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
June 30,
|
|
|
For the six-months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES, net
|
|
$
|
272,049
|
|
|
$
|
66,237
|
|
|
$
|
585,359
|
|
|
$
|
174,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
145,669
|
|
|
|
30,287
|
|
|
|
281,201
|
|
|
|
72,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
126,380
|
|
|
|
35,950
|
|
|
|
304,158
|
|
|
|
101,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative expenses
|
|
|
391,250
|
|
|
|
134,461
|
|
|
|
818,117
|
|
|
|
279,357
|
|
Salaries and wages
|
|
|
397,239
|
|
|
|
157,535
|
|
|
|
815,457
|
|
|
|
321,681
|
|
Professional fees
|
|
|
229,278
|
|
|
|
64,330
|
|
|
|
411,167
|
|
|
|
174,800
|
|
Stock based compensation
|
|
|
133,062
|
|
|
|
45,000
|
|
|
|
262,687
|
|
|
|
84,250
|
|
Research and development
|
|
|
67,747
|
|
|
|
22,442
|
|
|
|
127,978
|
|
|
|
72,417
|
|
Depreciation and amortization
|
|
|
7,530
|
|
|
|
7,400
|
|
|
|
17,135
|
|
|
|
14,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,226,106
|
|
|
|
431,168
|
|
|
|
2,452,541
|
|
|
|
947,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,099,726
|
)
|
|
|
(395,218
|
)
|
|
|
(2,148,383
|
)
|
|
|
(845,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
-
|
|
|
|
12,598
|
|
|
|
556
|
|
|
|
12,598
|
|
Interest income
|
|
|
815
|
|
|
|
587
|
|
|
|
1,934
|
|
|
|
1,168
|
|
Interest expense
|
|
|
(1,211
|
)
|
|
|
(1,010
|
)
|
|
|
(2,092
|
)
|
|
|
(1,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses)
|
|
|
(396
|
)
|
|
|
12,175
|
|
|
|
398
|
|
|
|
12,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before the provision for income taxes
|
|
|
(1,100,122
|
)
|
|
|
(383,043
|
)
|
|
|
(2,147,985
|
)
|
|
|
(833,879
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(1,100,122
|
)
|
|
$
|
(383,043
|
)
|
|
$
|
(2,147,985
|
)
|
|
$
|
(833,879
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES USED IN CALCULATION OF NET LOSS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
122,975,014
|
|
|
|
90,305,824
|
|
|
|
122,825,595
|
|
|
|
88,409,138
|
|
Diluted
|
|
|
122,975,014
|
|
|
|
90,305,824
|
|
|
|
122,825,595
|
|
|
|
88,409,138
|
|
The accompanying notes
are an integral part of these Condensed Consolidated Financial Statements.
Cardax,
Inc., and Subsidiary
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For
the six-months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,147,985
|
)
|
|
$
|
(833,879
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
17,135
|
|
|
|
14,801
|
|
Stock
based compensation
|
|
|
262,687
|
|
|
|
84,250
|
|
Bad
debt expense on note receivable and accrued interest
|
|
|
89,933
|
|
|
|
-
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
83,201
|
|
|
|
(7,554
|
)
|
Inventories
|
|
|
(58,637
|
)
|
|
|
1,044
|
|
Deposits
and other assets
|
|
|
(118,168
|
)
|
|
|
31,632
|
|
Prepaid
expenses
|
|
|
(78,376
|
)
|
|
|
1,026
|
|
Accrued
payroll and payroll related expenses
|
|
|
15,982
|
|
|
|
14,604
|
|
Accounts
payable and accrued expenses
|
|
|
44,902
|
|
|
|
39,777
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(1,889,326
|
)
|
|
|
(654,299
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Increase
in intangible assets
|
|
|
(20,328
|
)
|
|
|
(7,618
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(20,328
|
)
|
|
|
(7,618
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from the issuance of common stock
|
|
|
-
|
|
|
|
582,000
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
-
|
|
|
|
582,000
|
|
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH
|
|
|
(1,909,654
|
)
|
|
|
(79,917
|
)
|
|
|
|
|
|
|
|
|
|
CASH
AT THE BEGINNING OF THE PERIOD
|
|
|
2,236,837
|
|
|
|
158,433
|
|
|
|
|
|
|
|
|
|
|
CASH
AT THE END OF THE PERIOD
|
|
$
|
327,183
|
|
|
$
|
78,516
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
2,092
|
|
|
$
|
1,717
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING
AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Conversion
of accounts payable into restricted stock
|
|
$
|
-
|
|
|
$
|
44,700
|
|
Settlement
of receivables with payables
|
|
$
|
80,000
|
|
|
$
|
-
|
|
The accompanying notes
are an integral part of these Condensed Consolidated Financial Statements.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
NOTE
1 – COMPANY BACKGROUND
Cardax
Pharmaceuticals, Inc. (“Holdings”) was incorporated in the State of Delaware on March 23, 2006.
Holdings
was formed for the purpose of developing a platform of proprietary, exceptionally safe, small molecule compounds for large unmet
medical needs where oxidative stress and inflammation play important causative roles. Holdings’ platform has application
in arthritis, metabolic syndrome, liver disease, and cardiovascular disease, as well as macular degeneration and prostate disease.
Holdings’ current primary focus is on the development of astaxanthin technologies. Astaxanthin is a naturally occurring
marine compound that has robust anti-oxidant and anti-inflammatory activity.
In
May of 2013, Holdings formed a 100% owned subsidiary company called Cardax Pharma, Inc. (“Pharma”). Pharma was formed
to maintain Holdings’ operations going forward, leaving Holdings as an investment holding company.
On
November 29, 2013, Holdings entered into a definitive merger agreement (“Merger Agreement”) with Koffee Korner Inc.,
a Delaware corporation (“Koffee Korner”) (OTCQB:KOFF), and its wholly owned subsidiary (“Koffee Sub”),
pursuant to which, among other matters and subject to the conditions set forth in such Merger Agreement, Koffee Sub would merge
with and into Pharma. In connection with such merger agreement and related agreements, upon the consummation of such merger, Pharma
would become a wholly owned subsidiary of Koffee Korner and Koffee Korner would issue shares of its common stock to Holdings.
At the effective time of such merger, Holdings would own a majority of the shares of the then issued and outstanding shares of
common stock of Koffee Korner.
On
February 7, 2014, Holdings completed its merger with Koffee Korner, which was renamed to Cardax, Inc. (the “Company”)
(OTCQB:CDXI). Concurrent with the merger: (i) the Company received aggregate gross cash proceeds of $3,923,100 in exchange for
the issuance and sale of an aggregate 6,276,960 of shares of the Company’s common stock, together with five year warrants
to purchase an aggregate of 6,276,960 shares of the Company’s common stock at $0.625 per share, (ii) the notes issued on
January 3, 2014, in the outstanding principal amount of $2,076,000 and all accrued interest thereon, automatically converted into
3,353,437 shares of the Company’s common stock upon the reverse merger at $0.625 per share, together with five year warrants
to purchase 3,321,600 shares of common stock at $0.625 per share, (iii) the notes issued in 2013, in the outstanding principal
amount of $8,489,036 and all accrued interest thereon, automatically converted into 14,446,777 shares of the Company’s common
stock upon the reverse merger at $0.625 per share, together with five year warrants to purchase 14,446,777 shares of common stock
at $0.625 per share, (iv) stock options to purchase 15,290,486 shares of Holdings common stock at $0.07 per share were cancelled
and substituted with stock options to purchase 6,889,555 shares of the Company’s common stock at $0.155 per share, (v) additional
stock options to purchase 20,867,266 shares of the Company’s common stock at $0.625 per share were issued, and (vi) the
notes issued in 2008 and 2009, in the outstanding principal amounts of $55,000 and $500,000, respectively, and all accrued interest
thereon, were repaid in full. The assets and liabilities of Koffee Korner were distributed in accordance with the terms of a spin-off
agreement on the closing date.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
1 – COMPANY BACKGROUND (continued)
The
share exchange transaction was treated as a reverse acquisition, with Holdings and Pharma as the acquirers and Koffee Korner and
Koffee Sub as the acquired parties. Unless the context suggests otherwise, when the Company refers to business and financial information
for periods prior to the consummation of the reverse acquisition, the Company is referring to the business and financial information
of Holdings and Pharma. Under accounting principles generally accepted in the United States of America (“U.S. GAAP”)
guidance Accounting Standards Codification (“ASC”) No. 805-40,
Business Combinations – Reverse Acquisitions
,
the Acquisition has been treated as a reverse acquisition with no adjustment to the historical book and tax basis of the Company’s
assets and liabilities.
On
August 28, 2014, the Company entered into an Agreement and Plan of Merger (the “Holdings Merger Agreement”) with its
principal stockholder, Holdings, pursuant to which Holdings would merge with and into the Company (the “Holdings Merger”).
On September 18, 2015, the Company filed a Form S-4 with the SEC in contemplation of the Holdings Merger. There would not be any
cash consideration exchanged in the Holdings Merger. Upon the closing of the Holdings Merger, the stockholders of Holdings would
receive an aggregate number of shares and warrants to purchase shares of the Company’s common stock equal to the aggregate
number of shares of the Company’s common stock that were held by Holdings on the date of the closing of the Holdings Merger.
The Company’s restricted shares of common stock held by Holdings would be cancelled upon the closing of the Holdings Merger.
Accordingly, there would not be not any change to the Company’s fully diluted capitalization due to the Holdings Merger.
On
November 24, 2015, the Holdings Merger Agreement was amended and restated (the “Amended Holdings Merger Agreement”).
Under the terms of Amended Holdings Merger Agreement, the shares of common stock, par value $0.001 per share of Holdings and the
shares of all other issued and outstanding capital stock of Holdings that by their terms were convertible or could otherwise be
exchanged for shares of Holdings common stock, would be converted into and exchanged for the Company’s shares of Common
Stock in a ratio of approximately 2.2:1. In addition, the Company would grant Holdings’ option and warrant holders warrants
to purchase the Company’s warrants at the same stock conversion ratio. On November 24, 2015, the Company filed an amendment
to the Form S-4 with the SEC and on March 29, 2015, the Form S-4 was declared effective by the SEC.
On
December 30, 2015, the Company completed its merger with Holdings, pursuant to the Amended Holdings Merger Agreement. At closing,
Holdings merged with and into the Company, with the Company surviving the Holdings Merger. Pursuant to the Amended Holdings Merger
Agreement, there was not any cash consideration exchanged in the Holdings Merger. Upon the closing of the Holdings Merger, the
stockholders of Holdings received an aggregate number of shares and warrants to purchase shares of Company common stock equal
to the aggregate number of shares of Company common stock that were held by Holdings on the date of the closing of the Holdings
Merger. The Company’s restricted shares of common stock held by Holdings were cancelled upon the closing of the Holdings
Merger. Accordingly, there was not any change to the Company’s fully diluted capitalization due to the Holdings Merger.
The
Company is engaged in the development, marketing, and distribution of consumer health products. The Company’s first commercial
product, ZanthoSyn®, is a physician recommended anti-inflammatory supplement for health and longevity that features astaxanthin
with optimal absorption and purity. The Company sells ZanthoSyn® primarily through e-commerce and wholesale channels. As a
next generation product, the Company is developing CDX-085, its patented astaxanthin derivative for more concentrated astaxanthin
product applications. The Company may also pursue pharmaceutical applications of astaxanthin and related compounds. The safety
and efficacy of the Company’s products have not been directly evaluated in clinical trials or confirmed by the FDA.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
1 – COMPANY BACKGROUND (continued)
Going
concern matters
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial
statements, the Company incurred a net loss of $1,100,122 and $2,147,985, for the three and six months ended June 30, 2018, respectively,
and a net loss of $383,043 and $833,879 for the three and six months ended June 30, 2017, respectively. The Company has incurred
losses since inception resulting in an accumulated deficit of $60,067,081 as of June 30, 2018, and has had negative cash flows
from operating activities since inception. The Company expects that its marketing program for ZanthoSyn® will continue to
focus on outreach to physicians, healthcare professionals, retail personnel, and consumers, and anticipates further losses in
the development of its business. As a result of these and other factors, management has determined there is substantial doubt
about the Company’s ability to continue as a going concern.
The
Company plans to raise additional capital to carry out its business plan. As part of the Company’s efforts, it raised an
additional $1.44 million in gross proceeds through the exchange of 9.6 million warrants during a warrant exchange offering that
closed on July 27, 2018. The Company’s continued ability to raise additional capital through future equity and debt securities
issuances is unknown. Obtaining additional financing, the successful development of the Company’s contemplated plan of operations,
and its transition, ultimately, to profitable operations are necessary for the Company to continue operations. The ability to
successfully resolve these factors raises substantial doubt about the Company’s ability to continue as a going concern.
The condensed consolidated financial statements of the Company do not include any adjustments that may result from the outcome
of these uncertainties.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited
interim financial information
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and
regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. In the opinion
of the Company’s management, the accompanying condensed consolidated financial statements reflect all adjustments, consisting
of normal, recurring adjustments, considered necessary for a fair presentation of the results for the interim periods ended June
30, 2018 and 2017. Although management believes that the disclosures in these unaudited condensed consolidated financial statements
are adequate to make the information presented not misleading, certain information and footnote disclosures normally included
in financial statements that have been prepared in accordance U.S. GAAP have been condensed or omitted pursuant to the rules and
regulations of the SEC.
These
unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and
the related notes included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2017, filed
with the SEC on March 27, 2018.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue
from contracts with customers
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard related to revenue recognition.
Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects
the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure
of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The
Company adopted this standard effective January 1, 2018, using the retrospective method. As there was no impact on contracts that
were previously completed and no significant impact to contracts completed after adoption, there was no need to restate prior
results from operations.
The
Company recognizes revenues from its contracts with customers for its products through e-commerce and wholesale channels when
goods and services have been identified, the payment terms agreed to, the contract has commercial substance, both parties have
approved the contract, and it is probable that the Company will collect all substantial consideration.
The following table presents our
revenues disaggregated by revenue source and geographical location. Sales and usage-based taxes are included as a component of
revenues for the six-months ended:
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
Geographical
area
|
|
Source
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
United States
|
|
Nutraceuticals
|
|
$
|
568,946
|
|
|
$
|
174,227
|
|
Hong Kong
|
|
Nutraceuticals
|
|
$
|
16,413
|
|
|
$
|
-
|
|
Sales
discounts, rebates, promotional amounts to vendors, and returns and allowances are recorded as a reduction to sales in the period
in which sales are recorded. The Company records shipping charges and sales tax gross in revenues and cost of goods sold. Sales
discounts and other adjustments are recorded at the time of sale.
Other
significant accounting policies
There
have been no other material changes to our significant accounting policies during the six-months ended June 30, 2018, as compared
to the significant accounting policies described in our Annual Report.
Recently
issued accounting pronouncements not yet adopted
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
. This ASU requires management to recognize lease assets and lease
liabilities for all leases. ASU No. 2016-02 retains a distinction between finance leases and operating leases. The classification
criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria
for distinguishing between capital leases and operating leases in the previous leases guidance. The result of retaining a distinction
between finance leases and operating leases is that under the lessee accounting model, the effect of leases in the statement of
comprehensive income and the statement of cash flows is largely unchanged from previous U.S. GAAP. The guidance in ASU No. 2016-02
is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company
is currently assessing the impact of this ASU on the Company’s condensed consolidated financial statements.
In
June 2018, the FASB issued ASU No. 2018-07,
Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee
Share-Based Payment Accounting
. This ASU is intended to simplify aspects of share-based compensation issued to non-employees
by making the guidance consistent accounting for employee share-based compensation. It is effective for annual reporting periods,
and interim periods within those years, beginning after December 15, 2018. The Company is currently in the process of evaluating
the impact of the adoption of this ASU on its condensed consolidated financial statements.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently
adopted accounting pronouncements
In
November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 23)
. The amendments of ASU No. 2017-18 require
that a statement of cash flow explain the change during a period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. The guidance of ASU No. 2016-18 is effective for fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years. The Company has assessed the impact of this ASU
and does not believe that this update has a significant impact on its condensed consolidated financial statements.
In
May 2017, the FASB issued ASU No. 2017-09,
Compensation-Stock Compensation: Scope of Modification Accounting
. The amendments
of ASU No. 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity
to apply modification accounting. The guidance of ASU No. 2017-09 is effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. The Company has assessed the impact of this ASU and does not believe that
this update has a significant impact on its condensed consolidated financial statements.
The
Company does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have
a material effect on the condensed consolidated financial statements.
Reclassifications
The
Company has made certain reclassifications to conform its prior periods’ data to the current presentation. These reclassifications
had no effect on the reported results of operations or cash flows.
NOTE
3 – INVENTORIES
Inventories
consist of the following as of:
|
|
June
30, 2018
(Unaudited)
|
|
|
December
31, 2017
|
|
Raw materials
|
|
$
|
250,855
|
|
|
$
|
98,937
|
|
Finished goods
|
|
|
148,207
|
|
|
|
240,917
|
|
Packing supplies
and materials
|
|
|
-
|
|
|
|
571
|
|
Total inventories
|
|
$
|
399,062
|
|
|
$
|
340,425
|
|
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
4 – PROPERTY AND EQUIPMENT, net
Property
and equipment, net, consists of the following as of:
|
|
June
30, 2018
(Unaudited)
|
|
|
December
31, 2017
|
|
Information technology equipment
|
|
$
|
31,892
|
|
|
$
|
31,892
|
|
Less accumulated
depreciation
|
|
|
(31,892
|
)
|
|
|
(29,991
|
)
|
Total property
and equipment, net
|
|
$
|
-
|
|
|
$
|
1,901
|
|
Depreciation
expense was $420 and $1,901, for the three and six-months ended June 30, 2018, respectively, and $1,508 and $3,017, for the three
and six-months ended June 30, 2017, respectively.
NOTE
5 – INTANGIBLE ASSETS, net
Intangible
assets, net, consists of the following as of:
|
|
June
30, 2018
(Unaudited)
|
|
|
December
31, 2017
|
|
Patents
|
|
$
|
493,027
|
|
|
$
|
493,027
|
|
Less accumulated
amortization
|
|
|
(279,078
|
)
|
|
|
(263,843
|
)
|
|
|
|
213,949
|
|
|
|
229,184
|
|
Patents pending
|
|
|
217,755
|
|
|
|
197,426
|
|
Total intangible
assets, net
|
|
$
|
431,704
|
|
|
$
|
426,610
|
|
Patents
are amortized straight-line over a period of fifteen years. Amortization expense was $6,717 and $15,235 for the three and six-months
ended June 30, 2018, respectively, and $6,142 and $12,284, for the three and six-months ended June 30, 2017, respectively.
The
Company has capitalized costs for several patents that are still pending. In those instances, the Company has not recorded any
amortization. The Company will commence amortization when these patents are approved.
The
Company owns 22 issued patents, including 14 in the United States and 8 others in China, India, Japan, and Hong Kong. These patents
will expire beginning in 2023 through 2028, subject to any patent term extensions of the individual patent. The Company has 4
foreign patent applications pending in Europe, Canada, and Brazil.
NOTE
6 – STOCKHOLDERS’ DEFICIT
Self-directed
stock issuance
During
the year ended December 31, 2017, the Company sold securities in a self-directed offering in the aggregate amount of $179,000,
$3,774,456, and $124,979 at $0.08, $0.12, and $0.30, respectively, per unit. Each $0.08 unit consisted of 1 share of restricted
common stock (2,237,500 shares), a five year warrant to purchase 1 share of restricted common stock (2,237,500 warrant shares)
at $0.08 per share, a five year warrant to purchase 1 share of restricted common stock (2,237,500 warrant shares) at $0.12 per
share, and a five year warrant to purchase 1 share of restricted common stock (2,237,500 warrant shares) at $0.16 per share. Each
$0.12 unit consisted of 1 share of restricted common stock (31,453,788 shares) and a five-year warrant to purchase 1 share of
restricted common stock (31,453,788 warrant shares) at $0.12 per share. Each $0.30 unit consisted of 1 share of restricted common
stock (416,595 shares) and a five-year warrant to purchase 1 share of restricted common stock (416,595 warrant shares) at $0.30
per share.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
6 – STOCKHOLDERS’ DEFICIT (continued)
Equity
purchase agreement
In
July 2016, the Company entered into an equity purchase agreement (the “EPA”) and a registration rights agreement with
an investor. Pursuant to the terms of the EPA, the Company has the right, but not the obligation, to sell shares of its common
stock to the investor on the terms specified in the EPA. On the date of the EPA, the Company issued 1,500,000 shares to the investor.
The total fair value of this stock on the date of grant was $106,500. These shares were fully vested upon issuance.
During
the six-months ended June 30, 2018 and 2017, the Company sold 0 and 567,644 shares of common stock for $0 and $60,000, respectively,
pursuant to the EPA.
Payable
settlement
In
May 2017, the Company settled a payable in the amount of $44,700 with a previously engaged broker dealer through the issuance
of securities at $0.08 per unit. Each unit consisted of 1 share of restricted common stock (558,750 shares), a five-year warrant
to purchase 1 share of restricted common stock (558,750 warrant shares) at $0.08 per share, a five-year warrant to purchase 1
share of restricted common stock (558,750 warrant shares) at $0.12 per share, and a five-year warrant to purchase 1 share of restricted
common stock (558,750 warrant shares) at $0.16 per share.
Shares
outstanding
As
of June 30, 2018 and December 31, 2017, the Company had a total of 123,300,787 and 122,674,516, respectively, shares of common
stock outstanding.
NOTE
7 – STOCK GRANTS
Director
stock grants
During the six-months ended June
30, 2018, the Company granted its independent directors an aggregate of 469,274 shares of restricted common stock in the Company.
As a result of the increase in Board Members by three members, the total fair value of this stock on the date of grant
was $112,500 for the six-months ended June 30, 2018. These shares were fully vested upon issuance.
During the six-months ended June
30, 2017, the Company granted its independent directors an aggregate of 322,916 shares of restricted common stock in the Company.
The total fair value of this stock on the date of grant was $50,000 for the six-months ended June 30, 2017. These shares were fully
vested upon issuance.
Consultant stock grants
On April 10, 2017, the Company
granted a consultant 100,000 shares of restricted common stock valued at $0.23 per share. These shares were subject to a risk
of forfeiture and vested quarterly in arrears commencing on April 1, 2017. The Company recognized $5,750 and $0 in stock-based
compensation related to this grant during the six-months ended June 30, 2018 and 2017, respectively.
On
August 8, 2017, the Company granted a consultant 100,000 shares of restricted common stock valued at $0.175 per share. These shares
were subject to a risk of forfeiture and vested 25% upon grant and quarterly in arrears thereafter commencing on September 1,
2017. The Company recognized $4,375 and $0 in stock-based compensation related to this grant during the six-months ended June
30, 2018 and 2017, respectively.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
8 – STOCK OPTION PLANS
On
February 7, 2014, the Company adopted the 2014 Equity Compensation Plan. Under this plan, the Company may issue options to purchase
shares of common stock to employees, directors, advisors, and consultants. The aggregate number of shares that may be issued under
this plan is 30,420,148. On April 16, 2015, the majority stockholder of the Company approved an increase in the Company’s
2014 Equity Compensation Plan by 15 million shares.
Under
the terms of the 2014 Equity Compensation Plan and the 2006 Stock Incentive Plan (collectively, the “Plans”), incentive
stock options may be granted to employees at a price per share not less than 100% of the fair market value at date of grant. If
the incentive stock option is granted to a 10% stockholder, then the purchase or exercise price per share shall not be less than
110% of the fair market value per share of common stock on the grant date. Non-statutory stock options and restricted stock may
be granted to employees, directors, advisors, and consultants at a price per share, not less than 100% of the fair market value
at date of grant. Options granted are exercisable, unless specified differently in the grant documents, over a default term of
ten years from the date of grant and generally vest over a period of four years.
A
summary of stock option activity is as follows:
|
|
Options
|
|
|
Weighted
average exercise price
|
|
|
Weighted
average remaining contractual term in years
|
|
|
Aggregate
intrinsic value
|
|
Outstanding
January 1, 2017
|
|
|
36,821,969
|
|
|
$
|
0.41
|
|
|
|
5.94
|
|
|
$
|
301,273
|
|
Exercisable
January 1, 2017
|
|
|
36,771,969
|
|
|
$
|
0.41
|
|
|
|
5.94
|
|
|
$
|
299,273
|
|
Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,161,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(770,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
December 31, 2017
|
|
|
38,213,427
|
|
|
$
|
0.41
|
|
|
|
5.23
|
|
|
$
|
562,456
|
|
Exercisable
December 31, 2017
|
|
|
36,213,427
|
|
|
$
|
0.41
|
|
|
|
4.98
|
|
|
$
|
562,456
|
|
Canceled
|
|
|
(350,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,833,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(156,997
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(43,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
June 30, 2018
|
|
|
39,496,761
|
|
|
$
|
0.41
|
|
|
|
4.89
|
|
|
$
|
1,265,084
|
|
Exercisable
June 30, 2018
|
|
|
36,271,762
|
|
|
$
|
0.41
|
|
|
|
4.50
|
|
|
$
|
1,225,084
|
|
The
aggregate intrinsic value in the table above is before applicable income taxes and represents the excess amount over the exercise
price option recipients would have received if all options had been exercised on June 30, 2018, based on a valuation of the Company’s
stock for that day.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
8 – STOCK OPTION PLANS (continued)
A
summary of the Company’s non-vested options for the year ended December 31, 2017, and six-months ended June 30, 2018, are
presented below:
Non-vested
at January 1, 2017
|
|
|
50,000
|
|
Granted
|
|
|
2,161,458
|
|
Vested
|
|
|
(211,458
|
)
|
Forfeited
|
|
|
-
|
|
Non-vested
at December 31, 2017
|
|
|
2,000,000
|
|
Granted
|
|
|
1,833,334
|
|
Vested
|
|
|
(258,335
|
)
|
Canceled
|
|
|
(350,000
|
)
|
Non-vested
at June 30, 2018
|
|
|
3,224,999
|
|
The
Company estimates the fair value of stock options granted on each grant date using the Black-Scholes option valuation model and
recognizes an expense ratably over the requisite service period. The range of fair value assumptions related to options issued
outstanding were as follows for the:
|
|
Six-months
ended
June
30, 2018
|
|
|
Year
ended
December
31, 2017
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free rate
|
|
|
2.38
|
%
|
|
|
1.89%
- 2.26
|
%
|
Expected volatility
|
|
|
226
|
%
|
|
|
221%
- 232
|
%
|
Expected term
|
|
|
3
- 7 years
|
|
|
|
5
- 7 years
|
|
The
expected volatility was calculated based on the historical volatility of the Company. The risk-free interest rate used was based
on the U.S. Treasury constant maturity rate in effect at the time of grant for the expected term of the stock options to be valued.
The expected dividend yield was zero, as the Company does not anticipate paying a dividend within the relevant timeframe. Due
to a lack of historical information needed to estimate the Company’s expected term, it was estimated using the simplified
method allowed.
The
Company records forfeitures as they occur and reverses compensation cost previously recognized, in the period the award is forfeited,
for an award that is forfeited before completion of the requisite service period.
Stock
option exercise
During
the six-months ended June 30, 2018, the Company issued 156,997 shares of common stock in connection with the cashless exercise
of stock options for 100,000, 50,000, and 50,000 shares of common stock exercisable at $0.06 per share with 43,003 shares of common
stock withheld with an aggregate fair market value equal to the aggregate exercise price.
During
the year ended December 31, 2017, the Company issued 645,288 shares of common stock in connection with the cashless exercise of
stock options for 100,000, 45,000, and 625,000 shares of common stock exercisable at $0.155, $0.06, and $0.06, respectively, per
share with 124,712 shares of common stock withheld with an aggregate fair market value equal to the aggregate exercise price.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
8 – STOCK OPTION PLANS (continued)
The
Company recognized stock-based compensation expense related to options during the:
|
|
Six-months ended June 30
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation
|
|
|
133,334
|
|
|
$
|
108,500
|
|
|
|
-
|
|
|
$
|
-
|
|
Compensation for outside services
|
|
|
125,001
|
|
|
|
31,562
|
|
|
|
50,000
|
|
|
|
3,500
|
|
Director compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
161,458
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
258,335
|
|
|
$
|
140,062
|
|
|
|
211,458
|
|
|
$
|
28,500
|
|
NOTE
9 – WARRANTS
The
following is a summary of the Company’s warrant activity:
|
|
Warrants
|
|
|
Weighted
average exercise price
|
|
|
Weighted
average remaining contractual term in years
|
|
|
Aggregate
intrinsic value
|
|
Outstanding January
1, 2017
|
|
|
88,365,036
|
|
|
$
|
0.30
|
|
|
|
3.50
|
|
|
$
|
543,770
|
|
Exercisable January 1, 2017
|
|
|
88,365,036
|
|
|
$
|
0.30
|
|
|
|
3.50
|
|
|
$
|
543,770
|
|
Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
40,259,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(798,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(392,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2017
|
|
|
127,434,122
|
|
|
$
|
0.24
|
|
|
|
3.15
|
|
|
$
|
3,957,689
|
|
Exercisable December 31, 2017
|
|
|
127,434,122
|
|
|
$
|
0.24
|
|
|
|
3.15
|
|
|
$
|
3,957,689
|
|
Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2018
|
|
|
127,434,122
|
|
|
$
|
0.24
|
|
|
|
2.65
|
|
|
$
|
9,809,613
|
|
Exercisable June 30, 2018
|
|
|
127,434,122
|
|
|
$
|
0.24
|
|
|
|
2.65
|
|
|
$
|
9,809,613
|
|
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
9 – WARRANTS (continued)
The
Company estimates the fair value of warrants granted on each grant date using the Black-Scholes option valuation model. The expected
volatility was calculated based on the historical volatilities of publicly traded peer companies, determined by the Company. The
risk-free interest rate used was based on the U.S. Treasury constant maturity rate in effect at the time of grant for the expected
term of the warrants to be valued. The expected dividend yield was zero, as the Company does not anticipate paying a dividend
within the relevant timeframe. The expected warrant term is the life of the warrant.
The
Company did not recognize any stock-based compensation expense related to warrants during the six-months ended June 30, 2018 and
2017, respectively.
Warrant
exercise
During
the year ended December 31, 2017, the Company issued 233,217 shares of common stock in connection with the cashless exercise of
a warrant for 298,000 shares of common stock at $0.10 per share with 64,783 shares of common stock withheld with an aggregate
fair market value equal to the aggregate exercise price.
During
the year ended December 31, 2017, the Company issued 500,000 shares of common stock in connection with the exercise of a warrant
for 500,000 shares of common stock at $0.08 per share in exchange for $40,000.
Warrant
expiration
During
the year ended December 31, 2017, warrants to purchase an aggregate of 392,047 shares of restricted common stock expired.
Warrant
exchange
On May 2, 2018, the Company filed
a Form S-4 Registration Statement to register 27,705,782 shares of common stock with a par value of $0.001. These shares of common
stock would be issued to warrant holders in exchange for (i) their outstanding warrants to purchase shares of common stock at
$0.625 per share, and (ii) cash payment of $0.15 per share. This offering closed on July 27, 2018 and resulted in an exchange
of 9.6 million warrants for $1.44 million in gross proceeds. These amounts were held in escrow as of June 30, 2018, and are
not reflected in the June 30, 2018, financial statements.
NOTE
10 – INCOME TAXES
The
Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities
are determined based upon the difference between the financial statement carrying amounts and the tax basis of assets and liabilities
and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected
to be reversed.
The
effective tax rate for the three and six-months ended June 30, 2018 and 2017, differs from the statutory rate of 21% as a result
of state taxes (net of Federal benefit), permanent differences, and a reserve against deferred tax assets.
The
Company’s valuation allowance was primarily related to the operating losses. The valuation allowance is determined in accordance
with the provisions of ASC No. 740,
Income Taxes
, which requires an assessment of both negative and positive evidence when
measuring the need for a valuation allowance. Based on the available objective evidence and the Company’s history of losses,
management provides no assurance that the net deferred tax assets will be realized. As of June 30, 2018 and December 31, 2017,
the Company has applied a valuation allowance against its deferred tax assets net of the expected income from the reversal of
the deferred tax liabilities.
Recent
tax legislation
On
March 22, 2018, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changes existing U.S.
tax law and includes numerous provisions that affect our business, such as reducing the U.S. federal statutory tax rate. The TCJA
reduces the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
10 – INCOME TAXES (continued)
Uncertain
tax positions
The
Company is subject to taxation in the United States and two state jurisdictions. The preparation of tax returns requires management
to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid
by the Company. Management, in consultation with its tax advisors, files its tax returns based on interpretations that are believed
to be reasonable under the circumstances. The income tax returns, however, are subject to routine reviews by the various taxing
authorities. As part of these reviews, a taxing authority may disagree with respect to the tax positions taken by management (“uncertain
tax positions”) and therefore may require the Company to pay additional taxes.
Management
evaluates the requirement for additional tax accruals, including interest and penalties, which the Company could incur as a result
of the ultimate resolution of its uncertain tax positions. Management reviews and updates the accrual for uncertain tax positions
as more definitive information becomes available from taxing authorities, completion of tax audits, expiration of statute of limitations,
or upon occurrence of other events.
As
of June 30, 2018 and December 31, 2017, there was no liability for income tax associated with unrecognized tax benefits. The Company
recognizes accrued interest related to unrecognized tax benefits as well as any related penalties in interest income or expense
in its condensed consolidated statements of operations, which is consistent with the recognition of these items in prior reporting
periods.
The
federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally
for three years after they were filed.
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
11 – BASIC AND DILUTED NET LOSS PER SHARE
The
following table sets forth the computation of the Company’s basic and diluted net loss per share for:
|
|
Three-months
ended June 30, 2018
(Unaudited)
|
|
|
|
Net
Loss
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per
share
amount
|
|
Basic loss per share
|
|
$
|
(1,100,122
|
)
|
|
|
122,975,014
|
|
|
$
|
(0.01
|
)
|
Effect of dilutive
securities—Common stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted loss per share
|
|
$
|
(1,100,122
|
)
|
|
|
122,975,014
|
|
|
$
|
(0.01
|
)
|
|
|
Three-months
ended June 30, 2017(Unaudited)
|
|
|
|
Net
Loss
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per
share
amount
|
|
Basic loss per share
|
|
$
|
(383,043
|
)
|
|
|
90,305,824
|
|
|
$
|
(0.00
|
)
|
Effect of dilutive
securities—Common stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted loss per share
|
|
$
|
(383,043
|
)
|
|
|
90,305,824
|
|
|
$
|
(0.00
|
)
|
|
|
Six-months
ended June 30, 2018
(Unaudited)
|
|
|
|
Net
Loss
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per
share
amount
|
|
Basic loss per share
|
|
$
|
(2,147,985
|
)
|
|
|
122,825,595
|
|
|
$
|
(0.02
|
)
|
Effect of dilutive
securities—Common stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted loss per share
|
|
$
|
(2,147,985
|
)
|
|
|
122,825,595
|
|
|
$
|
(0.02
|
)
|
|
|
Six-months
ended June 30, 2017 (Unaudited)
|
|
|
|
Net
Loss
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per
share
amount
|
|
Basic loss per share
|
|
$
|
(833,879
|
)
|
|
|
88,409,138
|
|
|
$
|
(0.01
|
)
|
Effect of dilutive
securities—Common stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted loss per share
|
|
$
|
(833,879
|
)
|
|
|
88,409,138
|
|
|
$
|
(0.01
|
)
|
Cardax,
Inc., and Subsidiary
NOTES
TO THE CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (continued)
NOTE
11 – BASIC AND DILUTED NET LOSS PER SHARE (continued)
The
following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share for
the periods presented because including them would have been antidilutive for the periods ended:
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Common stock options
|
|
|
39,496,761
|
|
|
|
36,983,427
|
|
Common stock
warrants
|
|
|
127,434,122
|
|
|
|
99,322,970
|
|
Total common
stock equivalents
|
|
|
166,930,883
|
|
|
|
136,306,397
|
|
NOTE
12 – LEASES
Manoa
Innovation Center
The
Company entered into an automatically renewable month-to-month lease for office space on August 13, 2010. Under the terms of this
lease, the Company must provide a written notice 45 days prior to vacating the premises. Total rent expense under this agreement
as amended was $13,701 and $20,902, for the three and six-months ended June 30, 2018, respectively, and $7,842 and $15,771, for
the three and six-months ended June 30, 2017, respectively.
Fleet
Lease
In January 2018, the Company entered
into a vehicle lease arrangement with a rental company for three vehicles. The terms of the leases require total monthly payments
of $1,619 is for three-years. These leases convert to month-to-month leases in January 2021 unless terminated. Total rent expense
under this agreement was $5,621 and $9,351, for the three and six-months ended June 30, 2018, respectively, and $0 for the three
and six-months ended June 30, 2017.
NOTE 13 – SUBSEQUENT EVENTS
The Company evaluated all material
events through the date the financials were ready for issuance. Management identified the below subsequent event for
additional disclosure in the financial statements.
On May 2, 2018, the Company
filed a Form S-4 Registration Statement to register 27,705,782 shares of common stock with a par value of $0.001. These shares
of common stock would be issued to warrant holders in exchange for (i) their outstanding warrants to purchase shares of common
stock at $0.625 per share, and (ii) cash payment of $0.15 per share. This offering closed on July 27, 2018 and resulted in an
exchange of 9.6 million warrants for $1.44 million in gross proceeds. These amounts were held in escrow as of June 30, 2018, and
are not reflected in the June 30, 2018, financial statements.
***