Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended September 30, 2018 and 2017
|
1.
|
GENERAL
ORGANIZATION AND BUSINESS
|
Boston
Therapeutics, Inc. (the “Company”) was formed as a Delaware corporation on August 24, 2009 under the name Avanyx
Therapeutics, Inc. On November 10, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with Boston Therapeutics, Inc., a New Hampshire corporation (“BTI”) providing for the merger of
BTI into the Company with the Company being the surviving entity (the “Merger”), the issuance by the Company of
4,000,000 shares of common stock to the stockholders of BTI in exchange for 100% of the outstanding common stock of BTI, and
the change of the Company’s name to Boston Therapeutics, Inc. On February 12, 2018, the Company acquired CureDM Group
Holdings LLC (“CureDM”), for 47,741,140 shares of common stock of which 25,000,000 were delivered at closing and
22,741,140
shall be delivered in four equal tranches of 5,685,285 each upon the achievement of specific milestones. See Note 3
The
Company’s primary business is the development, manufacture and commercialization of therapeutic drugs with a focus on complex
carbohydrate chemistry to address unmet medical needs in diabetes and inflammatory diseases. We have brought one product, SUGARDOWN®,
to market and have begun to make initial sales. We are currently focused on the development of two additional drug products: BTI-320,
a non- systemic, non-toxic, tablet for reduction of post-meal blood glucose in people living with diabetes that is fully developed,
and IPOXYN, an injectable anti-necrosis, anti-hypoxia drug that we are currently developing. Due to the lack of adequate funding,
the Company has not done any work with respect to IPOXYN to date.
The
accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has limited
cash resources, recurring cash used in operations and operating losses history. As shown in the accompanying financial statements,
the Company has an accumulated deficit of approximately $21.9 million as of September 30, 2018 and used cash in operations of
approximately $511,000 during the nine months ended September 30, 2018. These factors among others, raise substantial doubt about
the Company’s ability to continue as a going concern.
The
Company has incurred recurring operating losses since inception as it has worked to bring its SUGARDOWN
®
product to
market and develop BTI-320 and IPOXYN. Management expects such operating losses will continue until such time that substantial
revenues are received from SUGARDOWN
®
or the regulatory and clinical development of BTI-320 or IPOXYN is completed.
The Company has approximately $311,000 cash on hand at September 30, 2018. Management is currently seeking additional capital
through private placements and public offerings of its common stock. In addition, the Company may seek to raise additional capital
through public or private debt or equity financings as well as collaboration activities in order to fund our operations. The Company
raised $275,000 in gross proceeds from private placements of our Series A Preferred Stock during the first quarter of 2018. See
Note 8. During the second quarter of 2018, the Company issued a note payable to a related party for $100,000. See Note 10. At
the end of the third quarter of 2018, the Company approved a Private Placement Memorandum in an effort to raise additional funds.
Also at the end of the third quarter, the Company issued a note payable to CJY Holdings, Ltd, a related
party, for $305,937. Also, in the fourth quarter of 2018, the Company
has increased the amount of the note payable to the related party noted above to $159,500. Management anticipates that cash resources
will be sufficient to fund our planned operations into the fourth quarter of 2018. The future of the Company is dependent upon
its ability to obtain continued financing and upon future profitable operations from the partnering, development and clarity of
its new business opportunities.
There
can be no assurance that we will be successful in accomplishing our objectives. Without such additional capital, we may be required
to cease operations. The accompanying financial statements do not include any adjustments that might result should the Company
be unable to continue as a going concern.
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING PRACTICES
|
Basis
of Presentation
The
financial statements have been prepared in conformity with accounting principles generally accepting in the United States of America
(“US GAAP”).
Principles
of Consolidation
The
Condensed Consolidated Financial Statements include the Company and its wholly-owned subsidiary, CureDM Group Holdings LLC (“CureDM”)
From the date of acquisition. All significant inter-company transactions are eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those
estimates.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended September 30, 2018 and 2017
Cash
and Cash Equivalents
For
purposes of reporting within the statement of cash flows, the Company considers all cash on hand, cash accounts not subject to
withdrawal restrictions or penalties, and all highly liquid investments with original maturities of 90 days or less at the time
of acquisition to be cash equivalents. The Company maintains its cash in institutions insured by the Federal Deposit Insurance
Corporation.
Revenue
Recognition
The
Company generates revenues from sales of SUGARDOWN®. Revenue is recognized when there is persuasive evidence that an arrangement
exists, the price is fixed and determinable, the product is shipped in accordance with the customers’ Free On Board (FOB)
shipping point terms and collectability is reasonably assured. In practice, the Company has not experienced or granted significant
returns of product. Shipping fees charged to customers are included in revenue and shipping costs are included in costs of sales.
The
Company generates revenue from royalties pursuant to a licensing and manufacturing agreement, whereby the licensee sells and distributes
territory licensed products, excluding those manufactured and supplied by the Company in the territory. Revenue is recognized
when there is persuasive evidence that an arrangement exists, the price is fixed and determinable, the product is shipped and
collectability is reasonably assured. No royalty revenue was recognized during the three or nine month periods ended September
30, 2018 or 2017.
Accounts
Receivable
Accounts
receivable is stated at the amount management expects to collect from outstanding balances. Management establishes a reserve for
doubtful accounts based on its assessment of the current status of individual accounts. Balances that remain outstanding after
management has used reasonable collection efforts are written off against the allowance. There were no allowances for doubtful
accounts as of September 30, 2018 and December 31, 2017.
Inventory
Inventory
consists of raw materials, work-in-process and finished goods of SUGARDOWN®. Inventories are stated at the lower of cost (weighted
average cost method) or market, not in excess of net realizable value. The Company adjusts the carrying value of its inventory
for excess and obsolete inventory. The Company continues to monitor the valuation of its inventory.
Intangible
Assets
Intangible
assets consist of identifiable finite-lived assets acquired in business acquisitions. Acquired intangible assets are recorded
at fair value on the date of acquisition and are amortized over their economic useful lives on a straight line basis.
Goodwill
The
Company follows the guidance of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350,
Goodwill
and Other Intangible Assets
. Under ASC 350, goodwill and certain other intangible assets with indefinite lives are not amortized,
but instead are reviewed for impairment at least annually.
As
the Company operates its business in one operating segment and one reporting unit, the Company’s goodwill is assessed at
the Company level for impairment in the fourth quarter of each year or more frequently if events or changes in circumstances indicate
that impairment may exist. The Company has the option to first assess qualitative factors to determine whether it is necessary
to perform the two-step impairment test. If the Company’s qualitative assessment reveals that goodwill impairment is more
likely than not, the Company performs the two-step impairment test. Alternatively, the Company may bypass the qualitative test
and initiate goodwill impairment testing with the first step of the two-step goodwill impairment test.
During
the first step of the goodwill impairment test, the Company compares the fair value of the reporting unit to its carrying value,
including goodwill. If the fair value of a reporting unit exceeds its carrying value, then the Company concludes that no goodwill
impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, the Company performs the second step
of the goodwill impairment test to measure possible goodwill impairment loss. If the carrying value of the reporting unit’s
goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.
The
Company performed its impairment review of goodwill for the year ended December 31, 2017 and concluded that no impairment existed.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended September 30, 2018 and 2017
Impairment
of Long-lived Assets
The
Company reviews long-lived assets, which include the Company’s intangible assets, for impairment whenever events or changes
in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. Future undiscounted cash
flows of the underlying assets are compared to the assets’ carrying values. Adjustments to fair value are made if the sum
of expected future undiscounted cash flows is less than book value. To date, no adjustments for impairment have been made.
Loss
per Share
Basic
net loss per share is computed based on the net loss for the period divided by the weighted average actual shares outstanding
during the period. Diluted net loss per share is computed based on the net loss for the period divided by the weighted average
number of common shares and common equivalent shares outstanding during each period unless the effect of such common equivalent
shares would be anti-dilutive. Common stock equivalents represent the dilutive effect of the assumed exercise of certain outstanding
stock options using the treasury stock method. The weighted average number of common shares for the three and nine month periods
ended September 30, 2018 did not include 13,594,000, 38,999,990 and 35,698,950 for options, warrants and shares to be issued upon
conversion of notes payable including accrued interest, respectively, because of their anti-dilutive effect. The weighted average
number of common shares for the three and nine month periods ended September 30, 2017 did not include 12,094,000, 39,404,669 and
64,624,013 for options, warrants and convertible notes payable including accrued interest, respectively, because of their anti-dilutive
effect.
Fair
Value of Financial Instruments
Fair
values determined by Level 1 inputs utilize observable data such as quoted prices in active markets. Fair values determined by
Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly.
Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, which require
the reporting entity to develop its own assumptions. The Company’s financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses, and notes payable. The carrying value of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximates fair value due to their short-term nature using level 3 inputs
as defined above. The carrying value of the notes payable as of September 30, 2018 and December 31, 2017, evaluated using level
3 inputs defined above based on quoted market prices on rates available to the Company for debt with similar terms and maturities,
approximates the fair value.
Convertible
Instruments
U.S.
GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative
financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics
and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks
of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is
not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported
in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered
a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described
under applicable ASC 480-10.
When
the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company
records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments
based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction
and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of
the related debt to their stated date of redemption.
Common
Stock Purchase Warrants and Other Derivative Financial Instruments
The
Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company
with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) providing that
such contracts are indexed to the Company’s own stock. The Company classifies as assets or liabilities any contracts that
(i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event
is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares
(physical settlement or net-share settlement). The Company assesses classification of its common stock purchase warrants and other
free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities
is required.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended September 30, 2018 and 2017
The
Company’s free standing derivatives consisted of warrants to purchase common stock that were issued in connection with the
issuance of debt and of embedded conversion options with senior convertible debentures. The Company evaluated these derivatives
to assess their proper classification in the balance sheet as of September 30, 2018 using the applicable classification criteria
enumerated under ASC 815-Derivatives and Hedging. The Company determined that certain embedded conversion and/or exercise features
do not contain fixed settlement provisions. The convertible debentures contain a conversion feature such that the Company could
not ensure it would have adequate authorized shares to meet all possible conversion demands.
As
such, the Company was required to record the debt and warrant derivatives which do not have fixed settlement provisions as liabilities
and mark to market all such derivatives to fair value at the end of each reporting period.
Stock-Based
Compensation
Stock–based
compensation, including grants of employee and non-employee stock options and modifications to existing stock options, is recognized
in the income statement based on the estimated fair value of the awards
.
The Company recognizes the compensation cost of
share- based awards on a straight-line basis over the requisite service period, which is generally the vesting period of the award.
The
determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by the stock price
and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. The
expected life of the awards is estimated based on the simplified method. The risk-free interest rate assumption is based on observed
interest rates appropriate for the terms of our awards. The dividend yield assumption is based on history and expectation of paying
no dividends. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. Stock-based compensation expense is recognized in the financial statements on a straight-line basis
over the requisite service period, based on awards that are ultimately expected to vest.
The
Company grants stock options to non-employee consultants from time to time in exchange for services performed for the Company.
Equity instruments granted to non- employees are subject to periodic revaluation over their vesting terms. In general, the options
vest over the contractual period of the respective consulting arrangement and, therefore, the Company revalues the options periodically
and records additional compensation expense related to these options over the remaining vesting period.
Recent
Accounting Pronouncements
There
are various updates recently issued, most of which represented technical corrections to the accounting literature or application
to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations
or cash flows.
Reclassification
Certain
amounts in the September 30, 2017 financial statements have been reclassified to conform to the presentation used at September
30, 2018.
On
February 12, 2018, the Company entered into a Contribution Agreement with the members of CureDM Group Holdings, LLC, a limited
liability company (“CureDM Group”), all of which except five are accredited investors (“CureDM Group Members”)
pursuant to which the CureDM Group Members agreed to contribute 100% of the outstanding securities of CureDM Group in exchange
for an aggregate of 47,741,140 shares of common stock of the Company (the “BTHE Contribution Shares”) of which 25,000,000
BTHE Contribution Shares were delivered at closing and 22,741,140 BTHE Contribution Shares (the “Milestone BTHE Shares”)
shall be delivered in four equal tranches of 5,685,285 BTHE Contribution Shares each upon the achievement of specific milestone
s (the “CureDM Group Contribution”). The closing of the CureDM Group Contribution occurred on February 12, 2018.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended September 30, 2018 and 2017
A
summary of consideration is as follows:
25,000,000
shares of the Company’s common stock
|
|
$
|
1,250,000
|
|
22,741,140
contingency shares of the Company’s common stock
|
|
|
1,137,057
|
|
|
|
|
|
|
Total
consideration
|
|
$
|
2,387,057
|
|
The
following summarizes the current estimates of fair value of assets acquired and liabilities assumed:
Assets acquired:
|
|
|
|
Cash
|
|
$
|
3,592
|
|
Property
and equipment
|
|
|
273
|
|
Goodwill
|
|
|
2,313,277
|
|
Intangibles
|
|
|
234,122
|
|
Liabilities
assumed:
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
(164,207
|
)
|
Net
assets acquired
|
|
$
|
2,387,057
|
|
The
purchase price allocation for the above acquisition is subject to further refinement as management completes its assessment of
the valuation of certain assets and liabilities.
The
Company accounts for acquisitions in accordance with the provisions of ASC 805-10. The Company assigns to all identifiable assets
acquired a portion of the cost of the acquired net assets equal to the estimated fair value of such assets at the date of acquisition.
The Company records the excess of the cost of the acquired net assets over the sum of the amounts assigned to identifiable assets
acquired as goodwill.
The
Company accounts for and reports acquired goodwill under Accounting Standards Codification subtopic 350-10, Intangibles-Goodwill
and Other (“ASC 350-10”). In accordance with ASC 350-10, at least annually, the Company tests its intangible assets
for impairment or more often if events and circumstances warrant. Any write-downs will be included in results from operations.
See Note 11.
Pro
forma results
The
following table sets forth the unaudited pro forma results of the Company as if the acquisition of CureDM had taken place on the
first day of the period presented. These combined results are not necessarily indicative of the results that may have been achieved
had the companies been combined as of the first day of the period presented.
|
|
Nine
months ended September 30, 2018
|
|
|
Nine
months ended, September 30, 2017
|
|
Total
revenues
|
|
$
|
25,192
|
|
|
$
|
14,092
|
|
Net
loss
|
|
$
|
(2,110,209
|
)
|
|
$
|
(1,965,493
|
)
|
Basic
and diluted net earnings per common share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
This
pro forma financial information is based on historical results of operations, adjusted for the allocation of the purchase price
and other acquisition accounting adjustments, and is not indicative of the results that may have been achieved had the companies
been combined as of the first day of the period presented.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended September 30, 2018 and 2017
Inventory
consist of material, labor and manufacturing overhead and are recorded at the lower of cost, using the weighted average cost method,
or net realizable value. The components of inventory at September 30, 2018 and December 31, 2017, net of inventory reserves, were
as follows:
|
|
2018
|
|
|
2017
|
|
Raw
materials
|
|
$
|
—
|
|
|
$
|
33,055
|
|
Finished
goods
|
|
|
1,914
|
|
|
|
5,486
|
|
Total
|
|
$
|
1,914
|
|
|
$
|
38,541
|
|
The
Company periodically reviews quantities of inventory on hand and compares these amounts to expected usage of each particular product
or product line. The Company records, as a charge to cost of sales, any amounts required to reduce the carrying value to net realizable
value.
The
SUGARDOWN® technology and patent applications, which were obtained through the acquisition of BTI in 2010, are being amortized
on a straight-line basis over their estimated useful lives of 14 years. The BTI-420 technology and patent applications, which
were obtained through the acquisition of CureDM in 2018, are being amortized on a straight-line basis over their estimated useful
lives of 5 years.
Intangible
assets consist of the following at September 30, 2018 and December 31, 2017:
|
|
2018
|
|
|
2017
|
|
SUGARDOWN®
technology and patent applications
|
|
$
|
1,819,827
|
|
|
$
|
900,000
|
|
Less
accumulated amortization
|
|
|
(1,265,674
|
)
|
|
|
(460,714
|
)
|
Intangible
assets, net
|
|
$
|
554,153
|
|
|
$
|
439,286
|
|
Amortization
expense was $39,570 and $16,071 for the three months ended September 30, 2018 and 2017, respectively. Amortization expense was
$119,255 and $48,214 for the nine months ended September 30, 2018 and 2017, respectively.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended September 30, 2018 and 2017
|
6.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
The
Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements
and Disclosures” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer
a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
ASC
820 describes three levels of inputs that may be used to measure fair value:
Level
1 - quoted prices in active markets for identical assets or liabilities
Level
2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 - inputs that are unobservable based on an entity’s own assumptions, as there is little, if any, related market activity
(for example, cash flow modeling inputs based on assumptions)
Financial
liabilities as of September 30, 2018 measured at fair value on a recurring basis are summarized below:
|
|
September
30,
2018
|
|
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Significant
Other Observable Inputs (Level 2)
|
|
|
Significant
Unobservable Inputs (Level 3)
|
|
Derivative
liability
|
|
$
|
109,605
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
109,605
|
|
Warrant
liability
|
|
|
1,257,657
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,257,657
|
|
Total
|
|
$
|
1,367,262
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,367,262
|
|
Financial
liabilities as of December 31, 2017 measured at fair value on a recurring basis are summarized below:
|
|
December
31, 2017
|
|
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Significant
Other Observable Inputs (Level 2)
|
|
|
Significant
Unobservable Inputs (Level 3)
|
|
Derivative
liability
|
|
$
|
429,141
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
429,141
|
|
Warrant
liability
|
|
|
1,099,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,099,200
|
|
Total
|
|
$
|
1,528,341
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,528,341
|
|
The
Company determined that certain conversion/exercise option related to a convertible note and issued warrants did not have fixed
settlement provisions and are deemed to be derivative financial instruments, since the conversion/exercise prices was subject
to reset adjustment should the Company issue any option to acquire the Company’s common stock lower than the conversion
/exercise price. Accordingly, the Company was required to record such conversion/exercise options as a liability and mark such
derivative to fair value each reporting period. Such instrument was classified within Level 3 of the valuation hierarchy.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended September 30, 2018 and 2017
The
fair value of the conversion/exercise options were calculated using a binomial lattice formula with the following weighted average
assumptions during the nine months ended September 30, 2018 and the year ended December 31, 2017:
Conversion
option:
|
|
|
|
|
|
|
|
|
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Common
Stock Closing Price
|
|
$
|
0.04
|
|
|
$
|
0.04
to 0.07
|
|
Conversion
Price per Share
|
|
|
$0.075
to 0.10
|
|
|
$
|
0.075
to 0.10
|
|
Conversion
Shares
|
|
|
5,333,333
|
|
|
|
21,666,667
|
|
Call Option
Value
|
|
|
0.016
to 0.023
|
|
|
|
0.0188
to 0.0568
|
|
Dividend
Yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Volatility
|
|
|
216.44
|
%
|
|
|
208.82%
to
214.34
|
%
|
Risk-free
Interest Rate
|
|
|
2.36%
to 2.59
|
%
|
|
|
1.03%
to 1.76
|
%
|
Term
|
|
|
0.57 to
0.87
years
|
|
|
|
0.62
to 2 years
|
|
Exercise
option:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Common
Stock Closing Price
|
|
$
|
0.04
|
|
|
$
|
0.04
to 0.075
|
|
Conversion
Price per Share
|
|
$
|
0.10
to 0.15
|
|
|
$
|
0.10
to 0.15
|
|
Conversion
Shares
|
|
|
34,000,000
|
|
|
|
29,000,000
|
|
Call Option
Value
|
|
|
0.036
to 0.038
|
|
|
|
0.0375
to 0.0723
|
|
Dividend
Yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Volatility
|
|
|
216.44
|
%
|
|
|
208.82
to 214.34
|
%
|
Risk-free
Interest Rate
|
|
|
2.40
to 2.94
|
%
|
|
|
1.62
to 2.2
|
%
|
Term
|
|
|
2.87
to 4.35 years
|
|
|
|
3.62
to 5 years
|
|
The
risk-free interest rate is the United States Treasury rate on the measurement date having a term equal to the remaining contractual
life of the instrument. The volatility is a measure of the amount by which the Company’s share price has fluctuated or is
expected to fluctuate. The dividend yield is 0% as the Company has not made any dividend payment and has no plans to pay dividends
in the foreseeable future. Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant
to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of
the fair value hierarchy, the Company’s Chief Financial Officer, who reports to the Chief Executive Officer, determine its
valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements
and fair value calculations are the responsibility of the Company’s Chief Financial Officer and are approved by the Chief
Executive Officer. Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for
these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value
measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or
assumptions and recorded as appropriate. Significant observable and unobservable inputs include stock price, exercise price, annual
risk free rate, term, and expected volatility, and are classified within Level 3 of the valuation hierarchy. An increase or decrease
in volatility or interest free rate, in isolation, can significantly increase or decrease the fair value of the derivative liabilities.
Changes in the values of the derivative liabilities are recorded as a component of other income (expense) on the Company’s
statements of operations.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended September 30, 2018 and 2017
The
following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that
are measured at fair value on a recurring basis using significant unobservable input for the nine months ended September 30, 2018:
|
|
Debt
Derivative
|
|
|
Warrant
Liability
|
|
Balance,
December 31, 2017
|
|
$
|
429,141
|
|
|
$
|
1,099,200
|
|
Aggregate
amount of derivative instruments issued
|
|
|
—
|
|
|
|
226,834
|
|
Transferred
in due to conversions
|
|
|
(229,381
|
)
|
|
|
—
|
|
Change
in fair value of derivative liabilities
|
|
|
(90,155
|
)
|
|
|
(68,377
|
)
|
Balance,
September 30, 2018
|
|
$
|
109,605
|
|
|
$
|
1,257,657
|
|
|
7.
|
CONVERTIBLE
NOTES PAYABLE
|
In
August and September 2016, the Company issued senior convertible debentures for an aggregate of $1,600,000 (the “Convertible
Debentures”) in exchange for an aggregate net cash proceeds of $1,327,300, net of financing costs. The Convertible Debentures
have a stated interest rate of 6% per annum payable quarterly beginning June 30, 2017 and are due two years from the date of issuance,
the latest due September 15, 2018 and are convertible into shares of the Company’s common stock at the option of the holder
at a conversion price of $0.075 with certain anti-dilutive (reset) provisions and are subject to forced conversion if either i)
the volume weighted average common stock price for each of any 10 consecutive trading days equals or exceeds $0.50, or (ii) the
Company’s elects to lists a class of securities on a national securities exchange.
As
long as the convertible notes remain outstanding, the Company is restricted from incurring any indebtedness or liens, except as
permitted (as defined), amend its charter in any matter that materially effects rights of noteholders, repay or repurchase more
than de minimis number of shares of common stock other than conversion or warrant shares, repay or repurchase all or any portion
of any indebtedness or pay cash dividends.
In
connection with the issuance of the Convertible Debentures, the Company issued an aggregate of 16,000,000 warrants to purchase
the Company’s common stock at $0.10 per share, expiring five years from the date of issuance, the latest being September
15, 2021. These warrants contain a cashless exercise and certain anti-dilutive (reset) provisions.
The
Company determined that certain conversion/exercise option related to a convertible note and issued warrants did not have fixed
settlement provisions and are deemed to be derivative financial instruments due to price protection features present in the conversion/
exercise price that are not consistent with a fixed for fixed model.
The
accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivative as
of the issuance date of the debenture and warrants and to re-measure the derivatives at fair value as of each subsequent reporting
date.
The
Company recognized the value attributable to the conversion feature of the convertible debenture and issued warrants of $2,203,336
and together with financing costs of $272,700 (aggregate of $2,476,036) as a discount against the notes up to $1,600,000 with
the excess of $876,036 charged to current period interest. The Company valued the conversion option and the warrants using the
Binomial Lattice pricing model as described in Note 6. The debt discount is amortized over the note’s maturity period as
interest expense.
On
April 11, 2017, one investor converted his Convertible Debenture of $75,000 plus accrued interest of $2,873, into 1,038,301 shares
of the Company’s common stock. Upon conversion, a loss on extinguishment was recorded in the amount of $51,267.
On
July 14, 2017, one investor converted his Convertible Debenture of $50,000 plus accrued interest of $2,482, into 711,755 shares
of the Company’s common stock. Upon conversion, a loss on extinguishment was recorded in the amount of $30,274.
In
August 2018, two investors entered into agreements to extend the due date of convertible debentures held in the amount of
$250,000 until August 31, 2019. One of the investors was issued warrants to acquire 375,000 shares of common stock for $0.075
per share. The warrants expire in five years.
The fair value of the warrants on the date of issuance was $21,121 which
is included in interest expense for the nine months ended September 30, 2018.
During
the first nine months of 2018, 29 investors converted their Convertible Debentures totaling $1,225,000 plus accrued interest of
$52,066, into 17,027,544 shares of the Company’s common stock. Upon conversion, a gain on extinguishment was recorded in
the amount of $2,374.
For
the nine months ended September 30, 2018 and 2017, the Company amortized $519,788 and $696,323, respectively, of debt discount
to operations as interest expense. For the three months ended September 30, 2018 and 2017, the Company amortized $88,752 and $239,338,
respectively, of debt discount to operations as interest expense.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended September 30, 2018 and 2017
Convertible
notes payable consist of the following at September 30, 2018 and December 31, 2017:
|
|
2018
|
|
|
2017
|
|
Principal
balance
|
|
$
|
250,000
|
|
|
$
|
1,475,000
|
|
Debt
discount
|
|
|
—
|
|
|
|
(189,175
|
)
|
Deferred
finance costs
|
|
|
—
|
|
|
|
(78,534
|
)
|
Outstanding,
net of debt discount
|
|
$
|
250,000
|
|
|
$
|
1,207,291
|
|
On
June 26, 2018, the Company entered into a License Agreement with Level Brands, Inc. (NYSE: LEVB), an innovative licensing, marketing
and brand management company with a focus on lifestyle-based products which includes an exclusive license to the
kathy ireland
®
Health & Wellness™ brand.
U
nder the terms of the License Agreement, the Company
received a non-exclusive, non-transferrable license to use the
kathy ireland
Health & Wellness™ trademark in
the marketing, development, manufacture, sale and distribution of the Sugardown® product domestically and internationally.
The initial term of the License Agreement is seven years, with an automatic two-year extension unless either party notifies the
other of non-renewal at least 90 days prior to the end of the then current term. Level Brands has agreed to use its commercially
reasonable efforts to perform certain promotional obligations, including: (i) producing four branded videos to promote the licensed
product and/or the Company; (ii) creation of an electronic press kit; (iii) making their media and marketing teams available for
use in creating the video content for which the Company will separately compensate; and (iv) curate social media posts in multiple
social media channels.
As
compensation, the Company will provide Level Brands with the following:
|
●
|
A
marketing fee of $850,000, for development of video content and an electronic press kit
which will be used ongoing to support product marketing. This fee is paid with a promissory
note of $450,000 and a number of shares of stock of the Company valued at $400,000, based
on the closing price on the day prior to the effective date. Through the date of this filing, no shares of stock have been issued;
|
|
●
|
Quarterly
fees for the first two years of up to $100,000 and issuance of 100,000 shares each quarter,
based on sales volumes. The Company has the right to make all the stock payments in cash;
and
|
|
●
|
a
royalty of 5% of the gross licensed marks sales up to $10,000,000, 7.5% royalty on sales
from $10,000,000 to $50,000,0000 and 10% on sales over $50,000,000, payable monthly as
well as a 1% of all revenue for all Company products as of the date hereof.
|
The
Note Payable of $450,000 bears interest at 8% and matures December 31, 2019, unless the Company raises $750,000 through Level
Brands prior to that date in which case the Note is to be repaid in full including accrued interest. Accrued interest at September
30, 2018 totaled $9,493.
The
Company is authorized to issue up to 5,000,000 shares of its $0.001 par value preferred stock and up to 2,000,000,000 shares of
its $0.001 par value common stock. During the year ended December 31, 2013, the Company amended its certificate of incorporation
to increase the number of common shares from 100,000,000 to 200,000,000. The amendment went into effect September 7, 2013.
On
January 9, 2018, the Company’s Board of Directors voted to approve an increase in authorized common stock from 200 million
shares to 2 billion shares of the Company’s common stock. This increase was approved by the shareholders in the first quarter
of 2018.
Series
A Preferred Stock
The
Company has designated 150,000 shares of its preferred stock as Series A Preferred Stock. Each share of Series A Preferred Stock
has a stated value of $10. The Series A Preferred Stock is convertible into shares of the Company’s common stock by dividing
the stated value by a conversion price of $0.10 per share. The Series A Preferred Stock shall have voting rights on an as converted
basis (subject to limitations) and liquidation preference for each share of Series A Preferred Stock at an amount equal to the
stated value per share. As of September 30, 2018, the Company has 82,500 shares of Series A Preferred Stock outstanding.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended September 30, 2018 and 2017
On
August 14, 2017, the Company entered into Securities Purchase Agreements with two accredited investors. In connection with these
agreements, the Company issued 45,000 shares of Series A Preferred Stock and warrants to acquire 9,000,000 shares of common stock.
The shares of Series A Preferred Stock are convertible, at any time at the option of the holder, into an aggregate of 4,500,000
shares of the Company’s common stock. The Warrants shall be exercisable for a period of five years at an exercise price
of $0.15 per share.
The
Company recognized the value attributable to the conversion feature of the issued warrants of $650,421 as a charge against additional
paid in capital up to $450,000 with the excess of $200,421 charged to change in fair value of warrant liability during the year
ended December 31, 2017. The Company valued the warrants using the Binomial Lattice pricing model as described in Note 6.
On
October 24, 2017, the Company entered into Securities Purchase Agreements with an accredited investor. In connection with the
agreement, the Company issued 10,000 shares of Series A Preferred Stock and warrants to acquire 2,000,000 shares of common stock.
The shares of Series A Preferred Stock are convertible, at any time at the option of the holder, into an aggregate of 1,000,000
shares of the Company’s common stock. The Warrants shall be exercisable for a period of five years at an exercise price
of $0.15 per share.
The
Company recognized the value attributable to the conversion feature of the issued warrants of $93,312 as a charge against additional
paid in capital. The Company valued the warrants using the Binomial Lattice pricing model as described in Note 6.
On
February 2, 2018, the Company entered into Securities Purchase Agreements with four accredited investors. In connection with these
agreements, the Company issued 27,500 shares of Series A Preferred Stock and warrants to acquire 5,500,000 shares of common stock
in consideration of $275,000. The shares of Series A Preferred Stock are convertible, at any time at the option of the holder,
into an aggregate of 2,750,000 shares of the Company’s common stock. The Warrants shall be exercisable for a period of five
years at an exercise price of $0.15 per share.
The
Company recognized the value attributable to the conversion feature of the issued warrants of $226,833 as a charge against additional
paid in capital. The Company valued the warrants using the Binomial Lattice pricing model as described in Note 6.
Common
Stock
On
February 16, 2018, the Company’s Board of Directors approved the issuance of 3,666,666 shares of the Company’s common
stock to two consultants for services rendered amounting to $330,000.
During
the first nine months of 2018, 29 investors converted their Convertible Debenture totaling $1,225,000 plus accrued interest of
$52,066, into
17,027,544 shares of the Company’s common stock.
Common
Stock Warrants
The
Company accounts for warrants as either equity instruments or liabilities depending on the specific terms of the warrant
agreement. As of
September 30, 2018, the Company had 38,999,990 warrants outstanding which are all classified as
equity instruments and are fully exercisable.
The
following table summarizes the Company’s common stock warrants activity for the nine months ended September 30, 2018:
|
|
|
Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
as of December 31,2017
|
|
|
|
41,029,669
|
|
|
$
|
0.23
|
|
|
$
|
—
|
|
Granted
|
|
|
|
5,875,000
|
|
|
|
0.15
|
|
|
|
—
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited/Canceled
—
|
|
|
|
(7,904,679
|
)
|
0.43
|
|
|
|
—
|
|
Outstanding
as of September 30, 2018
|
|
|
|
38,999,990
|
|
|
$
|
0.17
|
|
|
$
|
—
|
|
The
aggregate intrinsic value represents the pretax intrinsic value, based on the warrants with an exercise price less than the Company’s
stock price of $0.04 as September 30, 2018, which would have been received by the warrant holders had those warrant holders exercised
their warrants as of that date.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended September 30, 2018 and 2017
|
9.
|
STOCK
OPTION PLAN AND STOCK-BASED COMPENSATION
|
During
the year ended December 31, 2010, the Company adopted a stock option plan entitled “The 2010 Stock Plan” (2010 Plan)
under which the Company may grant options to purchase up to 5,000,000 shares of common stock. On September 7, 2013, the 2010 plan
was amended to increase the number of shares of common stock issuable under the 2010 Plan to 7,500,000. As of September 30, 2018,
and December 31, 2017, there were 250,000 and 250,000 options outstanding under the 2010 Plan, respectively.
During
the year ended December 31, 2011, the Company adopted a non-qualified stock option plan entitled “2011 Non-Qualified Stock
Plan” (2011 Plan) under which the Company may grant options to purchase 2,100,000 shares of common stock. In December 2012,
the 2011 Plan was amended to increase the number of shares of common stock issuable under the 2011 Plan to 12,000,000 shares.
During the period ended March 31, 2013, the 2011 Plan was amended to increase the number of shares of common stock issuable under
the 2011 Plan to 17,500,000. As of September 30, 2018, and December 31, 2017, there were 13,344,000 and 9,344,000 options outstanding
under the 2011 Plan, respectively
Under
the terms of the stock plans, the Board of Directors shall specify the exercise price and vesting period of each stock option
on the grant date. Vesting of the options is typically three to four years and the options typically expire in five to ten years.
On
February 12, 2018, Loraine Upham was appointed as Chief Operating Officer. Ms. Upham received a stock option to purchase 4,000,000
shares of common stock under the Company’s Amended and Restated 2011 Stock Incentive Plan, vesting over three (3) years,
one third on the first anniversary of the effective date and the balance in equal quarterly installments. The exercise price of
the initial tranche of options (1,333,334 shares) shall be $0.06 per share, the second tranche (1,333,333 shares) shall be $0.10
per share and the final tranche (1,333,333 shares) shall be $0.20 per share. The term of the options is five years.
On
March 1, 2018 the Board of Directors approved a reduction in the exercise price of 6,000,000 stock options issued to the Company’s
CEO on August 22, 2016. The First tranche of 2,000,000 will be exercisable at $0.10 per share and the second and third tranches
of 2,000,000 will be exercisable at $0.15 per share. The remainder of the terms remain unchanged.
No
stock options were issued under either plan during the nine months ended September 30, 2017.
The
fair value of stock options granted and revaluation of non-employee consultant options for the nine months ended September 30,
2018 was calculated with the following assumptions:
|
|
2018
|
|
Risk-free
interest rate
|
|
|
2.3
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
Volatility
factor
|
|
|
217.6
|
%
|
Expected
life of option
|
|
|
5
years
|
|
For
the three and nine months ended September 30, 2018, the Company recorded stock-based compensation expense of $43,290 and $141,686,
respectively, in connection with share-based payment awards. For the three and nine months ended September 30, 2017, the Company
recorded stock- based compensation expense of $12,439 and $37,317, respectively, in connection with share-based payment awards.
As of September 30, 2018, there was $263,370 of unrecognized compensation expense related to non-vested stock option awards.
The
following table summarizes the Company’s stock option activity during the nine months ended September 30, 2018:
|
|
Shares
|
|
|
Exercise
Price per
Share
|
|
|
Weighted
Average
Exercise Price
per Share
|
|
Outstanding
as of December 31, 2017
|
|
|
9,594,000
|
|
|
$
|
0.10
– 1.21
|
|
|
$
|
0.36
|
|
Granted
|
|
|
4,000,000
|
|
|
|
0.06
– 0.20
|
|
|
|
0.12
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options
forfeited/cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding
as of September 30, 2018
|
|
|
13,594,000
|
|
|
$
|
0.06
– 1.21
|
|
|
$
|
0.29
|
|
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended September 30, 2018 and 2017
The
following table summarizes information about stock options that are vested or expected to vest at September 30 2018:
|
|
|
|
|
|
|
|
Vested
or Expected to Vest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
Price
|
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price Per Share
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price Per Share
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
$
|
0.06
|
|
|
|
1,333,334
|
|
|
$
|
0.06
|
|
|
|
4.38
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
0.06
|
|
|
|
4.38
|
|
|
$
|
—
|
|
|
0.10
|
|
|
|
2,933,333
|
|
|
|
0.10
|
|
|
|
6.00
|
|
|
|
—
|
|
|
|
1,600,000
|
|
|
|
0.10
|
|
|
|
6.00
|
|
|
|
—
|
|
|
0.18
|
|
|
|
934,000
|
|
|
|
0.18
|
|
|
|
4.75
|
|
|
|
—
|
|
|
|
934,000
|
|
|
|
0.18
|
|
|
|
4.75
|
|
|
|
—
|
|
|
0.20
|
|
|
|
3,483,333
|
|
|
|
0.20
|
|
|
|
3.62
|
|
|
|
—
|
|
|
|
2,150,000
|
|
|
|
0.20
|
|
|
|
3.62
|
|
|
|
—
|
|
|
0.37
|
|
|
|
58,000
|
|
|
|
0.37
|
|
|
|
3.93
|
|
|
|
—
|
|
|
|
58,000
|
|
|
|
0.37
|
|
|
|
3.93
|
|
|
|
—
|
|
|
0.40
|
|
|
|
2,000,000
|
|
|
|
0.40
|
|
|
|
2.92
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.40
|
|
|
|
2.92
|
|
|
|
—
|
|
|
0.42
|
|
|
|
63,000
|
|
|
|
0.42
|
|
|
|
2.25
|
|
|
|
—
|
|
|
|
63,000
|
|
|
|
0.42
|
|
|
|
2.25
|
|
|
|
—
|
|
|
0.50
|
|
|
|
310,000
|
|
|
|
0.50
|
|
|
|
1.08
|
|
|
|
—
|
|
|
|
310,000
|
|
|
|
0.50
|
|
|
|
1.08
|
|
|
|
—
|
|
|
0.60
|
|
|
|
2,000,000
|
|
|
|
0.60
|
|
|
|
2.92
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.60
|
|
|
|
2.92
|
|
|
|
—
|
|
|
0.69
|
|
|
|
100,000
|
|
|
|
0.69
|
|
|
|
5.50
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
0.69
|
|
|
|
5.50
|
|
|
|
—
|
|
|
1.21
|
|
|
|
379,000
|
|
|
|
1.21
|
|
|
|
5.25
|
|
|
|
—
|
|
|
|
379,000
|
|
|
|
1.21
|
|
|
|
5.25
|
|
|
|
—
|
|
$
|
0.06-1.21
|
|
|
|
13,594,000
|
|
|
$
|
0.29
|
|
|
|
4.04
|
|
|
$
|
—
|
|
|
|
5,594,000
|
|
|
$
|
0.27
|
|
|
|
4.72
|
|
|
$
|
—
|
|
The
following table sets forth the status of the Company’s non-vested stock options as of September 30, 2018 and December 31,
2017:
|
|
|
Number
of
Options
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
Non-vested
as of December 31, 2017
|
|
|
|
4,000,000
|
|
|
$
|
0.50
|
|
Granted
|
|
|
|
4,000,000
|
|
|
|
0.12
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
|
—
|
|
|
|
—
|
|
Non-vested
as of September 30, 2018
|
|
|
|
8,000,000
|
|
|
$
|
0.31
|
|
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended September 30, 2018 and 2017
The
weighted-average remaining contractual life for options exercisable at September 30, 2018 is 4.72 years. At September 30,
2018 the Company has
4,156,000 and 7,250,000 options available for grant under the 2011 Plan and 2010 Plan,
respectively.
The
aggregate intrinsic value for fully vested, exercisable options was $0 at September 30, 2018. The aggregate intrinsic value of
all options granted at
September 30, 2018 was $0.
10.
RELATED PARTY TRANSACTIONS
Through
December 31, 2011, a founder of the company and significant shareholder, Dr. David Platt advanced $257,820 to the Company to fund
start-up costs and operations. Advances by Dr. Platt carry an interest rate of 6.5% and were due on June 29, 2013. On May 7, 2012,
Dr. Platt and the Company’s former President and also a significant shareholder entered into promissory notes to advance
to the Company an aggregate of $40,000. The notes accrue interest at 6.5% per year and were due June 30, 2013. The outstanding
notes of $297,820 were amended each year to extend the maturity dates. Effective June 30, 2015, the outstanding notes for Dr.
Platt were amended to extend the maturity dates to June 30, 2017. During 2017, the Company made principal payments totaling $20,000
to the former President of the Company, reducing the total balance of the outstanding notes to $277,820. As of September 30, 2018,
the remaining notes to Dr. Platt are in default and are classified as current liabilities.
On
June 24, 2011, the Company entered into a definitive Licensing and Manufacturing Agreement (the “Agreement”) with
Advance Pharmaceutical Company Ltd. (“Advance Pharmaceutical”), a Hong Kong-based privately-held company. Under terms
of the Agreement, the Company manufactures and supplies product in bulk for Advance Pharmaceutical. Advance Pharmaceutical is
responsible for the packaging, marketing and distribution of SUGARDOWN® in certain territories within Asia. In addition, APC
is able to purchase the SUGARDOWN product directly from the US manufacturer and sell it within APC’s distribution area.
In these situations, the Company is entitled to royalty payments from APC of 10% of the total sales price paid upon shipment of
the product. Advance Pharmaceutical, through a wholly owned subsidiary, has purchased an aggregate 1,799,800 shares of the Company’s
common stock in conjunction with the Company’s private placement offerings during the years ended December 31, 2012 and
2011. The shares were purchased on the same terms as the other participants acquiring shares in the respective offerings. Conroy
Chi-Heng Cheng is a director of Advance Pharmaceutical and joined the Company’s Board in December 2013. No revenue was generated
pursuant to the Agreement for the nine months ended September 30, 2018 or 2017.
In
December 2013, the Board of Directors agreed to indemnify Dr. Platt for legal costs incurred in connection with an arbitration
(now concluded) initiated before the American Arbitration Association by Galectin Therapeutics, Inc. (formerly named Pro-Pharmaceuticals,
Inc.) for which Dr. Platt previously served as CEO and Chairman. Galectin sought to rescind or reform the Separation Agreement
entered into with Dr. Platt upon his resignation from Galectin to remove a $1.0 million milestone payment which Dr. Platt asserted
he was entitled to receive and to be repaid all separation benefits paid to Dr. Platt. The Company initially capped the amount
for which it would indemnify Dr. Platt at $150,000 in December 2013 and Dr. Platt agreed to reimburse the indemnification amounts
paid by the Company should he prevail in the arbitration. The Board decided to indemnify Dr. Platt after considering a number
of factors, including the scope of the Company’s existing indemnification obligations to officers and directors and the
potential impact of the arbitration on the Company. In May 2014, the Board approved a $50,000 increase in indemnification support,
solely for the payment of outside legal expenses. The Company recorded a total of $182,697 in costs associated with Dr. Platt’s
indemnification, of which $119,401 was expensed in the year ended December 31, 2013 and of which $63,296 was expensed in the year
ended December 31, 2014. In July 2014, the arbitration was concluded in favor of Dr. Platt, confirming the effectiveness of the
separation agreement and payment was made to Dr. Platt in July 2014.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended September 30, 2018 and 2017
On
March 2, 2015, the Board of Directors voted to reduce the amount that Dr. Platt was required to reimburse the Company to $82,355
and to offset this amount against interest accrued in respect of the outstanding note payable to Dr. Platt. In addition, the Board
determined that Dr. Platt would be charged interest related to the $182,697 indemnification payment since funds were received
by Dr. Platt in July 2014. The Board of Directors concluded the foregoing constituted complete satisfaction of Dr. Platt’s
indemnification by the Company. Accordingly, the Company recorded the reduction in accrued interest through equity during the
year ended December 31, 2015. As of September 30, 2018 and December 31, 2017, $54,401 and $38,979, respectively, of accrued interest
in connection with the related party promissory notes, had been included in accrued expenses and other current liabilities on
the accompanying balance sheet.
During
September 2015, the Company entered into a securities purchase agreement with CJY. Pursuant to this agreement, the Company
issued to CJY a convertible promissory note in the principal amount of $750,000. The Note was amended during the fourth
quarter of 2015 to $1,200,000. During 2016, the Note was amended to $1,752,000. This Note provided necessary bridge financing
to the Company prior to a financing of $1,600,000 completed in the third quarter of 2016. Interest accrues at the rate of 10%
per annum and is due upon maturity of the note in August
2018. The Company may prepay this Note and any accrued
interest at any time. At any time amounts outstanding under the CJY Note are convertible into the Company’s common
stock, in whole or in part, at the option of the lender, at a conversion price of $0.05 per share. A beneficial conversion
feature of $1,642,000 was calculated and capped at the value of the note pursuant to ASC 470 - 20. The Company recorded
amortization of the beneficial conversion feature as interest expense in the amount of $52,334 and $261,656 during the three
and nine months ended September 30, 2018, respectively. The Company recorded amortization of the beneficial conversion
feature as interest expense in the amount of $153,466 and $460,399 during the three and nine months ended September 30, 2017,
respectively. The maturity date of the note has been extended to August 2019.
On
October 6, 2017, in accordance with the terms of the Securities Purchase Agreement, CJY Holdings converted $500,000 of Notes in
exchange for 10,000,000 shares of the Company’s common stock. The cost basis for the shares issued was $0.05. Upon conversion,
a loss on extinguishment of $15,354 was charged to additional paid in capital.
On
October 16, 2017, CJY holdings converted an additional $50,000 of the Notes along with $150,000 of accrued interest into 4,000,000
shares of the Company’s common stock. The cost basis for the shares issued was $0.05. Upon conversion, a loss on extinguishment
of $155,459 was charged to additional paid in capital.
During
August 2018, CJY Holdings agreed to extend the maturity of the Notes payable for one year through August 2019.
On
April 26, 2017, Boston Therapeutics, Inc. (the “Company”) entered into Securities Purchase Agreement with CJY Holdings
Limited (“CJY”) providing for the sale by the Company to CJY of 6% Subordinated Convertible Debenture in an amount
of up to $1,000,000 (the “Debentures”). In addition to the Debentures, CJY will also receive stock purchase warrants
(the “Warrants”) to acquire 500,000 shares of common stock of the Company for every $50,000 in Debentures purchased.
The Warrants are exercisable for five years at an exercise price of $0.10 and may be exercised on a cashless basis. The Company
may only use the proceeds for the payment of services or materials associated with clinical trials. The Company closed on $200,000
in financing and issued the related Debentures and Warrants under this agreement on April 26, 2017.
The
Debentures bear interest at 6% per annum and mature two years from issuance. CJY may elect to convert all or part of the Debentures,
plus accrued interest, at any time into shares of common stock of the Company at a conversion price of $0.10 per share. Interest
on the Debentures is payable in cash or shares of common stock at $0.10 per share quarterly commencing June 30, 2017. The conversion
price is subject to adjustment for stock dividends and stock splits. In addition, if after the original issue date of the Debentures,
either (i) the volume weighted average price equals or exceeds $0.50 for 10 consecutive trading days or (ii) the Company elects
to list a class of securities on a national securities exchange, the Company may cause CJY to convert all or part of the then
outstanding principal amount of the Debentures plus, accrued but unpaid interest, liquidated damages and other amounts owed.
CJY
agreed to restrict its ability to convert the Debentures and exercise the Warrants and receive shares of common stock such that
the number of shares of common stock held by CJY after such conversion or exercise does not exceed 4.99% of the then issued and
outstanding shares of common stock.
A
beneficial conversion feature of $186,939 was calculated and capped at the value of the note pursuant to ASC 470 - 20. The Company
recorded amortization of the beneficial conversion feature as interest expense in the amount of $23,094 and $69,774 during the
three and nine months ended September 30, 2018. The Company recorded amortization of the beneficial conversion feature as interest
expense in the amount of $23,560 and $40,205, respectively during the three and nine months ended September 30, 2017. In connection
with this borrowing, the Company also issued warrants to purchase 2,000,000 shares of the Company’s common stock at $0.10
per share.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended September 30, 2018 and 2017
Convertible
notes payable – related party consist of the following at September 30, 2018 and December 31, 2017:
|
|
2018
|
|
|
2017
|
|
Principal balance
|
|
$
|
1,402,000
|
|
|
$
|
1,402,000
|
|
Debt discount
|
|
|
(53,426
|
)
|
|
|
(384,857
|
)
|
Outstanding, net of debt discount
|
|
$
|
1,348,574
|
|
|
$
|
1,017,143
|
|
On June 12, 2018, the Company
issued a note payable for $100,000 to World Technology East II Limited (“WTE2”). WTE2 is a Hong Kong company owned
equally by Carl W. Rausch, the Company’s CEO and a director, and Conroy Chi-Heng Cheng, a director of the Company. The WTE2
Note is an unsecured obligation of the Company. Principal and interest under the WTE2 Note is due and payable June 12, 2019, however,
in the event that the Company raises in excess of $1,000,000 in equity financing, then the Company will use part of its proceeds
to pay off the WTE2 Note. Interest accrues on the WTE2 Note at the rate of 10.0% per annum. Accrued interest at September 30,
2018 totaled $2,993.
On September 26, 2018, the Company issued a note payable for $305,937 to CJY Holdings, Ltd (“CJY”).
CJY is a Hong Kong company owned by Conroy Chi-Heng Cheng, a director of the Company. The CJY Note is an unsecured obligation of
the Company. Principal and interest under the CJY Note is due and payable September 26, 2019. Interest accrues on the CJY Note
at the rate of 10% per annum.
Included
in accounts payable at September 30, 2018 and December 31, 2017, are amounts due shareholders, officers and directors of the Company
in the amounts of $113,935 and $80,982, respectively.
11.
COMMITMENTS AND CONTINGENCIES
Leases
The
Company currently leases office space at 354 Merrimack Street, Lawrence, MA 01843 on a month to month basis. The Company recognized
rent expense of $900 and $2,700 during the three and nine months ended September 30, 2018 and 2017, respectively.
The
Company also leases office space on a month-to-month basis at The BioScience Center 5901 Indian School Rd., Albuquerque, NM 87110.
The Company recognized rent expense of $1,281 and $3,450 during the three and nine months ended September 30, 2018.
Contingent
share liability
On
February 12, 2018, the Company entered into a Contribution Agreement with the members of CureDM Group Holdings, LLC, a limited
liability company (“CureDM Group”), all of which except five are accredited investors (“CureDM Group Members”)
pursuant to which the CureDM Group Members agreed to contribute 100% of the outstanding securities of CureDM Group in exchange
for an aggregate of 47,741,140 shares of common stock of the Company (the “BTHE Contribution Shares”) of which 25,000,000
BTHE Contribution Shares were delivered at closing and 22,741,140 BTHE Contribution Shares (the “Milestone BTHE Shares”)
shall be delivered in four equal tranches of 5,685,285 BTHE Contribution Shares each upon the achievement of specific milestones
(the “CureDM Group Contribution”). The closing of the CureDM Group Contribution occurred on February 12, 2018.
Under
the agreement, BTI was to use its best efforts to secure a binding commitment to close an equity financing with net proceeds
of at least
$1,000,000 within 180 days after the closing date. The use of the equity financing proceeds would be
designated as working capital for at least, but not limited to the synthesis of HIP2B clinical material. In the event the
equity financing is not closed by the required date, then, if both BTI and CureDM, Inc. mutually agree, (i) this Acquisition
Agreement will then be null and void and have no further force and effect and all other rights and liabilities of the parties
will terminate without any liability of any party to any other party and (ii) each party shall have released the other party.
Further, if such event occurs, the CureDM Members will return all shares to BTI for cancellation.
Subsequent
to June 30, 2018, the 180 day time period elapsed and the Company did not raise the required funding. The two Companies have agreed
to keep working toward a successful closing and are negotiating a new expiration date.
The
Company believes the milestones noted above will be achieved and that the Milestone BTHE Shares will be issued. Therefore, the
Company has established a contingent liability to recognize the shares expected to be issued. The basis for the contingent liability
shares obligation is at $0.05 per share or $1,137,057 which is the fair value of the Company’s stock on the day of the closing.
Contingent share liability at September 30, 2018 is $1,137,057.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended September 30, 2018 and 2017
Employment
Agreement
The
Company entered into an Employment Agreement with Carl W. Rausch pursuant to which Mr. Rausch was engaged as the Chief Executive
Officer of the Company for a period of three years. Mr. Rausch was initially required to relocate from Hong Kong to the United
States. However, due to his continued efforts in Hong Kong, the Company and Mr. Rausch, in March 2017, have amended the employment
agreement to remove the provision requiring Mr. Rausch to relocate to the United States. Mr. Rausch received a signing bonus of
$60,000 and an annual salary of $224,000, which will be increased to $264,000 upon Mr. Rausch relocating to the United States.
Further, upon the Company being listed on a national exchange, Mr. Rausch’s salary will be increased by $20,000. The Company
granted Mr. Rausch a Stock Option (the “Rausch Option”) to acquire an aggregate of 6,000,000 shares of common stock
of the Company, exercisable for five (5) years, subject to vesting. The Rausch Option shall be earned and vested in three equal
tranches of 2,000,000 upon the Company raising $1,000,000 in financing, the Company raising $5,000,000 in financing and the Company
entering into a significant corporate alliance for substantial marketing and selling of the Company’s product portfolio.
The initial tranche shall be exercisable at $0.20 per share, the second tranche will be $0.40 per share and the third tranche
shall be $0.60 per share, which such vesting is subject to Mr. Rausch’s continued employment as an executive with the Company
as of the vesting date. In addition, as additional consideration for Mr. Rausch’s commitment to the Company, the stock options
previously granted to Mr. Rausch shall be amended to extend the expiration date to the ten year anniversary of signing date and
such options shall be considered fully vested. Mr. Rausch shall be entitled to certain raises and milestones subject to the achievement
of certain milestones to be agreed upon. In the event the Employment Agreement is terminated prior to the expiration of the term
by the Company without cause or by Mr. Rausch with good reason, the Company shall pay Mr. Rausch an amount equal to Mr. Rausch’s
accrued but unpaid base salary and earned but unpaid bonus prior to the termination date, reimbursement for any reimbursable business
expenses and Mr. Rausch’s salary for a period of one year.
On
March 1, 2018 the Board of Directors approved a reduction in the exercise price of 6,000,000 stock options issued to the Company’s
CEO on August 22, 2016. The First tranche of 2,000,000 will be exercisable at $0.10 per share and the second and third tranches
of 2,000,000 will be exercisable at $0.15 per share. The remainder of the terms remain unchanged.
On
February 12, 2018, Loraine Upham was appointed as Chief Operating Officer. The Company and Ms. Upham entered into an Executive
Retention Agreement pursuant to which Ms. Upham was engaged as Chief Operating Officer with an annual salary of $200,000. However,
Ms. Upham’s salary shall accrue until the Company has raised a minimum of $1,250,000. Ms. Upham is eligible for bonuses
as determined by the Board of Directors. These include a bonus of $20,000 is to be paid upon the Company successfully raising
$1,250,000 through the sale of equity; an annual performance bonus based on milestones related to clinical progress, partnering
and fund raising success to be established by the Board of Directors or the Compensation Committee, if in existence on an annual
basis. In addition, Ms. Upham received a stock option to purchase 4,000,000 shares of common stock under the Company’s Amended
and Restated 2011 Stock Incentive Plan, vesting over three (3) years, one third on the first anniversary of the effective date
and the balance in equal quarterly installments. The exercise price of the initial tranche of options (1,333,334 shares) shall
be $0.06 per share, the second tranche (1,333,333 shares) shall be $0.10 per share and the final tranche (1,333,333 shares) shall
be $0.20 per share. The term of the options is five years.
12.
SUBSEQUENT EVENTS
The
Company has evaluated events and transactions that occurred from September 30, 2018 through the date of the filing for possible disclosure
and recognition in the financial statements.
Subsequent to September 30, 2018, the Company borrowed a total of $59,500 from a related party. The Note bears interest at 10% and is due in twelve months.
On
October 2, 2018, the Company signed an agreement to collaborate with a clinical provider, Under the agreement, the
clinical provider may assist with the Company’s recently initiated exploratory and adaptive multicenter clinical
study of BTI 320 in Type 2 diabetes patients.