applications. The REPZ study was recently completed, and final data analysis is underway.

 

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Benefits of Synthetic Astaxanthin vs. Natural Astaxanthin

 

Dietary supplements containing astaxanthin typically derive astaxanthin from microalgae, krill, or other natural sources, whereas ZanthoSyn® astaxanthin is made through total synthesis. While multiple studies demonstrate that astaxanthin from either natural or synthetic sources is efficacious and both are Generally Recognized as Safe according to FDA regulations, we believe synthetic astaxanthin offers significant advantages compared to astaxanthin from microalgae, krill, or other natural sources:

 

  Synthetic astaxanthin can be formulated for superior bioavailability. In a human crossover study comparing ZanthoSyn® to a leading microalgal astaxanthin dietary supplement, the astaxanthin blood levels following administration of ZanthoSyn® were nearly three times higher than the microalgal astaxanthin product at the same dose:

 

A SCREENSHOT OF A CELL PHONE

DESCRIPTION AUTOMATICALLY GENERATED

 

  AUC (area under curve, astaxanthin blood levels) = 2.85-fold greater (p=0.013)
  Cmax (maximum concentration, astaxanthin blood levels) = 3.0-fold greater (p=0.013)
  Coefficient of variation (variation between subjects of astaxanthin blood levels)

  ZanthoSyn® = 27%
  Microalgal astaxanthin = 62%

  Tmax (time of maximum concentration) = 6 hours
  No adverse events observed

 

The superior bioavailability described in this prospectus means that three times more astaxanthin from ZanthoSyn® is absorbed into the body from each dose, which provides a superior value proposition compared to other astaxanthin dietary supplements.

 

  Synthetic astaxanthin has been extensively tested in a wide range of toxicity studies, including acute, subacute, sub-chronic, and chronic toxicity studies, carcinogenicity studies, genotoxicity/mutagenicity studies, and developmental and reproductive toxicity studies; whereas to our knowledge microalgal or other sources of astaxanthin have not undergone the same amount of safety testing in such toxicity studies.
  Synthetic astaxanthin is manufactured with superior purity and precision, whereas astaxanthin extracted from microalgae and krill oil is obtained in a complex mixture, which may include many unknown marine byproducts.
  Synthetic manufacture of astaxanthin is scalable, whereas we believe the ability to readily scale the production and extraction of astaxanthin from microalgae or other sources will be limited as demand for astaxanthin grows.
  Synthetic manufacture of astaxanthin emits fewer greenhouse gases and consumes less energy, raw material, and land than traditional microalgal astaxanthin production.

 

Intellectual Property

 

We have obtained and are continuing to seek patent protection for compositions of matter, pharmaceutical compositions, and pharmaceutical uses, in certain disease areas, of our various carotenoid analogs and derivatives. Such carotenoids include astaxanthin, zeaxanthin, lutein, and/or lycophyll, and esters and other analogs and derivatives of these compounds. More specifically, we seek to protect: (i) the composition of matter of novel carotenoid analogs and derivatives, (ii) pharmaceutical compositions comprising synthetic or natural preparations of novel or natural occurring carotenoid analogs and derivatives, and (iii) the pharmaceutical use of synthetic preparations of novel or naturally occurring carotenoid analogs and derivatives in specific disease areas, including, but not limited to, the treatment of inflammation and related tissue damage, liver disease, and reperfusion injury, as well as the pharmaceutical use of synthetic or natural preparations of novel or natural occurring carotenoid analogs and derivatives for the reduction of platelet aggregation. We intend to enforce and defend our intellectual property rights consistent with our strategic business objectives.

 

We have 29 issued patents and two pending patents related to the composition of matter, pharmaceutical compositions, and pharmaceutical uses of our drugs candidates as well as many other related molecules that will expire between 2023 and 2028, subject to patent term extensions. We also have filed additional patents to extend patent coverage in the U.S. and worldwide to 2039-2040, with such applications including coverage related to certain cardiovascular uses on the basis of the CHASE clinical trial results as well as coverage related to the composition of matter of CDX-101.

 

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The Company’s patents are summarized in the table below.

 

    United States     Foreign     Expiration  
                   
Issued Patents     14       15       2023-2028  
                         
Pending Patents     0       1       2023-2028  
                         
Pending Patents     2       1       2039-2040  

 

Research and Development

 

Our research and development program is presently comprised of employees, consultants, including regulatory, scientific, and medical professionals, and third-party collaborators or contract organizations, including academic institutions, contract research organizations, and contract development and manufacturing organizations. Contract organizations provide us with access to significant research and development resources and infrastructure. We anticipate that our research and development will be primarily conducted by contract organizations with direction and oversight by our in-house research and development personnel.

 

In addition to conducting or overseeing research and development activities, our research and development personnel analyze and interpret other research on astaxanthin, as well as related compounds, competing products, applications, and industry trends. In the United States National Library of Medicine’s online repository, PubMed.gov, there are more than 2,000 peer-reviewed journal articles that reference astaxanthin in the title or abstract, over 500 of which were published in the last three years, with the vast majority published by organizations and researchers that are not affiliated with us. This type of “open-source” research has served to significantly advance the understanding of astaxanthin and related carotenoids, and has also presented our research and development personnel with the critical task of keeping up-to-date on all of the latest research and interpreting and integrating the findings with our research and that of others in order to serve as leading experts on the mechanism of action and biological applications of astaxanthin and related carotenoids.

 

Our research and development expenditures totaled $269,077 and $97,479 for the years ended December 31, 2018 and 2017, respectively, and we incurred $250,141 of research and development expenditures during the nine-month period ending September 30, 2019. These expenditures primarily reflect the cost of product development activities, including clinical trials. The compensation of our research and development personnel are included as a component of salaries and wages in the consolidated statements of operations. Our research and development expenditures for the year ended December 31, 2017 were reclassified to conform to the presentation of expenditures for the year ended December 31, 2018, in accordance with Note 2 to such consolidated financial statements.

 

Manufacturing

 

We utilize contract manufacturers and/or other third-party suppliers for the production of our products. The raw materials and supplies required for the production of our products may be available, in some instances from one supplier, and in other instances, from multiple suppliers. In those cases where raw materials are only available through one supplier, such supplier may be either a sole source (the only recognized supply source available to us) or a single source (the only approved supply source for us among other sources). We, our contract manufacturers, and/or other third-party suppliers will adopt appropriate policies to attempt, to the extent feasible, to minimize our raw material supply risks, including maintenance of greater levels of raw materials inventory and implementation of multiple raw materials sourcing strategies, especially for critical raw materials. Although to date we have not experienced any significant delays in obtaining any raw materials from suppliers, we cannot provide assurance that we, our contract manufacturers, and/or other third-party suppliers will not face shortages from one or more suppliers in the future.

 

Competition

 

The industries in which we intend to compete are subject to intense competition. The primary competition for our pharmaceutical candidates are the numerous pharmaceutical and biotechnology companies developing or marketing anti-inflammatories and other drugs or therapeutics targeting chronic diseases driven by inflammation, including cardiovascular disease, metabolic disease, liver disease, arthritis, aging, and macular degeneration. Certain competitors for our pharmaceutical candidates include, but are not limited to, AbbVie, Acasti Pharma, Acucela, Alkeus Pharmaceuticals, Amarin, Amgen, Astellas, AstraZeneca, Bayer, Boehringer Ingelheim, Bristol-Myers Squibb, Eli Lilly, Gilead, GlaxoSmithKline, Johnson & Johnson, Matinas Biopharma, Merck, MT Pharma, Nestle/Pamlab, Novartis, Pfizer, Reata Pharmaceuticals, Regeneron Pharmaceuticals, Roche/Genentech, Sanofi-Aventis, Servier, and Takeda. The primary competition for our dietary supplements are the many companies developing or marketing astaxanthin dietary supplements and other supplements targeting inflammatory health, cardiovascular health, metabolic health, liver health, joint health, and longevity. We believe that our ability to compete will be based primarily on scientific superiority, availability of patent protection, protection of other intellectual property rights, access to adequate capital, ability to develop, acquire, and market products successfully, ability to obtain governmental approvals, and ability to serve the particular needs of customers.

 

Our success will depend in large part on our ability to ob