As of March 27, 2017 there were 88,290,519
shares of common stock, par value $0.001 per share (“
common stock
”), of the registrant outstanding.
Part
I
Item
1. Business.
Explanatory
Note
Unless
otherwise noted, references in this Annual Report on Form 10-K to “Cardax,” the “Company,” “we,”
“our,” or “us” means Cardax, Inc., the registrant, and, unless the context otherwise requires, together
with its wholly-owned subsidiary, Cardax Pharma, Inc., a Delaware corporation (“
Pharma
”), and Pharma’s
predecessor, Cardax Pharmaceuticals, Inc., a Delaware corporation (“
Holdings
”), which merged with and into
Cardax, Inc. on December 30, 2015.
Special
Note Regarding Forward-Looking Statements
There
are statements in this annual report that are not historical facts. These “forward-looking statements” can be identified
by use of terminology such as “anticipate,” “believe,” “estimate,” “expect,” “hope,”
“intend,” “may,” “plan,” “positioned,” “project,” “propose,”
“should,” “strategy,” “will,” or any similar expressions. You should be aware that these forward-looking
statements are subject to risks and uncertainties that are beyond our control. For a discussion of these risks, you should read
this entire annual report carefully, especially the risks discussed under 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 annual
report will in fact transpire.
These forward-looking statements are not guarantees of future performance. You are cautioned
to not place undue reliance on these forward-looking statements, which speak only as of their dates.
We do not undertake any
obligation to update or revise any forward-looking statements, except as required by law.
Cautionary
Note Regarding Industry Data
Unless
otherwise indicated, information contained in this annual report 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.
Overview
We
are a life sciences company that develops consumer health and pharmaceutical technologies and we are a smaller reporting company
as defined by applicable federal securities regulations.
The
following events summarize the material transactions of our history and acquisition of our life science business:
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May
5, 2006:
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Holdings
acquired the intellectual property and other assets regarding certain astaxanthin technologies from Hawaii Biotech, Inc.,
a Delaware corporation (“
HBI
”), in exchange for shares of common stock of Holdings, shares of preferred
stock of Holdings, options to purchase shares of common stock of Holdings and the assumption by Holdings of certain liabilities
of HBI. At this date, Holdings became a separate company with the initial life-science astaxanthin technologies.
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May
5, 2006 to May 31, 2013:
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Holdings
continued the research and development of astaxanthin technologies and related compounds and raised capital primarily through
the issuance of debt securities.
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January
30, 2012:
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We
were incorporated in Delaware under the name “Koffee Korner Inc.” At this time, we acquired all the capital stock
of Koffee Korner’s Inc, a Texas corporation (“
Koffee Sub
”), which operated as a single location retailer
of specialty coffee in Houston, Texas.
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May
16, 2013:
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Pharma
was formed as a wholly owned subsidiary of Holdings.
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May
31, 2013:
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Holdings
contributed its assets to Pharma in exchange for all of the capital stock of Pharma and the assumption by Pharma of all of
the liabilities of Holdings.
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May
31, 2013 to February 7, 2014:
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Pharma
continued the business of Holdings including the research and development of consumer health and pharmaceutical technologies
and the commercialization of our technologies for products, and raised capital through the offering of senior secured convertible
promissory notes.
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November
25, 2013:
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We
formed Cardax Acquisition, Inc., a Delaware corporation (“
Cardax Sub
”), as our wholly owned subsidiary
as part of a corporate structure to enable the merger of Cardax Sub with and into Pharma, which would result in our acquisition
of the consumer health and pharmaceutical business of Pharma
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January
10, 2014:
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We
made our first investment in Pharma by purchasing 40% of the Pharma common stock (determined after our purchase of such shares)
in exchange for shares of our common stock. At this point, our assets were: Koffee Sub, Cardax Sub, and our investment in
Pharma.
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February
7, 2014:
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We
consummated the merger (the “
Merger
”) of Cardax Sub with and into Pharma, and Pharma became our wholly
owned subsidiary. We divested Koffee Sub and exclusively continued the consumer health and pharmaceutical business of Pharma.
On this date, we amended and restated our certificate of incorporation and bylaws and changed our name to “Cardax, Inc.”
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December
30, 2015:
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We
consummated the merger (the “
Holdings Merger
”) of Holdings with and into us. Upon the closing of the Holdings
Merger, the stockholders of Holdings received an aggregate number of shares and warrants to purchase shares of our common
stock equal to the aggregate number of shares of our common stock that were held by Holdings on the date of the closing of
the Holdings Merger. Our restricted shares of common stock held by Holdings were cancelled upon the closing of the Holdings
Merger. Accordingly, there was not any change to our fully diluted capitalization due to the Holdings Merger.
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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 https://www.cardaxpharma.com. The information on our website is not part of this annual report.
Our
Business
We
are a life sciences company devoting substantially all of our efforts to developing safe anti-inflammatory dietary supplements
and drugs. We are initially focusing on astaxanthin, which is a powerful and safe naturally occurring anti-inflammatory without
the side effects of currently marketed anti-inflammatories. The safety and efficacy of our products have not been directly evaluated
in clinical trials or confirmed by the U.S. Food and Drug Administration, or the FDA.
Many
anti-inflammatories have significant safety risks and side effects that limit their chronic use. We believe that our ability to
develop and commercialize astaxanthin and related products should provide us with a competitive advantage through a novel approach
that combines robust efficacy with safety, oral bioavailability, and tissue selectivity.
Strategic
Alliances
We
intend to expand our capabilities for the development, manufacturing, formulation, marketing and distribution or other exploitation
of products based on our proprietary technologies by entering into one or more strategic alliances with companies that have established
capabilities.
In
November 2006, we entered into a Joint Development and Supply Agreement (the “
BASF Agreement
”) with BASF, relating
to the research, development, manufacture, commercialization and related matters, and the related intellectual property rights
with respect to consumer health or “nutraceutical” and pharmaceutical products containing or utilizing synthetically
manufactured astaxanthin in the geometric (
trans
) and optical (
S
,
S’
) isomeric form most prevalent in
nature (“
ASTX-1
”), which is the same geometric and optical isomeric form of astaxanthin found in GRAS-designated
microalgal astaxanthin products. Under the BASF Agreement, we have granted BASF an exclusive worldwide license to our rights related
to the development and commercialization and related obligations of consumer health products containing or utilizing ASTX-1 (“
BASF
Astaxanthin Products
”). This license will provide us with potential benefits including specified royalties for future
net sales of BASF Astaxanthin Products, from and after the development and manufacture and applicable regulatory approval of any
such BASF Astaxanthin Products. The BASF Agreement does not prohibit Cardax from purchasing BASF Astaxanthin Products for consumer
health applications and provides that BASF will manufacture and supply Cardax on a mutually exclusive basis with preclinical,
clinical, and commercial scale amounts of ASTX-1 for pharmaceutical applications. The BASF Agreement is subject to certain termination
rights of the parties. If any termination is a result of the non-renewal of the then current term of the agreement or because
BASF no longer manufactures astaxanthin, then the terminating party shall, upon the request of the non-terminating party, grant
the non-terminating party a reasonable royalty-bearing, irrevocable, worldwide non-exclusive license of certain intellectual property
rights of the terminating party that will enable the non-terminating party to continue the manufacture and distribution of BASF
Astaxanthin Products. Either party may also terminate the BASF Agreement if there is a change of a controlling interest in the
other party; however, the provision shall not apply if a party that is not a manufacturer of synthetic carotenoids acquires the
Company. The BASF Agreement provides for an initial term of three years that is automatically extended for 18 month periods unless
notice of termination by either party is provided not less than 18 months prior to the expiration of the current term. Our material
benefits under the BASF Agreement, including our rights to royalty payments on future net sales of such products survive any termination
in full force. While we are not currently developing any products with BASF, we may pursue development and commercialization with
BASF under this Joint Development and Supply Agreement in the future.
In
August 2014, we entered into a Collaboration Agreement (the “
Capsugel Agreement
”) with Capsugel US, LLC relating
to the commercial development of astaxanthin products for the consumer health market. Under the terms of the Capsugel Agreement,
we agreed to jointly develop consumer health products (“
Capsugel Astaxanthin Products
”) containing ASTX-1 using
Capsugel’s proprietary formulation technology. The Capsugel Agreement provides for the joint administration of activities
under a product development plan that will include identifying at least one mutually acceptable third-party marketer (a “
Marketer
”)
who will enter into an agreement with Capsugel to further develop, market and distribute Capsugel Astaxanthin Products. The terms
of any such agreement with a Marketer are subject to our reasonable consent. The Capsugel Agreement provides that Capsugel shall
share revenues with us based on net sales of Capsugel Astaxanthin Products, subject to an administrative fee payable to Capsugel.
Capsugel agreed to certain exclusivity obligations with respect to the development and manufacture of Capsugel Astaxanthin Products.
Among other matters, Capsugel will perform the development work necessary to formulate, analytically develop and take all other
developmental actions necessary or required to develop the Capsugel Astaxanthin Products, and manufacture pre-clinical and clinical
batches for use by us and Capsugel. Under the Capsugel Agreement, we will be responsible for, among other matters, the U.S. regulatory
process and the regulatory process in non-U.S. jurisdictions to the extent mutually agreed. The term of the Capsugel Agreement
is for an initial stated period of three years from the date that a Marketer first offers product for commercial sale under an
agreement with Capsugel, subject to specified renewal provisions for additional three year terms and to earlier termination, if
commercial milestones that are to be mutually agreed are not achieved. In January 2016, we suspended development of a Capsugel
Astaxanthin Product, ASTX-1F, based on certain technical issues which, together with other business and regulatory issues, materially
impeded the formulation of ASTX-1F as a commercially viable product for the consumer health market.
Our
Strategy
We
believe we are well positioned for significant and sustained growth by focusing on additional research and development to commercialize
consumer health and pharmaceutical technologies or products utilizing synthetically manufactured astaxanthin (“
Cardax
Astaxanthin
”) and related xanthophyll carotenoids, which deliver nature-identical compounds to the body and reduce inflammation
in a multifaceted, quantifiable, and inherently safer manner than steroids or non-steroidal anti-inflammatory drugs (“
NSAIDs
”).
Our
initial primary focus is astaxanthin technologies. Astaxanthin is a naturally occurring marine compound that has robust anti-oxidant
and anti-inflammatory activity with exceptional safety. Astaxanthin is a member of the carotenoid family, which is comprised of
organic pigments that are produced in various plants and photosynthetic organisms and consumed by various higher-level organisms;
astaxanthin is known for giving salmon and lobster their distinctive red coloration. More specifically, astaxanthin is classified
as a xanthophyll, which is an oxygen containing carotenoid (such as lutein, zeaxanthin, and lycophyll), as compared to a carotene,
which is non-oxygen containing carotenoid (such as beta-carotene). Research demonstrates that xanthophylls behave differently
than carotenes with respect to biological mechanism of action (for example, by spanning and stabilizing biological membranes rather
than disrupting membranes), which we believe translates into clinical benefit. Peer-reviewed studies have shown that astaxanthin
reduces inflammation, at its source, without the harmful side effects that are common with other anti-inflammatory pharmaceutical
products, for example steroids and NSAIDs, including immune system suppression, liver damage, cardiovascular disease risk, and
gastrointestinal bleeding.
Astaxanthin
has an exceptional safety profile. For example, the FDA found no basis for questioning the safety determination made by Fuji Chemical
Industry Co., Ltd. (“
Fuji
”) in GRAS Notice No. GRN 000294 that
Haematococcus pluvialis
extract containing
astaxanthin esters (the primary ingredient in its microalgal astaxanthin consumer health product) is GRAS as a food additive under
the intended conditions of use. Other microalgal astaxanthin consumer health manufacturers, including Cyanotech Corporation and
Algatechnologies, Ltd., have relied on Fuji’s GRAS designation and self-affirmed their microalgal astaxanthin products as
GRAS. The FDA also found no basis for questioning the safety of microalgal astaxanthin products, for use as dietary ingredients
in dietary supplements, in several New Dietary Ingredient (NDI) notifications, including RPT 50, RPT 65, RPT 119, RPT 236, RPT
274, and RPT 278. In addition, the FDA amended the color additive regulations under 21 CFR 73 to provide for the safe use of astaxanthin
as a color additive to fish feed in 1995 (Federal Register Document No. 95-9178, Docket No. 87C–0316) in response to Color
Additive Petition CAP 7C0211 filed by Hoffman-La Roche in 1987, which contained robust non-clinical safety studies with a racemic
mixture of synthetic astaxanthin (“
DSM Astaxanthin
”) now owned by DSM Nutritional Products Ltd. (“
DSM
”).
DSM announced the marketing of DSM Astaxanthin as a consumer health product in 2013 based on its history of use in the food supply
as a color additive, the robust non-clinical safety studies that supported the food color additive approval, and additional long
term toxicity studies that were submitted to the FDA in 2005. DSM also announced the GRAS self-affirmation of DSM Astaxanthin
in 2015. Our claim that astaxanthin is exceptionally safe relies upon:
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widely
available astaxanthin research, peer-reviewed studies, and regulatory filings spanning several decades, including (a) FDA
GRAS and NDI regulatory filings related to microalgal astaxanthin and other naturally-occurring sources of astaxanthin, (b)
FDA color additive petition related to the racemic mixture of synthetic astaxanthin, (c) DSM’s published safety summary
supporting the use of DSM Astaxanthin as a dietary ingredient in dietary supplements, and (d) DSM’s GRAS self-affirmation
of DSM Astaxanthin;
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human
exposure to (a) naturally-occurring astaxanthin in the diet from sources such as wild salmon, trout, and shell-fish, for millennia,
(b) synthetic astaxanthin from sources such as industrially raised salmon since 1995, and (c) dietary supplements containing
naturally-occurring astaxanthin since 1999; and
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our
published and unpublished preliminary non-clinical studies utilizing astaxanthin product candidates.
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In
humans, astaxanthin has been found in publicly available research studies to lower important inflammatory and metabolic disease
measures such as tumor necrosis factor alpha (“
TNF-α
”), high-sensitivity complement reactive protein
(“
hsCRP
”), low-density lipoprotein cholesterol (“
LDL-C
”), apolipoprotein B (“
ApoB
”),
and triglycerides while raising adiponectin and high-density lipoprotein cholesterol (“
HDL-C
”). Astaxanthin
has also positively affected markers of oxidative stress in humans including isoprostanes, malondialdehyde (“
MDA
”),
total anti-oxidant capacity (“
TAC
”), and superoxide dismutase (“
SOD
”). Astaxanthin and related
esters have demonstrated efficacy in models of inflammatory-mediated disease including reduction of TNF-α levels equivalent
to a steroid, reduction of liver enzymes and liver histological damage, reduction of cholesterol levels, reduction of elevated
triglycerides, decrease of atheroma formation, reduction of oxidized-LDL levels, reduction in blood clot formation with no increase
in bleeding, and decrease in myocardial tissue damage following experimentally-induced myocardial infarction.
We
believe that the current manufacturing capability of astaxanthin producers utilizing microalgal or other natural manufacturing
processes may not satisfy the growing demand for astaxanthin and there will be a need for the synthetic production of nature-identical
astaxanthin with high purity at economical costs.
We
plan to promote scientific understanding of astaxanthin through several strategies, including:
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educating
physicians and other healthcare professionals on the benefits of astaxanthin;
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sponsoring
relevant scientific and medical conferences and presenting or facilitating the presentation of appropriate scientific data
to physicians, key opinion leaders, and patient groups;
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advancing
direct-to-consumer internet and social media marketing;
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continuing
to support scientific research and publication of peer-reviewed papers; we have collaborated on more than 50 such papers,
including 10 papers published in
The American Journal of Cardiology
, which have noted the benefits and safety of astaxanthin
in the treatment of diseases that have inflammation as a common cause;
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convening
scientific advisory board meetings to review existing and planned scientific research, with scientific advisory board members
including, but not limited to, persons previously engaged by our predecessors, in the areas of osteoarthritis, cardiovascular
disease, and liver disease; and
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conducting
human clinical trials.
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While
the FDA does not require human clinical trials for consumer health products, and under applicable regulations we are not permitted
to make claims for treatment of diseases for any consumer health products, we believe that positive results from a Phase I human
clinical trial and a suite of approximately three to five Phase II human clinical trials in select disease areas of major unmet
medical need would significantly raise scientific and consumer awareness that would promote consumer health sales and advance
our pharmaceutical development program.
Our
Consumer Health Program
On
August 24, 2016, we launched our first commercial product, ZanthoSyn™. On January 25, 2017, we began selling ZanthoSyn™
to GNC stores in Hawaii on a wholesale basis.
ZanthoSyn™
is marketed as a novel astaxanthin dietary supplement with superior absorption and purity. We are using e-commerce and wholesale
as our primary sales channels for ZanthoSyn™.
Astaxanthin
is a clinically studied ingredient with safe anti-inflammatory activity that supports joint health, cardiovascular health, metabolic
health, and liver health. The form of astaxanthin utilized in ZanthoSyn™ has demonstrated excellent safety in peer-reviewed
published studies and is designated as GRAS (Generally Recognized as Safe) according to FDA regulations.
Our
ZanthoSyn™ product manufacturing process relies on certain third-party suppliers and this dependence creates several risks,
including limited control over pricing, availability, quality, and delivery schedules. In addition, any supply interruption could
materially harm our ability to manufacture ZanthoSyn™ until a new source of supply is obtained on acceptable terms. We may
be unable to find such other sources in a reasonable time period or on commercially reasonable terms, if at all, which would have
an adverse effect on our business, financial condition and results of operations.
As
a second generation product candidate, we are developing CDX-085, our patented astaxanthin derivative, which could reduce
the size/number of capsules or tablets required to achieve equivalent circulating levels of astaxanthin.
Our
Planned Pharmaceutical Program
We
believe that a pharmaceutical program will increase our revenue opportunities. A pharmaceutical product would enable the delivery
of astaxanthin with an FDA approved over-the-counter drug (“
OTC
”) label for disease treatment at consumer-appropriate
doses and/or an FDA approved prescription drug (“
Rx
”) label for disease treatment at physician-recommended
doses, and should support increased market penetration. We have patents covering pharmaceutical compositions of astaxanthin esters,
allowing us to transition an astaxanthin consumer health product into a pharmaceutical product following requisite clinical trials
and FDA approval.
We
plan to raise additional capital or enter into a strategic collaboration to pursue clinical development of Cardax Astaxanthin.
We may choose to undertake the following actions upon certain events including if Cardax Astaxanthin obtains all applicable regulatory
approvals or designations necessary for marketing as a consumer health product:
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file
an Investigational New Drug application (“
IND
”) with the FDA;
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conduct
a Phase I human clinical trial to expand clinical dosing of Cardax Astaxanthin beyond that of the approved consumer health
dose of Cardax Astaxanthin; and
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conduct
three to five Phase II human clinical trials, with a range of doses in areas of major consumer health and/or unmet medical
need.
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This
strategy would offer more than one potential avenue of development and mitigate the risks, including “binary events,”
associated with single indication development. We may appropriately augment our management team to pursue this strategy.
If
any of the lower doses of Cardax Astaxanthin tested in our planned Phase II human clinical trials demonstrate robust safety and
efficacy in an area of major consumer health need and are less than or equal to the currently approved consumer health dose of
Cardax Astaxanthin, we may decide to conduct pivotal Phase III trials and file a 505(b)(1) or 505(b)(2) New Drug Application (“
NDA
”)
to obtain an OTC label for “low-dose” Cardax Astaxanthin (“
OTC-ASTX
”). Post-approval clinical studies
could also be conducted to expand the label and/or dose. OTC-ASTX may be initially targeted for light-to-moderate osteoarthritis
or the onset of other inflammatory disorders. Marketing and distribution of OTC-ASTX could be conducted through global consumer
health companies or global pharmaceutical companies under license from Cardax, or through any other strategic relationship that
we find acceptable.
If
any of the higher doses of Cardax Astaxanthin tested in any such Phase II human clinical trials demonstrate robust safety and
efficacy in an area of major unmet medical need, then we may decide to conduct pivotal Phase III trials and file a 505(b)(1) NDA
to obtain an Rx label for “high-dose” Cardax Astaxanthin (“
Rx-ASTX
”). Rx-ASTX may be initially
targeted for moderate-to-severe osteoarthritis, rheumatoid arthritis, cognitive decline, metabolic disease, dyslipidemia, or diabetes.
Post-approval clinical studies could also be conducted to expand the initial label. Other potential indications driven by oxidative
stress and inflammation include, but are not limited to, hepatitis, atherosclerosis, and recurrent thrombosis. Marketing and distribution
of Rx-ASTX could be conducted through global pharmaceutical companies under license from Cardax.
Astaxanthin
Disease Applications, Mechanism of Action, and Safety
Chronic
inflammation and oxidative stress drive “inflammation syndrome” and “metabolic syndrome,” which are manifested
in the form of multifactorial symptomatic disease, and redound to the treatment of many apparently distinct yet interconnected
disorders at their inflammatory source with a safe and effective product such as astaxanthin.
Cardax
Astaxanthin products deliver astaxanthin to the circulation. In the case of CDX-085, the novel astaxanthin ester cleaves in the
gut and delivers non-esterified astaxanthin to the circulation. Microalgal astaxanthin consumer health products are comprised
of a mixture of naturally occurring astaxanthin esters that also cleave in the gut and deliver non-esterified astaxanthin to the
circulation. Non-esterified astaxanthin, as can be delivered by Cardax Astaxanthin, microalgal astaxanthin products, or other
astaxanthin products, can be measured in blood and tissues and is generally recognized to be responsible for the anti-inflammatory
and anti-oxidant effects and exceptional safety found in animals and humans following administration of astaxanthin products.
For the purpose of discussing astaxanthin disease applications, mechanism of action, safety, and supporting scientific studies,
whether examining non-esterified astaxanthin, naturally occurring astaxanthin esters, or novel astaxanthin esters, we refer to
these products as “astaxanthin.”
Astaxanthin
for Arthritis
We
believe that there is a large potential market for osteoarthritis treatment. We estimate that there are more than 150 million
people in developed nations that suffer from osteoarthritis who have the financial ability to pay for treatment through astaxanthin
products. Assuming $1 per day for treatment, the potential market could exceed $50 billion annually. Recent expenditures for treatment
of arthritis are also substantial. The Centers for Disease Control and Prevention of the U.S. Department of Health and Human Services
(the “
CDC
”) report that the amount of direct medical expenditures in the United States for arthritis and other
rheumatic conditions for 2003 was $80.8 billion. Drugs.com noted that aggregate U.S. sales of the top three injected TNF-α
inhibitors totaled more than $12 billion in 2012. New oral anti-inflammatory drugs may also be approved, further increasing the
amount expended for drug treatment. We expect that these drugs will be based on steroid, NSAID, or enzyme/receptor technologies
that could pose significant side effects when administered chronically. In contrast, astaxanthin, at very low doses, reduces TNF-α
in humans. In non-human tests, astaxanthin reduces TNF-α equivalent to a corticosteroid—considered to be the most
potent of the anti-inflammatory compounds—as well as other important mediators of inflammation including hsCRP, prostaglandin
E2 (“
PGE-2
”), interleukin 6 (“
IL-6
”), nuclear factor kappa B (“
NF-κB
”),
and nitric oxide (“
NO
”). We believe that no evidence of the immunosuppressive effects of steroids or TNF-α
inhibitors has been seen in multiple animal or human studies using astaxanthin. In fact, in animals, astaxanthin administration
is statistically significantly associated with fewer infections.
Astaxanthin
for Cognitive Decline
According
to the CDC, the number of U.S. adults aged 65 or older will more than double by 2030. As the percentage of elderly in the population
continues to increase, the prevalence of diseases resulting in cognitive decline may be also expected to increase. While the underlying
cause of cognitive decline still remains to be fully elucidated, many studies support the important pathophysiological role of
oxidative stress and inflammation, particularly in both Alzheimer’s disease and Parkinson’s disease. Further, epidemiological
studies support a relationship between brain carotenoids (i.e., a class of related natural compounds including astaxanthin) and
cognitive performance. Measurable amounts of carotenoids have also been found in the human brain and are reported to be significantly
lower in the brain of Alzheimer’s disease patients. Most importantly, a recently conducted, randomized, double-blind, placebo-controlled
human clinical trial supported the potential for astaxanthin to improve cognitive function in an elderly population afflicted
with age-related forgetfulness. The trial was conducted with astaxanthin doses comparable to current consumer health product doses.
The development of an astaxanthin based anti-inflammatory approach to aid in cognitive decline represents potential treatment
for an expanding population with few options to help slow progression or delay onset of these diseases.
Astaxanthin
for Metabolic Syndrome
Metabolic
syndrome is a combination of medical disorders that together increase the risk of developing cardiovascular disease, diabetes,
and liver disease. Several pathophysiological features define metabolic syndrome including central obesity, increased triglyceride
levels, decreased HDL-C levels, elevated blood pressure, and increased fasting glucose levels. In humans, astaxanthin has been
shown to significantly lower triglycerides and increase HDL-C levels. Similarly, in animal models of disease, astaxanthin administration
significantly decreased blood pressure, increased HDL-C levels, lowered triglycerides, and decreased fasting glucose levels. In
addition, decreased levels of the metabolic regulator adiponectin are associated with dysfunction of critical signaling pathways
that control glucose production and uptake, triglyceride production and distribution, and mitochondrial biogenesis and function.
Astaxanthin has been shown in human and animal studies to significantly increase levels of adiponectin with the inference that
restoration of adiponectin function is key to remediation of metabolic syndrome physiology. These studies underscore the potential
for astaxanthin treatment to ameliorate the majority of physiological measures defining metabolic syndrome and thereby decrease
the risk of ensuing cardiovascular disease, diabetes, and liver disease.
Astaxanthin
for Triglyceride Reduction
Certain
therapies for the reduction of triglycerides have issues of safety or convenience. Astaxanthin, however, has been shown to reduce
elevated triglycerides in a multi-faceted, quantifiable, and safer manner. Fibric acid derivatives exhibit risks of adverse effects
when used in combination with statins. Newer drugs such as purified derivatives of the omega-3 fatty acids must be taken at very
high doses and some increase LDL-C concomitant with induced liver stress. In contrast, astaxanthin not only shows significant
triglyceride and LDL-C lowering capability, at much lower, more manageable doses, but it also lowers key markers of inflammation
such as TNF-α and raises HDL-C and adiponectin in humans.
Astaxanthin
for Type 2 Diabetes
Type
2 diabetes mellitus (“
T2DM
”) is a metabolic disorder characterized by chronic high blood glucose in the context
of insulin resistance and relative insulin deficiency. The rate of T2DM has increased materially over the last several decades
in parallel with obesity. Chronic inflammation and oxidative stress, which influence intracellular signaling pathways critical
to normal metabolic function, have been shown to play an important role in the pathology of T2DM. Drugs including the highly prescribed
Metformin are presumed to act via pathways that regulate glucose production, insulin signaling, and mitochondrial functionality,
including AMPK (adiponectin pathway) and PI-3/AKT (insulin receptor pathway). Astaxanthin has also been shown to upregulate adiponectin
levels in humans and animal models of metabolic dysfunction and thereby restore AMPK pathway functionality. Additionally, astaxanthin
has increased insulin levels, decreased glucose levels, and elevated measures of insulin sensitivity in several animal models
of disease. Importantly, signaling pathways that regulate glucose and insulin signaling (PI-3/AKT) are often dysregulated and
inhibited by oxidative stress and inflammation. Astaxanthin has been shown to upregulate and normalize these insulin and glucose
pathways in animal models resulting in restoration of metabolic homeostasis. The evidence to date supports the potential for astaxanthin
to ameliorate causes and symptoms of T2DM in humans.
Astaxanthin
for Hepatic Disease
While
hepatitis C virus and hepatitis B virus related liver disease continues to be of significant health concern, several metabolism-linked
liver diseases currently have significant prevalence including fatty liver disease (“
FLD
”), non-alcoholic steatohepatitis
(“
NASH
”), and alcoholic steatohepatitis (“
ASH
”). NASH is the inflammatory progression of
FLD and threatens to be the leading indication for liver transplantation in the United States. Chronic oxidative stress and inflammation
play an important physiological role in the initiation and progression of NASH and ASH, a position supported by the fact that
the anti-oxidant vitamin E has recently been shown to decrease liver enzyme levels and, importantly, diminish biopsy-determined
liver pathology in the PIVENS trial, underscoring the importance of oxidative stress in NASH pathophysiology. Astaxanthin, which
is normally processed and stored in the liver, has been shown in an animal model of liver disease to decrease elevated liver enzymes
and diminish histological pathology. Current clinical treatments for NASH include the thiazolidinediones (pioglitazone and rosiglitazone)
that appear to act via stimulation of peroxisome proliferator-activated receptor gamma (“
PPAR-γ
”) driven
pathways to influence lipid and glucose metabolism. In cell studies, both vitamin E and astaxanthin also exhibit PPAR-γ
activating capacities. The importance of chronic inflammation and oxidative stress on NASH and ASH pathological progression underscores
the potential influence of astaxanthin to ameliorate liver disease in humans.
Astaxanthin
for Atherosclerosis
Atherosclerosis
is a syndrome affecting arterial blood vessels resulting from chronic inflammation and the accumulation of macrophages and LDL
without adequate removal of fats and cholesterol by HDL. In addition to chronic inflammation, chronic oxidative and nitrosative
stress also play a significant role in the disease via oxidation and dysregulation of LDL and HDL particles. Astaxanthin has been
shown to significantly decrease LDL-C and ApoB levels, increase HDL-C, and decrease TNF-α in humans. Likewise, astaxanthin
has been shown to significantly decrease total cholesterol and LDL-C levels and increased HDL-C levels in several animal models
of disease. Astaxanthin has been shown to decrease atheroma formation in a diet-driven atherogenesis animal model as well as decrease
several measures of LDL oxidation. The effect of astaxanthin on HDL and LDL functionality is understandable because astaxanthin
is naturally located within HDL and LDL particles for distribution systemically. An important source of oxidative stress affecting
HDL and LDL particles in humans is myeloperoxidase (“
MPO
”) and astaxanthin has been shown to significantly
decrease MPO activity in animals. Astaxanthin was also shown in a cell-based study to increase cholesterol efflux from macrophages,
a function that would drastically aid in reduction of atherosclerotic disease. These observations underscore the potential importance
of astaxanthin in treatment of atherosclerosis and related cardiovascular diseases.
Astaxanthin
for Thrombosis
Rethrombosis
is a major risk for people who have had acute coronary syndrome or an ischemic stroke. The goal of therapy following thrombosis
is to maintain arterial patency and to preserve the area of reduced perfusion in the heart or the brain. Following a thrombotic
stroke, for example, the re-occlusion, or rethrombosis rate, is high, estimated at 30% overall in the first 30 days. A majority
of the re-occlusive events occur within the initial 7-10 days post-treatment. While therapies targeting stroke and in particular
brain salvage (i.e., neuroprotection) have had limited clinical success, we believe that prevention of the reformation of blood
clots, or rethrombosis, is a novel and relatively efficient pathway to demonstrate feasibility for human use and to an eventual
FDA approval for this indication. Lysing blood clots has already proven helpful with tissue plasminogen activator (“
tPA
”)
and other thrombolytic agents, and prevention of rethrombosis can be measured in a statistically significant and clinically meaningful
way. In several animal studies of thrombosis and rethrombosis, astaxanthin administration has been shown to demonstrate robust
efficacy with no change in bleeding times.
Consistent
with other astaxanthin disease applications, oxidative stress and inflammation play major roles in the pathophysiology of rethrombosis.
While we plan to focus initially on arthritis, cognitive decline, and metabolic dysfunction, we remain very interested in areas
such as rethrombosis and related platelet aggregation following an ischemic stroke, where animal models have been particularly
predictive of human efficacy.
Astaxanthin
Mechanism of Action
Following
oral administration of astaxanthin and intestinal uptake, astaxanthin is delivered initially to the liver via chylomicrons and
subsequently distributed to tissues throughout the body via plasma lipoprotein particles including very low-density lipoprotein
(“
VLDL
”), HDL, and LDL. Once in the cell, astaxanthin accumulates within various organelles including nuclear,
endoplasmic reticulum (“
ER
”), and mitochondrial membranes. Localization within mitochondria is highly controlled
by the cell and allows astaxanthin to uniquely regulate oxidative and nitrosative stress in a privileged location critical to
normal metabolic function and often at the heart of metabolic dysfunction and aging. Due to its chemical structure, astaxanthin
completely spans the lipid component of cell membranes, facilitating its biphasic (aqueous and lipid) anti-oxidant functions.
In support of the unique property of astaxanthin, one study examined X-ray diffraction profiles of five structurally related anti-oxidants
embedded in a lipid matrix and demonstrated that each oriented differently with only astaxanthin traversing the lipid, potentially
explaining in part why other well-known anti-oxidants, including beta-carotene, vitamin C, and vitamin E, have not achieved greater
clinical success. In addition to mitochondrial influence, astaxanthin’s aqueous and lipid anti-oxidant functions have the
capacity to influence intracellular inflammatory and metabolic pathway signaling because many important intracellular pathways
are directly modulated by inflammatory and oxidative stress mediators. In support of strong anti-oxidant function within the body,
astaxanthin administration has been shown to demonstrate statistically significant anti-oxidant capacity in humans as measured
by decreased isoprostanes, decreased MDA levels, increased TAC, and increased SOD, as well as decreased lipid peroxidation. Likewise,
numerous animal studies have supported the extensive and powerful anti-oxidant capacity of astaxanthin
in vivo
. Many studies
support the strong influence of astaxanthin on mitochondrial functionality, as well as inflammatory and metabolic intracellular
signaling in animals and in cell-based models.
Astaxanthin
Anti-Inflammatory Comparison to Steroids and NSAIDs
Glucocorticoid
steroids and NSAIDs act mechanistically to trans-repress and reduce many inflammatory pathways/mediators including but not restricted
to tumor necrosis factor alpha (TNF-α), interleukin one beta (IL-1β), nuclear factor kappa B (NF-κB), interleukin
six (IL-6), prostaglandin E2 (PGE-2), monocyte chemoattractant protein one (MCP-1), extracellular signal-regulated kinase (ERK),
c-jun N-terminal kinase (JNK), inducible nitric oxide synthase (iNOS) and cyclooxygenase 2 (COX-2). Astaxanthin has been shown
in humans, animal models and cell systems to act upon and inhibit/reduce many of the same inflammatory mediators affected by glucocorticoid
steroids and NSAIDs. Although Cardax’s particular astaxanthin product candidates have not been tested in human clinical
studies, the following statements are based on relevant data derived from human/animal/cell system studies conducted using microalgal
and synthetic astaxanthin sources. Importantly, administration of astaxanthin to humans reduced the inflammatory mediator TNF-α
in an open label study and decreased C-Reactive Protein (CRP) in a double-blind, placebo-controlled study. More specifically,
in animal models and cell culture systems, administration of astaxanthin reduced several markers of inflammation overlapping with
glucocorticoid steroid targets. In particular, astaxanthin has been shown to significantly reduce TNF-α, IL-1β, NF-κB,
IL-6, PGE-2, MCP-1, ERK, JNK, iNOS, and COX-2. In one comparative animal study, astaxanthin and prednisolone showed quantitatively
equivalent efficacy by significantly reducing TNF-α and PGE-2 levels an equal amount when administered at equivalent doses.
Safety
Safety
is a critical aspect of drug development in the current regulatory environment. Many anti-inflammatory drugs target highly specific
biological enzymes or receptors such as cyclooxygenase 2 (“
COX-2
”), TNF-α, and C-C chemokine receptor
type 2 (“
CCR2
”). While these natural targets play a significant role in inflammation, they are also critical
components of other important biological pathways. With chronic use of most anti-inflammatory drugs, these pathways may not function
normally, resulting in adverse side effects. Also, these treatments often negatively affect other crucial biological systems,
creating additional off-target side effects.
In
contrast, astaxanthin safely reduces inflammation at its source, in that it:
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localizes
in the plasma, mitochondrial, and nuclear membranes;
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scavenges
or quenches the unwanted initiators and effectors of inflammation—reactive oxygen (“
ROS
”) and nitrogen
species (“
RNS
”); and
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demonstrates
no evidence of the immunosuppressive effects of steroids or TNF-α inhibitors or off-target effects (e.g., receptor or
pathway).
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Our
Other Programs
We
have two other anti-inflammatory programs with potential applications in large markets that are in development: zeaxanthin esters
for macular degeneration and hepatic disease; and lycophyll esters for prostate disease. Both of these product platforms have
potential to be developed first as consumer health products and later as pharmaceuticals. We have used a limited amount of synthetic
zeaxanthin in our preliminary research and development efforts. We plan additional research and development to select the optimal
zeaxanthin esters for consumer health and/or pharmaceutical development through our own capabilities or through a strategic alliance
or a manufacturing agreement. We have produced synthetic lycophyll and we plan to conduct additional research and development
to first increase our production capabilities of lycophyll and then to select the optimal lycophyll esters for consumer health
and/or pharmaceutical development through our own capabilities or through a strategic alliance or a manufacturing agreement.
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 manufacturing organizations. We utilized dedicated internal synthetic chemistry, biology, and bioanalytical chemistry
laboratories and a research and development staff to conduct discovery stage synthesis of product candidates (with transfer of
materials and/or methods for additional process development and/or testing),
in vitro
testing of product candidates and
related components to elucidate the mechanism of action, and analysis of biological samples from internal research and/or contract
organizations to detect and quantify levels of product candidates and related components following administration of product in
various studies. Our research and development staff has also worked with other professionals to identify, contract and transfer
materials and methods, and oversee research and manufacturing by contract organizations. Contract organizations provide us with
access to larger scale manufacturing, animal studies of disease, pharmacokinetics, and toxicity, and analysis that would not otherwise
be available to us without significant expense. We anticipate that the majority of our research and development will be conducted
by contract organizations with direction and oversight by our current internal research and development personnel, including two
Ph.D. scientists, two Ph.D. scientific executives, one operational executive, and one M.D. consultant.
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, applicable disease pathology, and industry trends.
In the United States National Library of Medicine’s online repository, PubMed.gov, there are more than 1,400 peer-reviewed
journal articles that reference astaxanthin in the title or abstract, over 400 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 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 the preeminent thought leaders on astaxanthin’s mechanism of action
and its application in biological systems and disease areas.
Our
research and development expenditures totaled $347,885 and $491,829 for the years ended December 31, 2016 and 2015. These expenditures
primarily reflect the compensation of our research and development personnel and product development activities.
Government
Regulation
Most
aspects of our business are subject to some degree of government regulation. For some of our products, government regulation is
significant and, in general, there appears to be a trend toward more stringent regulation throughout the world, as well as global
harmonization of various regulatory requirements. We expect to devote significant time, effort and expense to address the extensive
government and regulatory requirements applicable to our business. We believe that we are no more or less adversely affected by
existing government regulations than our competitors.
FDA
Regulation
Pharmaceutical
companies must comply with comprehensive regulation by the FDA and other regulatory agencies in the United States and comparable
authorities in other countries. While the FDA does not require human clinical trials for consumer health products, we may conduct
Phase I, Phase II, and/or Phase III clinical trials with our products.
We
must obtain regulatory approvals by the FDA and, to the extent we have any international distribution of our products, foreign
government agencies prior to human clinical testing and commercialization of any pharmaceutical product and for post-approval
clinical studies for additional indications in approved drugs. We anticipate that any pharmaceutical product candidate will be
subject to rigorous preclinical and clinical testing and pre-market approval procedures by the FDA and similar health authorities
in foreign countries to the extent applicable. The extent to which our products are regulated by the FDA, and the designations
applicable to our products, will depend upon the types of products we ultimately develop. We are currently evaluating other product
developments or technologies to pursue and cannot predict, during this stage of our development, the scope of FDA or other agency
regulation to which we or our products and technologies will be subject. Various federal statutes and regulations also govern
or influence the preclinical and clinical testing, record-keeping, approval, labeling, manufacture, quality, shipping, distribution,
storage, marketing and promotion, export and reimbursement of products and product candidates.
The
steps ordinarily required before a drug product may be marketed in the United States include:
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preclinical
studies;
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submission
to the FDA of an IND, which must become effective before human clinical trials may commence;
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adequate
and well-controlled human clinical trials to establish the safety and efficacy of the product candidate in the desired indication
for use;
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submission
of a NDA to the FDA, together with payment of a substantial user fee; and
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FDA
approval of the NDA, including inspection and approval of the product manufacturing facility and select sites at which human
clinical trials were conducted.
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Preclinical
trials typically involve laboratory evaluation of product candidate chemistry, formulation and stability, as well as animal studies
to assess the potential safety and efficacy of each product candidate. The results of preclinical trials are submitted to the
FDA as part of an IND and are reviewed by the FDA before the commencement of clinical trials. Unless the FDA objects to an IND,
the IND will become effective 30 days following its receipt by the FDA. Submission of an IND may not result in FDA clearance to
commence clinical trials, and the FDA’s failure to object to an IND does not guarantee FDA approval of a marketing application.
Clinical
trials involve the administration of the product candidate to humans under the supervision of a qualified principal investigator.
In the United States, clinical trials must be conducted in accordance with Good Clinical Practices under protocols submitted to
the FDA as part of the IND. In addition, each clinical trial must be approved and conducted under the auspices of an institutional
review board and with the patient’s informed consent. We would be subject to similar protocols and similar regulatory considerations
if we conduct clinical trials outside the United States.
The
goal of Phase I clinical trials is to establish initial data about safety and tolerability of the product candidate in humans.
The investigators seek to evaluate the effects of various dosages and to establish an optimal dosage level and schedule.
The
goal of Phase II clinical trials is to provide evidence about the desired therapeutic efficacy of the product candidate in limited
studies with small numbers of carefully selected subjects. Investigators also gather additional safety data.
Phase
III clinical trials consist of expanded, large-scale, multi-center studies in the target patient population. This phase further
tests the product’s effectiveness, monitors side effects, and, in some cases, compares the product’s effects to a
standard treatment, if one is already available. Phase III trials are designed to more rigorously test the efficacy of a product
candidate and are normally randomized, double-blinded, and placebo-controlled. Phase III trials are typically monitored by an
independent data monitoring committee, or DMC, which periodically reviews data as a trial progresses. A DMC may recommend that
a trial be stopped before completion for a number of reasons including safety concerns, patient benefit or futility.
Data
obtained from this development program are submitted as part of a NDA to the FDA and possibly to corresponding agencies in other
countries for review. The NDA requires agency approval prior to marketing in the relevant country. Extensive regulations define
the form, content and methods of gathering, compiling and analyzing the product candidate’s safety and efficacy data.
The
process of obtaining regulatory approval can be costly, time consuming and subject to unanticipated delays. Regulatory agencies
may refuse to approve an application if they believe that applicable regulatory criteria are not satisfied and may also require
additional testing for safety and efficacy and/or post-marketing surveillance or other ongoing requirements for post-marketing
studies. In some instances, regulatory approval may be granted with the condition that confirmatory Phase IV clinical trials are
carried out, and if these trials do not confirm the results of previous studies, regulatory approval for marketing may be withdrawn.
Moreover, each regulatory approval of a product is limited to specific indications. The FDA or other regulatory authorities may
approve only limited label information for the product. The label information describes the indications and methods of use for
which the product is authorized, may include Risk Evaluation and Mitigation Strategies and, if overly restrictive, may limit a
sponsor’s ability to successfully market the product. Regulatory agencies routinely revise or issue new regulations, which
can affect and delay regulatory approval of product candidates.
Furthermore,
pharmaceutical manufacturing processes must conform to current Good Manufacturing Practices, or cGMPs. Manufacturers, including
a drug sponsor’s third-party contract manufacturers, must expend time, money and effort in the areas of production, quality
control and quality assurance, including compliance with stringent record-keeping requirements. Manufacturing establishments are
subject to periodic inspections by the FDA or other health authorities, in order to assess, among other things, compliance with
cGMP. Before approval of the initiation of commercial manufacturing processes, the FDA will usually perform a preapproval inspection
of the facility to determine its compliance with cGMP and other rules and regulations. In addition, foreign manufacturing establishments
must also comply with cGMPs in order to supply products for use in the United States, and are subject to periodic inspection by
the FDA or by regulatory authorities in certain countries under reciprocal agreements with the FDA. Manufacturing processes and
facilities for pharmaceutical products are highly regulated. Regulatory authorities may choose not to certify or may impose restrictions,
or even shut down existing manufacturing facilities that they determine are non-compliant.
FDA
GRAS Determination
“
GRAS
”
is an acronym for the phrase “generally recognized as safe,” which the FDA utilizes to describe those substances that,
in the generally recognized opinion of the scientific community, will not be harmful to consumers, provided the substance is used
as intended. According to applicable FDA regulations, any substance that is intentionally added to food is a food additive, which
is subject to premarket review and approval by FDA, unless the substance is generally recognized, among qualified experts, as
having been adequately shown to be safe under the conditions of its intended use. Under sections 201(s) and 409 of the Federal
Food, Drug, and Cosmetic Act (the “
FD&C Act
”), and FDA’s implementing regulations in 21 CFR 170.3
and 21 CFR 170.30, the use of a food substance may be GRAS either through scientific procedures or, for a substance used in food
before 1958, through experience based on common use in food. General recognition of safety through scientific procedures requires
the same quantity and quality of scientific evidence as is required to obtain approval of the substance as a food additive and
ordinarily is based upon published studies, which may be corroborated by unpublished studies and other data and information. General
recognition of safety through experience based on common use in foods requires a substantial history of consumption for food use
by a significant number of consumers.
Manufacturers
of GRAS substances may provide the FDA with a notification of GRAS determination, which includes a description of the substance,
the applicable conditions of use, and an explanation of how the substance was determined to be safe. Upon review of such a notification,
the FDA may respond with a “no questions” position, whereby the manufacturer’s determination that a product
is GRAS for its intended purposes is affirmed. Alternatively, manufacturers may elect to “self-affirm” a given substance
as GRAS without FDA notification but should retain all applicable safety data used for GRAS determination in the case of FDA inquiry.
Synthetic
copies of naturally-occurring dietary ingredients or related components do not qualify as dietary ingredients under the FD&C
Act, but substances that have been affirmed by the FDA as GRAS, self-affirmed as GRAS, or approved as direct food additives in
the U.S. may be marketed as dietary ingredients, subject to FDA regulations for dietary ingredients.
FDA
NDI Notification
The
Dietary Supplement Health and Education Act of 1994 (the “
DSHEA
”) (Pub. L. 103-417) was signed into law on
October 25, 1994 and amended the FD&C Act by adding: (i) section 201(ff) (21 U.S.C. 321(ff)), which defines the term “dietary
supplement”, and (ii) section 413 (21 U.S.C. 350b), which defines the term “new dietary ingredient” (“
NDI
”)
and requires the manufacturer or distributor of an NDI, or of the dietary supplement that contains the NDI, to submit a premarket
notification to FDA at least 75 days before introducing/delivering the supplement into interstate commerce, unless the NDI and
any other dietary ingredients in the dietary supplement have been present in the food supply without chemical alteration (21 U.S.C.
350b(a)(1)). The NDI notification must contain applicable information, including history of use and citations to published articles,
from which the manufacturer or distributor of the NDI or dietary supplement has concluded that the dietary supplement containing
the NDI will be reasonably expected to be safe under the conditions of its intended use. NDI notifications are not required for
the marketing of approved food additives or GRAS substances as NDIs unless the dietary ingredient has been chemically altered.
Hawaii
Tax Credit
For
tax years 2006 to 2010, our predecessor received an aggregate amount of $1,262,117 in refundable tax credits from the State of
Hawaii – Department of Taxation in connection with qualified research expenditures in the State of Hawaii. The Hawaii Tax
Credit for Research Activities (“
HTCRA
”) was intended to encourage taxpayers to design, develop, and/or improve
products, processes, techniques, formulas or software and intended to reward programs that pursue innovation in the State of Hawaii.
The HTCRA was discontinued by the State of Hawaii for tax years 2011 and 2012, but was made available again starting in tax year
2013 with certain modifications to the qualification and credit calculations.
Other
Regulations
Pharmaceutical
companies, including us, are subject to various federal and state laws pertaining to healthcare “fraud and abuse,”
including anti-kickback and false claims laws. The Federal Anti-Kickback Statute makes it illegal for any person, including a
prescription drug manufacturer, or a party acting on its behalf, to knowingly and willfully solicit, offer, receive or pay any
remuneration, directly or indirectly, in exchange for, or to induce, the referral of business, including the purchase, order or
prescription of a particular drug, for which payment may be made under federal healthcare programs such as Medicare and Medicaid.
Some of the state prohibitions apply to referral of patients for healthcare services reimbursed by any source, not only the Medicare
and Medicaid programs.
In
the course of practicing medicine, physicians may legally prescribe FDA approved drugs for an indication that has not been approved
by the FDA and which, therefore, is not described in the product’s approved labeling, so-called “off-label use.”
The FDA does not ordinarily regulate the behavior of physicians in their choice of treatments. The FDA and other governmental
agencies do, however, restrict communications on the subject of off-label use by a manufacturer or those acting on behalf of a
manufacturer. Companies may not promote FDA-approved drugs for off-label uses. The FDA and other governmental agencies do permit
a manufacturer (and those acting on its behalf) to engage in some limited, non-misleading, non-promotional exchanges of scientific
information regarding unapproved indications. The United States False Claims Act prohibits, among other things, anyone from knowingly
and willfully presenting, or causing to be presented for payment to third-party payers (including Medicare and Medicaid) claims
for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed or claims
for medically unnecessary items or services. Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions,
including imprisonment, fines and civil monetary penalties, as well as possible exclusion from federal health care programs (including
Medicare and Medicaid). In addition, under this and other applicable laws, such as the Food, Drug and Cosmetic Act, there is an
ability for private individuals to bring similar actions. Further, there is an increasing number of state laws that require manufacturers
to make reports to states on pricing and marketing information. Many of these laws contain ambiguities as to what is required
to comply with the law.
We
are subject to various laws and regulations regarding laboratory practices and the experimental use of animals in connection with
our research. In each of these areas, as above, the FDA and other regulatory authorities have broad regulatory and enforcement
powers, including the ability to suspend or delay issuance of approvals, seize or recall products, withdraw approvals, enjoin
violations and institute criminal prosecution, any one or more of which could have a material adverse effect upon our business,
financial condition and results of operations.
We
must comply with regulations under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances
Control Act and other federal, state and local regulations. We are subject to federal, state and local laws and regulations governing
the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain hazardous or potentially
hazardous materials. We may be required to incur significant costs to comply with environmental and health and safety regulations
in the future. Our research and development involves the controlled use of hazardous materials, including, but not limited to,
certain hazardous chemicals.
Our
activities are also potentially subject to federal and state consumer protection and unfair competition laws. We are also subject
to the United States Foreign Corrupt Practices Act, or the FCPA, which prohibits companies and individuals from engaging in specified
activities to obtain or retain business or to influence a person working in an official capacity. Under the FCPA, it is illegal
to pay, offer to pay, or authorize the payment of anything of value to any foreign government official, governmental staff members,
political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in
an official capacity. In addition, federal and state laws protect the confidentiality of certain health information, in particular,
individually identifiable information, and restrict the use and disclosure of that information. At the federal level, the Department
of Health and Human Services promulgated health information privacy and security rules under the Health Insurance Portability
and Accountability Act of 1996. In addition, many state laws apply to the use and disclosure of health information.
Competition
The
industry in which we intend to compete is subject to intense competition. We believe that our ability to compete will be dependent
in large part upon our ability to continually enhance and improve our products and technologies. In order to do so, we plan to
effectively utilize and expand our research and development capabilities. Competition is based primarily on scientific and technological
superiority, technical support, availability of patent protection, protection of trade secrets, 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. We intend to compete on the basis of safety, effectiveness, convenience, manufacturing superiority, intellectual
property, and where appropriate, price.
Because
of the broad manifestation of inflammation in chronic disease, numerous pharmaceutical and biotechnology companies are developing
or producing anti-inflammatory therapeutic agents. These companies include, but are not limited to: AbbVie, Amgen, Astellas, AstraZeneca,
Bayer, Boehringer Ingelheim, Bristol-Myers Squibb, Eisai, Eli Lilly, Gilead, GlaxoSmithKline, Johnson & Johnson, Merck, MT
Pharma, Nestle/Pamlab, Novartis, Pfizer, Reata, Roche/Genentech, Sanofi-Aventis, Servier, Takeda, Vivus.
In
addition to competing with non-astaxanthin anti-inflammatory drugs, we intend to compete with microalgal astaxanthin consumer
health products on the basis of our global-scale manufacturing capability and product purity. Leading manufacturers of microalgal
astaxanthin include Cyanotech, which produces the BioAstin brand; Fuji Health Science (parent company: Fuji Chemical), which produces
the AstaREAL brand; and Algatechnologies, which produces the AstaPure brand. Many other companies, including Valensa International
(parent company: EID Parry), acquire astaxanthin from these or other smaller manufacturers. We believe that large-scale, multi-fold
expansion of naturally produced microalgal astaxanthin would require large amounts of land, and fresh water for open pond systems
or large amounts of infrastructure and energy for closed systems, and, consequently, a significant if not overwhelming amount
of investment capital. Furthermore, microalgal astaxanthin products, which are lipophilic extracts of a commercially cultivated
microalgae, typically have relatively low astaxanthin content, with the majority of the product comprised of other lipophilic,
non-astaxanthin microalgal compounds. In contrast, our synthetically manufactured astaxanthin products have very high astaxanthin
content, with consistent purity. Higher relative astaxanthin content reduces the size/number of capsules or tablets required to
achieve equivalent circulating levels of astaxanthin. We may also face competition from other synthetic astaxanthin consumer health
products, although competitors in this space are limited by the substantial cost and technical expertise required to develop large-scale,
industrial production of astaxanthin.
Our
success will also depend in large part on our ability to obtain and maintain international and domestic patent and other legal
protections for the proprietary technology that we consider important to our business. We intend to continue to seek appropriate
patent protection for our products where applicable by filing patent applications in the United States and other selected countries.
We intend for these patent applications to cover, where applicable, claims for composition of matter, uses, processes for preparation
and formulations. Our success will also depend on our ability, and the ability of our current and/or future strategic partners
to maintain trade secrets related to proprietary production methods for products that we, or our partners, intend to market.
Raw
Materials and Components
We
utilize strategic partners, contract manufacturers, and/or other third-party suppliers for the production of our products and
product candidates. The raw materials and supplies required for the production of our products and product candidates 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 strategic partners, 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 strategic partners, contract manufacturers,
and/or other third-party suppliers will not face shortages from one or more of them in the future.
Customers
In
late August 2016, we initiated limited consumer sales of ZanthoSyn™, our first commercial product. On January 25, 2017,
we began selling ZanthoSyn™ to GNC stores in Hawaii on a wholesale basis.
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, but are not limited
to, 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
own 21 issued patents, including 14 in the United States and 7 others in China, India, Japan, and Hong Kong, related to the technology
described above. These patents will expire during the years of 2023 to 2028, subject to any patent term extensions of the individual
patent. We have 5 foreign patent applications pending in Europe, Canada, and Brazil, also related to the technology described
above. Of these patents and patent applications, 20 patents and 4 patent applications have coverage related to astaxanthin analogs
and derivatives; however, our proprietary technologies and business opportunities are not dependent on any single patent or sub-set
of patents—the portfolio, which includes coverage related to compositions of matter, pharmaceutical compositions, and pharmaceutical
uses, as described above, provides the comprehensive coverage that we deem material to our business.
Our
strategic alliances also provide intellectual property benefits. BASF owns all manufacturing technology related to ASTX-1 developed
under the BASF Agreement; however, BASF must exclusively supply ASTX-1 to Cardax for pharmaceutical applications, and in the event
BASF becomes unable to supply ASTX-1, we would receive a reasonable royalty-bearing, irrevocable, worldwide non-exclusive license
to certain intellectual property rights related to the manufacture of ASTX-1.
Employees
As
of the date of this report, we have 5 full-time employees and 3 part-time employees dedicated to our consumer health and pharmaceutical
business. None of our employees are subject to a collective bargaining agreement. We believe the relations with our employees
are satisfactory.
Item
1A. 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
in this annual report, 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 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 annual report.
Risks
Related to Our Business, Industry and Financial Condition
We
have a history of operating losses and have received a going concern opinion from our auditors.
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 December 31,
2016, we have accumulated a total deficit of $55,933,862.
Additionally,
we have received a “going concern” opinion from our independent registered public accounting firm. As reflected in
the consolidated financial statements that are filed with this report, we have been pre-revenue company with no material amount
of earned revenue since our inception and just recently launched our first commercial product on August 24, 2016. This raises
substantial doubt about our 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
have limited experience as a commercial company.
On
August 24, 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:
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drive
adoption of our current and future products, including ZanthoSyn™;
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attract
and retain customers for our products;
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provide
appropriate levels of customer support for our products;
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implement
an effective marketing strategy to promote awareness of our products;
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develop,
manufacture and commercialize new products or achieve an acceptable return on our research and development efforts and expenses;
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comply
with regulatory requirements applicable to our products;
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anticipate
and adapt to changes in our market;
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maintain
and develop strategic relationships with vendors and manufacturers to acquire necessary materials for the production of our
existing or future products;
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scale
our manufacturing activities to meet potential demand at a reasonable cost;
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avoid
infringement and misappropriation of third-party intellectual property;
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obtain
any necessary licenses to third-party intellectual property on commercially reasonable terms;
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obtain
valid and enforceable patents that give us a competitive advantage;
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protect
our proprietary technology; and
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attract,
retain and motivate qualified personnel.
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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
We
are dependent upon the success of our lead astaxanthin technologies, which may not be successfully commercialized.
While
the FDA does not require clinical trials for consumer health products such as dietary ingredients/supplements and food additives,
we plan to conduct clinical trials to demonstrate the safety and efficacy of our product(s) in humans. A failure of any clinical
trial can occur at any stage of testing. The results of initial clinical testing of this product 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 patients treated with an active drug versus
the placebo vehicle. 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.
Additionally,
our products will be subject to a variety of FDA and other food and drug regulatory regimes. The extent of regulations applicable
to our products, and the designations our products may receive from regulatory agencies such as the FDA, are dependent upon the
nature and development of our future products and how such products are ultimately commercialized and marketed.
A
number of different factors could prevent us from conducting a clinical trial or commercializing our product candidates on a timely
basis, or at all.
We,
the FDA, other applicable regulatory authorities or an institutional review board, or IRB, may suspend clinical trials of a product
candidate at any time for various reasons, including if we or they believe the subjects or patients participating in such trials
are being exposed to unacceptable health risks. Among other reasons, adverse side effects of a product candidate on subjects or
patients in a clinical trial could result in the FDA or other regulatory authorities suspending or terminating the trial and refusing
to approve a particular product candidate for any or all indications of use.
Clinical
trials of a product require the enrollment of a sufficient number of patients, including patients who are suffering from the disease
or condition the product candidate is intended to treat and who meet other eligibility criteria. Rates of patient enrollment are
affected by many factors, and delays in patient 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 drug development efforts, including the following:
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delays
in filing or acceptance of investigational drug applications for our product candidates;
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difficulty
in securing centers to conduct clinical trials;
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conditions
imposed on us by the FDA or comparable foreign authorities that are applicable to our business regarding the scope or design
of our clinical trials;
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problems
in engaging IRBs to oversee trials or problems in obtaining or maintaining IRB approval of studies;
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difficulty
in enrolling patients in conformity with required protocols or projected timelines;
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third-party
contractors failing to comply with regulatory requirements or to meet their contractual obligations to us in a timely manner;
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our
product candidates 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;
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the
need to suspend or terminate clinical trials if the participants are being exposed to unacceptable health risks;
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insufficient
or inadequate supply or quality of our product candidates or other materials necessary to conduct our clinical trials;
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effects
of our product candidates not being the desired effects or including undesirable side effects or the product candidates having
other unexpected characteristics;
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the
cost of our clinical trials being greater than we anticipate;
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negative
or inconclusive results from our clinical trials or the clinical trials of others for similar product candidates or inability
to generate statistically significant data confirming the efficacy of the product being tested;
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changes
in the FDA’s requirements for testing during the course of that testing;
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reallocation
of our limited financial and other resources to other programs; and
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adverse
results obtained by other companies developing similar products.
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It
is possible that none of our future product candidates that 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 candidate. 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 candidate.
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.
We
have limited experience in managing communications with regulatory agencies, including filing investigational new drug applications,
filing new drug applications, submission of promotional materials and generally directing the regulatory processes in all territories.
We
may be responsible for managing communications with regulatory agencies, including filing investigational new drug applications,
filing new drug applications, submission of 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 product candidates 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 product candidates 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
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
consumer health 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, is expected to primarily compete against consumer health and pharmaceutical products that provide
anti-inflammatory 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, or that of our strategic partners, to:
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develop
or acquire new products and innovative technologies;
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obtain
regulatory clearance and compliance for our products;
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manufacture
and sell our products cost-effectively;
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meet
all relevant quality standards for our products in their particular markets;
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respond
to competitive pressures specific to each of our geographic and product markets;
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protect
the proprietary technology of our products and avoid infringement of the proprietary rights of others;
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market
our products;
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attract
and retain skilled employees, including sales representatives;
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maintain
and establish distribution relationships; and
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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.
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.
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 users, 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:
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the
safety and efficacy of our products;
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favorable
regulatory approval and product labeling;
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the
availability, safety, efficacy and ease of use of alternative products or treatments;
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our
ability to educate potential users on the advantages of our products;
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the
price of our products relative to alternative technologies; and
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the
availability of third-party reimbursement.
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If
our proposed products do not achieve significant market acceptance, our future revenues and profitability would be adversely affected.
The
pharmaceutical and consumer health 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.
If
we fail to comply with FDA regulations our business could suffer.
The
manufacture and marketing of pharmaceutical and consumer health products are subject to extensive regulation by the FDA and foreign
and state regulatory authorities. In the United States, pharmaceutical and consumer health 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 pharmaceutical and consumer health products 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.
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.
Because we are currently evaluating the extent of our pharmaceutical program, we are unable to determine the extent of FDA regulations
applicable to our product candidates. 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 product candidates
will depend upon the nature and extent of any relationships with such partners. While consumer health products are not as extensively
regulated as pharmaceutical products, the extent of any other regulatory regimes to which we may be subject will depend upon the
specific products we ultimately produce.
Recently
enacted and future legislation may increase the difficulty and cost for us to commercialize our product candidates 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 product candidates, restrict or regulate post-approval activities
and affect our ability to profitably sell any product candidate 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 pharmaceutical products. 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, 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 drug products 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.
In
addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. In August 2011,
the 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
recent 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. Further, 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. Congress also could consider subsequent legislation to replace elements of the Affordable
Care Act that are repealed. We will continue to evaluate the effect that the Affordable Care Act and any future measures to 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
rely on third parties to supply and manufacture our proposed 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:
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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.
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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.
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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.
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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.
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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.
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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.
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 a sufficient
amount of 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
have limited experience in marketing our products and services.
We
have undertaken limited marketing efforts for ZanthoSyn and any future products and services. Our sales and marketing teams, and/or
those of our strategic partners, will 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:
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the
ability of sales representatives to obtain access to or persuade adequate numbers of healthcare providers to promote and/or
purchase and use our products and services;
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the
ability to recruit, properly motivate, retain, and train adequate numbers of qualified sales and marketing personnel;
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the
costs associated with hiring, training, maintaining, and expanding an effective sales and marketing team; and
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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.
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:
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lack
of day-to-day control over the activities of third-party distributors;
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third-party
distributors may not fulfill their obligations to us or otherwise meet our expectations;
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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
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disagreements
with our distributors could require or result in costly and time-consuming litigation or arbitration.
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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 GNC stores
will continue on terms that are favorable to us or at all.
Commercialization
of our products and services will require us to build and maintain sophisticated sales and marketing teams.
We
have limited prior experience with commercializing our products. To successfully commercialize our products and services, we will
need to establish and maintain sophisticated sales and marketing teams. 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.
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 product candidates.
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 formulate product candidates, to
manufacture our product candidates and to conduct clinical trials for some or all of our product candidates. 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 product candidates. If we are unable to obtain or maintain these agreements, we may not be able to clinically
develop, formulate, manufacture, obtain regulatory approvals for or commercialize our future product candidates. We cannot
necessarily control the amount or timing of resources that our contract partners will devote to our research and development programs,
product candidates or potential product candidates, 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
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 proprietary technologies, and additional substantial funds will be required for further
research and development, including preclinical testing and clinical trials of any product candidates, 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 product candidates, to become profitable.
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, pharmaceutical and consumer health products that provide anti-inflammatory
benefits. As a result, we will face an inherent risk of product liability claims. The pharmaceutical industry has 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. 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 agency, 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.
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 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. 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 near 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 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. 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.
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 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 have also introduced new exclusions or limitations of coverage
for claims related to certain perils including, but not limited to, mold and terrorism. If a series of losses occurred, such as
from a series of lawsuits in the ordinary course of business 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. We do not presently have any product liability insurance that would
provide coverage for any allegation of product defects or related claims. We will review our ability to obtain such insurance
coverage later, but there cannot be any assurance that such insurance coverage will be available on acceptable terms.
Our
operating results may fluctuate, which may result in volatility of our share price.
Our
operating results, including components of operating results, can be expected to fluctuate from time to time in the future. Some
of the factors that may cause these fluctuations include:
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impact of acquisitions;
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market
acceptance of our existing products, as well as products in development;
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the
timing of regulatory approvals;
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our
ability or the ability of third-party distributors to sell, market, and distribute our products;
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our
ability or the ability of our contract manufacturers to manufacture our products efficiently; and
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the
timing of our research and development expenditures.
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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 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.
We
are highly dependent on our senior management, 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, including David G. Watumull, our President and Chief Executive Officer, Gilbert
M. Rishton, our Chief Science Officer, Timothy J. King, our Vice President, Research, John B. Russell, our Chief Financial Officer,
and David M. Watumull, our Vice President, Operations. 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 a $1 million “key person” life insurance policy on David G. Watumull but 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.
You
may have limited access to information regarding our Company because we are a limited reporting company exempt from many regulatory
requirements.
As
a filer subject to Section 15(d) of the Exchange Act, the Company is not required to prepare proxy or information statements;
our common stock is not subject to the protection of the going private regulations; the Company is subject to only limited portions
of the tender offer rules; our officers, directors, and more than ten (10%) percent stockholders are not required to file beneficial
ownership reports about their holdings in our Company; such persons are not subject to the short-swing profit recovery provisions
of the Exchange Act; and stockholders of more than five percent (5%) are not required to report information about their ownership
positions in the securities. As a result, investors will have reduced visibility as to the Company and its financial condition.
Risks
Related to Ownership of Our Common Stock
Our
common stock has a limited trading market, which could affect your ability to sell shares of our common stock and the price you
may receive for our common stock.
Our
common stock is currently traded in the over-the-counter market and “bid” and “asked” quotations regularly
appear on the OTCQB maintained by OTC Markets, Inc. under the symbol “CDXI”. There is only limited trading activity
in our securities. We have a relatively small public float compared to the number of our shares outstanding. Accordingly, we cannot
predict the extent to which investors’ interest in our common stock will provide an active and liquid trading market, which
could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital
in the future. Due to our limited public float, we may be vulnerable to investors taking a “short position” in our
common stock, which would likely have a depressing effect on the price of our common stock and add increased volatility to our
trading market. The volatility of the market for our common stock could have a material adverse effect on our business, results
of operations and financial condition. There cannot be any guarantee that an active trading market for our securities will develop
or, if such a market does develop, will be sustained. Accordingly, investors must be able to bear the financial risk of losing
their entire investment in our common stock.
We
may voluntarily file for deregistration of our common stock with the Commission.
Compliance
with the periodic reporting requirements required by the Securities and Exchange Commission (the “
Commission
”
or “
SEC
”) consumes a considerable amount of both internal, as well external, resources and represents a significant
cost for us. Our senior management team has relatively limited experience managing a company subject to the reporting requirements
of the Exchange Act, and the regulations promulgated thereunder. Our management will be required to design and implement appropriate
programs and policies in responding to increased legal, regulatory compliance and reporting requirements, and any failure to do
so could lead to the imposition of fines and penalties and harm our business. In addition, if we are unable to continue to devote
adequate funding and the resources needed to maintain such compliance, while continuing our operations, we may be in non-compliance
with applicable SEC rules or the securities laws, and be delisted from the OTCQB or other market we may be listed on, which would
result in a decrease in or absence of liquidity in our common stock, and potentially subject us and our officers and directors
to civil, criminal and/or administrative proceedings and cause us to voluntarily file for deregistration of our common stock with
the Commission.
Future
sales of our common stock in the public market could lower the price of our common stock and impair our ability to raise funds
in future securities offerings.
We
intend to raise additional capital through the sale of our securities. Future sales of a substantial number of shares of our common
stock in the public market, or the perception that such sales may occur, could adversely affect the then prevailing market price
of our common stock and could make it more difficult for us to raise funds in the future through the sale of our securities.
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.
The
market price of our common stock may be volatile and may be affected by market conditions beyond our control.
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.
The
market price of our common stock is subject to significant fluctuations in response to, among other factors:
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changes
in our financial performance or a change in financial estimates or recommendations by securities analysts;
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announcements
of innovations or new products or services by us or our competitors;
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emergence of new competitors or success of our existing competitors;
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operating
and market price performance of other companies that investors deem comparable;
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in our Board of Directors or management;
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sales
or purchases of our common stock by insiders;
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commencement
of, or involvement in, litigation;
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in governmental regulations; and
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general
economic conditions and slow or negative growth of related markets.
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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
do not intend to pay dividends for the foreseeable future, and you must rely on increases in the market prices of our common stock
for returns on your investment.
For
the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not
anticipate paying any cash dividends on our common stock. Accordingly, investors must be prepared to rely on sales of their common
stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not
purchase our common stock. Any determination to pay dividends in the future will be made at the discretion of our Board of Directors
and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable
law and other factors our Board of Directors deems relevant.
We
are subject to penny stock regulations and restrictions and 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 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.
There
can be no assurance that our shares of common stock will qualify 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.
Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties.
We
maintain a facility of approximately 738 square feet at 2800 Woodlawn Drive, Honolulu, Hawaii, which is leased on a month-to-month
basis. We also maintained a laboratory located in a leased facility of approximately 1,094 square feet at 99-193 Aiea Heights
Drive, Aiea, Hawaii, which we vacated in February 2015. We believe that our facility is adequate for our current purposes.
Item
3. Legal Proceedings.
From
time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to
time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have
a material adverse effect on our business, financial condition or operating results.
Item
4. Mine Safety Disclosures.
Not
applicable.
Part
III
Item
10. Directors, Executive Officers and Corporate Governance.
Set
forth below is a list of the names, ages and positions of our directors and executive officers.
Name
|
|
Age
|
|
Position(s)
|
George
W. Bickerstaff, III
|
|
61
|
|
Chairman
of the Board of Directors
|
David
G. Watumull
|
|
67
|
|
President,
Chief Executive Officer, and Director
|
Terence
A. Kelly, Ph.D.
|
|
55
|
|
Director
|
Michele
Galen
|
|
60
|
|
Director
|
John
B. Russell
|
|
44
|
|
Chief
Financial Officer and Treasurer
|
Richard
M. Morris
|
|
56
|
|
Secretary
|
David
M. Watumull
|
|
35
|
|
Vice
President, Operations, Assistant Treasurer, and Assistant Secretary
|
Biographies
of Directors and Executive Officers
George
W. Bickerstaff, III
has served as a Director since June 16, 2014. Mr. Bickerstaff is currently a Managing Director of M.M.
Dillon & Co., LLC, which he joined in 2005. Prior to joining M.M. Dillon & Co., LLC, Mr. Bickerstaff held various positions
with Novartis International AG, a global pharmaceuticals and consumer health company, including Chief Financial Officer of Novartis
Pharma AG from October 2000 to May 2005. From December 1999 to September 2000, Mr. Bickerstaff served as Executive Vice President
and Chief Financial Officer of Workscape, Inc. a provider of employee-related information services. From July 1998 to December
1999, Mr. Bickerstaff served as Executive Vice President and Chief Financial Officer of Uniscribe Professional Services, Inc.,
a nationwide provider of paper and technology-based document management solutions. From January 1998 to June 1998, Mr. Bickerstaff
served as Executive Vice President and Chief Financial Officer of Intellisource Group, Inc., a provider of information technology
solutions to the federal, state and local government and utility markets. From July 1997 to December 1997, Mr. Bickerstaff served
as Vice President of Finance of Cognizant Corporation, a global business information services company. From January 1990 to June
1997, Mr. Bickerstaff served in various senior finance roles, including Chief Financial Officer of IMS Healthcare, a global business
information services company in the healthcare and pharmaceutical industries. Prior to that, Mr. Bickerstaff held various finance,
audit and engineering positions with the Dun & Bradstreet Corporation and General Electric Company. Mr. Bickerstaff has been
a member of the board of directors of CareDx, Inc., a company that develops, markets, and delivers diagnostic surveillance solutions
for organ transplant recipients, since April 2014. Mr. Bickerstaff was a member of the board of directors of Vion Pharmaceuticals,
Inc., from June 2005 to March 2010. Mr. Bickerstaff’s nonprofit activities include serving on the board of directors of
the International Vaccine Institute, the International Centre for Missing and Exploited Children, The Center for Disease Dynamics,
Economics & Policy and The Global Alliance for Vaccines and Immunization. Mr. Bickerstaff holds a B.S. in Engineering and
a B.A. in Business Administration from Rutgers University (1978). Mr. Bickerstaff’s experience through various roles in
establishing the strategic, operational, and financial direction of numerous private and public companies, including those in
the pharmaceutical industry, will be instrumental in enabling our Board to implement our strategic plan.
David
G. Watumull
has served as our Chief Executive Officer, President, and Director since February 7, 2014. Mr. Watumull has served
as the Chief Executive Officer, President, and Director of Pharma since its inception in May 2013 and as the Chief Executive Officer,
President, and Director of Holdings since its inception in March 2006. Mr. Watumull is a co-founder of Holdings and has over 20
years of experience as a biotechnology industry executive. From 2001 to 2006, Mr. Watumull served as President, Chief Executive
Officer, and Director of Hawaii Biotech, Inc. Mr. Watumull was Executive Vice President of Aquasearch, Inc., a public astaxanthin
consumer health company, from 1998 to 2000. From 1997 to 1998 he headed his own biotech research firm, Watumull & Co. From
1994 to 1997 he was a biotech research analyst, money manager, and investment banker at First Honolulu Securities. From 1992 to
1994 he led his own money management firm, Biovest, Inc. Prior to that, from 1982 to 1992, Mr. Watumull worked at Paine Webber
in various capacities, including as a biotech money manager and investment executive. Mr. Watumull’s extensive background
in the biotechnology industry, his operational acumen, and his position of leadership since the founding of our business uniquely
qualifies him to serve as a member of our Board.
Terence
A. Kelly, Ph.D.
has served as a Director since June 16, 2014. Dr. Kelly has over 20 years of experience as a scientist and
executive in the pharmaceutical industry starting as a medicinal chemist in 1990. Dr. Kelly is currently the President and Chief
Executive Officer of CoMentis, Inc. and a founder of Kelly Pharma Research Consulting, LLC. From 1990 to 2009, Dr. Kelly served
in various scientific and executive positions at Boehringer Ingelheim, where after a successful early career developing LFA-1
antagonists, he led its US-based medicinal chemistry department, which included 145 scientists in the high throughput screening,
computational chemistry, structural biology, combinatorial chemistry and medicinal chemistry groups. Dr. Kelly holds a B.S. degree
in Chemistry at Rensselaer Polytechnic Institute (1982) and a Ph.D. degree in Chemistry at the University of Texas at Austin (1988).
He completed postdoctoral work in natural products synthesis at Yale University (1988-1990) and holds an MBA from New York University,
Stern School of Business (1998). Dr. Kelly is the co-author of over 25 scientific publications and serves on the College of Natural
Sciences Advisory Council for the University of Texas. Dr. Kelly’s scientific training and his track record of delivering
high quality compounds into advanced clinical studies provide valuable skills and knowledge to our Board.
Michele
Galen
has served as a Director since January 4, 2017. Ms. Galen serves as a strategic advisor and board member across pharmaceuticals,
biotechnology, health start-ups and global health, drawing on her broad experience in global business, communications, law and
journalism. From June 2016 to present, Ms. Galen has led an independent consultancy, Michele Galen LLC. From April 2015 to June
2016, Ms. Galen served as Global Head, Communications and Public Affairs, for Shire plc, a biotechnology company, where she served
as the lead communications and public affairs advisor on the successful $32 billion acquisition and integration of Baxalta. From
February 2015 to March 2015, Ms. Galen led an independent consultancy, Michele Galen LLC. From May 2014 to January 2015, Ms. Galen
served as a senior advisor to Novartis AG. From February 2012 to May 2014, Ms. Galen led Global Communications for Novartis AG,
based in Basel, Switzerland. From February 2010 to February 2012, Ms. Galen served as Vice President and Global Head of Communications
& Patient Advocacy for Novartis Pharma AG. From October 2003 to February 2010, Ms. Galen served as Vice President and Global
Head, Oncology Affairs for Novartis Pharma AG. From February 2001 to October 2003, Ms. Galen served as Vice President, Corporate
Communications for Novartis Pharmaceuticals Corporation. Earlier in her career, Ms. Galen was a Managing Director in the global
public relations firm Burson-Marsteller. There, she co-founded the Organizational Change Communications practice. She is an award-winning
journalist, and worked as Legal Editor and Social Issues Editor at Business Week magazine. Ms. Galen is a member of the New York
State Bar and practiced law at Stroock, Stroock & Lavan LLP, and Skadden, Arps, Slate, Meagher & Flom LLP. Ms.
Galen currently serves on the inaugural board of directors of Global Oncology, and on the advisory board of MK&A, a global
healthcare consultancy firm. Formerly, she served as a pro bono advisor to the UNICEF Office of Public Advocacy, and on the boards
of the Global Health Council and Stupid Cancer. Ms. Galen received a B.A. from George Washington University, M.S. from the Columbia
University Graduate School of Journalism, and J.D. from New York University School of Law. She also completed the External Executive
Coaching Intensive at Columbia University.
Ms. Galen’s broad pharmaceutical, biotechnology, and healthcare background
provide valuable skills and knowledge to our Board.
John
B. Russell, CPA,
has served as our Chief Financial Officer and Treasurer since February 7, 2014. Mr. Russell has also served
as the Chief Financial Officer and Treasurer of Pharma and Holdings since July 2013. Mr. Russell is the founder of JBR Business
Solutions, LLC and has served as its President since 2010. Mr. Russell has over 20 years of accounting, finance, operations, and
SEC reporting experience in biopharmaceutical and high-tech industries. From 2010 to the present, he has served as Chief Financial
Officer for various privately-held start-up companies. Mr. Russell was in charge of the Business Advisory Services for the Grant
Thornton Honolulu office from 2006 to 2010. From 2005 to 2006, Mr. Russell worked at a consulting company as the Operations Consulting
- Financial Management lead, advising Cisco Systems, Inc. Mr. Russell was the General Accounting Manager of the publicly traded
company Scios Inc. from 2003 to 2005, where he was in charge of SEC reporting and internal controls. Mr. Russell was the Controller
for several portfolio companies in the venture capital firm, Raza Foundries, Inc., from 2001 to 2002, and the General Accounting
Manager for inSilicon Corporation, a public company, from 2000 to 2001. Previous to that, Mr. Russell was an auditor at PricewaterhouseCoopers
LLP from 1995 to 2000. Mr. Russell is a licensed CPA in Hawaii and has a B.A. in Economics/Accounting from Claremont McKenna College.
Richard
M. Morris
has served as our Secretary since February 7, 2014. Mr. Morris has served as Assistant Secretary of Pharma since
May 2013 and Assistant Secretary of Holdings since July 2013. Mr. Morris is a Partner at Herrick, Feinstein LLP, our legal counsel
(“
Herrick
”). As a partner of Herrick, Mr. Morris represents a variety of clients, primarily in corporate matters.
Prior to becoming a lawyer, Mr. Morris was an auditor with the Commodities Exchange in New York and later focused on operations
and financial management at Kidder Peabody. He also was the U.S. Audit Manager for the financial division for a diversified Australian
company. Mr. Morris has a B.S. in Accounting from New York University (1982) and a J.D. from Fordham University School of Law
(1990), with bar admissions in New York and Connecticut.
David
M. Watumull
has served as our Vice President, Operations, Assistant Treasurer, and Assistant Secretary since February 7, 2014.
Mr. Watumull has served as Vice President, Operations of Pharma since its inception in May 2013, Assistant Treasurer and Assistant
Secretary of Pharma since July 2013, and Secretary and Treasurer of Pharma from its inception in May 2013 to July 2013. Mr. Watumull
has served as Vice President, Operations, Assistant Treasurer, and Assistant Secretary of Holdings since July 2013, and previously
as Director, Operations and Finance from 2009 to 2013, Operations Manager from 2008 to 2009, and Program Manager from its inception
in 2006 to 2009. Mr. Watumull heads day-to-day company operations related to accounting, banking, budgeting, leasing, insurance,
debt/equity transactions and due diligence, capitalization structure, reporting, corporate governance, contracting and related
legal matters, intellectual property, human resources, front office, facilities and equipment, and information technology. Mr.
Watumull also manages the relationships, timelines, and budgets of development partners, contractors, and regulatory consultants
associated with the production and testing of Cardax products. Mr. Watumull was previously Program Manager at Hawaii Biotech,
Inc. from 2005 to 2006, Project Coordinator from 2004 to 2005, and Information Technology Associate / Manager from 2002 to 2004.
Mr. Watumull also worked at Aquasearch, Inc. from 2000 to 2001 in various capacities including Medical Information Specialist
and Information Technology Associate. Mr. Watumull graduated first in his high school class and studied Electrical Engineering
at the University of Hawaii.
Executive
officers are appointed by our Board of Directors. Each executive officer holds his or her office until he or she resigns, is removed
by our Board of Directors or his or her successor is elected and qualified. Directors are elected annually by our stockholders
at the annual meeting. Each director holds his or her office until his or her successor is elected and qualified or his or her
earlier resignation or removal.
There
have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors since
our last annual report.
Family
Relationships
David
G. Watumull is the father of David M. Watumull. There are no other family relationships among any of our officers or directors.
Involvement
in Certain Legal Proceedings
To
the best of our knowledge, none of our directors or executive officers has been convicted in a criminal proceeding, excluding
traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past ten
years that resulted in a judgment, decree, or final order enjoining the person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters
that were dismissed without sanction or settlement. Except as set forth in our discussion below in “Certain Relationships
and Related Transactions, and Director Independence – Transactions with Related Persons,” none of our directors, director
nominees, or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates,
or associates which are required to be disclosed pursuant to the rules and regulations of the Commission.
Code
of Ethics
Our
Code of Business Conduct and Ethics, effective as of February 7, 2014 (the “
Code of Ethics
”), contains the
ethical principles by which our Chief Executive Officer and Chief Financial Officer, among others, are expected to conduct themselves
when carrying out their duties and responsibilities. A copy of our Code of Ethics may be found on our website at www.cardaxpharma.com.
We will provide a copy of our Code of Ethics to any person, without charge, upon request, by writing to David G. Watumull, Cardax,
Inc., 2800 Woodlawn Drive, Suite 129, Honolulu, Hawaii 96822.
Board
Committees
We
are not required under the Securities and Exchange Act to maintain any committees of our Board of Directors. We have formed certain
committees of our board as a matter of preferred corporate practices.
We
have an audit committee, a compensation committee and a nominating and corporate governance committee, each of which has the composition
and responsibilities described below.
Audit
Committee.
Our audit committee oversees a broad range of issues surrounding our accounting and financial reporting processes
and audits of our consolidated financial statements, including the following:
|
●
|
monitors
the integrity of our financial statements, our compliance with legal and regulatory requirements, our independent registered
public accounting firm’s qualifications and independence, and the performance of our internal audit function and independent
registered public accounting firm;
|
|
|
|
|
●
|
assumes
direct responsibility for the appointment, compensation, retention and oversight of the work of any independent registered
public accounting firm engaged for the purpose of performing any audit, review or attest services and for dealing directly
with any such accounting firm;
|
|
|
|
|
●
|
provides
a medium for consideration of matters relating to any audit issues; and
|
|
|
|
|
●
|
prepares
the audit committee report that the rules require be included in our filings with the SEC.
|
The
members of our audit committee are George W. Bickerstaff, III (Chairperson) and Terence A. Kelly, Ph.D. Our audit committee has
a written charter available on our website at www.cardaxpharma.com.
Compensation
Committee.
Our compensation committee reviews and recommends policy relating to compensation and benefits of our officers,
directors and employees, including reviewing and approving corporate goals and objectives relevant to the compensation of our
Chief Executive Officer and other senior officers, evaluating the performance of these persons in light of those goals and objectives
and setting compensation of these persons based on such evaluations. The compensation committee reviews and evaluates, at least
annually, the performance of the compensation committee and its members, including compliance of the compensation committee with
its charter.
The
members of our compensation committee are Terence A. Kelly, Ph.D. (Chairperson) and George W. Bickerstaff, III. Our compensation
committee has a written charter available on our website at www.cardaxpharma.com.
Nominating
and Corporate Governance Committee.
The nominating and corporate governance committee oversees and assists our Board of Directors
in identifying, reviewing and recommending nominees for election as directors; evaluating our Board of Directors and our management;
developing, reviewing and recommending corporate governance guidelines and a corporate code of business conduct and ethics; and
generally advises our Board of Directors on corporate governance and related matters.
The
members of our nominating and corporate governance committee are Terence A. Kelly, Ph.D. (Chairperson) and George W. Bickerstaff,
III. Our nominating and corporate governance committee has a written charter available on our website at www.cardaxpharma.com.
Conflicts
of Interest
Certain
potential conflicts of interest are inherent in the relationships between our officers and directors and us.
From
time to time, one or more of our affiliates may form or hold an ownership interest in and/or manage other businesses both related
and unrelated to the type of business that we own and operate. These persons expect to continue to form, hold an ownership interest
in and/or manage additional other businesses which may compete with our business with respect to operations, including financing
and marketing, management time and services and potential customers. These activities may give rise to conflicts between or among
the interests of us and other businesses with which our affiliates are associated. Our affiliates are in no way prohibited from
undertaking such activities, and neither us nor our stockholders will have any right to require participation in such other activities.
Further,
because we intend to transact business with some of our officers, directors and affiliates, as well as with firms in which some
of our officers, directors or affiliates have a material interest, potential conflicts may arise between the respective interests
of us and these related persons or entities. We believe that such transactions will be effected on terms at least as favorable
to us as those available from unrelated third parties.
With
respect to transactions involving real or apparent conflicts of interest, we have adopted policies and procedures which require
that: (i) the fact of the relationship or interest giving rise to the potential conflict be disclosed or known to the directors
who authorize or approve the transaction prior to such authorization or approval; and (ii) the transaction be fair and reasonable
to us at the time it is authorized or approved by our directors.
Item
11. Executive Compensation.
The
following sets forth information with respect to the compensation awarded or paid to David G. Watumull, our Chief Executive Officer,
Nicholas Mitsakos, our former Executive Chairman of the Board, and David M. Watumull, our Vice President, Operations, for all
services rendered in all capacities to the Company and its predecessors during the fiscal years ending December 31, 2015 and 2016.
These three executive officers are referred to as the “named executive officers” throughout this Annual Report on
Form 10-K. In addition, the following sets forth information with respect to the compensation awarded or paid to our two highest
compensated individuals not serving as executive officers, Gilbert M. Rishton, our Chief Science Officer, and Timothy J. King,
our Vice President, Research, for all services rendered in all capacities to the Company and its predecessors during the fiscal
years ending December 31, 2015 and 2016.
Compensation
of Executive Officers
The
following table sets forth information regarding each element of compensation that we paid or awarded to our named executive officers,
and our two highest compensated individuals not serving as executive officers, for the two fiscal years ended December 31, 2015
and 2016, which includes cash compensation, stock options awarded in lieu of cash compensation, and all other compensation:
Name
|
|
Year
|
|
Cash Comp.
(1)
|
|
|
Stock Options
in Lieu of
Cash Comp.
(2)
|
|
|
All Other
Comp.
(3)
|
|
|
Total
|
|
David G. Watumull
|
|
2015
|
|
$
|
88,807
|
(4)
|
|
$
|
205,424
|
|
|
$
|
16,151
|
|
|
$
|
310,382
|
|
Chief Executive Officer
|
|
2016
|
|
$
|
48,682
|
(5)
|
|
$
|
46,463
|
|
|
$
|
8,935
|
|
|
$
|
104,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas Mitsakos
|
|
2015
|
|
$
|
9,230
|
(6)
|
|
$
|
167,885
|
(6)
|
|
$
|
-
|
|
|
$
|
177,115
|
|
Former Executive Chairman
|
|
2016
|
|
$
|
-
|
|
|
$
|
37,500
|
(7)
|
|
$
|
-
|
|
|
$
|
37,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David M. Watumull
|
|
2015
|
|
$
|
63,230
|
|
|
$
|
113,308
|
|
|
$
|
5,917
|
|
|
$
|
182,455
|
|
Vice President, Operations
|
|
2016
|
|
$
|
55,718
|
(8)
|
|
$
|
33,771
|
|
|
$
|
3,736
|
|
|
$
|
93,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gilbert M. Rishton
|
|
2015
|
|
$
|
72,461
|
|
|
$
|
135,232
|
|
|
$
|
526
|
|
|
$
|
208,219
|
|
Chief Science Officer
|
|
2016
|
|
$
|
27,003
|
(9)
|
|
$
|
40,694
|
|
|
$
|
167
|
|
|
$
|
67,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy J. King
|
|
2015
|
|
$
|
63,230
|
|
|
$
|
113,308
|
|
|
$
|
281
|
|
|
$
|
176,819
|
|
Vice President, Research
|
|
2016
|
|
$
|
45,146
|
(10)
|
|
$
|
33,771
|
|
|
$
|
-
|
|
|
$
|
78,917
|
|
|
(1)
|
The
amounts disclosed refer to cash compensation.
|
|
|
|
|
(2)
|
The
amounts disclosed refer to stock options awarded in lieu of cash compensation.
|
|
|
|
|
(3)
|
The
amounts disclosed refer to imputed income in connection with certain benefits and/or insurance premiums paid in lieu of additional
cash compensation.
|
|
|
|
|
(4)
|
The
annual salary of Mr. David G. Watumull was decreased to $225,000 effective April 2015.
|
|
|
|
|
(5)
|
On
March 28, 2016, Mr. David G. Watumull was furloughed and agreed to continue service as Chief Executive Officer for cash compensation
equal to the minimum wage. On September 6, 2016, the compensation arrangement of Mr. David G. Watumull was amended so that,
effective September 8, 2016, he would receive bi-weekly compensation equal to $4,327.
|
|
|
|
|
(6)
|
The
annual compensation of Mr. Mitsakos as the former Executive Chairman was decreased to $150,000 effective April 2015, payable
quarterly in arrears in the form of equity.
|
|
|
|
|
(7)
|
Mr.
Mitsakos agreed, effective April 1, 2016, to suspend any additional equity compensation, until otherwise agreed by the Company.
Effective August 12, 2016, we accepted the request for a leave of absence and resignation by Mr. Mitsakos as Executive Chairman
and member of the Board of Directors.
|
|
|
|
|
(8)
|
On
March 28, 2016, Mr. David M. Watumull was furloughed and agreed to continue service as Vice President, Operations for cash
compensation equal to the minimum wage. On June 3, 2016, the compensation arrangement of David M. Watumull was amended so
that, effective May 30, 2016, he would receive bi-weekly compensation equal to $3,269.
|
|
|
|
|
(9)
|
On
March 28, 2016, Mr. Rishton was furloughed and would from time to time be re-engaged to the extent his services are required
at cash compensation equal to the hourly minimum wage. On September 6, 2016, the compensation arrangement of Mr. Rishton was
amended so that, effective September 8, 2016, he would receive bi-weekly compensation equal to $1,923.
|
|
|
|
|
(10)
|
On
March 28, 2016, Mr. King was furloughed and would from time to time be re-engaged to the extent his services were required
at cash compensation equal to the hourly minimum wage. On June 3, 2016, the compensation arrangement of Mr. King was amended
so that, effective May 30, 2016, he would receive bi-weekly compensation equal to $1,635. On September 6, 2016, the compensation
arrangement of Mr. King was amended so that, effective September 8, 2016, he would receive bi-weekly compensation equal to
$3,269.
|
Outstanding
Equity Awards to Executive Officers at Fiscal Year-End 2016
The
following table sets forth information regarding outstanding option awards to our named executive officers as of December 31,
2016:
|
|
Option awards
(1)(2)
|
|
Name
|
|
Number of
securities
underlying
unexercised
options
exercisable
|
|
|
Number of
securities
underlying
unexercised
options
unexercisable
|
|
|
Equity
incentive
plan awards:
Number of
securities
underlying
unexercised
unearned
options
|
|
|
Option
exercise
price
($)
|
|
|
Option
expiration date
|
David G. Watumull
|
|
|
1,750,588
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.155
|
|
|
February 7, 2024
|
David G. Watumull
|
|
|
4,941,845
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.625
|
|
|
February 7, 2024
|
David G. Watumull
|
|
|
468,498
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.32
|
|
|
June 30, 2020
|
David G. Watumull
|
|
|
390,686
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.20
|
|
|
June 30, 2020
|
David G. Watumull
|
|
|
89,523
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.49
|
|
|
September 30, 2020
|
David G. Watumull
|
|
|
137,675
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.27
|
|
|
December 31, 2020
|
David G. Watumull
|
|
|
774,385
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.06
|
|
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas Mitsakos
|
|
|
1,496,700
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.155
|
|
|
February 7, 2024
|
Nicholas Mitsakos
|
|
|
2,762,121
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.625
|
|
|
February 7, 2024
|
Nicholas Mitsakos
|
|
|
263,736
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.32
|
|
|
June 30, 2020
|
Nicholas Mitsakos
|
|
|
288,462
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.20
|
|
|
June 30, 2020
|
Nicholas Mitsakos
|
|
|
129,310
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.49
|
|
|
September 30, 2020
|
Nicholas Mitsakos
|
|
|
170,455
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.27
|
|
|
December 31, 2020
|
Nicholas Mitsakos
|
|
|
625,000
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.06
|
|
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David M. Watumull
|
|
|
45,058
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.155
|
|
|
February 7, 2024
|
David M. Watumull
|
|
|
2,388,554
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.625
|
|
|
February 7, 2024
|
David M. Watumull
|
|
|
160,806
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.32
|
|
|
June 30, 2020
|
David M. Watumull
|
|
|
284,917
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.20
|
|
|
June 30, 2020
|
David M. Watumull
|
|
|
67,639
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.49
|
|
|
September 30, 2020
|
David M. Watumull
|
|
|
104,021
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.27
|
|
|
December 31, 2020
|
David M. Watumull
|
|
|
562,846
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.06
|
|
|
March 31, 2021
|
|
(1)
|
The
type of securities underlying all outstanding option awards is our common stock.
|
|
|
|
|
(2)
|
None
of our named executive officers have received stock awards.
|
|
|
|
|
(3)
|
Stock
options awarded in lieu of cash compensation.
|
Compensation
of Directors
Mr.
Mitsakos, our former Executive Chairman of the Board, received compensation for his services as a director as set forth under
“Compensation of Executive Officers.”
The
following table sets forth information regarding each element of compensation that we paid or awarded to our current independent
directors for the two fiscal years ended December 31, 2015 and 2016:
Name
|
|
Year
|
|
Cash Comp.
|
|
|
Equity Awards
|
|
|
Total
|
|
George W. Bickerstaff, III
|
|
2015
|
|
$
|
-
|
|
|
$
|
58,333
|
(1)
|
|
$
|
58,333
|
|
George W. Bickerstaff, III
|
|
2016
|
|
$
|
-
|
|
|
$
|
41,667
|
(2)
|
|
$
|
41,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terence A. Kelly
|
|
2015
|
|
$
|
-
|
|
|
$
|
58,333
|
(3)
|
|
$
|
58,333
|
|
Terence A. Kelly
|
|
2016
|
|
$
|
-
|
|
|
$
|
41,667
|
(4)
|
|
$
|
41,667
|
|
|
(1)
|
The
amount disclosed represents compensation recognized in 2015 for stock awarded in connection with services provided by Mr.
Bickerstaff as an independent director.
|
|
|
|
|
(2)
|
The
amount disclosed represents compensation recognized in 2016 for stock awarded in connection with services provided by Mr.
Bickerstaff as an independent director. Effective April 1, 2016, Mr. Bickerstaff agreed to suspend any additional equity compensation,
until otherwise agreed by the Company. On September 6, 2016, the compensation arrangement of Mr. Bickerstaff was amended so
that effective September 30, 2016, he would each receive quarterly equity compensation of $12,500 in arrears in the form of
a grant of shares of our common stock or non-qualified stock options to purchase shares of our common stock based on the higher
of the then current market price or $0.15 per share, with such compensation prorated for one of three months for the quarter
ended September 30, 2016.
|
|
|
|
|
(3)
|
The
amount disclosed represents compensation recognized in 2015 for stock awarded in connection with services provided by Dr.
Kelly as an independent director.
|
|
|
|
|
(4)
|
The
amount disclosed represents compensation recognized in 2016 for stock options awarded in connection with services provided
by Dr. Kelly as an independent director. Effective April 1, 2016, Dr. Kelly agreed to suspend any additional equity compensation,
until otherwise agreed by the Company. On September 6, 2016, the compensation arrangement of Dr. Kelly was amended so that
effective September 30, 2016, he would each receive quarterly equity compensation of $12,500 in arrears in the form of a grant
of shares of our common stock or non-qualified stock options to purchase shares of our common stock based on the higher of
the then current market price or $0.15 per share, with such compensation prorated for one of three months for the quarter
ended September 30, 2016.
|
The
following table sets forth information regarding each element of compensation that we paid or awarded to our former independent
directors for the two fiscal years ended December 31, 2015 and 2016:
Name
|
|
Year
|
|
Cash Comp.
|
|
|
Stock Awards
|
|
|
Total
|
|
Frank C. Herringer
(1)
|
|
2015
|
|
$
|
-
|
|
|
$
|
23,787
|
(1)
|
|
$
|
23,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tamar D. Howson
(3)
|
|
2015
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
(1)
|
Mr.
Herringer’s service as our independent director ended in 2015.
|
|
|
|
|
(2)
|
The
amount disclosed represents compensation recognized in 2015 for stock awarded in connection with continued services provided
by Mr. Herringer as an independent director. The shares of common stock were subject to a risk of forfeiture and vested quarterly
in arrears commencing on June 1, 2014.
|
|
|
|
|
(3)
|
Ms.
Howson’s service as our independent director ended in 2015.
|
Outstanding
Equity Awards to Directors at Fiscal Year-End 2016
Mr.
Mitsakos, our former Executive Chairman of the Board, received option awards for his services as a director as set forth under
“Outstanding Equity Awards to Directors at Fiscal Year-End 2016.”
The
following table sets forth information regarding outstanding equity awards to our independent directors as of December 31, 2016:
|
|
Stock awards
(1)
|
|
|
Option awards
(2)
|
|
Name
|
|
Number of
securities
awarded
|
|
|
Number of
securities
underlying
unexercised
options
exercisable
|
|
|
Number of
securities
underlying
unexercised
options
unexercisable
|
|
|
Equity
incentive
plan awards:
Number of
securities
underlying
unexercised
unearned
options
|
|
|
Option
exercise
price
($)
|
|
|
Option
expiration date
|
George W. Bickerstaff, III
|
|
|
895,564
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terence A. Kelly
|
|
|
411,163
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
-
|
Terence A. Kelly
|
|
|
-
|
|
|
|
416,667
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.06
|
|
|
March 31, 2021
|
Terence A. Kelly
|
|
|
-
|
|
|
|
27,778
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.15
|
|
|
September 30, 2021
|
Terence A. Kelly
|
|
|
-
|
|
|
|
83,333
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.15
|
|
|
December 31, 2021
|
|
(1)
|
All
shares are fully vested.
|
|
|
|
|
(2)
|
The
type of securities underlying all outstanding option awards is our common stock.
|
Employment
and Consulting Agreements
On
February 7, 2014, we entered into employment agreements with each of Messrs. David G. Watumull, David M. Watumull, Gilbert M.
Rishton, and Timothy J. King, which provided for employment for an initial term of one year, subject to renewal and earlier termination
rights as provided in such agreements. These agreements provide for compensation terms and duration of employment as set forth
in each such agreement. Such agreements include restrictive covenants concerning competition with us and solicitation of our employees
and clients, if such individuals are terminated for cause as defined in such agreements.
On
February 7, 2014, we entered into an Agreement for Services as the Executive Chairman with Nicholas Mitsakos, pursuant to which
Mr. Mitsakos agreed to serve as our Executive Chairman. We agreed to pay Mr. Mitsakos an annual salary of $240,000 for his services
as an executive officer.
To
conserve cash resources while seeking additional financing, we and our employees, including Messrs. David G. Watumull, David M.
Watumull, Gilbert M. Rishton, and Timothy J. King, agreed to reduce cash compensation effective January 15, 2015. In addition,
Mr. Mitsakos reduced his cash compensation to zero. The amount of an individual’s compensation that was not paid was deferred.
On
June 30, 2015, the compensation arrangements of Messrs. David G. Watumull, David M. Watumull, Gilbert M. Rishton, and Timothy
J. King were amended so that, effective after June 30, 2015, we had the right to pay any compensation due to such officer during
any calendar quarter that was not paid in cash in the form of shares of our common stock or incentive stock options under the
2014 Plan. In addition, the amount of the unpaid cash compensation that accrued during the first and second quarters of 2015 was
paid with incentive stock options under the 2014 Plan.
On
June 30, 2015, the compensation arrangement with Mr. Mitsakos was amended so that, effective April 1, 2015, Mr. Mitsakos would
receive an aggregate annual compensation equal to $150,000, payable quarterly, in arrears, in the form of a grant of shares of
our common stock or non-qualified stock options to purchase shares of our common stock under the 2014 Plan. In addition, the amount
of the unpaid cash compensation that accrued during the first and second quarters of 2015 was paid with non-qualified stock options
under the 2014 Plan. Effective August 12, 2016, we accepted the request for a leave of absence and resignation by Mr. Mitsakos
as Executive Chairman and member of the Board of Directors.
On
March 28, 2016, we furloughed all of our employees and independent contractors indefinitely and arranged with our Chief Executive
Officer, David G. Watumull; our Chief Financial Officer, John B. Russell; and our Vice President, Operations, David M. Watumull,
to continue their services for cash compensation equal to the minimum wage. In addition, each of the directors agreed, effective
April 1, 2016, to suspend any additional equity compensation, until otherwise agreed by the Company.
On
June 3, 2016, the compensation arrangement of David M. Watumull was amended so that, effective May 30, 2016, he would receive
bi-weekly compensation equal to $3,269 and the compensation arrangement of Timothy J. King was amended so that, effective May
30, 2016, he would receive bi-weekly compensation equal to $1,635.
On
September 6, 2016, the compensation arrangements of certain officers were amended so that effective September 8, 2016, (i) David
G. Watumull would receive bi-weekly compensation equal to $4,327, (ii) Gilbert M. Rishton would receive bi-weekly compensation
equal to $1,923, and (iii) Timothy J. King would receive bi-weekly compensation equal to $3,269.
On
September 6, 2016, the compensation arrangement with JBR Business Solutions, LLC, under which John B. Russell serves as our Chief
Financial Officer, was amended so that effective September 30, 2016, he would receive monthly compensation of $3,500.
On
September 6, 2016, the compensation arrangements of the independent directors of the Company were amended so that effective September
30, 2016, they would each receive quarterly equity compensation of $12,500 in arrears in the form of a grant of shares of our
common stock or non-qualified stock options to purchase shares of the Company’s common stock under the Cardax, Inc. 2014
Equity Compensation Plan based on the higher of the then current market price or $0.15 per share, with such compensation prorated
for one of three months for the quarter ended September 30, 2016.
2014
Equity Compensation Plan
Our
2014 Plan is administered by our compensation committee. The purpose of the 2014 Plan is to provide financial incentives for selected
directors, employees, advisers, and consultants of Cardax and/or its subsidiaries, thereby promoting the long-term growth and
financial success of the Company. The issuance of awards under the 2014 Plan is at the discretion of our compensation committee,
which has the authority to determine the persons to whom any awards shall be granted and the terms, conditions and restrictions
applicable to any award. Under the 2014 Plan, we may grant equity based incentive awards, including options, restricted stock,
and other stock-based awards, to any directors, employees, advisers, and consultants that provide services to us or any of our
subsidiaries. An aggregate of 45,420,148 shares of our common stock have been reserved for issuance under the 2014 Plan, which
is subject to adjustment as described in such plan. As of March 27, 2017, there are 6,848,645 shares of common stock available
for future awards under the 2014 Plan.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities
Authorized for Issuance under Equity Compensation Plans
The
information required by Item 201(d) of Regulation S-K regarding our 2014 Plan is outlined above in Item 5 of this Annual Report
on Form 10-K.
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth information regarding the ownership of our common stock as of March 27, 2017 for:
|
●
|
each
director;
|
|
|
|
|
●
|
each
person known by us to own beneficially 5% or more of our common stock;
|
|
|
|
|
●
|
each
officer named in the summary compensation table elsewhere in this report; and
|
|
|
|
|
●
|
all
directors and executive officers as a group.
|
The
amounts and percentages of our common stock beneficially owned are reported on the basis of regulations of the SEC governing the
determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial
owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct
the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition
of such security. A person is also deemed to be a beneficial owner of any securities of which that person has the right to acquire
beneficial ownership within 60 days. Under these rules more than one person may be deemed a beneficial owner of the same securities
and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.
Unless
otherwise indicated below, to the best of our knowledge each beneficial owner named in the table has sole voting and sole investment
power with respect to all shares beneficially owned, subject to community property laws where applicable.
Name
|
|
Amount of
Beneficial
Ownership of
Common Stock
|
|
|
Percent of
Common
Stock
(1)
|
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
George W. Bickerstaff, III
(2)
|
|
|
895,564
|
(3)
|
|
|
1.0
|
%
|
Terence A. Kelly, Ph.D.
(4)
|
|
|
938,941
|
(5)
|
|
|
1.1
|
%
|
Michele Galen
(6)
|
|
|
-
|
|
|
|
0.0
|
%
|
David G. Watumull
(7)
|
|
|
9,012,364
|
(8)
|
|
|
9.3
|
%
|
David M. Watumull
(9)
|
|
|
3,613,841
|
(10)
|
|
|
3.9
|
%
|
John B. Russell
(11)
|
|
|
331,997
|
(12)
|
|
|
0.4
|
%
|
All directors and executive officers as a group (6 persons)
|
|
|
14,792,707
|
|
|
|
14.6
|
%
|
|
|
|
|
|
|
|
|
|
Beneficial Owner of 5% or more
|
|
|
|
|
|
|
|
|
Nicholas Mitsakos
(13)
|
|
|
7,566,266
|
(14)
|
|
|
8.0
|
%
|
(1)
|
Based
on 88,290,519 shares of common stock issued and outstanding as of March 27, 2017.
|
|
|
(2)
|
The
address of Mr. George W. Bickerstaff, III is c/o Cardax, Inc., 2800 Woodlawn Drive, Honolulu, Hawaii 96822. Mr. Bickerstaff
is the current Chairman of our Board of Directors.
|
|
|
(3)
|
Represents
895,564 shares of common stock.
|
|
|
(4)
|
The
address of Dr. Terence A. Kelly is c/o Cardax, Inc., 2800 Woodlawn Drive, Honolulu, Hawaii 96822. Dr. Kelly is a member of
our Board of Directors.
|
|
|
(5)
|
Represents
(a) 411,163 shares of common stock, (b) 416,667 shares of common stock issuable upon exercise by Dr. Kelly of options that
are presently exercisable, at an exercise price of $0.06 per share, and (c) 111,111 shares of common stock issuable upon exercise
by Dr. Kelly of options that are presently exercisable, at an exercise price of $0.15 per share.
|
|
|
(6)
|
The
address of Ms. Michele Galen is c/o Cardax, Inc., 2800 Woodlawn Drive, Honolulu, Hawaii 96822. Ms. Galen is a member of our
Board of Directors.
|
|
|
(7)
|
The
address of Mr. David G. Watumull is c/o Cardax, Inc., 2800 Woodlawn Drive, Honolulu, Hawaii 96822. Mr. David G. Watumull is
our President, CEO, and a member of our Board of Directors.
|
|
|
(8)
|
Represents
(a) 1,750,588 shares of common stock issuable upon exercise by Mr. David G. Watumull of options that are presently exercisable,
at an exercise price of $0.155 per share, (b) 4,941,845 shares of common stock issuable upon exercise by Mr. David G. Watumull
of options that are presently exercisable, at an exercise price of $0.625 per share, (c) 468,498 shares of common stock issuable
upon exercise by Mr. David G. Watumull of options that are presently exercisable, at an exercise price of $0.32 per share,
(d) 390,686 shares of common stock issuable upon exercise by Mr. David G. Watumull of options that are presently exercisable,
at an exercise price of $0.20 per share, (e) 89,523 shares of common stock issuable upon exercise by Mr. David G. Watumull
of options that are presently exercisable, at an exercise price of $0.49 per share, (f) 137,675 shares of common stock issuable
upon exercise by Mr. David G. Watumull of options that are presently exercisable, at an exercise price of $0.27 per share,
(g) 774,385 shares of common stock issuable upon exercise by Mr. David G. Watumull of options that are presently exercisable,
at an exercise price of $0.06 per share, (h) 408,172 shares of common stock issued in the Holdings Merger, which Mr. Watumull
may be deemed to beneficially own as the Trustee of the David G. Watumull Revocable Living Trust, and (i) 50,992 shares of
common stock issuable upon exercise of a certain warrant issued in the Holdings Merger at an exercise price of $0.981 per
share, which Mr. Watumull may be deemed to beneficially own as the Trustee of the David G. Watumull Revocable Living Trust.
|
|
|
(9)
|
The
address of Mr. David M. Watumull is c/o Cardax, Inc., 2800 Woodlawn Drive, Honolulu, Hawaii 96822. Mr. David M. Watumull is
our Vice President, Operations.
|
|
|
(10)
|
Represents
(a) 45,058 shares of common stock issuable upon exercise by Mr. David M. Watumull of options that are presently exercisable,
at an exercise price of $0.155 per share, (b) 2,388,554 shares of common stock issuable upon exercise by Mr. David M. Watumull
of options that are presently exercisable, at an exercise price of $0.625 per share, (c) 160,806 shares of common stock issuable
upon exercise by Mr. David M. Watumull of options that are presently exercisable, at an exercise price of $0.32 per share,
(d) 284,917 shares of common stock issuable upon exercise by Mr. David M. Watumull of options that are presently exercisable,
at an exercise price of $0.20 per share, (e) 67,639 shares of common stock issuable upon exercise by Mr. David M. Watumull
of options that are presently exercisable, at an exercise price of $0.49 per share, (f) 104,021 shares of common stock issuable
upon exercise by Mr. David M. Watumull of options that are presently exercisable, at an exercise price of $0.27 per share,
and (g) 562,846 shares of common stock issuable upon exercise by Mr. David M. Watumull of options that are presently exercisable,
at an exercise price of $0.06 per share.
|
|
|
(11)
|
The
address of Mr. John B. Russell is c/o Cardax, Inc., 2800 Woodlawn Drive, Honolulu, Hawaii 96822. Mr. Russell is our Chief
Financial Officer.
|
|
|
(12)
|
Represents
(a) 59,835 shares of common stock issuable upon exercise of options that are presently exercisable, at an exercise price of
$0.32 per share, which Mr. Russell may be deemed to beneficially own as the Managing Partner of JBR Business Solutions, LLC,
(b) 62,424 shares of common stock issuable upon exercise of options that are presently exercisable, at an exercise price of
$0.20 per share, which Mr. Russell may be deemed to beneficially own as the Managing Partner of JBR Business Solutions, LLC,
(c) 18,956 shares of common stock issuable upon exercise of options that are presently exercisable, at an exercise price of
$0.49 per share, which Mr. Russell may be deemed to beneficially own as the Managing Partner of JBR Business Solutions, LLC,
(d) 24,988 shares of common stock issuable upon exercise of options that are presently exercisable, at an exercise price of
$0.27 per share, which Mr. Russell may be deemed to beneficially own as the Managing Partner of JBR Business Solutions, LLC,
and (e) 165,794 shares of common stock issuable upon exercise of options that are presently exercisable, at an exercise price
of $0.06 per share, which Mr. Russell may be deemed to beneficially own as the Managing Partner of JBR Business Solutions,
LLC.
|
(13)
|
The
address of Mr. Nicholas Mitsakos is One Ferry Building, Suite 255, San Francisco, CA 94111. Effective August 12, 2016, we
accepted the request for a leave of absence and resignation by Mr. Mitsakos as Executive Chairman and member of the Board
of Directors.
|
|
|
(14)
|
Represents
(a) 1,496,700 shares of common stock issuable upon exercise by Mr. Mitsakos of options that are presently exercisable, at
an exercise price of $0.155 per share, (b) 2,762,121 shares of common stock issuable upon exercise by Mr. Mitsakos of options
that are presently exercisable, at an exercise price of $0.625 per share, (c) 263,736 shares of common stock issuable upon
exercise by Mr. Mitsakos of options that are presently exercisable, at an exercise price of $0.32 per share, (d) 288,462 shares
of common stock issuable upon exercise by Mr. Mitsakos of options that are presently exercisable, at an exercise price of
$0.20 per share, (e) 129,310 shares of common stock issuable upon exercise by Mr. Mitsakos of options that are presently exercisable,
at an exercise price of $0.49 per share, (f) 170,455 shares of common stock issuable upon exercise by Mr. Mitsakos of options
that are presently exercisable, at an exercise price of $0.27 per share, (g) 625,000 shares of common stock issuable upon
exercise by Mr. Mitsakos of options that are presently exercisable, at an exercise price of $0.06 per share, (h) 219,335 shares
of common stock, which may be deemed to be beneficially owned by Mr. Mitsakos as the sole owner, Chairman and CEO of Arcadia
Holdings, Inc., the owner of such shares, (i) 219,335 shares of common stock issuable upon exercise by Arcadia Holdings, Inc.
of warrants that are presently exercisable, at an exercise price of $0.625 per share, and which may be deemed to be beneficially
owned by Mr. Mitsakos, (j) 1,201,242 shares of common stock issued in the Holdings Merger to Arcadia Holdings, Inc., which
Mr. Mitsakos may be deemed to beneficially own as the Chairman and CEO of Arcadia Holdings, Inc., and (k) 190,570 shares of
common stock issued in the Holdings Merger.
|
Item
13. Certain Relationships and Related Transactions, and Director Independence.
Transactions
with Related Persons
On
June 30, 2015, we entered into an agreement with George W. Bickerstaff, III and Terence A. Kelly, Ph.D. that provided for the
annual compensation of each independent director equal to $100,000, payable quarterly in arrears in the form of a grant of shares
of our common stock or non-qualified stock options to purchase shares of our common stock under the 2014 Plan. In addition, each
independent director received a grant of 55,556 shares of our common stock for compensation during June 2015. On September 30,
2015, each independent director received a grant of 73,529 shares of our common stock pursuant to the agreement. On December 31,
2015, each independent director received a grant of 100,000 shares of our common stock pursuant to the agreement. On March 31,
2016, George W. Bickerstaff, III received 357,143 shares of our common stock pursuant to the agreement, and Terence A. Kelly,
Ph.D. received an option to purchase 416,667 shares of our common stock at an exercise price of $0.06 per share pursuant to the
agreement. In addition, each of the directors agreed, effective April 1, 2016, to suspend any additional equity compensation,
until otherwise agreed by the Company. On September 6, 2016, the compensation arrangements of the independent directors of the
Company were amended so that effective September 30, 2016, they will each receive quarterly equity compensation of $12,500 in
arrears in the form of a grant of shares of our common stock or non-qualified stock options to purchase shares of the Company’s
common stock under the Cardax, Inc. 2014 Equity Compensation Plan based on the higher of the then current market price or $0.15
per share, with such compensation prorated for one of three months for the quarter ended September 30, 2016. On September 30,
2016, George W. Bickerstaff, III received 27,778 shares of our common stock pursuant to the agreement, and Terence A. Kelly, Ph.D.
received an option to purchase 27,778 shares of our common stock at an exercise price of $0.15 per share pursuant to the agreement.
On December 31, 2016, George W. Bickerstaff, III received 83,333 shares of our common stock pursuant to the agreement, and Terence
A. Kelly, Ph.D. received an option to purchase 83,333 shares of our common stock at an exercise price of $0.15 per share pursuant
to the agreement.
On
January 4, 2017, our Board of Directors elected Michele Galen to serve as an independent director until our next annual meeting
of stockholders. Ms. Galen will receive quarterly equity compensation of $12,500 in arrears in the form of a grant of shares of
our common stock or non-qualified stock options to purchase shares of our common stock under the Cardax, Inc. 2014 Equity Compensation
Plan based on the higher of the then current market price or $0.15 per share. Such compensation is subject to adjustment commensurate
with any adjustment of compensation for our other independent directors.
On
June 30, 2015, our compensation arrangement with JBR Business Solutions, LLC, under which John B. Russell serves as our Chief
Financial Officer, was amended so that, effective after June 30, 2015, we had the right to pay up to 50% of any compensation due
during any calendar quarter that was not paid in cash in the form of shares of our common stock or non-qualified stock options
under the 2014 Plan. In addition, 50% of the amount of the unpaid cash compensation that accrued during the first and second quarters
of 2015 was paid with non-qualified stock options under the 2014 Plan: 50% of the unpaid amount that accrued during the first
quarter of 2015 or $12,565 was paid by a non-qualified stock option to purchase 59,835 shares of our common stock at an exercise
price of $0.32 per share, and 50% of the unpaid amount that accrued during the second quarter of 2015 or $8,115 was paid by a
non-qualified stock option to purchase 62,424 shares of our common stock at an exercise price of $0.20 per share. On September
30, 2015, 50% of the unpaid amount that accrued during the third quarter of 2015 or $5,497 was paid by a non-qualified stock option
to purchase 18,956 shares of our common stock at an exercise price of $0.49 per share. On December 31, 2015, 50% of the unpaid
amount that accrued during the fourth quarter of 2015 or $5,497 was paid by a non-qualified stock option to purchase 24,988 shares
of our common stock at an exercise price of $0.27 per share. Mr. Russell is the Managing Partner of JBR Business Solutions, LLC.
On March 28, 2016, Mr. Russell was furloughed and agreed to continue service as Chief Financial Officer for cash compensation
equal to the minimum wage. On September 6, 2016, the compensation arrangement with JBR Business Solutions, LLC, under which John
B. Russell serves as our Chief Financial Officer, was amended so that effective September 30, 2016, he would receive monthly compensation
of $3,500.
On
December 30, 2015, we completed our merger with Holdings, our former principal stockholder. At closing, Holdings merged with and
into us. There was not any cash consideration exchanged in the Holdings Merger. Upon the closing of the Holdings Merger, the stockholders
of Holdings received an aggregate number of 31,597,574 shares of our common stock and warrants to purchase 1,402,426 shares of
our common stock. The 33,000,000 restricted shares of our common stock held by Holdings were cancelled upon the closing of the
Holdings Merger. Accordingly, there was not any change to our fully diluted capitalization due to the Holdings Merger. David G.
Watumull and Nicholas Mitsakos were the only directors of Holdings upon the Holdings Merger. Each individual was also a director
of us and a stockholder of Holdings. Each individual had a personal interest in the Holdings Merger, and received shares of our
common stock in exchange for their equity interest in Holdings. An aggregate of 1,201,242 shares of our common stock were issued
in the Holdings Merger to Arcadia Holdings, Inc., which Mr. Mitsakos may be deemed to beneficially own as the Chairman and CEO
of Arcadia Holdings, Inc., and 190,570 shares of our common stock were issued in the Holdings Merger to Mr. Mitsakos. An aggregate
of 408,172 shares of our common stock and a warrant to purchase 50,992 shares of our common stock at an exercise price equal to
$0.981 per share through December 31, 2018 were issued in the Holdings Merger to the David G. Watumull Revocable Living Trust,
which Mr. Watumull may be deemed to beneficially own as the Trustee.
Director
Independence
George
W. Bickerstaff, III, Terence A. Kelly, Ph.D., and Michele Galen are our independent directors. Because our common stock is not
currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock
Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person
other than an officer or employee of the Company or any other individual having a relationship that, in the opinion of the Company’s
Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ
listing rules provide that a director cannot be considered independent if:
|
●
|
the
director is, or at any time during the past three years was, an employee of the Company;
|
|
|
|
|
●
|
the
director or a family member of the director accepted any compensation from the Company in excess of $120,000 during any period
of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including,
among other things, compensation for board or board committee service);
|
|
|
|
|
●
|
a
family member of the director is, or at any time during the past three years was, an executive officer of the Company;
|
|
|
|
|
●
|
the
director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity
to which the Company made, or from which the Company received, payments in the current or any of the past three fiscal years
that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject
to certain exclusions);
|
|
|
|
|
●
|
the
director or a family member of the director is employed as an executive officer of an entity where, at any time during the
past three years, any of the executive officers of the Company served on the compensation committee of such other entity;
or
|
|
|
|
|
●
|
the
director or a family member of the director is a current partner of the Company’s outside auditor, or at any time during
the past three years was a partner or employee of the Company’s outside auditor, and who worked on the Company’s
audit.
|
Item
14. Principal Accounting Fees and Services.
We engaged KBL, LLP
as our independent registered public accounting firm for the years ended December 31, 2016 and 2015. The table below sets
forth the aggregate fees billed for fiscal years ended December 31, 2016 and 2015 for professional services rendered by KBL,
LLP for the audit of our annual consolidated financial statements and review of the consolidated financial statements included
in our quarterly reports on Form 10-Q and services that are normally provided in connection with statutory and regulatory filings
or engagements.
|
|
Fiscal Year Ended
December 31, 2016
|
|
|
Fiscal Year Ended
December 31, 2015
|
|
Audit Fees
(1)
|
|
$
|
62,500
|
*
|
|
$
|
67,500
|
*
|
Audit-Related Fees
(2)
|
|
$
|
-
|
|
|
$
|
-
|
|
Tax Fees
(3)
|
|
$
|
-
|
|
|
$
|
-
|
|
All Other Fees
(4)
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
62,500
|
|
|
$
|
67,500
|
|
*
|
The
amounts of audit fees disclosed for our fiscal years ended December 31, 2016 and 2015 represent the aggregate audit fees billed
during 2016 and 2015, respectively. The amount billed in 2016 includes fees incurred in connection with the audit of our financial
statements for the fiscal year ended December 31, 2015 and the review of our interim financial statements in 2016. The amount
billed in 2015 includes fees incurred in connection with the audit of our financial statements for the fiscal year ended December
31, 2014 and the review of our interim financial statements in 2015.
|
(1)
|
Audit
fees
consist of fees incurred for professional services rendered for the audit of our financial statements, for reviews
of our interim financial statements included in our quarterly reports on Form 10-Q and for services that are normally provided
in connection with statutory or regulatory filings or engagements.
|
(2)
|
Audit-related
fees
consist of fees billed for professional services that are reasonably related to the performance of the audit or review
of our financial statements, but are not reported “Audit Fees.”
|
(3)
|
Tax
fees
consist of fees billed for professional services relating to tax compliance, tax advice, and tax planning.
|
(4)
|
All
other fees
consist of fees billed for products and services provided by our principal accountants, other than for products
and services reported above.
|
Audit
Committee’s Pre-Approval Policies
Our
audit committee is responsible for, among other things, the selection, appointment, retention and dismissal of our independent
auditors. Additionally, our audit committee pre-approves the retention of our independent auditors for any non-audit services,
and the funding for payment of compensation to our independent auditors for both audit and non-audit services.
Audit
Hours Incurred
Less
than fifty percent of the hours expended on our principal accountant’s engagement to audit our financial statements for
the most recent fiscal year were attributed to work performed by persons other than our principal accountant’s full-time,
permanent employees.
The accompanying notes are an integral part of this consolidated financial statement.
The accompanying notes are an integral part of this consolidated financial statement.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – COMPANY BACKGROUND
Cardax
Pharmaceuticals, Inc. (“Holdings”) was incorporated in the State of Delaware on March 23, 2006.
In
May of 2006, Hawaii Biotech, Inc. (“HBI”), contributed its anti-inflammatory, small molecule line of business into
Holdings. Holdings issued (i) 9,447,100 shares of common stock of Holdings, (ii) 14,440,920 shares of Series A preferred stock
of Holdings, (iii) 11,113,544 shares of Series B preferred stock of Holdings, and (iv) 13,859,324 shares of Series C preferred
stock of Holdings to HBI, in exchange for the assets and liabilities contributed to Holdings. The above shares were then distributed
by HBI to its shareholders. An additional 704,225 shares of Series C preferred stock were issued as part of the initial capitalization
of Holdings. On January 30, 2007, all outstanding shares of Series A, B, and C preferred stock were converted into shares of Series
A preferred stock.
Holdings
was formed for the purpose of developing a platform of proprietary, exceptionally safe, small molecule compounds for large unmet
medical needs where oxidative stress and inflammation play important causative roles. Holdings’ platform has application
in arthritis, metabolic syndrome, liver disease, and cardiovascular disease, as well as macular degeneration and prostate disease.
Holdings’ current primary focus is on the development of astaxanthin technologies. Astaxanthin is a naturally occurring
marine compound that has robust anti-oxidant and anti-inflammatory activity.
In
May of 2013, Holdings formed a 100% owned subsidiary company called Cardax Pharma, Inc. (“Pharma”). Pharma was formed
to maintain Holdings’ operations going forward, leaving Holdings as an investment holding company.
On
November 29, 2013, Holdings entered into a definitive merger agreement (“Merger Agreement”) with Koffee Korner Inc.,
a Delaware corporation (“Koffee Korner”) (OTCQB:KOFF), and its wholly owned subsidiary (“Koffee Sub”),
pursuant to which, among other matters and subject to the conditions set forth in such Merger Agreement, Koffee Sub would merge
with and into Pharma. In connection with such merger agreement and related agreements, upon the consummation of such merger, Pharma
would become a wholly owned subsidiary of Koffee Korner and Koffee Korner would issue shares of its common stock to Holdings.
At the effective time of such merger, Holdings would own a majority of the shares of the then issued and outstanding shares of
common stock of Koffee Korner.
On
February 7, 2014, Holdings completed its merger with Koffee Korner, which was renamed to Cardax, Inc. (the “Company”)
(OTCQB:CDXI). Concurrent with the merger: (i) the Company received aggregate gross cash proceeds of $3,923,100 in exchange for
the issuance and sale of an aggregate 6,276,960 of shares of the Company’s common stock, together with five year warrants
to purchase an aggregate of 6,276,960 shares of the Company’s common stock at $0.625 per share, (ii) the notes issued on
January 3, 2014, in the outstanding principal amount of $2,076,000 and all accrued interest thereon, automatically converted into
3,353,437 shares of the Company’s common stock upon the reverse merger at $0.625 per share, together with five year warrants
to purchase 3,321,600 shares of common stock at $0.625 per share, (iii) the notes issued in 2013, in the outstanding principal
amount of $8,489,036 and all accrued interest thereon, automatically converted into 14,446,777 shares of the Company’s common
stock upon the reverse merger at $0.625 per share, together with five year warrants to purchase 14,446,777 shares of common stock
at $0.625 per share, (iv) stock options to purchase 15,290,486 shares of Holdings common stock at $0.07 per share were cancelled
and substituted with stock options to purchase 6,889,555 shares of the Company’s common stock at $0.155 per share, (v) additional
stock options to purchase 20,867,266 shares of the Company’s common stock at $0.625 per share were issued, and (vi) the
notes issued in 2008 and 2009, in the outstanding principal amounts of $55,000 and $500,000, respectively, and all accrued interest
thereon, were repaid in full. The assets and liabilities of Koffee Korner were distributed in accordance with the terms of a spin-off
agreement on the closing date.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
1 – COMPANY BACKGROUND (continued)
The
share exchange transaction was treated as a reverse acquisition, with Holdings and Pharma as the acquirers and Koffee Korner and
Koffee Sub as the acquired parties. Unless the context suggests otherwise, when the Company refers to business and financial information
for periods prior to the consummation of the reverse acquisition, the Company is referring to the business and financial information
of Holdings and Pharma. Under accounting principles generally accepted in the United States of America (“U.S. GAAP”)
guidance Accounting Standards Codification (“ASC”) No. 805-40,
Business Combinations – Reverse Acquisitions
,
the Acquisition has been treated as a reverse acquisition with no adjustment to the historical book and tax basis of the Company’s
assets and liabilities.
On
August 28, 2014, the Company entered into an Agreement and Plan of Merger (the “Holdings Merger Agreement”) with its
principal stockholder, Holdings, pursuant to which Holdings would merge with and into the Company (the “Holdings Merger”).
On September 18, 2015, the Company filed a Form S-4 with the SEC in contemplation of the Holdings Merger. There would not be any
cash consideration exchanged in the Holdings Merger. Upon the closing of the Holdings Merger, the stockholders of Holdings would
receive an aggregate number of shares and warrants to purchase shares of the Company’s common stock equal to the aggregate
number of shares of the Company’s common stock that were held by Holdings on the date of the closing of the Holdings Merger.
The Company’s restricted shares of common stock held by Holdings would be cancelled upon the closing of the Holdings Merger.
Accordingly, there would not be not any change to the Company’s fully diluted capitalization due to the Holdings Merger.
On
November 24, 2015, the Holdings Merger Agreement was amended and restated (the “Amended Holdings Merger Agreement”).
Under the terms of Amended Holdings Merger Agreement, the shares of common stock, par value $0.001 per share of Holdings and the
shares of all other issued and outstanding capital stock of Holdings that by their terms were convertible or could otherwise be
exchanged for shares of Holdings common stock, would be converted into and exchanged for the Company’s shares of Common
Stock in a ratio of approximately 2.2:1. In addition, the Company would grant Holdings’ option and warrant holders warrants
to purchase the Company’s warrants at the same stock conversion ratio. On November 24, 2015, the Company filed an amendment
to the Form S-4 with the SEC and on December 29, 2015, the Form S-4 was declared effective by the SEC.
On
December 30, 2015, the Company completed its merger with Holdings, pursuant to the Amended Holdings Merger Agreement. At closing,
Holdings merged with and into the Company, with the Company surviving the Holdings Merger. Pursuant to the Amended Holdings Merger
Agreement, there was not any cash consideration exchanged in the Holdings Merger. Upon the closing of the Holdings Merger, the
stockholders of Holdings received an aggregate number of shares and warrants to purchase shares of Company common stock equal
to the aggregate number of shares of Company common stock that were held by Holdings on the date of the closing of the Holdings
Merger. The Company’s restricted shares of common stock held by Holdings were cancelled upon the closing of the Holdings
Merger. Accordingly, there was not any change to the Company’s fully diluted capitalization due to the Holdings Merger.
The
Company is engaged in the development, marketing, and distribution of consumer health products in the United States. On August
24, 2016, the Company launched its first commercial product, ZanthoSyn™. On January 25, 2017, the Company began selling
ZanthoSyn™ to GNC stores in Hawaii on a wholesale basis. ZanthoSyn™ is marketed as a novel astaxanthin dietary supplement
with superior absorption and purity. Astaxanthin is a clinically studied ingredient with safe anti-inflammatory activity that
supports joint health, cardiovascular health, metabolic health, and liver health. As a second generation product candidate,
the Company is developing CDX-085, its patented astaxanthin derivative, which could reduce the size/number of capsules or tablets
required to achieve equivalent circulating levels of astaxanthin. The Company also plans to pursue pharmaceutical applications
of astaxanthin and related compounds.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
1 – COMPANY BACKGROUND (continued)
Going
concern matters
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial
statements, the Company incurred a net loss of $1,783,705 and $4,257,875 for the years ended December 31, 2016 and 2015, respectively.
The Company has incurred losses since inception resulting in an accumulated deficit of $55,933,862 as of December 31, 2016, and
has had negative cash flows from operating activities since inception. The Company expects that its initial marketing program
for ZanthoSyn™ will continue to focus on outreach to physicians, healthcare professionals, and consumers over the following
several fiscal quarters, and anticipates further losses in the development of its business. As a result of these and other factors,
the Company’s independent registered public accounting firm has determined there is substantial doubt about the Company’s
ability to continue as a going concern.
In
addition to the $1,121,000 raised during the year ended December 31, 2016 and the $289,000 raised in the calendar year-to-date,
the Company plans to raise additional capital to carry out its business plan. The Company’s ability to raise additional
capital through future equity and debt securities issuances is unknown. Obtaining additional financing, the successful development
of the Company’s contemplated plan of operations, and its transition, ultimately, to profitable operations are necessary
for the Company to continue operations. The ability to successfully resolve these factors raises substantial doubt about the Company’s
ability to continue as a going concern. The consolidated financial statements of the Company do not include any adjustments that
may result from the outcome of these uncertainties.
On
March 28, 2016, the Company furloughed all of its employees and independent contractors indefinitely and arranged with its Chief
Executive Officer, David G. Watumull; its Chief Financial Officer, John B. Russell; and its Vice President, Operations, David
M. Watumull, to continue their services for cash compensation equal to the minimum wage. On May 30, 2016, the compensation arrangement
of our Vice President, Operations, David M. Watumull, was amended so that he would receive bi-weekly compensation equal to $3,269.
On May 30, 2016, the compensation arrangement of our Vice President, Research, Timothy J. King, was amended so that he would receive
bi-weekly compensation equal to $1,635. The Company continues to assess its commercial opportunities, which may include developing
products or licensing its intellectual property, and may re-engage furloughed employees and contractors from time to time to the
extent their services are required. In addition, each of the directors has agreed, effective April 1, 2016, to suspend any additional
equity compensation, until otherwise agreed by the Company. In addition, the Company has deferred payment of other trade payables.
On September 6, 2016, the compensation arrangements of certain officers were amended so that effective September 8, 2016, (i)
our Chief Executive Officer, David G. Watumull would receive bi-weekly compensation equal to $4,327, (ii) our Chief Science Officer,
Gilbert M. Rishton would receive bi-weekly compensation equal to $1,923, and (iii) our Vice President, Research, Timothy J. King
would receive bi-weekly compensation equal to $3,269. On September 6, 2016, the compensation arrangement with JBR Business Solutions,
LLC, under which John B. Russell serves as our Chief Financial Officer, was amended so that effective September 30, 2016, he would
receive monthly compensation of $3,500. On September 6, 2016, the compensation arrangements of the independent directors of the
Company were amended so that effective September 30, 2016, they would each receive quarterly equity compensation of $12,500 in
arrears in the form of a grant of shares of our common stock or non-qualified stock options to purchase shares of the Company’s
common stock under the Cardax, Inc. 2014 Equity Compensation Plan based on the higher of the then current market price or $0.15
per share.
Basis
of presentation
The
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States (“U.S. GAAP “) and include the accounts of Cardax, Inc., and its wholly owned subsidiary, Cardax Pharma, Inc.,
and its predecessor, Cardax Pharmaceuticals, Inc., which was merged with and into Cardax, Inc. All significant intercompany balances
and transactions have been eliminated in consolidation.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of estimates
The
preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the amounts reported in our consolidated financial statements and the accompanying notes. Estimates in these consolidated
financial statements include asset valuations, estimates of future cash flows from and the economic useful lives of long-lived
assets, valuations of stock compensation, certain accrued liabilities, income taxes and tax valuation allowances, and fair value
estimates. Despite management’s intention to establish accurate estimates and reasonable assumptions, actual results could
differ materially from these estimates and assumptions.
Cash
The
Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
The Company held no cash equivalents as of December 31, 2016 and 2015.
The
Company maintains cash deposit accounts at one financial institution. Accounts at this institution are insured by the Federal
Deposit Insurance Corporation up to $250,000. The Company’s cash balance at times may exceed these limits. As of December
31, 2016 and 2015, the Company had $0 and $85,140, respectively, in excess of federally insured limits on deposit.
Accounts
receivable
Accounts
receivable consist of amounts due from sales of consumer health products.
It
is the Company’s policy to provide for an allowance for doubtful collections based upon a review of outstanding receivables,
historical collection information, and existing economic conditions. Normal receivables are due 30 days after the issuance of
the invoice. Receivables past due more than 60 days are considered delinquent. Delinquent receivables are written off based on
individual credit evaluation and specific circumstances of the customer. There were no accounts receivable outstanding as of December
31, 2016 and 2015.
Inventory
Inventory
is stated at the lower of cost or market in accordance with ASC No. 330-10-30. Cost is determined using the average cost method.
Market is defined as sales price less cost to dispose and a normal profit margin. Inventory costs include third party costs for
finished goods. The Company utilizes contract manufacturers and receives inventory in finished form.
The
Company provides a reserve against inventory for known or expected inventory obsolescence. The reserve is determined by specific
review of inventory items for product age and quality that may affect salability. There were no reserves for inventory as of December
31, 2016.
Property
and equipment, net
Property
and equipment are recorded at cost, less depreciation. Equipment under capital lease obligations and leasehold improvements are
amortized on the straight-line method over the shorter period of the lease term or the estimated useful life of the equipment.
Such amortization is included in depreciation and amortization in the consolidated financial statements. Depreciation is calculated
using the straight-line method over the estimated useful lives of the respective assets are as follows.
Furniture
and office equipment
|
7
years
|
Research
and development equipment
|
3
to 7 years
|
Information
technology equipment
|
5
years
|
Software
|
3
years
|
Major
additions and improvements are capitalized, and routine expenditures for repairs and maintenance are charged to expense as incurred.
When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts,
and any resulting gain or loss is charged to income for the period.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment
of long-lived assets
In
accordance with ASC No. 360,
Property, Plant, and Equipment
; the Company evaluates long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset or group of assets, as appropriate, may not be
recoverable.
When
the sum of the undiscounted future net cash flows expected to result from the use and the eventual disposition is less than the
carrying amounts, an impairment loss would be measured based on the discounted cash flows compared to the carrying amounts. There
was no impairment charge recorded for the years ended December 31, 2016 and 2015.
Revenue
recognition
The
Company recognizes revenue from the sale of its products through e-commerce and wholesale channels when the transfer of title
and risk of loss occurs in accordance with ASC No. 605-15-25. For shipments with terms of FOB Shipping Point, revenue is recognized
upon shipment. For shipments with terms of FOB Destination, revenue is recognized upon delivery.
Sales
returns and allowances are recorded as a reduction to sales in the period in which sales are recorded. The Company records shipping
charges and sales tax gross in revenues and cost of goods sold. Sales discounts and other adjustments are recorded at the time
of sale.
Fair
value measurements
U.S.
GAAP establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The
three levels of the fair value hierarchy are described below:
Level
1:
|
Inputs
to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company
has the ability to access.
|
|
|
Level
2:
|
Inputs
to the valuation methodology include:
|
|
●
|
Quoted
prices for similar assets or liabilities in active markets;
|
|
|
|
|
●
|
Quoted
prices for identical or similar assets or liabilities in inactive markets;
|
|
|
|
|
●
|
Inputs
other than quoted prices that are observable for the asset or liability; and
|
|
|
|
|
●
|
Inputs
that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
|
|
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
|
Level
3:
|
Inputs
to the valuation methodology are unobservable and significant to the fair value measurement.
|
The
asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of
any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable
inputs and minimize the use of unobservable inputs.
As
of December 31, 2016 and 2015, there were no recurring fair value measurements of assets and liabilities subsequent to initial
recognition.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock
based compensation
The
Company accounts for stock based compensation costs under the provisions of ASC No. 718,
Compensation—Stock Compensation
and ASC No. 505,
Equity
, which require the measurement and recognition of compensation expense related to the fair
value of stock based compensation awards that are ultimately expected to vest. Stock based compensation expense recognized includes
the compensation cost for all stock based payments granted to employees, officers, directors, and consultants based on the grant
date fair value estimated in accordance with the provisions of ASC Nos. 718 and 505. ASC Nos. 718 and 505 are also applied to
awards modified, repurchased, or canceled during the periods reported.
Basic
and diluted net income (loss) per share
Basic
earnings per common share is calculated by dividing net loss for the year by the weighted average number of common shares outstanding
during the year. Diluted earnings per common share is calculated by dividing net loss for the year by the sum of the weighted
average number of common shares outstanding during the year plus the number of potentially dilutive common shares (“dilutive
securities”) that were outstanding during the year. Dilutive securities include options granted pursuant to the Company’s
stock option plans, and warrants issued to non-employees. Potentially dilutive securities are excluded from the computation of
earnings per share in periods in which a net loss is reported, as their effect would be antidilutive.
Cost
of Goods Sold
Cost
of goods sales is comprised of (i) costs to manufacture or acquire products sold to customers, and (ii) direct and indirect distribution
costs incurred in the sale of goods.
Shipping
and Handling Costs
Shipping
and handling costs are included in cost of goods sold. For the years ended December 31, 2016 and 2015, shipping and handling costs
were $3,884 and $0, respectively.
Advertising
Advertising
costs are expensed as incurred and are included as an element of sales and marketing costs in the accompanying consolidated statements
of operations. For the years ended December 31, 2016 and 2015, advertising costs were $27,939 and $0, respectively.
Research
and development
Research
and development costs are expensed as incurred and consists primarily of salaries and wages of scientists and related personnel
engaged in research and development activities, scientific consultations, manufacturing of product candidates, third-party research,
laboratory supplies, rents associated with operating leased laboratory equipment, and scientific advisory boards. The focus of
these costs is on the development of Astaxanthin technologies. For the years ended December 31, 2016 and 2015, research and development
costs were $347,885 and $491,829, respectively.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income
taxes
The
Company accounts for income taxes under an asset and liability approach. Deferred income taxes reflect the impact of temporary
differences between assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax
reporting purposes, net operating loss carry-forwards, and other tax credits measured by applying currently enacted tax laws.
A valuation allowance is provided when necessary to reduce deferred tax assets to an amount that is more likely than not to be
realized.
The
Company determines whether a tax position is more likely than not to be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the position. The Company uses a two-step approach to
recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining
if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority
examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit
as the largest amount that is more than 50% likely of being realized upon ultimate settlement.
The
Company files income tax returns in the United States (“U.S.”) Federal and the States of Hawaii and California jurisdictions.
Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require
significant judgment to apply.
The
Company did not recognize any tax liabilities for income taxes associated with unrecognized tax benefits as of December 31, 2016
and 2015. The Company’s policy is to include interest and penalties related to unrecognized tax benefits, if any, within
the provision for taxes in the statements of operations.
Sales
and use tax
Revenues,
as presented on the accompanying income statement, include taxes collected from customers and remitted to governmental authorities.
Such taxes amounted to $1,205 and $0 for the years ended December 31, 2016 and 2015, respectively.
Reclassifications
The
Company has made certain reclassifications to conform its prior periods’ data to the current presentation. These reclassifications
had no effect on the reported results of operations or cash flows.
Recent
accounting pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2014-09,
Revenue from Contracts with Customers
, related to revenue recognition. The underlying
principle of this ASU is that a business or other organization will recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. This ASU
also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely
in prior accounting guidance. ASU No. 2014-09 provides alternative methods of initial adoption. The Company is currently
assessing the impact of this ASU on the Company’s consolidated financial statements. In August 2015, the FASB issued
ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, which defers the
effective date of ASU No. 2014-09 by one year to December 15, 2017 for interim and annual reporting periods beginning after
that date and permitted early adoption of the standard, but not before the original effective date. The Company is currently
assessing the impact of this ASU on the Company’s consolidated financial statements.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent
accounting pronouncements (continued)
Three
ASUs were issued in 2016 that affect the guidance in ASU 2014-09,
Revenue from Contracts with Customers
, and are effective
upon adoption of ASU No. 2014-09. The Company is currently evaluating the impact the new revenue recognition guidance will have
on its Financial Statements, including the following ASUs:
|
●
|
In
March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net)
. This ASU clarifies the implementation guidance on principal versus
agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified
good or service before it is transferred to the customers.
|
|
|
|
|
●
|
In
April 2016, the FASB issued ASU No. 2016-10,
Identifying Performance Obligations and Licensing
. This ASU clarifies
the following two aspects of ASU No. 2014-09: identifying performance obligations and licensing implementation guidance. The
amendment requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects
the consideration that a company expects to be entitled to in exchange for the goods or services. To achieve this principle,
a company must apply five steps including identifying the contract with a customer, identifying the performance obligations
in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing
revenue when (or as) the company satisfies the performance obligations. Additional quantitative and qualitative disclosures
to enhance the understanding about the nature, amount, timing, and uncertainty of revenue and cash flows are also required.
|
|
|
|
|
●
|
In
May 2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients
. This ASU makes narrow-scope amendments to ASU No. 2014-09, Revenue from Contracts with Customers,
and provides practical expedients to simplify the transition to the new standard and to clarify certain aspects of the standard.
|
In
July 2015, the FASB issued ASU No. 2015-11,
Inventory: Simplifying the Measurement of Inventory
, that requires inventory
not measured using either the last in, first out (“LIFO”) or the retail inventory method to be measured at the lower
of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less
reasonably predictable cost of completion, disposal, and transportation. The guidance in ASU No. 2015-11 is effective for fiscal
years beginning after December 15, 2016, including interim periods within those fiscal years, and will be applied prospectively.
Early adoption is permitted. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial
statements.
The
amendments of ASU No. 2015-17 require that a statement of cash flow explain the change during a period in the total of cash, cash
equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The guidance in ASU No. 2016-18
is effective for the Company’s fiscal years beginning after December 15, 2017, and interim reporting periods within annual
reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact the new statement of cash
flow guidance will have on its Financial Statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
. This ASU requires management to recognize lease assets and lease
liabilities for all leases. ASU No. 2016-02 retains a distinction between finance leases and operating leases. The classification
criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria
for distinguishing between capital leases and operating leases in the previous leases guidance. The result of retaining a distinction
between finance leases and operating leases is that under the lessee accounting model, the effect of leases in the statement of
comprehensive income and the statement of cash flows is largely unchanged from previous U.S. GAAP. The guidance in ASU No. 2016-02
is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company
is currently assessing the impact of this ASU on the Company’s consolidated financial statements.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent
accounting pronouncements (continued)
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation
.
This ASU was issued as part of the FASB’s simplification initiative focused on improving areas of U.S. GAAP for which cost
and complexity may be reduced while maintaining or improving the usefulness of information disclosed within the financial statements.
The amendments focused on simplification specifically with regard to share-based payment transactions, including income tax consequences,
classification of awards as equity or liabilities, and classification on the statement of cash flows. The guidance in ASU No.
2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.
Early adoption is permitted. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial
statements.
In
November 2015, the FASB issued ASU 2015-17,
Income Taxes (Topic 740)
. This ASU was issued as part of the FASB’s simplification
initiative focused on improving areas of U.S. GAAP for which cost and complexity may be reduced while maintaining or improving
the usefulness of information disclosed within the financial statements. ASU No. 2015-17 simplifies the presentation of deferred
income taxes by requiring that deferred tax liabilities and assets be presented net and classified as noncurrent in a classified
statement of financial position. The guidance in ASU No. 2015-17 is effective for financial statements issued for annual periods
beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities
as of the beginning of an interim or annual reporting period. The Company is currently assessing the impact of this ASU on the
Company’s consolidated financial statements.
In
November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flow (Topic 23)
. The amendments of ASU No. 2016-18 require
that a statement of cash flow explain the change during a period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. The guidance of ASU No. 2016-18 is effective for the Company’s
fiscal years beginning after December 15, 2017, and interim reporting periods within annual reporting periods beginning after
December 15, 2019. The Company is currently evaluating the impact the new statement of cash flow guidance will have on its consolidated
financial statements.
The
Company does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have
a material effect on the consolidated financial statements.
NOTE
3 – INVENTORY
Inventory
consists of the following as of December 31:
|
|
2016
|
|
|
2015
|
|
Finished
goods
|
|
$
|
10,827
|
|
|
$
|
-
|
|
Total
inventories
|
|
$
|
10,827
|
|
|
$
|
-
|
|
On
January 5, 2016, the Company was informed by one of its production partners that there were certain technical issues which, together
with other business and regulatory issues, materially impede the formulation of one of its potential products as a commercially
viable product for the consumer health market. The Company, therefore, decided to suspend development of this product line. In
evaluating this triggering event and the diminished utility of the materials used in the production of this potential commercial
product, the Company considered the impact of ASC No. 330,
Accounting for Inventory
, and recognized a loss on impairment
of $958,575 as of December 31, 2015.
As
of December 31, 2016, inventory in the amount of $10,827 consisted of products available for sale and was unrelated to the inventory
impaired as of December 31, 2015.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
4 – PROPERTY AND EQUIPMENT, net
Property
and equipment, net, consists of the following as of December 31:
|
|
2016
|
|
|
2015
|
|
Information
technology equipment
|
|
$
|
31,892
|
|
|
$
|
31,892
|
|
Less
accumulated depreciation
|
|
|
(24,137
|
)
|
|
|
(17,969
|
)
|
Total
property and equipment, net
|
|
$
|
7,755
|
|
|
$
|
13,923
|
|
Depreciation
expense was $6,168 and $6,688 for the years ended December 31, 2016 and 2015, respectively.
During
the year ended December 31, 2015, the Company wrote off $10,161, of fully depreciated property and equipment. There was no effect
on the consolidated statement of operations for the year ended December 31, 2015.
NOTE
5 – INTANGIBLE ASSETS, net
Intangible
assets, net, consists of the following as of December 31:
|
|
2016
|
|
|
2015
|
|
Patents
|
|
$
|
432,985
|
|
|
$
|
432,820
|
|
Less
accumulated amortization
|
|
|
(240,275
|
)
|
|
|
(217,342
|
)
|
|
|
|
192,710
|
|
|
|
215,478
|
|
Patents
pending
|
|
|
238,060
|
|
|
|
209,019
|
|
Total
intangible assets, net
|
|
$
|
430,770
|
|
|
$
|
424,497
|
|
Patents
are amortized straight-line over a period of fifteen years. Amortization expense was $22,933 and $17,070, for the years ended
December 31, 2016 and 2015, respectively.
The
Company has capitalized costs for several patents that are still pending. In those instances, the Company has not recorded any
amortization. The Company will commence amortization when these patents are approved.
The
Company owns 21 issued patents, including 14 in the United States and 7 others in China, India, Japan, and Hong Kong. These patents
will expire during the years of 2023 to 2028, subject to any patent term extensions of the individual patent. The Company has
5 foreign patent applications pending in Europe, Canada, and Brazil.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
6 – STOCKHOLDERS’ DEFICIT
Reverse
acquisition accounting
On
February 7, 2014, Koffee Sub and Pharma completed a reverse acquisition transaction (the “Acquisition”). Concurrent
with this transaction: (i) the Company received aggregate gross cash proceeds of $3,923,100 in exchange for the issuance and sale
of an aggregate 6,276,960 of shares of the Company’s common stock, together with five year warrants to purchase an aggregate
of 6,276,960 shares of the Company’s common stock at $0.625 per share, (ii) the notes issued on January 3, 2014, in the
outstanding principal amount of $2,076,000 and all accrued interest thereon, automatically converted into 3,353,437 shares of
the Company’s common stock upon the reverse merger at $0.625 per share, together with five year warrants to purchase 3,321,600
shares of common stock at $0.625 per share, (iii) the notes issued in 2013, in the outstanding principal amount of $8,489,036
and all accrued interest thereon, automatically converted into 14,446,777 shares of the Company’s common stock upon the
reverse merger at $0.625 per share, together with five year warrants to purchase 14,446,777 shares of common stock at $0.625 per
share, (iv) stock options to purchase 15,290,486 shares of Holdings common stock at $0.07 per share were cancelled and substituted
with stock options to purchase 6,889,555 shares of the Company’s common stock at $0.155 per share, (v) additional stock
options to purchase 20,867,266 shares of the Company’s common stock at $0.625 per share were issued, and (vi) the notes
issued in 2008 and 2009, in the outstanding principal amounts of $55,000 and $500,000, respectively, and all accrued interest
thereon, were repaid in full. The assets and liabilities of Koffee Korner were distributed in accordance with the terms of a spin-off
agreement on the closing date.
The
share exchange transaction was treated as a reverse acquisition, with Holdings and Pharma as the acquirers and Koffee Korner and
Koffee Sub as the acquired parties. Unless the context suggests otherwise, when the Company refers to business and financial information
for periods prior to the consummation of the reverse acquisition, the Company is referring to the business and financial information
of Holdings and Pharma. Under U.S. GAAP guidance ASC 805-40,
Business Combinations – Reverse Acquisitions
, the Acquisition
has been treated as a reverse acquisition with no adjustment to the historical book and tax basis of the Company’s assets
and liabilities.
Preferred
and common stock – post reverse acquisition
After
completion of the reverse merger on February 7, 2014, the Company Amended and Restated its Articles of Incorporation. Under these
amendments, the Company is authorized to issue a total of 400,000,000 shares of common stock and 50,000,000 shares of preferred
stock. Each common stock holder is entitled to one vote. Common stock holders have no conversion rights or liquidation preferences.
None of the preferred stock was issued or outstanding at December 31, 2016 and December 31, 2015. Under the terms of the Company’s
Amended and Restated Articles of Incorporation, the Board of Directors are authorized to determine or alter the rights, preferences,
privileges, and restrictions of the Company’s authorized but unissued shares of preferred stock.
Holdings Merger
On
August 28, 2014, the Company entered into an Agreement and Plan of Merger (the “Holdings Merger Agreement”) with its
principal stockholder, Holdings, pursuant to which Holdings would merge with and into the Company (the “Holdings Merger”).
On November 24, 2015, the Holdings Merger Agreement was amended and restated (the “Amended Holdings Merger Agreement”).
Under the terms of the Amended Holdings Merger Agreement, the shares of common stock, par value $0.001 per share of Holdings and
the shares of all other issued and outstanding capital stock of Holdings that by their terms were convertible or could otherwise
be exchanged for shares of Holdings common stock, would be converted into and exchanged for the Company’s shares of Common
Stock in a ratio of approximately 2.2:1. In addition, the Company would grant Holdings’ option and warrant holders warrants
to purchase the Company’s warrants at the same stock conversion ratio.
On
December 30, 2015, the Company completed its merger with Holdings, pursuant to the Amended Holdings Merger Agreement. At closing,
Holdings merged with and into the Company, with the Company surviving the Holdings Merger. Pursuant to the Amended Holdings Merger
Agreement, there was not any cash consideration exchanged in the Holdings Merger. Upon the closing of the Holdings Merger, the
stockholders of Holdings received 31,597,574 shares and 1,402,426 warrants to purchase shares of common stock, which in aggregate
was 33,000,000 shares. The Company’s 33,000,000 restricted shares of common stock held by Holdings were cancelled upon the
closing of the Holdings Merger. Accordingly, there was not any change to the Company’s fully diluted capitalization due
to the Holdings Merger.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
6 – STOCKHOLDERS’ DEFICIT (continued)
Self-directed
stock issuance
During
the year ended December 31, 2015, the Company sold securities in a self-directed offering in the aggregate amount of $1,806,222
at $0.30 per unit, which included the conversion of the $30,000 note payable and $222 in accrued interest. Each unit consisted
of one share of restricted common stock (6,020,725 shares), two Class D warrants, each to purchase one share of restricted common
stock at $0.10 per share, which expire March 31, 2020, and one Class E warrant to purchase three-fourths of one share of restricted
common stock at $0.1667 per share, which expires March 31, 2020. Warrants issued to date in this offering totaled 16,557,004.
“Most favored nation” rights are available to the purchasers of such units as described in the Subscription Agreement.
During
the year ended December 31, 2016, the Company sold securities in a self-directed offering in the aggregate amount of $1,121,000,
respectively, at $0.08 per unit. Each unit consisted of 1 share of restricted common stock (14,012,500 shares), a five-year warrant
to purchase 1 share of restricted common stock (14,012,500 warrant shares) at $0.08 per share, a five-year warrant to purchase
1 share of restricted common stock (14,012,500 warrant shares) at $0.12 per share, and a five-year warrant to purchase 1 share
of restricted common stock (14,012,500 warrant shares) at $0.16 per share.
Equity
purchase agreement
On
July 13, 2016, the Company entered into an equity purchase agreement (the “EPA”) and a registration rights agreement
with an investor. Pursuant to the terms of the EPA, the Company has the right, but not the obligation, to sell shares of its common
stock to the investor on the terms specified in the EPA. On the date of the EPA, the Company issued 1,500,000 shares to the investor.
The total fair value of this stock on the date of grant was $106,500. These shares were fully vested upon issuance.
Note
conversion
On
January 28, 2015, the Company received a short-term loan of $30,000. The loan accrued interest at the rate of 3% per annum. Principal
and interest were due on April 28, 2015. Interest accrued and expensed on this short-term loan was $222 for the year ended December
31, 2015.
This
note and accrued interest were converted on April 28, 2015, into securities of the Company at $0.30 per unit. Each unit consisted
of one share of restricted common stock (100,739 shares), two Class D warrants, each to purchase one share of restricted common
stock at $0.10 per share, which expire March 31, 2020, and one Class E warrant to purchase three-fourths of one share of restricted
common stock at $0.1667 per share, which expires March 31, 2020. “Most favored nation” rights are available to the
purchaser of such units as described in the Subscription Agreement.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
7 – STOCK GRANTS
Director
stock grants
In
2014, the Company granted its independent directors an aggregate of 776,753 shares of restricted common stock in the Company.
The total fair value of this stock on the date of grant was $706,234. These shares were subject to a risk of forfeiture and vested
quarterly in arrears commencing on June 1, 2014 and were fully vested at the end of one full year.
In
2015, the Company granted its independent directors an aggregate of 458,170 shares of restricted common stock in the Company.
The total fair value of this stock on the date of grant was $116,667. These shares were fully vested upon issuance.
In
2016, the Company granted its independent directors an aggregate of 468,254 shares of restricted common stock in the Company.
The total fair value of this stock on the date of grant was $41,666. These shares were fully vested upon issuance.
The
Company recognizes the expense related to these grants ratably over the requisite service period. Total stock compensation expense
recognized as a result of these grants was $41,666 and $410,931 for the years ended December 31, 2016 and 2015, respectively.
Consultant
stock issuance
During
the year ended December 31, 2015, the Company granted a consultant 100,000 shares of restricted common stock in the Company. Total
expense recognized was $45,000 during the year ended December 31, 2015, based on the total fair value of this stock on the date
of grant.
NOTE
8 – STOCK OPTION PLANS
On
February 7, 2014, the Company adopted the 2014 Equity Compensation Plan. Under this plan, the Company may issue options to purchase
shares of common stock to employees, directors, advisors, and consultants. The aggregate number of shares that may be issued under
this plan is 30,420,148. On April 16, 2015, the majority stockholder of the Company approved an increase in the Company’s
2014 Equity Compensation Plan by 15 million shares.
Under
the terms of the 2014 Equity Compensation Plan and the 2006 Stock Incentive Plan (collectively, the “Plans”), incentive
stock options may be granted to employees at a price per share not less than 100% of the fair market value at date of grant. If
the incentive stock option is granted to a 10% stockholder, then the purchase or exercise price per share shall not be less than
110% of the fair market value per share of common stock on the grant date. Non-statutory stock options and restricted stock may
be granted to employees, directors, advisors, and consultants at a price per share, not less than 100% of the fair market value
at date of grant. Options granted are exercisable, unless specified differently in the grant documents, over a default term of
ten years from the date of grant and generally vest over a period of four years.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
8 – STOCK OPTION PLANS (continued)
A
summary of stock option activity is as follows:
|
|
Options
|
|
|
Weighted
average exercise price
|
|
|
Weighted
average remaining contractual term in years
|
|
|
Aggregate
intrinsic value
|
|
Outstanding
January 1, 2015
|
|
|
27,752,315
|
|
|
$
|
0.51
|
|
|
|
8.02
|
|
|
$
|
1,963,523
|
|
Exercisable
January 1, 2015
|
|
|
26,156,553
|
|
|
$
|
0.50
|
|
|
|
7.95
|
|
|
$
|
1,962,239
|
|
Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
6,456,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(41,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
December 31, 2015
|
|
|
34,167,354
|
|
|
$
|
0.47
|
|
|
|
6.57
|
|
|
$
|
974,066
|
|
Exercisable
December 31, 2015
|
|
|
34,167,354
|
|
|
$
|
0.47
|
|
|
|
6.57
|
|
|
$
|
974,066
|
|
Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
6,156,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,501,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
December 31, 2016
|
|
|
36,821,969
|
|
|
$
|
0.41
|
|
|
|
5.94
|
|
|
$
|
301,273
|
|
Exercisable
December 31, 2016
|
|
|
36,771,969
|
|
|
$
|
0.41
|
|
|
|
5.94
|
|
|
$
|
299,273
|
|
The
aggregate intrinsic value in the table above is before applicable income taxes and represents the excess amount over the exercise
price option recipients would have received if all options had been exercised on December 31, 2016, based on a valuation of the
Company’s stock for that day.
A
summary of the Company’s non-vested options for the year ended December 31, 2016 and 2015, are presented below:
Non-vested
at January 1, 2015
|
|
|
1,595,762
|
|
Granted
|
|
|
6,456,890
|
|
Vested
|
|
|
(8,052,652
|
)
|
Forfeited
|
|
|
-
|
|
Non-vested
at December 31, 2015
|
|
|
-
|
|
Granted
|
|
|
6,156,580
|
|
Vested
|
|
|
(6,106,580
|
)
|
Forfeited
|
|
|
-
|
|
Non-vested
at December 31, 2016
|
|
|
50,000
|
|
As
of December 31, 2016, total unrecognized stock-based compensation expense related to unvested stock options was $3,500, which
is expected to be expensed over the next two-quarters.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
8 – STOCK OPTION PLANS (continued)
Under
ASC Nos. 718 and 505, the Company estimates the fair value of stock options granted on each grant date using the Black-Scholes
option valuation model and recognizes an expense ratably over the requisite service period. The range of fair value assumptions
related to options outstanding were as follows as of December 31:
|
|
2016
|
|
|
2015
|
|
Dividend
yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free
rate
|
|
|
0.12%
- 1.47
|
%
|
|
|
0.12%
- 1.47
|
%
|
Expected
volatility
|
|
|
112%
- 225
|
%
|
|
|
112%
- 170
|
%
|
Expected
term
|
|
|
1.1
- 5.5 years
|
|
|
|
1.1
- 5.5 years
|
|
The
expected volatility was calculated based on the historical volatilities of publicly traded peer companies, determined by the Company,
and the historical volatility of the Company. The risk-free interest rate used was based on the U.S. Treasury constant maturity
rate in effect at the time of grant for the expected term of the stock options to be valued. The expected dividend yield was zero,
as the Company does not anticipate paying a dividend within the relevant timeframe. Due to a lack of historical information needed
to estimate the Company’s expected term, it was estimated using the simplified method allowed under ASC Nos. 718 and 505.
In calculating the number of options issued in lieu of pay during the year ended December 31, 2016, the Company used assumptions
comparable to December 31, 2015, with a 20-day weighted average stock price.
As
part of the requirements of ASC Nos. 718 and 505, the Company is required to estimate potential forfeitures of stock grants and
adjust stock based compensation expense accordingly. The estimate of forfeitures will be adjusted over the requisite service period
to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures
will be recognized in the period of change and will also impact the amount of stock based compensation expenses to be recognized
in future periods.
The
Company recognized $376,896 and $1,413,552 in stock based compensation expense related to options during the years ended December
31, 2016 and 2015, respectively. Of these amounts, $227,784 and $830,545 were related to 3,796,385 and 4,473,225 options issued
to employees in lieu of salaries accrued for services during the years ended December 31, 2016 and 2015, respectively. $66,445
and $211,694 were related to 1,107,417 and 1,131,702 options issued to consultants in lieu of fees accrued for services during
the years ended December 31, 2016 and 2015, respectively. $3,500 and $0 were related to 50,000 and 0 vested options issued to
a consultant as compensation for services during the years ended December 31, 2016 and 2015, respectively. $79,167 and $167,885
were related to 1,152,778 and 851,963 options issued to directors as compensation for services during the years ended December
31, 2016 and 2015, respectively. $0 and $199,468 were related to stock options issued in prior years that vested during the years
ended December 31, 2016 and 2015, respectively. $0 and $3,960 were related to stock options exercised during the years ended December
31, 2016 and 2015, respectively.
Option
exercise
On
October 26, 2015, the Company issued 25,556 shares of common stock in the Company to a consultant in connection with the cashless
exercise of a stock option for 41,851 shares of common stock at $0.155 per share with 16,295 shares of common stock withheld with
an aggregate fair market value equal to the aggregate exercise price.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
9 – WARRANTS
The
following is a summary of the Company’s warrant activity:
|
|
Warrants
|
|
|
Weighted average exercise price
|
|
|
Weighted average remaining contractual term in years
|
|
|
Aggregate intrinsic value
|
|
Outstanding January 1, 2015
|
|
|
28,435,782
|
|
|
$
|
0.64
|
|
|
|
4.07
|
|
|
$
|
-
|
|
Exercisable January 1, 2015
|
|
|
28,435,782
|
|
|
$
|
0.64
|
|
|
|
4.07
|
|
|
$
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
18,568,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2015
|
|
|
47,003,962
|
|
|
$
|
0.46
|
|
|
|
3.49
|
|
|
$
|
2,579,541
|
|
Exercisable December 31, 2015
|
|
|
47,003,962
|
|
|
$
|
0.46
|
|
|
|
3.49
|
|
|
$
|
2,579,541
|
|
Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
42,037,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(676,426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2016
|
|
|
88,365,036
|
|
|
$
|
0.30
|
|
|
|
3.50
|
|
|
$
|
543,770
|
|
Exercisable December 31, 2016
|
|
|
88,365,036
|
|
|
$
|
0.30
|
|
|
|
3.50
|
|
|
$
|
543,770
|
|
Under
ASC Nos. 718 and 505, the Company estimates the fair value of warrants granted on each grant date using the Black-Scholes option
valuation model. The fair value of warrants issued with debt is recorded as a debt discount and amortized over the life of the
debt. The range of fair value assumptions related to warrants outstanding were as follows as of December 31:
|
|
2016
|
|
|
2015
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free rate
|
|
|
0.12% - 0.86
|
%
|
|
|
0.12% - 0.66
|
%
|
Expected volatility
|
|
|
102% - 159
|
%
|
|
|
112% - 159
|
%
|
Expected term
|
|
|
1.0 - 2.5 years
|
|
|
|
1.0 - 2.5 years
|
|
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
9 – WARRANTS (continued)
The
expected volatility was calculated based on the historical volatilities of publicly traded peer companies, determined by the Company.
The risk-free interest rate used was based on the U.S. Treasury constant maturity rate in effect at the time of grant for the
expected term of the warrants to be valued. The expected dividend yield was zero, as the Company does not anticipate paying a
dividend within the relevant timeframe. The expected warrant term is the life of the warrant.
The
Company recognized $0 and $48,700 in stock based compensation expense related to warrants for the years ended December 31, 2016
and 2015, respectively.
Warrant
expiration
During
the year ended December 31, 2016, warrants to purchase an aggregate of 676,426 shares of restricted common stock expired.
NOTE
10 – RELATED PARTY TRANSACTIONS
Executive
chairman agreement
As
part of an executive chairman agreement, a director provided services to the Company. This agreement was amended on April 1, 2015.
Under the terms of this amendment, the director received $37,500 in equity instruments issued quarterly in arrears as compensation.
Effective April 1, 2016, the director agreed to suspend any additional equity compensation, until otherwise agreed by the Company.
Effective August 12, 2016, the Company accepted the request for a leave of absence and resignation by the director as Executive
Chairman and member of the Board of Directors.
The
Company incurred $37,500 and $167,885 in stock based compensation to this director during the years ended December 31, 2016 and
2015, respectively. The Company incurred $0 and $9,230 in consulting fees to this director during the years ended December 31,
2016 and 2015, respectively.
Amounts
payable to this director was $293,546 as of December 31, 2016 and 2015.
NOTE
11 – INCOME TAXES
The
Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities
are determined based upon the difference between the financial statement carrying amounts and the tax basis of assets and liabilities
and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected
to be reversed.
The
income tax provision (benefit) is composed of the following as of December 31:
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
Federal
|
|
|
|
State
|
|
|
|
Total
|
|
|
|
Federal
|
|
|
|
State
|
|
|
|
Total
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
11 – INCOME TAXES (continued)
The
Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities
are determined based upon the difference between the financial statement carrying amounts and the tax basis of assets and liabilities
and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected
to be reversed.
The
following table presents a reconciliation of the statutory Federal rate and the Company’s effective tax rate for the years
ended December 31:
|
|
2016
|
|
|
2015
|
|
Tax provision (benefit) at Federal statutory rate
|
|
|
(34.00
|
)%
|
|
|
(34.00
|
)%
|
Accrued compensation
|
|
|
0.89
|
%
|
|
|
(0.70
|
)%
|
Stock based compensation
|
|
|
10.01
|
%
|
|
|
15.32
|
%
|
Depreciation and amortization
|
|
|
0.36
|
%
|
|
|
0.22
|
%
|
Other
|
|
|
0.09
|
%
|
|
|
0.06
|
%
|
Change in valuation allowance
|
|
|
22.65
|
%
|
|
|
19.10
|
%
|
Effective tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The
effective tax rate for the years ended December 31, 2016 and 2015, differs from the statutory rate of 34% as a result of the state
taxes (net of Federal benefit) and permanent differences.
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The following table presents significant components of the Company’s
deferred tax assets and liabilities for the years ended December 31:
|
|
2016
|
|
|
2015
|
|
DEFERRED TAX ASSETS:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
12,013,384
|
|
|
$
|
11,532,857
|
|
Accrued compensation
|
|
|
1,535,184
|
|
|
|
1,485,827
|
|
Stock based compensation
|
|
|
200,700
|
|
|
|
733,206
|
|
Credit carryforwards
|
|
|
100,318
|
|
|
|
106,856
|
|
Gross deferred tax assets
|
|
|
13,849,586
|
|
|
|
13,858,746
|
|
Less valuation allowance
|
|
|
(13,761,683
|
)
|
|
|
(13,768,801
|
)
|
Net deferred tax assets
|
|
|
87,903
|
|
|
|
89,945
|
|
DEFERRED TAX LIABILITIES:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(87,903
|
)
|
|
|
(89,945
|
)
|
Gross deferred tax liabilities
|
|
|
(87,903
|
)
|
|
|
(89,945
|
)
|
NET DEFERRED TAX ASSETS
|
|
$
|
-
|
|
|
$
|
-
|
|
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
11 – INCOME TAXES (continued)
As
of December 31, 2016, the Company had a Federal net operating loss carryforward of $31,428,904. The net operating loss carryforward
expires at various dates beginning in 2026 if not utilized. In addition, the Company had a net operating loss carryforward for
Hawaii income tax purposes of $25,880,354 as of December 31, 2016, which expires at various dates beginning in 2026 if not utilized.
These amounts differ from the Company’s accumulated deficit due to permanent and temporary tax differences.
The
Company’s valuation allowance was primarily related to the operating losses. The valuation allowance is determined in accordance
with the provisions of ASC No. 740,
Income Taxes
, which requires an assessment of both negative and positive evidence when
measuring the need for a valuation allowance. Based on the available objective evidence and the Company’s history of losses,
management provides no assurance that the net deferred tax assets will be realized. As of December 31, 2016 and 2015, the Company
has applied a valuation allowance against its deferred tax assets net of the expected income from the reversal of the deferred
tax liabilities.
The
Company is subject to taxation in the United States and two state jurisdictions. The preparation of tax returns requires management
to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid
by the Company. Management, in consultation with its tax advisors, files its tax returns based on interpretations that are believed
to be reasonable under the circumstances. The income tax returns, however, are subject to routine reviews by the various taxing
authorities. As part of these reviews, a taxing authority may disagree with respect to the tax positions taken by management (“uncertain
tax positions”) and therefore may require the Company to pay additional taxes.
Management
evaluates the requirement for additional tax accruals, including interest and penalties, which the Company could incur as a result
of the ultimate resolution of its uncertain tax positions. Management reviews and updates the accrual for uncertain tax positions
as more definitive information becomes available from taxing authorities, completion of tax audits, expiration of statute of limitations,
or upon occurrence of other events.
As
of December 31, 2016 and 2015, there was no liability for income tax associated with unrecognized tax benefits. The Company recognizes
accrued interest related to unrecognized tax benefits as well as any related penalties in interest income or expense in its consolidated
statements of operations, which is consistent with the recognition of these items in prior reporting periods.
The
federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally
for three years after they were filed.
The
Company received a refundable tax credit of $47,802 from the state of Hawaii during the year ended December 31, 2016. This amount
is recorded as other income in the consolidated statement of operations.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
12 – BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
The
following table sets forth the computation of the Company’s basic and diluted net income (loss) per share for the:
|
|
Year ended December 31, 2016
|
|
|
|
Net Loss
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per share
amount
|
|
Basic loss per share
|
|
$
|
(1,783,705
|
)
|
|
|
76,227,524
|
|
|
$
|
(0.02
|
)
|
Effect of dilutive securities—Common stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted loss per share
|
|
$
|
(1,783,705
|
)
|
|
|
76,227,524
|
|
|
$
|
(0.02
|
)
|
|
|
Year ended December 31, 2015
|
|
|
|
Net Loss
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per share
amount
|
|
Basic loss per share
|
|
$
|
(4,257,875
|
)
|
|
|
66,873,761
|
|
|
$
|
(0.06
|
)
|
Effect of dilutive securities—Common stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted loss per share
|
|
$
|
(4,257,875
|
)
|
|
|
66,873,761
|
|
|
$
|
(0.06
|
)
|
The
following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share for
the periods presented because including them would have been antidilutive for the years ended December 31:
|
|
2016
|
|
|
2015
|
|
Common stock options
|
|
|
36,821,969
|
|
|
|
34,167,354
|
|
Common stock warrants
|
|
|
88,365,036
|
|
|
|
47,003,962
|
|
Total common stock equivalents
|
|
|
125,187,005
|
|
|
|
81,171,316
|
|
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
13 – LEASES
Hawaii
Research Center
The
Company entered into a lease for laboratory and office space on May 9, 2006. This lease was amended on September 7, 2011, and
October 30, 2012. This lease expired on October 31, 2014, after which the terms converted to month-to-month. The Company vacated
the space in February 2015. Total rent expense under this agreement as amended was $3,437 and $12,718 for the years ended December
31, 2016 and 2015, respectively. The $3,437 of rent expense for the year ended December 31, 2016, was related to common area maintenance
reconciliation.
Manoa
Innovation Center
The
Company entered into an automatically renewable month-to-month lease for office space on August 13, 2010. Under the terms of this
lease, the Company must provide a written notice 45 days prior to vacating the premises. Total rent expense under this agreement
as amended was $32,049 and $31,479, for the years ended December 31, 2016 and 2015, respectively.
NOTE
14 – COMMITMENTS
Patent
payable
As
part of the formation of the Company, a patent license was transferred to the Company. The original license began in 2006. Under
the terms of the license the Company agreed to pay $10,000 per year through 2015 and royalties of 2% on any revenues resulting
from the license. There were no revenues generated by this license during the years ended December 31, 2016 and 2015. The remaining
obligation of $20,000 as of December 31, 2016 and 2015, is recorded as a part of accounts payable on the consolidated balance
sheets. The license expired in February 2016.
Employee
settlement
As
of December 31, 2016 and 2015, the Company owed a former employee a severance settlement payable in the amount of $50,000 for
accrued vacation benefits. As part of the severance settlement, a stock option previously granted to the former employee was fully
vested and extended.
BASF
agreement and license
In
November 2006, the Company entered into a joint development and supply agreement with BASF SE (“BASF”). Under the
agreement, the Company granted BASF an exclusive world-wide license to the Company’s rights related to the development and
commercialization of Astaxanthin consumer health products; the Company retains all rights related to Astaxanthin pharmaceutical
products. The Company is to receive specified royalties based on future net sales of such Astaxanthin consumer health products.
No royalties were realized from this agreement during the years ended December 31, 2016 and 2015.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
14 – COMMITMENTS (continued)
Capsugel
agreement
On
August 18, 2014, the Company entered into a collaboration agreement with Capsugel US, LLC (“Capsugel”) for the joint
commercial development of Astaxanthin products (“Capsugel Astaxanthin Products”) for the consumer health market that
contain nature-identical synthetic Astaxanthin and use Capsugel’s proprietary formulation technology. The agreement provides
for the parties to jointly administer activities under a product development plan that will include identifying at least one mutually
acceptable third party marketer who will further develop, market and distribute Capsugel Astaxanthin Products. Capsugel will share
revenues with the Company based on net sales of products that are developed under the collaboration. No revenues were realized
from this agreement during the three and years ended December 31, 2016 and 2015. In January 2016, the Company suspended development
of a Capsugel Astaxanthin Product, ASTX-1F, based on certain technical issues which, together with other business and regulatory
issues, materially impeded the formulation of ASTX-1F as a commercially viable product for the consumer health market.
NOTE
15 – SUBSEQUENT EVENTS
The
Company evaluated its December 31, 2016, consolidated financial statements for subsequent events through March 30, 2017,
the date the consolidated financial statements were available to be issued and noted the following non-recognized events for disclosure.
Stock
issuance
During the first quarter of
2017, the Company sold securities in a self-directed offering in the aggregate amount of $179,000 at $0.08 per unit. Each
unit consisted of 1 share of restricted common stock (2,237,500 shares), a five-year warrant to purchase 1 share of restricted
common stock (2,237,500 warrant shares) at $0.08 per share, a five-year warrant to purchase 1 share of restricted common stock
(2,237,500 warrant shares) at $0.12 per share, and a five-year warrant to purchase 1 share of restricted common stock (2,237,500
warrant shares) at $0.16 per share.
On March 7, 2017, the Company sold
567,644 shares of common stock at $0.1057 per share for $60,000, pursuant to the previously reported equity purchase agreement.
On March 27, 2017, the Company
sold securities in a self-directed offering in the aggregate amount of $50,000 at $0.12 per unit. Each unit consisted of 1 share
of restricted common stock (416,666 shares) and a five-year warrant to purchase 1 share of restricted common stock (416,666 warrant
shares) at $0.12 per share.
***
Supplemental
Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Exchange Act by Registrants Which Have Not Registered
Securities Pursuant to Section 12 of the Exchange Act
No
annual report to security holders covering the Company’s last fiscal year has been sent as of the date of this report. No
proxy statement, form of proxy, or other proxy soliciting material relating to the Company’s last fiscal year has been sent
to any of the Company’s security holders with respect to any annual or other meeting of security holders. If such report
or proxy material is furnished to security holders subsequent to the filing of this Annual Report on Form 10-K, the Company will
furnish copies of such material to the Commission at the time it is sent to security holders.