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., 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
Hawaii Biotech, Inc., in exchange for the assets and liabilities contributed to Holdings. The above shares were then distributed
by Hawaii Biotech, Inc. 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.
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 $4,257,875 and $16,994,625 for the years ended December 31, 2015 and 2014, respectively.
The Company has incurred losses since inception resulting in an accumulated deficit of $54,150,157 as of December 31, 2015, and
has had negative cash flows from operating activities since inception. The Company 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.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
1 – COMPANY BACKGROUND (continued)
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. The Company continues to assess its commercial
opportunities, which may include licensing its intellectual property or developing products with others, and may re-engage furloughed
employees and contractors from time to time to the extent their services are required at cash compensation equal to the hourly
minimum wage. 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 to the $1,806,000 raised during the year ended December 31, 2015, 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.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation
The
consolidated financial statements have been prepared in accordance with 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., on December 30, 2015. All significant intercompany balances and transactions have been eliminated in consolidation.
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 at December 31, 2015 and 2014.
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, 2015, the Company had $85,140 in excess of federally insured limits on deposit. As of December 31, 2014, the Company did not
have any amounts in excess of federally insured limits on deposit.
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 materials and third party costs.
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.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Impairment
of long-lived assets
In
accordance with ASC 360 No.,
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, 2015 and 2014.
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, 2015 and 2014, 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
,
which requires 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 No. 718. ASC No. 718 is 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.
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, 2015
and 2014. It is 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.
Advertising
Advertising
costs are expensed as incurred and are included as an element of general and administrative costs in the accompanying statements
of operations. There were no advertising expenses for the years ended December 31, 2015 and 2014.
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.
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.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent
accounting pronouncements
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-02,
Leases
. The main provisions of ASU No. 2016-02 require management to recognize lease assets and lease liabilities
for all leases. ASU 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 GAAP. The amendments in this ASU are 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 2015, the FASB issued ASU No. 2015-17,
Income taxes.
The provisions of ASU No. 2015-17 simplify the presentation
of deferred income taxes, the amendments in this ASU require that deferred tax liabilities and assets be classified as noncurrent
in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified
statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of
an entity be offset and presented as a single amount is not affected by the amendments in this Update. The amendments in this
ASU are effective for the annual period ending after December 15, 2016, including interim periods within those fiscal years. The
Company does not believe that the adoption of this update will have a significant impact to the Company’s consolidated financial
statements.
In
July 2015, the FASB issued ASU No. 2015-11,
Inventory—Simplifying the Measurement of Inventory.
The provisions of
ASU No. 2015-11 clarify measurement of inventory at the lower of cost or market and net realizable value. Net realizable value
is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal,
and transportation. The amendments in this ASU are effective for the annual period ending after December 15, 2016, including interim
periods within those fiscal years. The Company does not believe that the adoption of this update will have a significant impact
to the Company’s consolidated financial statements.
In
August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements—Going Concern.
The provisions
of ASU No. 2014-15 require management to assess an entity’s ability to continue as a going concern by incorporating and
expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition
of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles
for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated
as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial
doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are
issued (or available to be issued). The amendments in this ASU are effective for the annual period ending after December 15, 2016,
and for annual periods and interim periods thereafter. The Company is currently assessing the impact of this ASU on the Company’s
consolidated financial statements.
Management
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 filed with this annual report.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
3 – INVENTORY
Inventory
consists of the following as of:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
Processed
materials
|
|
$
|
-
|
|
|
$
|
958,575
|
|
Total inventories
|
|
$
|
-
|
|
|
$
|
958,575
|
|
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 FASB ASC No. 330,
Accounting for Inventory
, and recognized a loss on impairment
of $958,575 as of December 31, 2015.
At
December 31, 2014, inventory in the amount of $924,452 was stored at one of the Company’s suppliers located in Germany,
with the balance of the inventory maintained in the United States. During the year ended December 31, 2014, the Company utilized
$28,099 in Astaxanthin as part of commercial product research and development.
NOTE
4 – PROPERTY AND EQUIPMENT, net
Property
and equipment, net, consists of the following as of:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
Information technology equipment
|
|
$
|
31,892
|
|
|
$
|
31,892
|
|
Furniture and
office equipment
|
|
|
-
|
|
|
|
10,161
|
|
|
|
|
31,892
|
|
|
|
42,053
|
|
Less accumulated
depreciation
|
|
|
(17,969
|
)
|
|
|
(21,442
|
)
|
Total property
and equipment, net
|
|
$
|
13,923
|
|
|
$
|
20,611
|
|
Depreciation
expense was $6,688 and $7,063 for the years ended December 31, 2015 and 2014, respectively.
During
the years ended December 31, 2015 and 2014, the Company wrote off $10,161 and $992,797, respectively, of fully depreciated property
and equipment. There was no effect on the statement of operations for the years ended December 31, 2015 and 2014, respectively.
On
December 16, 2014, the Company entered into an agreement to sell laboratory equipment with a net book value of $0 for $95,000.
One payment of $85,000 was received on December 26, 2014 with the balance being received on January 7, 2015. Final sale took place
upon delivery of the equipment in February 2015.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
5 – INTANGIBLE ASSETS, net
Intangible
assets, net, consists of the following as of:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
Patents
|
|
$
|
432,820
|
|
|
$
|
393,370
|
|
Less accumulated
amortization
|
|
|
(217,342
|
)
|
|
|
(200,272
|
)
|
|
|
|
215,478
|
|
|
|
193,098
|
|
Patents pending
|
|
|
209,019
|
|
|
|
226,420
|
|
Total intangible
assets, net
|
|
$
|
424,497
|
|
|
$
|
419,518
|
|
Patents
are amortized straight-line over a period of fifteen years. Amortization expense was $17,070 and $31,909, for the years ended
December 31, 2015 and 2014, 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 – NOTE PAYABLE
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.
NOTE
7 – STOCKHOLDERS’ DEFICIT
Authorized
shares - Holdings
On
March 23, 2006, Holdings was authorized to issue 10,000 shares of common stock with a par value of $0.001 per share. On May 5,
2006, the Articles of Incorporation were amended and restated. As part of this amendment, the number of authorized shares increased
to 219,582,802 of which 127,000,000 were designated as common stock and the remaining 92,582,802 was designated as preferred stock.
The 92,582,802 of preferred stock was allocated 14,440,920 to Series A, 11,113,544 Series B, 42,028,338 to Series C with 25,000,000
undesignated. Par value for all classes of stock was $0.001.
On
January 30, 2007, the Articles of Incorporation were amended and restated. As part of this amendment, the number of authorized
shares increased to 245,673,568 of which 150,000,000 were designated as common stock and the remaining 95,673,568 was designated
as preferred stock. The 95,673,568 of preferred stock was allocated 40,118,013 to Series A and 55,555,555 to Series B. As part
of this amendment all outstanding shares of Series A, B, and C preferred stock on the date of amendment were converted into shares
of Series A preferred stock. Par value for all classes of stock was $0.001.
Dividends
- Holdings
Subject
to the rights of any series of Preferred Stock that may from time to time come into existence, the holders of Series A and Series
B preferred stock were entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available
therefor, dividends at the rate of 8.5% of the original Series A Series and B issue prices, per annum, on each outstanding share
of Series A and Series B preferred stock on a pari passu basis, payable in preference and priority to any payment of any dividend
on common stock of the Company for such year. The right to such dividends on Preferred Stock were not cumulative, and no rights
were to be accrued to the holders of Preferred Stock by reason of the fact that the Company may have failed to declare or pay
dividends on Preferred Stock in any previous fiscal year of the Company, whether or not earnings of the Company where sufficient
to pay such dividends. No dividend was to be paid on common stock in any year, other than dividends payable solely in common stock,
until all dividends for such year had been declared and paid on preferred stock. No dividends were accrued or paid during 2015
and 2014.
Liquidation
preference - Holdings
The
holders of Series A and Series B preferred stock were entitled to receive, prior and in preference to any distribution of any
of the assets or surplus funds of the Company to the holders of common stock by reason of their ownership of such stock, the amount
of $0.33, the original Series A issue price, and $0.45, the original Series B issue price, (in each case adjusted for any stock
dividends, combinations or splits with respect to such shares) for each share of Series A and Series B preferred stock, respectively,
then held by them, and, in addition, an amount equal to all declared but unpaid dividends on Series A and Series B preferred stock,
respectively, held by them.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
7 – STOCKHOLDERS’ DEFICIT (continued)
Liquidation
preference - Holdings
(continued)
If
the assets and funds thus distributed among the holders of Series A and Series B preferred stock were insufficient to permit the
payment to such holders of full aforesaid preferential amounts, then, subject to the rights of series of preferred stock that
may from time to time come into existence, the entire assets and funds of the Company legally available for distribution were
to be distributed ratably among the holders of Series A and Series B preferred stock in the respective proportions which the aggregate
preferential amount of all shares of Series A and Series B preferred stock then held by each such holder bears to the aggregate
preferential amount of all shares of Series A and Series B preferred stock outstanding as of the date of the distribution upon
the occurrence of such liquidation event.
After
payment had been made to the holders of preferred stock of the full amounts to which they were to be entitled as aforesaid, the
holders of Series A preferred stock, Series B preferred stock and common stock were to participate on a pro rata basis based on
the number of Common Stock equivalent shares held by a holder in the distribution of all remaining assets of the Company legally
available for distribution, with the outstanding shares of Series A and Series B preferred stock treated as though they had been
converted into the appropriate number of shares of Common Stock.
Conversion
rights - Holdings
Each
share of Series A and Series B preferred stock were to be convertible, at the option of the holder thereof, at any time after
the date of issuance of such share at the office of the Company or any transfer agent for such series of Series A or Series B
preferred stock into such number of fully paid and non-assessable shares of common stock as is determined by dividing $0.33 in
the case of Series A preferred stock and $0.45 in the case of Series B preferred stock, by the applicable Conversion Price, in
effect on the date the certificate is surrendered for conversion. The price at which shares of Common Stock were to be deliverable
upon conversion of Series A or Series B preferred stock were initially at $0.33 per share with respect to shares of Series A preferred
stock and $0.45 per share with respect to shares of Series B preferred stock.
Voting
rights - Holdings
The
holder of each share of common stock issued and outstanding were to have one vote and the holder of each share of preferred stock
were to be entitled to the number of votes equal to the number of shares of common stock into which such share of preferred stock
would be converted.
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.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
7 – STOCKHOLDERS’ DEFICIT (continued)
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 four-hundred million shares of common stock and fifty million 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, 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.
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.
NOTE
8 – 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.
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 $410,931 and $411,970 for the years ended December 31, 2015 and 2014, respectively.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
8 – STOCK GRANTS (continued)
Consultant
stock issuance
During
the years ended December 31, 2015 and 2014, the Company granted a consultant 100,000 and 250,000 shares of restricted common stock
in the Company, respectively. Total expense recognized was $45,000 and $87,500 during the years ended December 31, 2015 and 2014,
respectively, based on the total fair value of this stock on the date of grant.
NOTE
9 – STOCK OPTION PLANS
On
May 15, 2006, the Company adopted the 2006 Stock Incentive Plan. Under this plan, the Company may issue shares of restricted stock,
incentive stock options, or non-statutory stock options to employees, directors, and consultants. The aggregate number of shares
which may be issued under this plan was 16,521,704, which was increased by 1,456,786 to 17,978,490 as part of the Series B Offering
in 2007. This plan was terminated on February 7, 2014.
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
9 – 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, 2014
|
|
|
15,290,486
|
|
|
$
|
0.07
|
|
|
|
3.89
|
|
|
$
|
305,810
|
|
Exercisable January 1, 2014
|
|
|
15,290,486
|
|
|
$
|
0.07
|
|
|
|
3.89
|
|
|
$
|
305,810
|
|
Canceled
|
|
|
(15,290,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
27,756,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2014
|
|
|
27,752,315
|
|
|
$
|
0.51
|
|
|
|
8.02
|
|
|
$
|
1,963,523
|
|
Exercisable December 31, 2014
|
|
|
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
|
|
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, 2015, 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, 2015 and year ended December 31, 2014, are presented
below:
Non-vested at January 1, 2014
|
|
|
-
|
|
Granted
|
|
|
27,756,821
|
|
Vested
|
|
|
(26,156,553
|
)
|
Exercised
|
|
|
(4,506
|
)
|
Forfeited
|
|
|
-
|
|
Non-vested at December 31, 2014
|
|
|
1,595,762
|
|
Granted
|
|
|
6,456,890
|
|
Vested
|
|
|
(8,010,801
|
)
|
Exercised
|
|
|
(41,851
|
)
|
Forfeited
|
|
|
-
|
|
Non-vested at December 31, 2015
|
|
|
-
|
|
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
9 – STOCK OPTION PLANS (continued)
Under
ASC No. 718, 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 as of December 31, 2015 and 2014, were as follows:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free rate
|
|
|
0.12%
- 1.47
|
%
|
|
|
0.12%
- 1.47
|
%
|
Expected volatility
|
|
|
112%
- 170
|
%
|
|
|
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.
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 time frame. 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 No. 718. In calculating the number of options issued during
the year ended December 31, 2015, the Company used assumptions comparable to December 31, 2014, with a 20-day weighted average
stock price.
As
part of the requirements of ASC No. 718, 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 $1,413,552 and $5,917,351 in stock based compensation expense related to options during the years ended December
31, 2015 and 2014, respectively. Of these amounts, $1,210,124 and $0 were related to 6,456,890 options issued to employees, directors,
and consultants in lieu of salaries, wages, and fees accrued for services during the years ended December 31, 2015 and 2014, 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
10 – 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, 2014
|
|
|
3,395,833
|
|
|
$
|
0.45
|
|
|
|
5.28
|
|
|
$
|
-
|
|
Exercisable January 1, 2014
|
|
|
3,395,833
|
|
|
$
|
0.45
|
|
|
|
5.28
|
|
|
$
|
-
|
|
Canceled
|
|
|
(3,395,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
28,435,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2014
|
|
|
28,435,782
|
|
|
$
|
0.64
|
|
|
|
4.07
|
|
|
$
|
-
|
|
Exercisable December 31, 2014
|
|
|
28,435,782
|
|
|
$
|
0.64
|
|
|
|
4.07
|
|
|
$
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
18,009,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2015
|
|
|
46,445,212
|
|
|
$
|
0.46
|
|
|
|
3.48
|
|
|
$
|
2,517,337
|
|
Exercisable December 31, 2015
|
|
|
46,445,212
|
|
|
$
|
0.46
|
|
|
|
3.48
|
|
|
$
|
2,517,337
|
|
Under
ASC No. 718, 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 as of December 31, 2015 and 2014, were as follows:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
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
|
|
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 time frame. The expected warrant term is the life of the warrant.
The
Company recognized $48,700 and $5,250,540 in stock based compensation expense related to warrants for the years ended December
31, 2015 and 2014, respectively.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
11 – RELATED PARTY TRANSACTIONS
Executive
chairman agreement
As
part of an executive chairman agreement, a director provided services to the Company. The Company incurred $240,000, in consulting
fees to this director for the year ended December 31, 2014.
This
agreement was amended on April 1, 2015. Under the terms of this amendment, this director receives $37,500 in equity instruments
issued quarterly in arrears as compensation. During the year ended December 31, 2015, the director incurred $177,115 in consulting
fees of which $9,231 was settled in cash with $167,884 being settled in options to purchase 851,963 shares of Company stock.
Amounts
payable to this director was $293,546 as of December 31, 2015 and 2014.
NOTE
12 – 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 at December 31:
|
|
2015
|
|
|
2014
|
|
|
|
Federal
|
|
|
State
|
|
|
Total
|
|
|
Federal
|
|
|
State
|
|
|
Total
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
The
following table presents a reconciliation of the statutory Federal rate and the Company’s effective tax rate for the years
ended December 31:
|
|
2015
|
|
|
2014
|
|
Tax provision (benefit)
at Federal statutory rate
|
|
|
(34.00
|
)%
|
|
|
(34.00
|
)%
|
Accrued compensation
|
|
|
(0.70
|
)%
|
|
|
(0.54
|
)%
|
Accrued interest expense
|
|
|
(0.00
|
)%
|
|
|
(1.31
|
)%
|
Stock based compensation
|
|
|
15.32
|
%
|
|
|
23.34
|
%
|
Depreciation and amortization
|
|
|
0.22
|
%
|
|
|
(0.08
|
)%
|
Other
|
|
|
0.06
|
%
|
|
|
0.10
|
%
|
Change in valuation
allowance
|
|
|
19.10
|
%
|
|
|
12.49
|
%
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The
effective tax rate for the years ended December 31, 2015 and 2014, differs from the statutory rate of 34% as a result of the state
taxes (net of Federal benefit) and permanent differences.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
12 – INCOME TAXES (continued)
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:
|
|
2015
|
|
|
2014
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
11,532,857
|
|
|
$
|
11,265,332
|
|
Stock based compensation
|
|
|
733,206
|
|
|
|
4,459,732
|
|
Accrued compensation
|
|
|
1,485,827
|
|
|
|
1,525,089
|
|
Credit carryforwards
|
|
|
106,856
|
|
|
|
124,525
|
|
Amortization
|
|
|
-
|
|
|
|
1,755
|
|
Gross deferred tax
assets
|
|
|
13,858,746
|
|
|
|
17,376,433
|
|
Less valuation
allowance
|
|
|
(13,768,801
|
)
|
|
|
(17,321,688
|
)
|
Net
deferred tax assets
|
|
|
89,945
|
|
|
|
54,745
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(89,945
|
)
|
|
|
(54,745
|
)
|
Gain
on sale of assets
|
|
|
-
|
|
|
|
-
|
|
Gross
deferred tax liabilities
|
|
|
(89,945
|
)
|
|
|
(54,745
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of December 31, 2015, the Company had Federal net operating loss carryforward of $30,171,769. The net operating loss carryforward
expires at various dates beginning in 2026 if not utilized. In addition, the Company had net operating losses for Hawaii income
tax purposes of $25,550,778 as of December 31, 2015, which expire 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, 2015 and 2014, 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.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
12 – INCOME TAXES (continued)
As
of December 31, 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.
NOTE
13 – 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 nine-months
ended:
|
|
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
|
)
|
|
|
Year
ended December 31, 2014
|
|
|
|
Net
Loss
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per
share
amount
|
|
Basic loss per share
|
|
$
|
(16,994,625
|
)
|
|
|
60,225,524
|
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive
securities—Common stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(16,994,625
|
)
|
|
|
60,225,524
|
|
|
$
|
(0.28
|
)
|
The
following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share for
the years presented because including them would have been antidilutive for the years ended:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
Common stock options
|
|
|
34,167,354
|
|
|
|
26,156,553
|
|
Common stock
warrants
|
|
|
46,445,212
|
|
|
|
28,435,782
|
|
Total common
stock equivalents
|
|
|
80,612,566
|
|
|
|
54,592,335
|
|
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
14 – CONCENTRATION
The
Company purchased all of its inventory from one vendor in Germany. Although, there were no purchases from this vendor during the
two years ended December 31, 2015 and 2014, outstanding payables to this vendor were $86,255 as of December 31, 2015, and 2014.
NOTE
15 – 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 $12,718 and $56,856 for the years ended December
31, 2015 and 2014, respectively.
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 $31,479 and $28,169, for the years ended December 31, 2015 and 2014, respectively.
NOTE
16 – 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, 2015 and 2014. The remaining
obligation of $20,000 as of December 31, 2015 and December 31, 2014, is recorded as a part of accounts payable on the consolidated
balance sheets.
Employee
settlement
As
of December 31, 2015 and 2014, 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, 2015 and 2014. The license does not prohibit
the Company from purchasing Astaxanthin consumer health products from BASF for consumer health applications, similar to any third-party
wholesale customer.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
16 – 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 years ended December 31, 2015 and 2014. 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
17 – SUBSEQUENT EVENTS
The
Company evaluated its December 31, 2015, consolidated financial statements for subsequent events through March 28, 2016, the date
the consolidated financial statements were available to be issued and noted the following non-recognized events for disclosure.
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. The Company continues to assess its commercial
opportunities, which may include licensing its intellectual property or developing products with others, and may re-engage furloughed
employees and contractors from time to time to the extent their services are required at cash compensation equal to the hourly
minimum wage. In addition, each of the directors has agreed, effective April 1, 2016, to suspend any additional equity compensation,
until otherwise agreed by the Company.
Cardax,
Inc., and Subsidiary
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
240,898
|
|
|
$
|
323,410
|
|
Inventory
|
|
|
25,275
|
|
|
|
-
|
|
Deposits and
other assets
|
|
|
89,482
|
|
|
|
87,715
|
|
Prepaid
expenses
|
|
|
21,617
|
|
|
|
2,533
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
377,272
|
|
|
|
413,658
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, net
|
|
|
9,263
|
|
|
|
13,923
|
|
|
|
|
|
|
|
|
|
|
INTANGIBLE
ASSETS, net
|
|
|
431,233
|
|
|
|
424,497
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
817,768
|
|
|
$
|
852,078
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accrued payroll
and payroll related expenses
|
|
$
|
3,511,589
|
|
|
$
|
3,468,610
|
|
Accounts payable
and accrued expenses
|
|
|
675,128
|
|
|
|
662,803
|
|
Fees payable
to directors
|
|
|
418,546
|
|
|
|
418,546
|
|
Employee
settlement
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
4,655,263
|
|
|
|
4,599,959
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
4,655,263
|
|
|
|
4,599,959
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
Preferred Stock - $0.001 par value;
50,000,000 shares authorized,
|
|
|
-
|
|
|
|
-
|
|
0 shares issued and outstanding
as of September 30, 2016 and December 31, 2015, respectively
|
|
|
-
|
|
|
|
-
|
|
Common stock - $0.001 par value;
400,000,000 shares authorized, 80,972,876 and 69,087,955 shares issued and outstanding as of September 30, 2016 and December
31, 2015, respectively
|
|
|
80,973
|
|
|
|
69,088
|
|
Additional paid-in-capital
|
|
|
51,619,615
|
|
|
|
50,333,188
|
|
Accumulated
deficit
|
|
|
(55,538,083
|
)
|
|
|
(54,150,157
|
)
|
|
|
|
|
|
|
|
|
|
Total
stockholders' deficit
|
|
|
(3,837,495
|
)
|
|
|
(3,747,881
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$
|
817,768
|
|
|
$
|
852,078
|
|
The
accompanying notes are an integral part of these Condensed Consolidated Financial Statements
Cardax,
Inc., and Subsidiary
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
For
the three-months
ended September 30,
|
|
|
For
the nine-months
ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
11,160
|
|
|
$
|
-
|
|
|
$
|
11,160
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS OF GOOD
SOLD
|
|
|
5,717
|
|
|
|
-
|
|
|
|
5,717
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
5,443
|
|
|
|
-
|
|
|
|
5,443
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
expenses
|
|
|
213,275
|
|
|
|
266,018
|
|
|
|
595,757
|
|
|
|
681,059
|
|
Stock based compensation
|
|
|
116,583
|
|
|
|
256,959
|
|
|
|
498,312
|
|
|
|
1,534,468
|
|
Research and
development
|
|
|
87,735
|
|
|
|
216,228
|
|
|
|
260,413
|
|
|
|
352,328
|
|
Sales and marketing
|
|
|
63,375
|
|
|
|
-
|
|
|
|
63,375
|
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
6,619
|
|
|
|
4,373
|
|
|
|
22,055
|
|
|
|
19,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
487,587
|
|
|
|
743,578
|
|
|
|
1,439,912
|
|
|
|
2,587,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(482,144
|
)
|
|
|
(743,578
|
)
|
|
|
(1,434,469
|
)
|
|
|
(2,587,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(888
|
)
|
|
|
(477
|
)
|
|
|
(2,307
|
)
|
|
|
(1,619
|
)
|
Interest income
|
|
|
594
|
|
|
|
594
|
|
|
|
1,768
|
|
|
|
1,762
|
|
Other income
|
|
|
-
|
|
|
|
-
|
|
|
|
47,082
|
|
|
|
48,204
|
|
Gain
on sale of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
95,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expenses)
|
|
|
(294
|
)
|
|
|
117
|
|
|
|
46,543
|
|
|
|
143,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before the
provision for income taxes
|
|
|
(482,438
|
)
|
|
|
(743,461
|
)
|
|
|
(1,387,926
|
)
|
|
|
(2,443,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(482,438
|
)
|
|
$
|
(743,461
|
)
|
|
$
|
(1,387,926
|
)
|
|
$
|
(2,443,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES USED IN CALCULATION OF NET INCOME PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
79,581,511
|
|
|
|
67,955,379
|
|
|
|
73,949,386
|
|
|
|
66,000,101
|
|
Diluted
|
|
|
79,581,511
|
|
|
|
67,955,379
|
|
|
|
73,949,386
|
|
|
|
66,000,101
|
|
The
accompanying notes are an integral part of these Condensed Consolidated Financial Statements
Cardax,
Inc., and Subsidiary
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the nine-months
ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,387,926
|
)
|
|
$
|
(2,443,881
|
)
|
Adjustments to
reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
22,055
|
|
|
|
19,373
|
|
Stock based compensation
|
|
|
204,083
|
|
|
|
771,358
|
|
Gain on sale
of assets
|
|
|
-
|
|
|
|
(95,000
|
)
|
Changes in assets
and liabilities:
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
(25,275
|
)
|
|
|
-
|
|
Deposits and
other assets
|
|
|
(1,767
|
)
|
|
|
5,102
|
|
Prepaid expenses
|
|
|
(19,084
|
)
|
|
|
12,389
|
|
Accrued payroll
and payroll related expenses
|
|
|
270,763
|
|
|
|
676,364
|
|
Accounts payable
and accrued expenses
|
|
|
78,770
|
|
|
|
(16,626
|
)
|
Accrued
interest
|
|
|
-
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(858,381
|
)
|
|
|
(1,070,699
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from
sale of property and equipment
|
|
|
-
|
|
|
|
10,000
|
|
Increase
in patents
|
|
|
(24,131
|
)
|
|
|
(21,852
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(24,131
|
)
|
|
|
(11,852
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from
the issuance of common stock
|
|
|
800,000
|
|
|
|
1,430,000
|
|
Proceeds
from the issuances of notes payable
|
|
|
-
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
800,000
|
|
|
|
1,460,000
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE)
INCREASE IN CASH
|
|
|
(82,512
|
)
|
|
|
377,449
|
|
|
|
|
|
|
|
|
|
|
Cash at the
beginning of the period
|
|
|
323,410
|
|
|
|
35,696
|
|
|
|
|
|
|
|
|
|
|
Cash at the
end of the period
|
|
$
|
240,898
|
|
|
$
|
413,145
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of
notes payable and accrued interest into common stock
|
|
$
|
-
|
|
|
$
|
30,222
|
|
Conversion of
accrued payroll and payroll related expenses into stock options
|
|
$
|
227,784
|
|
|
$
|
669,006
|
|
Conversion of
accounts payable into stock options
|
|
$
|
66,445
|
|
|
$
|
301,063
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$
|
2,249
|
|
|
$
|
-
|
|
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.
In
May of 2006, Hawaii Biotech, Inc., 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
Hawaii Biotech, Inc., in exchange for the assets and liabilities contributed to Holdings. The above shares were then distributed
by Hawaii Biotech, Inc. 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 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.
Going
concern matters
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying condensed consolidated
financial statements, the Company incurred a net loss of $482,438 and $1,387,926 for the three and nine-months ended September
30, 2016, respectively, and a net loss of $743,461 and $2,443,881 for the three and nine-months ended 2015, respectively. The
Company has incurred losses since inception resulting in an accumulated deficit of $55,538,083 as of September 30, 2016, and has
had negative cash flows from operating activities since inception. The Company 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.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
1 – COMPANY BACKGROUND (continued)
In
addition to the
$985,000
raised in the calendar year through November 14, 2016, 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 condensed 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, with such compensation prorated for one of three months for the quarter ended September 30, 2016.
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 September
30, 2016 and 2015. 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.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use
of estimates
The
preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the amounts reported in our condensed consolidated financial statements and the accompanying notes.
Estimates in these condensed 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.
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 materials and third party costs.
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.
Revenue
recognition
The
Company recognizes revenue 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.
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.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 the new
standard 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. The standard also requires more
detailed disclosures and provides additional guidance for transactions that were not addressed completely in prior accounting
guidance. ASU 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
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 new standard will be 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.
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.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
. The main provisions of ASU No. 2016-02 require management to recognize
lease assets and lease liabilities for all leases. ASU 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 GAAP. The amendments in this
ASU are 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
March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation
. The amendments of ASU No. 2016-09 were
issued as part of the FASB's simplification initiative focused on improving areas of 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.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
3 – INVENTORY
Inventory
consists of the following as of:
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
Finished
goods
|
|
$
|
25,275
|
|
|
$
|
-
|
|
Total inventories
|
|
$
|
25,275
|
|
|
$
|
-
|
|
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 FASB ASC No. 330,
Accounting for Inventory
, and recognized a loss on impairment
of $958,575 as of December 31, 2015.
As
of September 30, 2016, inventory in the amount of $25,275 consisted of products available for sale and was unrelated to the inventory
impaired as of December 31, 2015.
NOTE
4 – PROPERTY AND EQUIPMENT, net
Property
and equipment, net, consists of the following as of:
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
Information technology
equipment
|
|
$
|
31,892
|
|
|
$
|
31,892
|
|
Less accumulated
depreciation
|
|
|
(22,629
|
)
|
|
|
(17,969
|
)
|
Total property
and equipment, net
|
|
$
|
9,263
|
|
|
$
|
13,923
|
|
Depreciation
expense was $1,508 and $4,660 for the three and nine-months ended September 30, 2016, respectively, and $1,670 and $5,008 for
the three and nine-months ended September 30, 2015, 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:
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
Patents
|
|
$
|
432,985
|
|
|
$
|
432,820
|
|
Less accumulated
amortization
|
|
|
(234,737
|
)
|
|
|
(217,342
|
)
|
|
|
|
198,248
|
|
|
|
215,478
|
|
Patents pending
|
|
|
232,985
|
|
|
|
209,019
|
|
Total intangible
assets, net
|
|
$
|
431,233
|
|
|
$
|
424,497
|
|
Patents
are amortized straight-line over a period of fifteen years. Amortization expense was $5,111 and $17,395, for the three and nine-months
ended September 30, 2016, respectively, and $2,703 and $14,365, for the three and nine-months ended September 30, 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
6 – STOCKHOLDERS’ DEFICIT
Authorized
shares – Holdings
On
March 23, 2006, Holdings was authorized to issue 10,000 shares of common stock with a par value of $0.001 per share. On May 5,
2006, the Articles of Incorporation were amended and restated. As part of this amendment, the number of authorized shares increased
to 219,582,802 of which 127,000,000 were designated as common stock and the remaining 92,582,802 was designated as preferred stock.
The 92,582,802 of preferred stock was allocated 14,440,920 to Series A, 11,113,544 Series B, 42,028,338 to Series C with 25,000,000
undesignated. Par value for all classes of stock was $0.001.
On
January 30, 2007, the Articles of Incorporation were amended and restated. As part of this amendment, the number of authorized
shares increased to 245,673,568 of which 150,000,000 were designated as common stock and the remaining 95,673,568 was designated
as preferred stock. The 95,673,568 of preferred stock was allocated 40,118,013 to Series A and 55,555,555 to Series B. As part
of this amendment all outstanding shares of Series A, B, and C preferred stock on the date of amendment were converted into shares
of Series A preferred stock. Par value for all classes of stock was $0.001.
Dividends
- Holdings
Subject
to the rights of any series of Preferred Stock that may from time to time come into existence, the holders of Series A and Series
B preferred stock were entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available
therefor, dividends at the rate of 8.5% of the original Series A Series and B issue prices, per annum, on each outstanding share
of Series A and Series B preferred stock on a pari passu basis, payable in preference and priority to any payment of any dividend
on common stock of the Company for such year. The right to such dividends on Preferred Stock were not cumulative, and no rights
were to be accrued to the holders of Preferred Stock by reason of the fact that the Company may have failed to declare or pay
dividends on Preferred Stock in any previous fiscal year of the Company, whether or not earnings of the Company where sufficient
to pay such dividends. No dividend was to be paid on common stock in any year, other than dividends payable solely in common stock,
until all dividends for such year had been declared and paid on preferred stock. No dividends were accrued or paid during the
three and nine-months ended September 30, 2016 or year ended December 31, 2015.
Liquidation
preference - Holdings
The
holders of Series A and Series B preferred stock were entitled to receive, prior and in preference to any distribution of any
of the assets or surplus funds of the Company to the holders of common stock by reason of their ownership of such stock, the amount
of $0.33, the original Series A issue price, and $0.45, the original Series B issue price, (in each case adjusted for any stock
dividends, combinations or splits with respect to such shares) for each share of Series A and Series B preferred stock, respectively,
then held by them, and, in addition, an amount equal to all declared but unpaid dividends on Series A and Series B preferred stock,
respectively, held by them.
If
the assets and funds thus distributed among the holders of Series A and Series B preferred stock were insufficient to permit the
payment to such holders of full aforesaid preferential amounts, then, subject to the rights of series of preferred stock that
may from time to time come into existence, the entire assets and funds of the Company legally available for distribution were
to be distributed ratably among the holders of Series A and Series B preferred stock in the respective proportions which the aggregate
preferential amount of all shares of Series A and Series B preferred stock then held by each such holder bears to the aggregate
preferential amount of all shares of Series A and Series B preferred stock outstanding as of the date of the distribution upon
the occurrence of such liquidation event.
After
payment had been made to the holders of preferred stock of the full amounts to which they were to be entitled as aforesaid, the
holders of Series A preferred stock, Series B preferred stock and common stock were to participate on a pro rata basis based on
the number of Common Stock equivalent shares held by a holder in the distribution of all remaining assets of the Company legally
available for distribution, with the outstanding shares of Series A and Series B preferred stock treated as though they had been
converted into the appropriate number of shares of Common Stock.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
6 – STOCKHOLDERS’ DEFICIT (continued)
Conversion
rights – Holdings
Each
share of Series A and Series B preferred stock were to be convertible, at the option of the holder thereof, at any time after
the date of issuance of such share at the office of the Company or any transfer agent for such series of Series A or Series B
preferred stock into such number of fully paid and non-assessable shares of common stock as is determined by dividing $0.33 in
the case of Series A preferred stock and $0.45 in the case of Series B preferred stock, by the applicable Conversion Price, in
effect on the date the certificate is surrendered for conversion. The price at which shares of Common Stock were to be deliverable
upon conversion of Series A or Series B preferred stock were initially at $0.33 per share with respect to shares of Series A preferred
stock and $0.45 per share with respect to shares of Series B preferred stock.
Voting
rights – Holdings
The
holder of each share of common stock issued and outstanding were to have one vote and the holder of each share of preferred stock
were to be entitled to the number of votes equal to the number of shares of common stock into which such share of preferred stock
would be converted.
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 four-hundred million shares of common stock and fifty million 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 September 30, 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.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
6 – STOCKHOLDERS’ DEFICIT (continued)
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.
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 three and nine-months ended September 30, 2016, the Company sold securities in a self-directed offering in the aggregate amount
of $237,000 and $800,000, respectively, at $0.08 per unit. Each unit consisted of 1 share of restricted common stock (10,000,000
shares), a five-year warrant to purchase 1 share of restricted common stock (10,000,000 warrant shares) at $0.08 per share, a
five-year warrant to purchase 1 share of restricted common stock (10,000,000 warrant shares) at $0.12 per share, and a five-year
warrant to purchase 1 share of restricted common stock (10,000,000 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 CONDENSED 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.
On
March 31, 2016, the Company granted an independent director 357,143 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.
On
September 30, 2016, the Company granted an independent director 27,778 shares of restricted common stock in the Company. The total
fair value of this stock on the date of grant was $4,166. These shares were fully vested upon issuance.
The
Company recognizes the expense related to grants ratably over the requisite service period. Total stock compensation expense recognized
as a result of these grants was $4,166 and $29,166 for the three and nine-months ended September 30, 2016, respectively, and $50,000
and $360,931 for the three and nine-months ended September 30, 2015, respectively.
NOTE
8 – STOCK OPTION PLANS
On
May 15, 2006, the Company adopted the 2006 Stock Incentive Plan. Under this plan, the Company may issue shares of restricted stock,
incentive stock options, or non-statutory stock options to employees, directors, and consultants. The aggregate number of shares
which may be issued under this plan was 16,521,704, which was increased by 1,456,786 to 17,978,490 as part of the Series B Offering
in 2007. This plan was terminated on February 7, 2014.
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 CONDENSED 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
|
|
|
6,073,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,501,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding September 30, 2016
|
|
|
36,738,636
|
|
|
$
|
0.41
|
|
|
|
6.19
|
|
|
$
|
89,682
|
|
Exercisable September 30, 2016
|
|
|
36,663,636
|
|
|
$
|
0.41
|
|
|
|
6.20
|
|
|
$
|
89,307
|
|
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 September 30, 2016, based on a valuation of the
Company’s stock for that day.
A
summary of the Company’s non-vested options for the nine-months ended September 30, 2016 and year ended December 31, 2015,
are presented below:
Non-vested at January 1, 2015
|
|
|
1,595,762
|
|
Granted
|
|
|
6,456,890
|
|
Vested
|
|
|
(8,010,801
|
)
|
Exercised
|
|
|
(41,851
|
)
|
Forfeited
|
|
|
-
|
|
Non-vested at December 31, 2015
|
|
|
-
|
|
Granted
|
|
|
6,073,247
|
|
Vested
|
|
|
(5,998,247
|
)
|
Exercised
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
Non-vested at September 30,
2016
|
|
|
75,000
|
|
As
of September 30, 2016, total unrecognized stock-based compensation expense related to unvested stock options was $5,250, which
is expected to be expensed over the next three-quarters.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
8 – STOCK OPTION PLANS (continued)
Under
ASC No. 718, 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:
|
|
September
30, 2016
|
|
|
December
31, 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 No. 718. In calculating
the number of options issued in lieu of pay during the nine-months ended September 30, 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 No. 718, 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 $5,917 and $362,646 in stock based compensation expense related to options during the three and nine-months
ended September 30, 2016, respectively, and $206,959 and $1,169,538 in stock based compensation expense related to options during
the three and nine-months ended September 30, 2015, 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 and nine-months ended September 30, 2016,
respectively, and $138,462 and $669,007 were related to 477,456 and 3,738,958 options issued to employees in lieu of salaries
accrued for services during the three and nine-months ended September 30, 2015, 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 and nine-months ended September
30, 2016, respectively, and $30,997 and $170,678 were related to 106,887 and 945,263 options issued to consultants in lieu of
fees accrued for services during the three and nine-months ended September 30, 2015, respectively. $1,750 was related to 25,000
vested options issued to a consultant as compensation for services during the three and nine-months ended September 30, 2016,
and $0 was related to 0 options issued to consultants as compensation for services during the three and nine-months ended September
30, 2015. $4,167 and $66,667 were related to 27,778 and 1,069,445 options issued to directors as compensation for services during
the three and nine-months ended September 30, 2016, respectively, and $37,500 and $130,385 were related to 129,310 and 681,508
options issued to a director as compensation for services during the three and nine-months ended September 30, 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 CONDENSED 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
|
|
|
18,009,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2015
|
|
|
46,445,212
|
|
|
$
|
0.46
|
|
|
|
3.48
|
|
|
$
|
2,517,337
|
|
Exercisable December 31, 2015
|
|
|
46,445,212
|
|
|
$
|
0.46
|
|
|
|
3.48
|
|
|
$
|
2,517,337
|
|
Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
30,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(602,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding September 30, 2016
|
|
|
75,842,649
|
|
|
$
|
0.33
|
|
|
|
3.52
|
|
|
$
|
-
|
|
Exercisable September 30, 2016
|
|
|
75,842,649
|
|
|
$
|
0.33
|
|
|
|
3.52
|
|
|
$
|
-
|
|
Under
ASC No. 718, 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:
|
|
September
30, 2016
|
|
|
December
31, 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 CONDENSED 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 no stock based compensation expense related to warrants for the three and nine-months ended September 30, 2016
and 2015.
Warrant
expiration
During
the three and nine-months ended September 30, 2016, warrants to purchase an aggregate of 60,866 and 602,563 shares, respectively,
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 and nine-months ended September
30, 2016, respectively.
The
Company incurred $37,500 and $130,385 in stock based compensation to this director during the three and nine-months ended September
30, 2015, respectively, and $0 and $9,230 in consulting fees to the director during the three and nine-months ended September
30, 2015.
Amounts
payable to this director was $293,546 as of September 30, 2016 and December 31, 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
effective tax rate for the three and nine-months ended September 30, 2016 and 2015, 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 September 30, 2016 and December 31,
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.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
11 – INCOME TAXES (continued)
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 September 30, 2016 and December 31, 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 $0 and $47,802 from the state of Hawaii during the three and nine-months ended September
30, 2016, respectively. This amount is recorded as other income in the condensed, consolidated statement of operations.
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 three
and nine-months ended:
|
|
Three-months
ended September 30, 2016
|
|
|
|
Net
Loss
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per
share
amount
|
|
Basic loss per share
|
|
$
|
(482,438
|
)
|
|
|
79,581,511
|
|
|
$
|
(0.01
|
)
|
Effect of
dilutive securities—Common stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted loss per share
|
|
$
|
(482,438
|
)
|
|
|
79,581,511
|
|
|
$
|
(0.01
|
)
|
|
|
Three-months
ended September 30, 2015
|
|
|
|
Net
Loss
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per
share
amount
|
|
Basic loss per share
|
|
$
|
(743,461
|
)
|
|
|
67,955,379
|
|
|
$
|
(0.01
|
)
|
Effect of
dilutive securities—Common stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted loss per share
|
|
$
|
(743,461
|
)
|
|
|
67,955,379
|
|
|
$
|
(0.01
|
)
|
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
12 – BASIC AND DILUTED NET INCOME (LOSS) PER SHARE (continued)
|
|
Nine-months
ended September 30, 2016
|
|
|
|
Net
Loss
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per
share
amount
|
|
Basic loss per share
|
|
$
|
(1,387,926
|
)
|
|
|
73,949,386
|
|
|
$
|
(0.02
|
)
|
Effect of
dilutive securities—Common stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted loss per share
|
|
$
|
(1,387,926
|
)
|
|
|
73,949,386
|
|
|
$
|
(0.02
|
)
|
|
|
Nine-months
ended September 30, 2015
|
|
|
|
Net
Loss
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per
share
amount
|
|
Basic loss per share
|
|
$
|
(2,443,881
|
)
|
|
|
66,000,101
|
|
|
$
|
(0.04
|
)
|
Effect of
dilutive securities—Common stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted loss per share
|
|
$
|
(2,443,881
|
)
|
|
|
66,000,101
|
|
|
$
|
(0.04
|
)
|
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:
|
|
September
30, 2016
|
|
|
September
30, 2015
|
|
Common stock options
|
|
|
36,738,636
|
|
|
|
33,118,044
|
|
Common stock
warrants
|
|
|
75,842,649
|
|
|
|
41,871,124
|
|
Total common
stock equivalents
|
|
|
112,581,285
|
|
|
|
74,989,168
|
|
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED 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 $0 and $3,437 for the three and nine-months
ended September 30, 2016, and $0 and $12,112, for the three and nine-months ended September 30, 2015, respectively. The $3,437
of rent expense for the nine-months ended September 30, 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 $7,929 and $23,784, for the three and nine-months ended September 30, 2016, respectively, and $7,931 and $23,759,
for the three and nine-months ended September 30 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 three and nine-months ended September 30, 2016 and
2015. The remaining obligation of $20,000 as of September 30, 2016 and December 31, 2015, is recorded as a part of accounts payable
on the condensed consolidated balance sheets. The license expired in February 2016.
Employee
settlement
As
of September 30, 2016 and December 31, 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 three and nine-months ended September 30, 2016 and 2015.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED 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 nine-months ended September 30, 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 September 30, 2016, condensed consolidated financial statements for subsequent events through November 14,
2016, the date the condensed consolidated financial statements were available to be issued and noted the following non-recognized
events for disclosure.
Stock
issuance
In
October and November 2016 (through November 14, 2016), the Company sold securities in a self-directed offering in the aggregate
amount of $185,000 at $0.08 per unit. Each unit consisted of 1 share of restricted common stock (2,312,500 shares), a five-year
warrant to purchase 1 share of restricted common stock (2,312,500 warrant shares) at $0.08 per share, a five-year warrant to purchase
1 share of restricted common stock (2,312,500 warrant shares) at $0.12 per share, and a five-year warrant to purchase 1 share
of restricted common stock (2,312,500 warrant shares) at $0.16 per share.
***
Through
and including
, 2017 (the 90th day after the date of this prospectus), all dealers effecting transactions in the registered securities
offered hereby, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement
is in addition to the obligation of dealers to deliver a prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.
8,820,509
Shares
Focusing
on the
source
of inflammation
TM
8,820,509
Common Stock
PROSPECTUS
,
201 7