Cardax,
Inc., and Subsidiary
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For
the three-months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(450,836
|
)
|
|
$
|
(677,746
|
)
|
Adjustments to reconcile
net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
7,401
|
|
|
|
7,748
|
|
Stock based compensation
|
|
|
39,250
|
|
|
|
87,500
|
|
Changes in assets
and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(17,378
|
)
|
|
|
-
|
|
Inventory
|
|
|
(30,907
|
)
|
|
|
-
|
|
Deposits and other
assets
|
|
|
32,219
|
|
|
|
(587
|
)
|
Prepaid expenses
|
|
|
2,318
|
|
|
|
(21,584
|
)
|
Accrued payroll
and payroll related expenses
|
|
|
18,410
|
|
|
|
242,033
|
|
Accounts
payable and accrued expenses
|
|
|
56,234
|
|
|
|
113,599
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(343,289
|
)
|
|
|
(249,037
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Increase
in patents
|
|
|
(6,463
|
)
|
|
|
(11,711
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(6,463
|
)
|
|
|
(11,711
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from the issuance of common stock
|
|
|
289,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash provided
by financing activities
|
|
|
289,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN
CASH
|
|
|
(60,752
|
)
|
|
|
(260,748
|
)
|
|
|
|
|
|
|
|
|
|
CASH AT THE BEGINNING
OF THE PERIOD
|
|
|
158,433
|
|
|
|
323,410
|
|
|
|
|
|
|
|
|
|
|
CASH AT THE END
OF THE PERIOD
|
|
$
|
97,681
|
|
|
$
|
62,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of accrued
payroll and payroll related expenses into stock options
|
|
$
|
-
|
|
|
$
|
227,784
|
|
Conversion of accounts
payable into stock options
|
|
$
|
-
|
|
|
$
|
66,445
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
707
|
|
|
$
|
538
|
|
Cash paid for income
taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these Condensed Consolidated Financial Statements
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
NOTE
1 – COMPANY BACKGROUND
Cardax
Pharmaceuticals, Inc. (“Holdings”) was incorporated in the State of Delaware on March 23, 2006.
Holdings
was formed for the purpose of developing a platform of proprietary, exceptionally safe, small molecule compounds for large unmet
medical needs where oxidative stress and inflammation play important causative roles. Holdings’ platform has application
in arthritis, metabolic syndrome, liver disease, and cardiovascular disease, as well as macular degeneration and prostate disease.
Holdings’ current primary focus is on the development of astaxanthin technologies. Astaxanthin is a naturally occurring
marine compound that has robust anti-oxidant and anti-inflammatory activity.
In
May of 2013, Holdings formed a 100% owned subsidiary company called Cardax Pharma, Inc. (“Pharma”). Pharma was formed
to maintain Holdings’ operations going forward, leaving Holdings as an investment holding company.
On
November 29, 2013, Holdings entered into a definitive merger agreement (“Merger Agreement”) with Koffee Korner Inc.,
a Delaware corporation (“Koffee Korner”) (OTCQB:KOFF), and its wholly owned subsidiary (“Koffee Sub”),
pursuant to which, among other matters and subject to the conditions set forth in such Merger Agreement, Koffee Sub would merge
with and into Pharma. In connection with such merger agreement and related agreements, upon the consummation of such merger, Pharma
would become a wholly owned subsidiary of Koffee Korner and Koffee Korner would issue shares of its common stock to Holdings.
At the effective time of such merger, Holdings would own a majority of the shares of the then issued and outstanding shares of
common stock of Koffee Korner.
On
February 7, 2014, Holdings completed its merger with Koffee Korner, which was renamed to Cardax, Inc. (the “Company”)
(OTCQB:CDXI). Concurrent with the merger: (i) the Company received aggregate gross cash proceeds of $3,923,100 in exchange for
the issuance and sale of an aggregate 6,276,960 of shares of the Company’s common stock, together with five year warrants
to purchase an aggregate of 6,276,960 shares of the Company’s common stock at $0.625 per share, (ii) the notes issued on
January 3, 2014, in the outstanding principal amount of $2,076,000 and all accrued interest thereon, automatically converted into
3,353,437 shares of the Company’s common stock upon the reverse merger at $0.625 per share, together with five year warrants
to purchase 3,321,600 shares of common stock at $0.625 per share, (iii) the notes issued in 2013, in the outstanding principal
amount of $8,489,036 and all accrued interest thereon, automatically converted into 14,446,777 shares of the Company’s common
stock upon the reverse merger at $0.625 per share, together with five year warrants to purchase 14,446,777 shares of common stock
at $0.625 per share, (iv) stock options to purchase 15,290,486 shares of Holdings common stock at $0.07 per share were cancelled
and substituted with stock options to purchase 6,889,555 shares of the Company’s common stock at $0.155 per share, (v) additional
stock options to purchase 20,867,266 shares of the Company’s common stock at $0.625 per share were issued, and (vi) the
notes issued in 2008 and 2009, in the outstanding principal amounts of $55,000 and $500,000, respectively, and all accrued interest
thereon, were repaid in full. The assets and liabilities of Koffee Korner were distributed in accordance with the terms of a spin-off
agreement on the closing date.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
1 – COMPANY BACKGROUND (continued)
The
share exchange transaction was treated as a reverse acquisition, with Holdings and Pharma as the acquirers and Koffee Korner and
Koffee Sub as the acquired parties. Unless the context suggests otherwise, when the Company refers to business and financial information
for periods prior to the consummation of the reverse acquisition, the Company is referring to the business and financial information
of Holdings and Pharma. Under accounting principles generally accepted in the United States of America (“U.S. GAAP”)
guidance Accounting Standards Codification (“ASC”) No. 805-40,
Business Combinations – Reverse Acquisitions
,
the Acquisition has been treated as a reverse acquisition with no adjustment to the historical book and tax basis of the Company’s
assets and liabilities.
On
August 28, 2014, the Company entered into an Agreement and Plan of Merger (the “Holdings Merger Agreement”) with its
principal stockholder, Holdings, pursuant to which Holdings would merge with and into the Company (the “Holdings Merger”).
On September 18, 2015, the Company filed a Form S-4 with the SEC in contemplation of the Holdings Merger. There would not be any
cash consideration exchanged in the Holdings Merger. Upon the closing of the Holdings Merger, the stockholders of Holdings would
receive an aggregate number of shares and warrants to purchase shares of the Company’s common stock equal to the aggregate
number of shares of the Company’s common stock that were held by Holdings on the date of the closing of the Holdings Merger.
The Company’s restricted shares of common stock held by Holdings would be cancelled upon the closing of the Holdings Merger.
Accordingly, there would not be not any change to the Company’s fully diluted capitalization due to the Holdings Merger.
On
November 24, 2015, the Holdings Merger Agreement was amended and restated (the “Amended Holdings Merger Agreement”).
Under the terms of Amended Holdings Merger Agreement, the shares of common stock, par value $0.001 per share of Holdings and the
shares of all other issued and outstanding capital stock of Holdings that by their terms were convertible or could otherwise be
exchanged for shares of Holdings common stock, would be converted into and exchanged for the Company’s shares of Common
Stock in a ratio of approximately 2.2:1. In addition, the Company would grant Holdings’ option and warrant holders warrants
to purchase the Company’s warrants at the same stock conversion ratio. On November 24, 2015, the Company filed an amendment
to the Form S-4 with the SEC and on 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, 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 CONDENSED 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 $450,836 and $677,746 for the three-months ended March 31, 2017 and 2016, respectively.
The Company has incurred losses since inception resulting in an accumulated deficit of $56,384,698 as of March 31, 2017, 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 $289,000 raised
in the three-months ended March 31, 2017 and the $190,000 raised in April and May 2017 (through May 8, 2017), 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.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and
regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. In the opinion
of the Company’s management, the accompanying condensed consolidated financial statements reflect all adjustments, consisting
of normal, recurring adjustments, considered necessary for a fair presentation of the results for the interim periods ended March
31, 2017 and 2016. Although management believes that the disclosures in these unaudited condensed consolidated financial statements
are adequate to make the information presented not misleading, certain information and footnote disclosures normally included
in financial statements that have been prepared in accordance U.S. GAAP have been condensed or omitted pursuant to the rules and
regulations of the SEC.
The
condensed consolidated financial statements 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., on December 30, 2015. All
significant intercompany balances and transactions have been eliminated in consolidation.
Accounts
receivable
Accounts
receivable of $17,378 and $0 as of March 31, 2017 and December 31, 2016, respectively, consists 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 was no allowance as of March 31, 2017 and December
31, 2016.
Inventory
Inventory
is stated at the lower of cost or market. 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 March
31, 2017 and December 31, 2016.
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. 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.
Cost
of Goods Sold
Cost
of goods sold is comprised of costs to manufacture or acquire products sold to customers, and 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. Shipping and handling costs were $2,824 and $0 for the three-months ended
March 31, 2017 and 2016, respectively.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Sales
and use tax
Revenues,
as presented on the accompanying income statement, include taxes collected from customers and remitted to governmental authorities.
Such taxes were $1,218 and $0 for the three-months ended March 31, 2017 and 2016, respectively.
Recent
accounting pronouncements
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-02,
Leases
. This ASU requires management to recognize lease assets and lease liabilities for all leases. ASU No.
2016-02 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between
finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital
leases and operating leases in the previous 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.
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:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Finished
goods
|
|
$
|
41,734
|
|
|
$
|
10,827
|
|
Total inventories
|
|
$
|
41,734
|
|
|
$
|
10,827
|
|
NOTE
4 – PROPERTY AND EQUIPMENT, net
Property
and equipment, net, consists of the following as of:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Information
technology equipment
|
|
$
|
31,892
|
|
|
$
|
31,892
|
|
Less
accumulated depreciation
|
|
|
(25,646
|
)
|
|
|
(24,137
|
)
|
Total
property and equipment, net
|
|
$
|
6,246
|
|
|
$
|
7,755
|
|
Depreciation
expense was $1,509 and $1,606 for the three-months ended March 31, 2017 and 2016, respectively.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
5 – INTANGIBLE ASSETS, net
Intangible
assets, net, consists of the following as of:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Patents
|
|
$
|
432,985
|
|
|
$
|
432,985
|
|
Less accumulated
amortization
|
|
|
(246,167
|
)
|
|
|
(240,275
|
)
|
|
|
|
186,818
|
|
|
|
192,710
|
|
Patents pending
|
|
|
244,523
|
|
|
|
238,060
|
|
Total intangible
assets, net
|
|
$
|
431,341
|
|
|
$
|
430,770
|
|
Patents
are amortized straight-line over a period of fifteen years. Amortization expense was $5,892 and $6,142, for the three-months ended
March 31, 2017 and 2016, 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.
NOTE
6 – STOCKHOLDERS’ DEFICIT
Self-directed
stock issuance
During
the year ended December 31, 2016, the Company sold securities in a self-directed offering in the aggregate amount of $1,121,000
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.
During
the three-months ended March 31, 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 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.
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.
During
the three-months ended March 31, 2017, the Company sold 567,644 shares of common stock for $60,000, pursuant to the EPA.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
7 – STOCK GRANTS
Director
stock grants
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.
During
the three-months ended March 31, 2017, the Company granted its independent directors an aggregate of 156,250 shares of restricted
common stock in the Company. The total fair value of this stock on the date of grant was $25,000. 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 $25,000 for the three-months ended March 31, 2017 and 2016.
NOTE
8 – STOCK OPTION PLANS
On
February 7, 2014, the Company adopted the 2014 Equity Compensation Plan. Under this plan, the Company may issue options to purchase
shares of common stock to employees, directors, advisors, and consultants. The aggregate number of shares that may be issued under
this plan is 30,420,148. On April 16, 2015, the majority stockholder of the Company approved an increase in the Company’s
2014 Equity Compensation Plan by 15 million shares.
Under
the terms of the 2014 Equity Compensation Plan and the 2006 Stock Incentive Plan (collectively, the “Plans”), incentive
stock options may be granted to employees at a price per share not less than 100% of the fair market value at date of grant. If
the incentive stock option is granted to a 10% stockholder, then the purchase or exercise price per share shall not be less than
110% of the fair market value per share of common stock on the grant date. Non-statutory stock options and restricted stock may
be granted to employees, directors, advisors, and consultants at a price per share, not less than 100% of the fair market value
at date of grant. Options granted are exercisable, unless specified differently in the grant documents, over a default term of
ten years from the date of grant and generally vest over a period of four years.
A
summary of stock option activity is as follows:
|
|
Options
|
|
|
Weighted
average exercise price
|
|
|
Weighted
average remaining contractual term in years
|
|
|
Aggregate
intrinsic value
|
|
Outstanding January
1, 2016
|
|
|
34,167,354
|
|
|
$
|
0.47
|
|
|
|
6.57
|
|
|
$
|
974,066
|
|
Exercisable January 1, 2016
|
|
|
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
|
|
Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
78,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding March 31, 2017
|
|
|
36,900,094
|
|
|
$
|
0.41
|
|
|
|
5.69
|
|
|
$
|
910,360
|
|
Exercisable March 31, 2017
|
|
|
36,875,094
|
|
|
$
|
0.41
|
|
|
|
5.69
|
|
|
$
|
907,485
|
|
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
8 – STOCK OPTION PLANS (continued)
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 March 31, 2017, 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 the three-months ended March 31, 2017,
are presented below:
Non-vested at January 1, 2016
|
|
|
-
|
|
Granted
|
|
|
6,156,580
|
|
Vested
|
|
|
(6,106,580
|
)
|
Forfeited
|
|
|
-
|
|
Non-vested at December 31, 2016
|
|
|
50,000
|
|
Granted
|
|
|
78,125
|
|
Vested
|
|
|
(103,125
|
)
|
Forfeited
|
|
|
-
|
|
Non-vested at March 31, 2017
|
|
|
25,000
|
|
As
of March 31, 2017, total unrecognized stock-based compensation expense related to unvested stock options was $1,750, which is
expected to be expensed over the next quarter.
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:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free rate
|
|
|
0.12%
- 1.47
|
%
|
|
|
0.12%
- 1.47
|
%
|
Expected volatility
|
|
|
112%
- 231
|
%
|
|
|
112%
- 225
|
%
|
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. In calculating the number
of options issued in lieu of pay during the three-months ended March 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.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
8 – STOCK OPTION PLANS (continued)
The
Company recognized $14,250 and $356,729 in stock based compensation expense related to options during the three-months ended March
31, 2017 and 2016, respectively. Of these amounts, $0 and $227,784 were related to 0 and 3,796,385 options issued to employees
in lieu of salaries accrued for services during the three-months ended March 31, 2017 and 2016, respectively; $0 and $66,445 were
related to 0 and 1,107,417 options issued to consultants in lieu of fees accrued for services during the three-months ended March
31, 2017 and 2016, respectively; $1,750 and $0 were related to 25,000 and 0 vested options issued to a consultant as compensation
for services during the three-months ended March 31, 2017 and 2016, respectively; and $12,500 and $62,500 were related to 78,125
and 1,041,667 options issued to directors as compensation for services during the three-months ended March 31, 2017 and 2016,
respectively.
NOTE
9 – WARRANTS
The
following is a summary of the Company’s warrant activity:
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
remaining
contractual
|
|
|
Aggregate
intrinsic
|
|
|
|
Warrants
|
|
|
exercise
price
|
|
|
term
in years
|
|
|
value
|
|
Outstanding
January 1, 2016
|
|
|
47,003,962
|
|
|
$
|
0.46
|
|
|
|
3.49
|
|
|
$
|
2,579,541
|
|
Exercisable January
1, 2016
|
|
|
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
|
|
Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
7,129,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(289,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding March
31, 2017
|
|
|
95,205,057
|
|
|
$
|
0.28
|
|
|
|
3.38
|
|
|
$
|
4,329,366
|
|
Exercisable March
31, 2017
|
|
|
95,205,057
|
|
|
$
|
0.28
|
|
|
|
3.38
|
|
|
$
|
4,329,366
|
|
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
9 – WARRANTS (continued)
The
Company estimates the fair value of warrants granted on each grant date using the Black-Scholes option valuation model. The 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:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free rate
|
|
|
0.12%
- 0.86
|
%
|
|
|
0.12%
- 0.86
|
%
|
Expected volatility
|
|
|
102%
- 159
|
%
|
|
|
102%
- 159
|
%
|
Expected term
|
|
|
1.0
- 2.5 years
|
|
|
|
1.0
- 2.5 years
|
|
The
expected volatility was calculated based on the historical volatilities of publicly traded peer companies, determined by the Company.
The risk-free interest rate used was based on the U.S. Treasury constant maturity rate in effect at the time of grant for the
expected term of the warrants to be valued. The expected dividend yield was zero, as the Company does not anticipate paying a
dividend within the relevant timeframe. The expected warrant term is the life of the warrant.
The
Company did not recognize any in stock based compensation expense related to warrants for the three-months ended March 31, 2017
and 2016, respectively.
Warrant
expiration
During
the three-months ended March 31, 2017, warrants to purchase an aggregate of 289,145 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 $0 and $37,500 in stock based compensation to this director during the three-months ended March 31, 2017 and
2016, respectively.
Amounts
payable to this director was $293,546 as of March 31, 2017 and December 31, 2016.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
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
effective tax rate for the three months ended March 31, 2017 and 2016, differs from the statutory rate of 34% as a result of the
state taxes (net of Federal benefit) and permanent 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 March 31, 2017 and 2016, 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 March 31, 2017 and 2016, 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.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
12 – BASIC AND DILUTED NET LOSS PER SHARE
The
following table sets forth the computation of the Company’s basic and diluted net loss per share for the:
|
|
Three-months
ended March 31, 2017
|
|
|
|
(Unaudited)
|
|
|
|
Net
Loss
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per
share
amount
|
|
Basic loss per share
|
|
$
|
(450,836
|
)
|
|
|
86,491,377
|
|
|
$
|
(0.01
|
)
|
Effect of dilutive
securities—Common stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted loss per share
|
|
$
|
(450,836
|
)
|
|
|
86,491,377
|
|
|
$
|
(0.01
|
)
|
|
|
Three-months
ended March 31, 2016
|
|
|
|
(Unaudited)
|
|
|
|
Net
Loss
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per
share
amount
|
|
Basic loss per share
|
|
$
|
(677,746
|
)
|
|
|
69,087,955
|
|
|
$
|
(0.01
|
)
|
Effect of dilutive
securities—Common stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted loss per share
|
|
$
|
(677,746
|
)
|
|
|
69,087,955
|
|
|
$
|
(0.01
|
)
|
The
following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share for
the periods presented because including them would have been antidilutive for the periods ended:
|
|
March
31, 2017
|
|
|
March
31, 2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Common stock options
|
|
|
36,900,094
|
|
|
|
40,112,823
|
|
Common stock
warrants
|
|
|
95,205,057
|
|
|
|
46,413,374
|
|
Total common
stock equivalents
|
|
|
132,105,151
|
|
|
|
86,526,197
|
|
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
13 – LEASES
Manoa
Innovation Center
The
Company entered into an automatically renewable month-to-month lease for office space on August 13, 2010. Under the terms of this
lease, the Company must provide a written notice 45 days prior to vacating the premises. Total rent expense under this agreement
as amended was $7,929 and $7,927, for the three-months ended March 31, 2017 and 2016, respectively.
NOTE
14 – SUBSEQUENT EVENTS
The Company evaluated its March
31, 2017, condensed consolidated financial statements for subsequent events through May 12, 2017, the date the consolidated
financial statements were available to be issued and noted the following non-recognized events for disclosure.
Stock
issuance
In
April and May 2017 (through May 8, 2017), the Company sold securities in a self-directed offering in the aggregate amount
of $190,000 at $0.12 per unit. Each unit consisted of 1 share of restricted common stock (1,583,331 shares) and
a five-year warrant to purchase 1 share of restricted common stock (1,583,331 warrant shares) at $0.12 per share.
On
April 10, 2017, the Company granted 100,000 shares of restricted common stock to a service provider. These shares are subject
to a risk of forfeiture and vest quarterly in arrears commencing on April 1, 2017.
On
May 3, 2017, the Company settled a payable in the amount of $44,700 with a previously engaged broker dealer through the issuance
of securities at $0.08 per unit. Each unit consisted of 1 share of restricted common stock (558,750 shares), a five-year warrant
to purchase 1 share of restricted common stock (558,750 warrant shares) at $0.08 per share, a five-year warrant to purchase 1
share of restricted common stock (558,750 warrant shares) at $0.12 per share, and a five-year warrant to purchase 1 share of restricted
common stock (558,750 warrant shares) at $0.16 per share.
***