Notes to Unaudited Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2019 and 2018
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 Notes 3 and 13.
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.
Going Concern
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 $24.4 million as of March 31, 2019 and used cash in operations of $54,348 during the three months ended
March 31, 2019. 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 $8,000 cash on
hand at March 31, 2019. 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 was advanced $50,000 through the issuance of 10%
notes payable to a related party during the first quarter of 2019. In addition, the Company was advanced $339,144 during April
2019, from two related parties. Management anticipates that cash resources will be sufficient to fund our planned operations into
the second quarter of 2019. 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 consolidated financial statements
include the Company and its wholly owned subsidiary, CureDM, from the date of acquisition. All significant intercompany transactions
are eliminated in consolidation.
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Consolidated
Financial Statements
For the Three Months Ended March 31, 2019
and 2018
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.
Cash and Cash Equivalents
The Company considers 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. The Company had no cash equivalents at March 31,
2019 and December 31, 2018.
Revenue Recognition
For revenue from product sales,
the Company recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 606 (“ASC 606”). A five-step analysis must be met as outlined in ASC 606: (i) identify
the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price,
(iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations
are satisfied. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided
for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered
or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered
or no refund will be required.
The Company generates revenues
from sales of SUGARDOWN®. 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. The Company did not recognize any revenue
from royalties from APC during the three months ended March 31, 2019 and 2018 respectively.
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 March 31, 2019 and
December 31, 2018.
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.
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Consolidated
Financial Statements
For the Three Months Ended March 31, 2019
and 2018
Property and Equipment
Property and equipment is depreciated
using the straight-line method over the following estimated useful lives:
Asset Category
|
|
Estimated Useful Life
|
Office Furniture and Equipment
|
|
5 years
|
Computer Equipment and Software
|
|
3 years
|
The Company begins to depreciate
assets when they are placed in service. The costs of repairs and maintenance are expensed as incurred; major renewals and
betterments are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts
and any resulting gain or loss is included in the statement of operations. For the three months ended March 31, 2019 and 2018,
the Company recorded depreciation expense of $406 and $488, respectively.
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, 2018 and concluded that goodwill was impaired at December 31, 2018. The company
recorded impairment of goodwill in the amount of $1,246,002 for the year ended December 31, 2018. No goodwill exists at March 31,
2019.
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.
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Consolidated
Financial Statements
For the Three Months Ended March 31, 2019
and 2018
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 months ended March 31, 2019 did not include 9,494,000,
38,583,320, 39,516,617 and 8,250,000 for options, warrants and shares to be issued upon conversion of notes payable and Series
A Preferred Stock, respectively, because of their anti-dilutive effect. The weighted average number of common shares for the three
months ended March 31, 2018 did not include 9,594,000, 46,179,669, 40,406,713 and 8,250,000 for options, warrants and shares to
be issued upon conversion of notes payable and Series A Preferred Stock, respectively, because of their anti-dilutive effect.
Income Taxes
The Company accounts for income
taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or be settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided
when it is more likely than not that some portion of the gross deferred tax asset will not be realized. The Company records interest
and penalties related to income taxes as a component of provision for income taxes. The Company did not recognize any interest
and penalty expense for the three months ended March 31, 2019 and 2018.
On December 22, 2017, the Tax
Cuts and Jobs Act (TCJA) was signed into law by the President of the United States. TCJA is a tax reform act that among other things,
reduced corporate tax rates to 21 percent effective January 1, 2018. FASB ASC 740, Income Taxes, requires deferred tax assets and
liabilities to be adjusted for the effect of a change in tax laws or rates in the year of enactment, which is the year in which
the change was signed into law. Accordingly, the Company adjusted its deferred tax assets and liabilities at December 31, 2017,
using the new corporate tax rate of 21 percent.
Advertising Costs
Advertising costs are expensed
as incurred and are reported as a component of operating expenses in the sales and marketing expenses in the statements of operations.
The Company did not incur any advertising costs for either three month period ended March 31, 2019 and 2018, respectively.
Research and Development
Costs
Research and development expenditures
are charged to the statement of operations as incurred. Such costs include proprietary research and development activities, purchased
research and development, and expenses associated with research and development contracts, whether performed by the Company or
contracted with independent third parties.
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, accounts receivable, prepaid expenses,
accounts payable, accrued expenses, and notes payable. The carrying value of cash, accounts receivable, prepaid expenses, 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 March 31, 2019 and December 31, 2018, 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.
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Consolidated
Financial Statements
For the Three Months Ended March 31, 2019
and 2018
Concentration of Credit Risk
Financial instruments that potentially
subject the Company to concentrations of credit risk are principally cash. The Company places its cash and cash equivalents in
highly rated financial institutions. The Company maintains cash balances with financial institutions that occasionally exceed federally
insured limits. The Company has not experienced any losses related to these balances, and management believes its credit risk to
be minimal.
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.
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 March 31, 2019 and December 31, 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.
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Consolidated
Financial Statements
For the Three Months Ended March 31, 2019
and 2018
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
In February 2016, the FASB established ASC Topic 842, Leases
(Topic 842), by issuing ASU No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information
about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition
to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The
new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the
balance sheet. Leases will be classified as finance or operating, with classification affecting the pattern and classification of
expense recognition in the statement of operations. The Company adopted the new standard on January 1, 2019.
The new standard provides a number of optional practical expedients
in transition. The Company has elected the ‘package of practical expedients’, which permit it not to reassess under
the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company
did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter is not applicable to the
Company.
The new standard did not have a material effect on the Company’s
consolidated Financial statements.
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.
On February 12, 2018, the Company
entered into a Contribution Agreement dated January 1, 2018, 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.
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
|
|
|
—
|
|
|
|
|
|
|
Total consideration
|
|
$
|
1,250,000
|
|
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
|
|
|
1,176,220
|
|
Intangibles
|
|
|
234,122
|
|
Liabilities assumed:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
(164,207
|
)
|
Net assets acquired
|
|
$
|
1,250,000
|
|
As of March 31, 2019 and
December 31, 2018, the Company expects the probability of the milestones for issuance of the contingent shares to be
remote and therefore has placed no value on the shares as of March 31, 2019 and
December 31, 2018. See Note 13.
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.
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.
|
|
Three months ended,
March 31, 2019
|
|
|
Three months ended,
March 31, 2018
|
|
Total revenues
|
|
$
|
4,085
|
|
|
$
|
9,236
|
|
Net loss
|
|
$
|
(951,880
|
)
|
|
$
|
(2,743,206
|
)
|
Basic and diluted net earnings per common share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
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 Months Ended March 31, 2019
and 2018
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.
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 March 31, 2019 and December 31, 2018, net of inventory reserves, were as follows:
|
|
2019
|
|
|
2018
|
|
Finished goods
|
|
$
|
7,637
|
|
|
$
|
1,013
|
|
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 March 31, 2019 and December 31, 2018:
|
|
2019
|
|
|
2018
|
|
SUGARDOWN® technology and patent applications
|
|
$
|
1,134,122
|
|
|
$
|
1,134,122
|
|
Less accumulated amortization
|
|
|
(657,360
|
)
|
|
|
(618,910
|
)
|
Intangible assets, net
|
|
$
|
476,762
|
|
|
$
|
515,212
|
|
Amortization expense was $38,450 and $39,918 for the three months
ended March 31, 2019 and 2018, respectively.
6.
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
The following table represents the major components
of accrued expenses and other current liabilities at March 31, 2019 and December 31, 2018:
|
|
2019
|
|
|
2018
|
|
Accrued payroll
|
|
$
|
188,716
|
|
|
$
|
188,716
|
|
Professional fees
|
|
|
77,472
|
|
|
|
95,018
|
|
Accrued consulting fees
|
|
|
523,600
|
|
|
|
413,600
|
|
Interest
|
|
|
519,120
|
|
|
|
456,613
|
|
Accrued expense reimbursement and other
|
|
|
13,195
|
|
|
|
6,696
|
|
Total
|
|
$
|
1,322,103
|
|
|
$
|
1,160,643
|
|
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Consolidated
Financial Statements
For the Three Months Ended March 31, 2019
and 2018
7.
|
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 March 31, 2019
measured at fair value on a recurring basis are summarized below:
|
|
March 31,
2019
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Derivative liability
|
|
$
|
47,996
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
47,996
|
|
Warrant liability
|
|
|
1,062,411
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,062,411
|
|
Total
|
|
$
|
1,110,407
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,110,407
|
|
Financial liabilities as of December 31,
2018 measured at fair value on a recurring basis are summarized below:
|
|
December 31,
2018
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Derivative liability
|
|
$
|
54,242
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
54,242
|
|
Warrant liability
|
|
|
925,806
|
|
|
|
—
|
|
|
|
—
|
|
|
|
925,806
|
|
Total
|
|
$
|
980,048
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
980,048
|
|
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 Months Ended March 31, 2019 and 2018
The
fair value of the conversion/exercise options were calculated using a binomial lattice formula with the following weighted average
assumptions during the three months ended March 31, 2019 and the year ended December 31, 2018:
Conversion
option:
|
March 31,
|
|
|
December 31,
|
|
|
2019
|
|
|
2018
|
|
Common Stock Closing Price
|
|
|
$
|
0.035
|
|
|
$
|
0.03
|
|
Conversion Price per Share
|
|
|
$
|
0.075 to 0.10
|
|
|
$
|
0.075 to 0.10
|
|
Conversion Shares
|
|
|
|
5,333,333
|
|
|
|
5,333,333
|
|
Call Option Value
|
|
|
|
0.011 to 0.0056
|
|
|
|
0.013 to 0.055
|
|
Dividend Yield
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Volatility
|
|
|
|
222.77
|
%
|
|
|
221.92
|
%
|
Risk-free Interest Rate
|
|
|
|
2.40% to 2.44
|
%
|
|
|
2.46% to 2.51
|
%
|
Term
|
|
|
|
0.25 to 0.375 years
|
|
|
|
0.32 to 0.625 years
|
|
Exercise
option:
|
March 31,
|
|
|
December 31,
|
|
|
2019
|
|
|
2018
|
|
Common Stock Closing Price
|
|
|
$
|
0.035
|
|
|
$
|
0.03
|
|
Conversion Price per Share
|
|
|
$
|
0.10 to 0.15
|
|
|
$
|
0.10 to 0.15
|
|
Conversion Shares
|
|
|
|
34,000,000
|
|
|
|
34,000,000
|
|
Call Option Value
|
|
|
|
0.029 to 0.033
|
|
|
|
0.026 to 0.028
|
|
Dividend Yield
|
|
|
|
0.00
|
%
|
|
|
0.00%
|
|
Volatility
|
|
|
|
222.77
|
%
|
|
|
221.92%
|
|
Risk-free Interest Rate
|
|
|
|
2.21 to 2.27
|
%
|
|
|
2.46 to 2.51
|
%
|
Term
|
|
|
|
2.07 to 3.85 years
|
|
|
|
2.62 to 4 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 Months Ended March 31, 2019 and 2018
The
following tables set 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 three months
ended March 31, 2019 and 2018:
|
|
Debt
|
|
|
Warrant
|
|
|
|
Derivative
|
|
|
Liability
|
|
Balance, December 31, 2018
|
|
$
|
54,242
|
|
|
$
|
925,806
|
|
Aggregate amount of derivative instruments issued
|
|
|
—
|
|
|
|
—
|
|
Transferred in due to conversions
|
|
|
—
|
|
|
|
—
|
|
Change in fair value of derivative liabilities
|
|
|
(6,246
|
)
|
|
|
136,605
|
|
Balance, March 31, 2019
|
|
$
|
47,996
|
|
|
$
|
1,062,411
|
|
|
|
Debt
|
|
|
Warrant
|
|
|
|
Derivative
|
|
|
Liability
|
|
Balance, December 31, 2017
|
|
$
|
429,141
|
|
|
$
|
1,099,200
|
|
Aggregate amount of derivative instruments issued
|
|
|
—
|
|
|
|
226,833
|
|
Transferred in due to conversions
|
|
|
(273,080
|
)
|
|
|
—
|
|
Change in fair value of derivative liabilities
|
|
|
179,952
|
|
|
|
1,228,703
|
|
Balance, March 31, 2018
|
|
$
|
336,013
|
|
|
$
|
2,554,736
|
|
8.
|
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 were 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 7. The debt discount was 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.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2019 and 2018
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 in 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 year ended December 31, 2018.
During
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 loss on extinguishment was recorded in the amount of $2,374.
For
the three months ended March 31, 2019 and 2018, the Company amortized $0 and $275,841, respectively, of debt discount to operations
as interest expense.
Convertible
notes payable consist of the following at March 31, 2019 and December 31, 2018:
|
|
2019
|
|
|
2018
|
|
Principal balance
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
Debt discount
|
|
|
—
|
|
|
|
—
|
|
Deferred finance costs
|
|
|
—
|
|
|
|
—
|
|
Outstanding, net of debt discount
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
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;
|
|
●
|
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 March
31, 2019 and December 31, 2018 totaled $27,493 and $18,493, respectively.
As
of March 31, 2019, the Company has not issued the $400,000 of common stock
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2019 and 2018
The
Company is currently in arbitration with Level Brands, regarding this marketing contract. Both parties are claiming non performance
under the contract. The matter is very early into the process and the Company is unable to determine any outcome positive or negative
at this time. See Note 13.
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 shares outstanding
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 March 31, 2019 and December 31, 2018, the Company has 82,500 shares of Series A Preferred Stock
outstanding.
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 7.
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 7.
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 7.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2019 and 2018
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
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.
On
January 10, 2019, the Company issued 1,000,000 shares of its common stock in exchange for consulting services amounting to $22,900
pursuant to a consulting agreement entered into and approved by the Board of Directors on November 23, 2018.
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 March 31, 2019, the Company had 38,583,320 warrants outstanding which are all classified as equity instruments and are fully
exercisable.
The
following tables summarize the Company’s common stock warrants activity for the three months ended March 31, 2019
and 2018:
|
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding as of December 31, 2018
|
|
|
|
38,999,990
|
|
|
$
|
0.17
|
|
|
$
|
—
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited/Canceled
|
|
|
|
(416,670
|
)
|
|
|
1.00
|
|
|
|
—
|
|
Outstanding as of March 31, 2019
|
|
|
|
38,583,320
|
|
|
$
|
0.16
|
|
|
$
|
—
|
|
|
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding as of December 31, 2017
|
|
|
|
41,029,669
|
|
|
$
|
0.23
|
|
|
$
|
—
|
|
Granted
|
|
|
|
5,500,000
|
|
|
|
0.15
|
|
|
|
—
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited/Canceled
|
|
|
|
(350,000
|
)
|
|
|
1.00
|
|
|
|
—
|
|
Outstanding as of March 31, 2018
|
|
|
|
46,179,669
|
|
|
$
|
0.22
|
|
|
$
|
—
|
|
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 $0.035 as of March 31, 2019, which would have been received by the warrant holders had those warrant holders exercised
their warrants as of that date.
11.
|
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 March 31, 2019 and
December 31, 2018, 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 March 31, 2019 and December 31, 2018, there were 9,244,000 and
9,344,000 options outstanding under the 2011 Plan.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2019 and 2018
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. Ms. Upham
resigned from the Company on November 30, 2018. As a result of her resignation all of her stock options were terminated and returned
to the option pool.
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 August 22, 2016, the Company
granted 6,000,000 options to purchase its common shares to its new CEO as a part of his employment agreement. The options consist
of 3 separate tranches with different exercise prices and vest upon reaching certain milestones. All 6 million options have a
five year life. The first 2,000,000 shares have an exercise price of $0.20 per share and vest upon the Company raising at least
$1 million in financing. The second 2,000,000 shares carry an exercise price of $0.40 per share and vest upon the Company raising
$5 million in financing. The third 2,000,000 shares carry an exercise price of $0.60 per share and vest upon the Company entering
into a significant corporate alliance for substantial marketing and selling of the Company’s product portfolio.
In
addition, the Company amended 1,500,000 stock options previously granted to the new CEO to extend the expiration date to August
22, 2026. These options were all previously vested.
No
stock options were issued under either plan during the three months ended March 31, 2019.
The
fair value of stock options granted and revaluation of non-employee consultant options for the three months ended March 31, 2018
was calculated with the following assumptions:
|
|
2018
|
|
Risk-free interest rate
|
|
|
2.22% to 2.3
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Volatility factor
|
|
|
217.6% to 219.04
|
%
|
Expected life of option
|
|
|
1.71 to 5 years
|
|
The
weighted-average fair value of stock options granted during the three months ended March 31, 2017 under the Black-Scholes option
pricing model was $0.048. For the three months ended March 31, 2019 and 2018, the Company recorded stock-based compensation expense
of $13,593 and $46,281, respectively, in connection with share-based payment awards. As of March 31, 2019 and 2018, there was
$131,398 and $334,179, respectively of unrecognized compensation expense related to non-vested stock option awards.
The
following table summarizes the Company’s stock option activity during the three months ended March 31, 2019:
|
|
Shares
|
|
|
Exercise
Price per
Share
|
|
|
Weighted
Average
Exercise Price
per Share
|
|
Outstanding as of December 31, 2018
|
|
|
9,594,000
|
|
|
$
|
0.10 – 1.21
|
|
|
$
|
0.36
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options forfeited/cancelled
|
|
|
100,000
|
|
|
|
0.10
|
|
|
|
0.10
|
|
Outstanding as of March 31, 2019
|
|
|
9,494,000
|
|
|
$
|
0.10 – 1.21
|
|
|
$
|
0.37
|
|
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2019 and 2018
The
following table summarizes the Company’s stock option activity during the three months ended March 31, 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 March 31, 2018
|
|
|
13,494,000
|
|
|
$
|
0.06 – 1.21
|
|
|
$
|
0.29
|
|
The
following table summarizes information about stock options that are vested or expected to vest at March 31, 2019:
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
0.10
|
|
|
|
1,500,000
|
|
|
$
|
0.10
|
|
|
|
5.50
|
|
|
$
|
—
|
|
|
|
1,500,000
|
|
|
$
|
0.10
|
|
|
|
5.50
|
|
|
$
|
—
|
|
|
0.18
|
|
|
|
934,000
|
|
|
|
0.18
|
|
|
|
4.23
|
|
|
|
—
|
|
|
|
934,000
|
|
|
|
0.18
|
|
|
|
4.23
|
|
|
|
—
|
|
|
0.20
|
|
|
|
2,150,000
|
|
|
|
0.20
|
|
|
|
3.12
|
|
|
|
—
|
|
|
|
2,150,000
|
|
|
|
0.20
|
|
|
|
3.12
|
|
|
|
—
|
|
|
0.37
|
|
|
|
58,000
|
|
|
|
0.37
|
|
|
|
3.43
|
|
|
|
—
|
|
|
|
58,000
|
|
|
|
0.37
|
|
|
|
3.43
|
|
|
|
—
|
|
|
0.40
|
|
|
|
2,000,000
|
|
|
|
0.40
|
|
|
|
2.42
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.40
|
|
|
|
2.42
|
|
|
|
—
|
|
|
0.42
|
|
|
|
63,000
|
|
|
|
0.42
|
|
|
|
1.75
|
|
|
|
—
|
|
|
|
63,000
|
|
|
|
0.42
|
|
|
|
1.75
|
|
|
|
—
|
|
|
0.50
|
|
|
|
310,000
|
|
|
|
0.50
|
|
|
|
0.58
|
|
|
|
—
|
|
|
|
310,000
|
|
|
|
0.50
|
|
|
|
0.58
|
|
|
|
—
|
|
|
0.60
|
|
|
|
2,000,000
|
|
|
|
0.60
|
|
|
|
2.42
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.60
|
|
|
|
2.42
|
|
|
|
—
|
|
|
0.69
|
|
|
|
100,000
|
|
|
|
0.69
|
|
|
|
5.00
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
0.69
|
|
|
|
5.00
|
|
|
|
—
|
|
|
1.21
|
|
|
|
379,000
|
|
|
|
1.21
|
|
|
|
4.78
|
|
|
|
—
|
|
|
|
379,000
|
|
|
|
1.21
|
|
|
|
4.78
|
|
|
|
—
|
|
$
|
0.10-1.21
|
|
|
|
9,494,000
|
|
|
$
|
0.29
|
|
|
|
3.45
|
|
|
$
|
—
|
|
|
|
5,494,000
|
|
|
$
|
0.27
|
|
|
|
4.22
|
|
|
$
|
—
|
|
The
following table sets forth the status of the Company’s non-vested stock options as of March 31, 2019 and December 31, 2018:
|
|
|
Number of
Options
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
Non-vested as of December 31, 2018
|
|
|
|
4,000,000
|
|
|
$
|
0.50
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
|
—
|
|
|
|
—
|
|
Non-vested as of March 31, 2019
|
|
|
|
4,000,000
|
|
|
$
|
0.50
|
|
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2019 and 2018
The
weighted-average remaining contractual life for options exercisable at March 31, 2019 is 3.45 years. At March 31, 2019 the Company
has 8,256,000 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 March 31, 2019. The aggregate intrinsic value of options
exercised during the three months ended March 31, 2019 was $0 as no options were exercised. The actual tax benefit realized from
stock option exercises during the three months ended March 31, 2018 was $0 as no options were exercised.
|
12
.
|
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 March 31, 2019
and December 31, 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 three months ended March 31, 2019 or 2018.
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.
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 March 31, 2019 and December 31, 2018, $64,801 and $59,650, 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.
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Consolidated
Financial Statements
For the Three Months Ended March 31, 2019
and 2018
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 $0
and $104,661 during the three months ended March 31, 2019 and 2018, respectively.
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 $23,560 during the three months ended March 31,
2019 and 2018, respectively. 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 Months Ended March 31, 2019
and 2018
Convertible notes payable – related party consist
of the following at March 31, 2019 and December 31, 2018:
|
|
2019
|
|
2018
|
Principal balance
|
|
$
|
1,402,000
|
|
|
$
|
1,402,000
|
|
Debt discount
|
|
|
(7,238
|
)
|
|
|
(30,332
|
)
|
Outstanding, net of debt
|
|
$
|
1,394,762
|
|
|
$
|
1,371,668
|
|
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. During the fourth quarter of 2018, the Company increased the amount of the note payable to $174,500 with
borrowings of $44,500 on October 4, $15,000 on November 5 and $15,000 on December 7. During the first quarter of 2019, the Company
increased the amount of the note payable to $224,500 with borrowings of $30,000 on January 17 and $20,000 on February 11. Interest
accrues on the WTE2 Note at the rate of 10.0% per annum. Accrued interest at March 31, 2019 and December 31, 2018 totaled $11,205
and $6,843, respectively.
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. Accrued interest
at March 31, 2019 and December 31, 2018 totaled $15,632 and $7,984, respectively.
Included in accounts payable
at March 31, 2019 and December 31, 2018 are amounts due shareholders, officers and directors of the Company in the amounts of $137,302
and $121,453, respectively.
Included in accrued expenses
at March 31, 2019 and December 31, 2018 are amounts due shareholders, officers and directors of the Company in the amounts of $933,573
and $779,545, respectively.
13.
|
COMMITMENTS AND CONTINGENCIES
|
Pending litigation
During March 2019 we were served
with notification of litigation regarding our merger with CureDM Holdings. CureDM Holdings’ former parent company, CureDM
Inc. has filed a complaint regarding breach of contract and other matters relating to their desire to unwind the merger according
to the original merger agreement. This matter has just recently been filed and we are still evaluating it with our legal counsel.
At this time, we are unable to state with certainty and outcome either positive or negative. We do intend to vigorously defend
against the claims.
In addition to the above matter,
we are also in arbitration with another company, Level Brands, regarding a marketing contract between our companies. Both parties
are claiming non performance under the contract. The matter is currently in arbitration but is very early into the process and
we are unable to determine any outcome positive or negative at this time.
Leases
The Company leased office space
at 354 Merrimack Street, Lawrence, MA 01843 on a month to month basis. The Company discontinued leasing the space on September
30, 2018 but maintains a mailing address at the location. The Company recognized rent expense of $900 for the three months ended
March 31, 2019 and 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.
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Consolidated
Financial Statements
For the Three Months Ended March 31, 2019
and 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 not be achieved and that the Milestone BTHE Shares will not be issued. Therefore, the Company has not established
a contingent liability to recognize the milestone shares obligations.
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. Ms. Upham resigned from the Company on November 30, 2018. As a result of her
resignation all of her stock options were terminated and returned to the option pool. Her accrued salary and vacation of $188,716
will be paid once the funding is obtained. (See Note 13)
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Consolidated
Financial Statements
For the Three Months Ended March 31, 2019
and 2018
Consulting Agreement
On April 1, 2018, the Company
entered into a Corporate Advisory Agreement with a consultant. Services commenced May 1, 2018 for a term of one year with an option
to renew for an additional six months. Compensation pursuant to the agreement is as follows: (1) a monthly fee of $6,500 paid in
cash, and (2) 3,000,000 shares of restricted common stock of which 1,400,000 shares were deliverable upon execution of the agreement
and the remaining 1,600,000 delivered in monthly installments of 400,000 shares as long as the agreement has not been terminated.
Included in accrued expenses is the monthly fee totaling$52,000 and the fair value of the shares of common stock totaling $211,600,
as the shares have not been issued as of March 31, 2019.
The Company has evaluated events
and transactions that occurred from March 31, 2019 through the date of the filing for possible disclosure and recognition in the
financial statements.
On April 4, 2019, the company
borrowed $50,000 from a related party. The Note bears interest at 10% and is due in twelve months.
On April 12, 2019, the
Company borrowed $289,144 from a related party to continue its clinical trials in the U.S. The Note bears interest at 10% and is
due in twelve months.