Explanatory Note
Unless otherwise noted, references in this Quarterly Report on Form 10-Q to
"Cardax," the "Company," "we," "our," or "us" means Cardax, Inc., the
registrant, and, unless the context otherwise requires, together with its
wholly-owned subsidiary, Cardax Pharma, Inc., a Delaware corporation ("Pharma"),
and Pharma's predecessor, Cardax Pharmaceuticals, Inc., a Delaware corporation
("Holdings"), which merged with and into Cardax, Inc., on December 30, 2015.
Unless otherwise noted, references in this Quarterly Report on Form 10-Q to our
"product" or "products" includes our dietary supplements, pharmaceutical
candidates, and any of our other current or future products, product candidates,
and technologies, to the extent applicable.
Corporate Overview and History
We are a development stage biopharmaceutical company primarily focused on the
development of pharmaceuticals for chronic diseases driven by inflammation. We
also have a commercial business unit that markets dietary supplements for
inflammatory health. CDX-101, our astaxanthin pharmaceutical candidate, is being
developed for cardiovascular inflammation and dyslipidemia, with a target
initial indication of severe hypertriglyceridemia. CDX-301, our zeaxanthin
pharmaceutical candidate, is being developed for macular degeneration. Our
pharmaceutical candidates are currently in pre-clinical development, including
the planning of IND enabling studies. ZanthoSyn® is a physician recommended
astaxanthin dietary supplement for inflammatory health. We sell ZanthoSyn®
primarily through wholesale and e-commerce channels. The safety and efficacy of
our products have not been directly evaluated in clinical trials or confirmed by
the FDA.
At present we are not able to estimate if or when we will be able to generate
sustained revenues. Our financial statements have been prepared assuming that we
will continue as a going concern; however, given our recurring losses from
operations, our independent registered public accounting firm has determined
there is substantial doubt about our ability to continue as a going concern.
Impact of COVID-19
The COVID-19 pandemic is a worldwide health crisis that is adversely affecting
the economies and financial markets of many countries and may have short-term
and long-term adverse effects on our business, financial condition, and results
of operations that cannot be predicted as the global pandemic continues to
evolve. Our sales, receivables, and access to financing, have been adversely
affected during the pandemic.
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Results of Operations
Results of Operations for the Three and Nine-Months Ended September 30, 2020 and
2019:
The following table reflects our operating results for the three and nine-months
ended September 30, 2020 and 2019:
Three-months Three-months Nine-months Nine-months
ended ended ended ended
September 30, September 30, September 30, September 30,
Operating Summary 2020 2019 2020 2019
Revenues, net $ 66,502 $ 229,142 $ 343,836 $ 439,505
Cost of Goods Sold (27,516 ) (120,818 ) (129,381 ) (254,479 )
Gross Profit 38,986 108,324 214,455 185,026
Operating Expenses (744,746 ) (1,300,035 ) (2,615,278 ) (3,540,412 )
Net Operating Loss (705,760 ) (1,191,711 ) (2,400,823 ) (3,355,386 )
Other Expenses, net (648,571 ) (241,915 ) (1,656,718 ) (295,354 )
Net Loss $ (1,354,331 ) $ (1,433,626 ) $ (4,057,541 ) $ (3,650,740 )
Operating Summary for the Three-Months Ended September 30, 2020 and 2019
Our revenues presently derive from the sale of ZanthoSyn® primarily through
wholesale and, to a lesser extent, e-commerce channels. We launched our
e-commerce channel in 2016 and began selling to GNC stores in 2017. ZanthoSyn®
is available at GNC corporate stores nationwide. As a result, revenues were
$66,502 and $229,142 for the three-months ended September 30, 2020 and 2019,
respectively. Costs of goods sold were $27,516 and $120,818 for the three-months
ended September 30, 2020 and 2019, respectively, and included costs of the
product, shipping and handling, sales taxes, merchant fees, and other costs
incurred on the sale of goods. Gross profits were $38,986 and $108,324 for the
three-months ended September 30, 2020 and 2019, respectively, which represented
gross profit margins of approximately 59% and 47%, respectively. The decreases
in revenues and gross profit were primarily attributed to decreased sales, which
we believe were related to the COVID-19 pandemic and GNC's Chapter 11
reorganization.
Operating expenses were $744,746 and $1,300,035 for the three-months ended
September 30, 2020 and 2019, respectively. Operating expenses primarily
consisted of services provided to the Company, including payroll, consultation,
and contract services, for research and development, including our clinical
trial and pharmaceutical development programs, sales and marketing, and
administration. These expenses were paid in accordance with agreements entered
with each employee or service provider. Included in operating expenses were
$144,062 and $175,712 in stock-based compensation for the three-months ended
September 30, 2020 and 2019, respectively. The decrease in operating expenses
was primarily attributed to decreased professional fees, research and
development, salaries and wages, and selling, general, and administrative
expenses.
Other expenses, net, were $648,571 and $241,915 for the three-months ended
September 30, 2020 and 2019, respectively. For the three-months ended September
30, 2020, other income (expenses), consisted of a change in fair value of
derivative liability of $(268,711), gain on modification of debt instruments of
$40,133, and interest expense of $(419,993). The interest expense was primarily
attributed to amortization of non-cash discounts associated with debt issuances.
For the three-months ended September 30, 2019, other income (expenses) consisted
of the change in the fair value of a derivative liability of $(20,524), loss on
abandonment of patents of $(36,205), and interest expense of $(185,186).
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Operating Summary for the Nine-Months Ended September 30, 2020 and 2019
Our revenues were $343,836 and $439,505 for the nine-months ended September 30,
2020 and 2019, respectively. Costs of goods sold were $129,381 and $254,479 for
the nine-months ended September 30, 2020 and 2019, respectively, and included
costs of the product, shipping and handling, sales taxes, merchant fees, and
other costs incurred on the sale of goods. Gross profits were $214,455 and
$185,026 for the nine-months ended September 30, 2020 and 2019, respectively,
which represented gross profit margins of approximately 62% and 42%,
respectively. The decrease in revenues was primarily attributed to decreased
sales, which we believe were related to the COVID-19 pandemic and GNC's Chapter
11 reorganization. The increase in gross profit was primarily attributed to
decreased GNC promotional discounts, incentives, and returns.
Operating expenses were $2,615,278 and $3,540,412 for the nine-months ended
September 30, 2020 and 2019, respectively. Operating expenses primarily
consisted of services provided to the Company, including payroll, consultation,
and contract services, for research and development, including our clinical
trial and pharmaceutical development programs, sales and marketing, and
administration. These expenses were paid in accordance with agreements entered
with each employee or service provider. Included in operating expenses were
$488,437 and $534,774 in stock-based compensation for the nine-months ended
September 30, 2020 and 2019, respectively. The decrease in operating expenses
was primarily attributed to decreased professional fees, research and
development, salaries and wages, and selling, general, and administrative
expenses.
Other expenses, net, were $1,656,718 and $295,354 for the nine-months ended
September 30, 2020 and 2019, respectively. For the nine-months ended September
30, 2020, other income (expenses), consisted of a change in fair value of
derivative liability of $(191,545), gain on modification of debt instruments of
$394,924, other income of $10,000, and interest expense of $(1,870,097). The
interest expense was primarily attributed to amortization of non-cash discounts
associated with debt issuances. For the nine-months ended September 30, 2019,
other income (expenses) consisted of the change in the fair value of a
derivative liability of $(3,139), loss on abandonment of patents of $(36,205),
and interest expense of $(256,010).
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Liquidity and Capital Resources
Since our inception, we have sustained operating losses and have used cash
raised by issuing securities. We expect to continue to operate with a net loss
until we are able to develop and commercialize our pharmaceutical product
candidates. During the nine-months ended September 30, 2020 and 2019, we used
cash in operating activities in the amount of $1,406,791 and $3,047,889,
respectively, and incurred net losses of $4,057,541 and $3,650,740,
respectively. The decrease in cash used in operating activities for the
nine-months ended September 30, 2020, primarily related to a combination of
decreased operating expenses and increased accruals for accounts payable and
accrued payroll.
Our existing liquidity is not sufficient to fund our operations, including
payroll, anticipated capital expenditures, working capital, and other financing
requirements for the foreseeable future. We may require more financing than
anticipated, especially if we experience downturns or cyclical fluctuations in
our business that are more severe or longer than anticipated, or if we
experience significant increases in the cost of manufacturing, research and
development, or sales and marketing activities, or increases in our expense
levels resulting from being a publicly-traded company.
Our working capital and capital requirements at any given time depend upon
numerous factors, including, but not limited to:
? revenues from the sale of any products or licenses;
? costs of production, marketing and sales capabilities, or other operating
expenses; and
? costs of research, development, and commercialization of our products and
technologies.
Our largest customer, GNC, filed for Chapter 11 reorganization under the U.S.
Bankruptcy Code on June 23, 2020. As of September 30, 2020, we provided an
allowance of $52,766 for our receivables from GNC. On October 7, 2020, GNC
announced it had emerged from bankruptcy as GNC Holdings, LLC, a Delaware
company, owned indirectly by Harbin Pharmaceutical Group Co., Ltd., a Chinese
pharmaceutical company ("Harbin"), through its wholly-owned subsidiary, ZT
Biopharmaceutical LLC, a Delaware company. Harbin was previously GNC's largest
stockholder and acquired the company for approximately $770 million according to
public reports. GNC orders of ZanthoSyn® have resumed, but we cannot predict the
extent of the impact that GNC's reorganization will have on our future sales and
receivables.
We have undertaken certain actions regarding the advancement of our
pharmaceutical development program, the conduct of a dietary supplement clinical
trial, and the continued sales and marketing of our commercial dietary
supplement. We plan to fund such activities, including compensation to service
providers, with a combination of cash and equity payments. The amount of
payments in cash and equity will be determined by us from time to time.
We will incur ongoing recurring expenses associated with professional fees for
accounting, legal, and other expenses for annual reports, quarterly reports,
proxy statements, and other filings under the Exchange Act. We estimate that
these costs will likely be in excess of $250,000 per year. These obligations
will reduce our ability and resources to fund other aspects of our business. We
hope to be able to use our status as a public company to increase our ability to
use non-cash means of settling obligations and compensate certain independent
contractors who provide professional services to us, although there can be no
assurances that we will be successful in any of those efforts.
We require additional financing in order to continue to fund our operations and
to pay existing and future liabilities and other obligations.
During the nine-months ended September 30, 2020 and 2019, we raised $2,101,300
and $2,870,000, respectively. During the nine-months ended September 30, 2020,
the amounts were raised through the issuance of $1,590,000 in convertible notes
payable, $250,000 in a related party convertible note payable, $211,300 in a
forgivable note payable, $25,000 in a note payable, and $25,000 in a note
payable to a related party. During the nine-months ended September 30, 2019, the
amounts were raised through the issuance of $245,000 in common stock, $1,575,000
in notes payable to related parties, $750,000 in a convertible note payable to a
related party, and $300,000 in convertible notes payable. In accordance with
U.S. GAAP, derivative liabilities of $649,417 and $827,314 were recognized in
connection with convertible notes outstanding as of September 30, 2020 and
December 31, 2019, respectively; however, these are non-cash amounts and do not
directly impact our liquidity or capital needs.
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We filed a registration statement on Form S-1 on August 14, 2019, as amended
September 27, 2019, and November 22, 2019, for a proposed $15 million public
offering of our common stock and warrants and the listing of our common stock
and such warrants on the Nasdaq Capital Market (the "Proposed Public Offering").
We would use the proceeds from any Proposed Public Offering primarily to fund
pharmaceutical development and our operations. After giving effect to the net
proceeds that we would receive from the Proposed Public Offering, if closed, we
expect to have sufficient cash resources to support our expected operations for
at least one year. Notwithstanding the uncertain market conditions related to
COVID-19, we plan to continue to pursue the Proposed Public Offering. We cannot
give any assurance that the Proposed Public Offering will be consummated on
acceptable terms, or at all. In addition, prior to any closing of the Proposed
Public Offering, we will need to obtain additional financing, which may not be
available on acceptable terms and conditions, or at all.
As of the date hereof, we have outstanding promissory notes that are (i) due in
the 2020 calendar year in the aggregate principal amount of $526,968, of which
the full amount has terms for conversion and/or repayment amortization, (ii) due
in the 2021 calendar year in the aggregate principal amount of $3,232,414, of
which $2,657,414 has terms for conversion and/or repayment amortization, and
(iii) due in the 2022 calendar year in the aggregate principal amount of
$1,211,300, of which $211,300 has terms for forgiveness and otherwise for
repayment amortization starting in November 2020. Our ability to repay any and
all of these notes as they become due if not otherwise repaid or converted on or
prior to the maturity dates described above is uncertain and will be based on
our ability to raise additional capital, generate additional revenues, and/or
modify the terms of such debt instruments to the extent necessary.
We need additional capital to fund our operations and pay our current and future
obligations, including without limitation our outstanding promissory notes;
however, our ability to access the capital markets or otherwise raise such
capital is unknown during the COVID-19 pandemic and there can be no assurance
that we will be able to obtain sufficient amounts of capital as and when needed.
Any additional financing in one or more transactions through the private
placement of our common stock, warrants to purchase our common stock, debt,
and/or convertible securities prior to any closing of the Proposed Public
Offering or as an alternative thereto may not be available to us on acceptable
terms and conditions, or at all.
Our stockholders may be diluted upon the exercise or conversion of our
outstanding warrants, options, and convertible notes, including as previously
disclosed, certain of our outstanding notes that have rights to convert into
shares of our common stock upon certain dates or events at prices that may cause
substantial dilution.
In July 2020, we submitted a grant application to a federal government agency to
fund a proposed clinical trial with one of our astaxanthin products in COVID-19
patients. In December 2020 or January 2021, we expect to submit an updated grant
application to address the comments received from the agency's reviewers. We are
also pursuing other governmental and non-governmental sources of funding for
COVID-19 clinical trials. If awarded, any such grant funding would provide
non-dilutive capital, but we cannot give any assurance that we will receive any
grant funding or the amount or timing or extent of restrictions thereof or our
obligations related thereto.
Any inability to obtain additional financing will materially and adversely
affect us, including requiring us to significantly curtail or cease business
operations altogether. We cannot give any assurance that we will in the future
be able to achieve a level of profitability from the sale of existing or future
products or otherwise to sustain our operations. These conditions raise
substantial doubt about our ability to continue as a going concern. The
accompanying financial statements do not include any adjustments to reflect the
possible future effects on recoverability and reclassification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.
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The following is a summary of our cash flows provided by (used in) operating,
investing, and provided by financing activities during the periods indicated:
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