ITEM
1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
Effective
January 21, 2020, Cardax, Inc. (the “Company”)
entered into and consummated a secured bridge financing of $250,000 through a Secured Convertible Promissory Note (the “Note”).
The lender was Harbor Gates Capital, LLC, a Wyoming limited liability company (the “Lender”).
The
terms of this bridge financing included the following agreements and documents, each entered into as of January 21, 2020:
Securities
Purchase Agreement
The
Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) by and between the Company
and the Lender to issue the Note, described below. Under the Purchase Agreement, the Company will issue $25,000 of its restricted
shares of common stock, par value $0.001 per share (the “Common Stock”) at a price per share equal to the average
of the volume weighted average prices of the Common Stock during the five (5) trading days prior to the February 21, 2020.
The
Purchase Agreement also included customary representations, warranties, and covenants of the parties to such agreement.
Secured
Convertible Promissory Note
The
Company issued to the Lender the Note, which included the following terms:
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Principal
Amount equal to $262,500, which included an original issue discount of $12,500, and gross
proceeds to the Company of $250,000, which were used by the Company to pay accrued expenses
and for other general corporate purposes.
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Maturity
date: June 30, 2020.
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The
Note bears a one-time interest charge of 10%, which shall be paid at the maturity date,
unless the Note is converted into shares of Common Stock.
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The
Lender may convert any or all of the obligations of the Note into shares of Common Stock
at a price per share (the “Conversion Price”) equal to the following,
subject to customary adjustments for stock splits or similar transactions:
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$14.00
initially, with a one-time reset on February 21, 2020 to a price equal to the average
of the volume weighted average prices of the Common Stock during the five (5) trading
days prior to February 21, 2020, wherein “trading day” means any day on which
the Common Stock is tradable on the OTCQB or on the principal securities exchange or
other securities market on which the Common Stock is then being traded; or if lower
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From
and after the maturity date, a price equal to 70% of the average of the two lowest daily
volume-weighted average prices of the Common Stock for the 15 trading days prior to the
Conversion Date.
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The
number of shares of Common Stock that may be issued upon conversion is subject to specified
limitations of beneficial ownership that are set forth in the Note of 4.99% or, at the
option of the Lender, 9.99% of the issued and outstanding shares of Common Stock, which
limitations may be decreased or terminated in the Lender’s sole discretion upon
61 days’ notice to the Company.
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The
Company may prepay the Note in whole or part, subject to specified prepayment premiums
or penalties, equal to 15% for prepayments on or prior to March 31, 2020; 25% for prepayments
on or prior to May 15, 2020; or 30% prior to June 30, 2020.
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The
Note provided for certain customary events of default, including:
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Change
of control, being: (1) acquisition of beneficial ownership of 50% or more of the voting
securities of the Company by any individual or legal entity or group, other than in connection
with an underwritten public offering; or (2) merger or similar transaction where the
stockholders of the Company do not own 50% of the aggregate voting power of the surviving
entity after such transaction; or (3) sale of all or substantially all of the assets
and the stockholders of the Company immediately prior to such transaction do not own
50% of the aggregate voting power of the acquiring entity immediately after such transaction;
or (4) a replacement at one time or within a two year period of more than half of the
members of the Board of Directors, if not approved by a majority of the Board of Directors;
or (5) David G. Watumull and David M. Watumull shall both have been terminated by the
Company as Chief Executive Officer and Chief Operating Officer other than for cause;
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Judgements
entered against the Company for more than $500,000 which are not vacated within 180 days;
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Failure
of the Company to comply with the reporting obligations under the Securities Exchange
Act of 1934, as amended;
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Suspension
of trading of the Common Stock that continues for 5 trading days; or
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Delisting
of the Common Stock on the OTCQB or any other exchange that the Common Stock is listed
for trading that continues for 15 days.
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Upon
any event of default, the principal of the Note is increased by 5% and, at the Lender’s
option, the maturity of the Note is accelerated.
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The
Note also included customary representations, warranties, and covenants of the Company.
Security
Agreement
The
Company granted to the Lender a security interest pursuant to the terms of the Security Agreement (the “Security Agreement”)
by and between the Company and the Lender in specified collateral, including (as defined under the Uniform Commercial Code): all
finished goods, including, without limitation, all inventory; all accounts, together with all instruments, all documents of title
representing any of the foregoing, and all right, title, security, and guaranties with respect to each account, including any
right of stoppage in transit; and the products and proceeds of all of the foregoing.
The
Security Agreement also included customary representations, warranties, and covenants of the parties to such agreement. Upon any
Event of Default under the terms of the Security Agreement, the Lender shall have the rights of a secured party under the Uniform
Commercial Code, including the right to take possession and sell the collateral and use under a license the intellectual property
of the Company related to its inventory.
Subsidiary
Guaranty
Cardax
Pharma, Inc., the wholly-owned subsidiary of the Company (the “Subsidiary”) entered into a Subsidiary Guaranty
(the “Subsidiary Guaranty”) in favor of the Lender that unconditionally and irrevocably, guarantees to Lender
and its successors, endorsees, transferees, and assigns, the prompt and complete payment and performance when due (whether at
the stated maturity, by acceleration, or otherwise) of the obligations of the Company under the transaction documents. Such Subsidiary
Guaranty also included customary representations, warranties, and covenants of the Subsidiary. Such covenants included that for
so long a 67% of the principal amount of the Note is outstanding, the Subsidiary would not:
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Incur
or suffer to exist indebtedness or grant or suffer to exist any lien that, in either
case, provides a security interest that is senior to the security interest granted by
the Company on the collateral pledged under the Security Agreement.
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Enter
into any affiliated transaction, other than transactions that are made on arm’s
length terms and approved by the majority of the disinterested directors or that provide
for any additional equity or unsecured debt investment in the Company.
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Personal
Guaranty of David G. Watumull
In
order to induce the Lender to make the bridge financing, the Company’s Chief Executive Officer and director, David G. Watumull,
personally guaranteed the obligations of the Company under the transaction documents described above pursuant to the terms of
a Personal Guaranty (the “Personal Guaranty”). The Personal Guaranty included customary representations, warranties,
and covenants. The Personal Guaranty is intended to be additional collateral for the Company’s obligations and will be enforced
by the Lender only after (1) the inventory collateral is transferred to the Lender and (2) at least 90% of such inventory collateral
is sold, or if earlier, 180 days after such transfer. The Company has agreed to indemnify and hold Mr. Watumull harmless for all
amounts that he may be required to pay or any obligations under the Personal Guaranty.
Definitive
Agreements
Forms
of the Purchase Agreement, Note, Security Agreement, Subsidiary Guaranty, and Personal Guaranty are filed as Exhibits 10.1, 10.2,
10.3, 10.4, and 10.5 respectively, to this Current Report on Form 8-K. Each such agreement or document has additional customary
representations, warranties, and covenants.
The
description of the transactions contemplated by these agreements does not purport to be complete and is qualified in its entirety
by reference to the full text of the documents filed as exhibits hereto and incorporated herein by reference.