Notes
to Unaudited Condensed Financial Statements
For
the Three and Nine Months Ended September 30, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company
Overview
Boston
Therapeutics, Inc., headquartered in Lawrence, MA, (OTC: BTHE) is a leader in the field of complex carbohydrate chemistry. The
Company’s initial product pipeline is focused on developing and commercializing therapeutic molecules for pre-diabetes and
diabetes: BTI-320, a non-systemic, non-toxic, therapeutic investigative material designed to reduce post-meal immediate glucose
elevations which according to recent findings, is important in prediabetes and diabetes sugar management. In addition, a formulation
of the material, SUGARDOWN®, falls within the regulatory dietary supplement guidelines and is designed to reduce immediate
post-meal blood sugar increases “sugar spikes” which can only be significantly controlled by prescription insulin.
In its patent portfolio, the Company has considered laboratory proof of concept development of a combination material called IPOXYN,
a complex carbohydrate with an oxygen carrier protein of unique characteristics. In its initial phase, IPOXYN presents as a continuous
intravenous drug for the prevention of necrosis, and event pending in many traumatic injuries and similarly, for possible treatment
of ischemia with a possible target indication for assisting in the treatment of lower limb ischemic disorders often associated
with diabetic neuropathies. The Company has been granted patents in the Ipoxyn and in the BTI-320 compound formulations.
The
accompanying unaudited condensed financial statements have been prepared assuming the Company will continue as a going concern.
The Company has limited resources and primarily a CRO/CMO contracted operating history. For the last few years, BTI has been largely
supported by its Asia development license holder, who is also a Director of the Company and a significant shareholder. The license
holder has participated in the ongoing development of the Sugardown related technologies. As shown in the accompanying unaudited
condensed financial statements, the Company has an accumulated deficit of approximately $19.8 million and $297,000 cash on hand
as of September 30, 2017. Management is currently seeking additional capital through private placements and public offerings of
its common stock and more recently through corporate alliances and strategic merger opportunities. 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. Management anticipates that the current cash available will be sufficient to fund our planned operations
into the first 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 and development for clarification of its new business opportunities. There can
be no assurance that the Company will be successful in accomplishing its objectives. Without such additional capital, the Company
may be required to cease operations.
These
conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements
do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification
of liabilities that might be necessary in the event the Company cannot continue operations.
Basis
of Presentation
The
accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) for interim financial information and the rules of the Securities and
Exchange Commission (“SEC”) for quarterly reports on Form 10-Q. These condensed financial statements should be read
in conjunction with the Company’s financial statements for its year ended December 31, 2016 included in its Form 10-K filed
with the SEC on March 28, 2017. In the opinion of management, the statements contain all adjustments, including normal recurring
adjustments necessary in order to present fairly the financial position as of September 30, 2017 and the results of operations
for the three and nine month periods ended September 30, 2017 and 2016.
The
condensed balance sheet, as of December 31, 2016, was derived from the audited financial statements but does not include all disclosures
required by accounting principles generally accepted in the United States of America. The results disclosed in the statements
of operations for the three and nine month periods ended September 30, 2017 are not necessarily indicative of the results to be
expected for the full fiscal year.
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 Financial Statements
For
the Three and Nine Months Ended September 30, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- continued
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, 2017 and December 31, 2016.
Inventory
Inventory
consists of raw materials, and finished goods of SUGARDOWN®. Inventories are stated at the lower of cost (first-in, first-out)
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.
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.
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. The carrying value of
the notes payable as of September 30, 2017 and December 31, 2016, 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.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Financial Statements
For
the Three and Nine Months Ended September 30, 2017 and 2016
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
continued
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 September 30, 2017 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 uses the Black-Scholes option pricing
model to determine the fair value of options granted and recognizes the compensation cost of share-based awards on a straight-line
basis over 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
Company has a limited history of market prices of the common stock, and as such volatility is estimated using historical volatilities
over the prior three years. 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 vesting 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.
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 nine month period ended September
30, 2017 does not include 64,624,013, and 12,094,000 and 39,404,669 for convertible notes payable and accrued interest, options
and warrants, respectively, because of their anti-dilutive effect. The weighted average number of common shares for the three
and nine month period ended September 30, 2016 did not include 54,495,233, 12,289,000 and 28,424,669 for convertible notes payable
and accrued interest, options and warrants, respectively, because of their anti-dilutive effect.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Financial Statements
For
the Three and Nine Months Ended September 30, 2017 and 2016
Recent
Adopted 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.
2.
INVENTORIES
Inventories
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 inventories at September 30, 2017 and December 31, 2016, net of inventory reserves, were as follows:
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
$
|
32,781
|
|
|
$
|
34,919
|
|
Finished goods
|
|
|
8,783
|
|
|
|
20,197
|
|
|
|
$
|
41,564
|
|
|
$
|
55,116
|
|
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.
3.
INTANGIBLE ASSETS
The
SUGARDOWN® technology and patent applications are being amortized on a straight-line basis over their useful lives of 14 years.
Goodwill is not amortized, but is evaluated annually for impairment.
Intangible
assets consist of the following at September 30, 2017 and December 31, 2016:
|
|
2017
|
|
|
2016
|
|
SUGARDOWN® technology and patent applications
|
|
$
|
900,000
|
|
|
$
|
900,000
|
|
Less accumulated amortization
|
|
|
(444,643
|
)
|
|
|
(396,429
|
)
|
Intangible assets, net
|
|
$
|
455,357
|
|
|
$
|
503,571
|
|
Amortization
expense was $16,071 for the three months ended September 30, 2017 and 2016. Amortization expense was $48,214 for the nine months
ended September 30, 2017 and 2016.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Financial Statements
For
the Three and Nine Months Ended September 30, 2017 and 2016
4.
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, 2017 measured at fair value on a recurring basis are summarized below:
|
|
September 30,
2017
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
798,503
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
798,503
|
|
Warrant liability
|
|
|
1,474,139
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,474,139
|
|
Total
|
|
$
|
2,272,642
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,272,642
|
|
Financial
liabilities as of December 31, 2016 measured at fair value on a recurring basis are summarized below:
|
|
December 31,
2016
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
1,234,106
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,234,106
|
|
Warrant liability
|
|
|
1,093,765
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,093,765
|
|
Total
|
|
$
|
2,327,871
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,327,871
|
|
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 Financial Statements
For
the Three and Nine Months Ended September 30, 2017 and 2016
4.
FAIR VALUE OF FINANCIAL INSTRUMENTS – continued
The
fair value of the conversion/exercise options were calculated using a binomial lattice formula with the following assumptions
during the nine months ended September 30, 2017:
Conversion
option:
|
|
September 30,
|
|
|
|
2017
|
|
Common Stock Closing Price
|
|
$
|
0.05 to 0.07
|
|
Conversion Price per Share
|
|
$
|
0.075 to 0.10
|
|
Conversion Shares
|
|
|
|
21,666,666
|
|
Call Option Value
|
|
|
|
0.034 to 0.057
|
|
Dividend Yield
|
|
|
|
0.00
|
%
|
Volatility
|
|
|
|
208.8 to 214.3
|
%
|
Risk-free Interest Rate
|
|
|
|
1.03 to 1.47
|
%
|
Term
|
|
|
|
0.87 to 2 years
|
|
Exercise
option:
|
|
September 30,
|
|
|
|
2017
|
|
Common Stock Closing Price
|
|
$
|
0.05 to 0.07
|
|
Conversion Price per Share
|
|
$
|
0.10 to 0.15
|
|
Conversion Shares
|
|
|
|
27,000,000
|
|
Call Option Value
|
|
|
|
0.048 to 0.072
|
|
Dividend Yield
|
|
|
|
0.00
|
%
|
Volatility
|
|
|
|
208.8 to 214.3
|
%
|
Risk-free Interest Rate
|
|
|
|
1.62 to 1.93
|
%
|
Term
|
|
|
|
3.87 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.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Financial Statements
For
the Three and Nine Months Ended September 30, 2017 and 2016
4.
FAIR VALUE OF FINANCIAL INSTRUMENTS – continued
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 condensed statements of operations.
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, 2017:
|
|
Debt
|
|
|
Warrant
|
|
|
|
Derivative
|
|
|
Liability
|
|
Balance, December 31, 2016
|
|
$
|
1,234,106
|
|
|
$
|
1,093,765
|
|
Aggregate amount of derivative instruments issued
|
|
|
85,381
|
|
|
|
551,558
|
|
Transferred in due to conversions
|
|
|
14,551
|
|
|
|
—
|
|
Change in fair value of derivative liabilities
|
|
|
(535,535
|
)
|
|
|
(171,184
|
)
|
Balance, September 30, 2017
|
|
$
|
798,503
|
|
|
$
|
1,474,139
|
|
The
Company’s sequencing policy requires that the instruments prioritized based on issued options, warrants, preferred stock,
convertible debt and other convertible instruments would be settled first. The sequencing policy also considers contingently issuable
additional shares, such as the convertible notes; which have variable terms based upon the Company’s common stock price,
to have an issuance date to coincide with the event giving rise to the additional shares. Using this sequencing policy, debt instruments
convertible into common stock are derivative liabilities.
In
accordance with the sequencing policy and based on ASC 815-10-15-74, stock warrants issued in connection with debt and other convertible
securities are considered by the company as a derivative, as the put option underlying these warrants are “tainted”
derivatives after considering the Company’s outstanding convertible notes and its sequencing policy.
5.
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 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.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Financial Statements
For
the Three and Nine Months Ended September 30, 2017 and 2016
5.
CONVERTIBLE NOTES PAYABLE – continued
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 interest during the three months ended September 30, 2016. The Company valued the conversion
option and the warrants using the Binomial Lattice pricing model as described in Note 4. 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.
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.
For
the three and nine months ended September 30, 2017, the Company amortized $239,338 and $696,323, respectively debt discount to
operations as interest expense.
Convertible
notes payable consist of the following at September 30, 2017 and December 31, 2016:
|
|
2017
|
|
|
2016
|
|
Principal balance
|
|
$
|
1,475,000
|
|
|
$
|
1,600,000
|
|
Debt discount
|
|
|
(375,065
|
)
|
|
|
(1,031,183
|
)
|
Deferred finance costs
|
|
|
(109,950
|
)
|
|
|
(204,198
|
)
|
Outstanding, net of debt discount
|
|
$
|
989,985
|
|
|
$
|
364,619
|
|
6.
STOCKHOLDERS’ EQUITY
The
Company is authorized to issue up to 5,000,000 shares of its $0.001 par value preferred stock and up to 200,000,000 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 on September 7, 2013.
On August 3, 2017, the Company’s Board of Directors voted to approve an increase in
authorized common stock shares outstanding from 200,000,000 shares to 750,000,000 shares of the Company’s common stock.
This increase is subject to shareholder approval.
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, 2017, the Company has 45,000 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 nine
months ended September 30, 2017. The Company valued the warrants using the Binomial Lattice pricing model as described in Note
4.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Financial Statements
For
the Three and Nine Months Ended September 30, 2017 and 2016
Common
Stock
On
April 11, 2017, the Company issued a total of 1,038,301 shares of its common stock in conjunction with the conversion of one of
the 6% Convertible Debentures plus accrued interest (See Note 5). Of the total amount of shares issued, 1,000,000 were for the
conversion of a Note for $75,000 and 38,301 shares were issued for the conversion of accrued interest of $2,873.
On
July 14, 2017, in accordance with the terms of a Securities Purchase Agreement, the Company issued 666,667 shares to an investor
upon conversion of a note payable held by the investor for $50,000. The cost basis for the shares issued was $0.075.
On
July 31, 2017, in accordance with the terms of a Securities Purchase Agreement, the Company issued 21,370 shares to a related
party in lieu of cash for payment of accrued interest of $2,130. The cost basis for the shares issued was $0.10.
On
September 29, 2017, in accordance with the terms of a Securities Purchase Agreement, the Company issued 1,507,989 shares to investors
in lieu of cash for payment of accrued interest of $79,169. The cost basis for the shares issued was $0.0525.
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, 2017, the Company had 39,404,669 warrants outstanding which are all classified as equity instruments and are
fully exercisable as of September 30, 2017.
The
following table summarizes the Company’s common stock warrant activity during the nine months ended September 30, 2017:
|
|
|
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding as of December 31, 2016
|
|
|
|
28,424,669
|
|
|
$
|
0.29
|
|
|
Granted
|
|
|
|
11,000,000
|
|
|
|
0.14
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited/cancelled
|
|
|
|
(20,000
|
)
|
|
|
1.15
|
|
Outstanding as of September 30, 2017
|
|
|
|
39,404,669
|
|
|
$
|
0.25
|
|
7.
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, 2017 and December 31, 2016, 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, 2017 and December 31, 2016, there were 11,844,000 and 12,039,000 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 one to four years and the options typically expire in five to ten years.
No
stock options were granted in either nine month period ending September 30, 2017 or 2016.
The
Company recognized $12,439 and $37,317 of stock-based compensation costs in the accompanying statement of operations for the three
and nine months ended September 30, 2017, respectively. The Company recognized $225,877 of stock-based compensation costs in the
accompanying statement of operations for the three and nine months ended September 30, 2016. As of September 30, 2017, there was
$194,878 of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized in future
periods.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Financial Statements
For
the Three and Nine Months Ended September 30, 2017 and 2016
|
7.
|
STOCK
OPTION PLAN AND STOCK-BASED COMPENSATION - continued
|
The
following table summarizes the Company’s stock option activity during the nine months ended September 30, 2017:
|
|
Shares
|
|
|
Exercise Price per
Share
|
|
|
Weighted
Average
Exercise
Price per
Share
|
|
Outstanding
as of December 31, 2016
|
|
|
12,289,000
|
|
|
$
|
0.10-1.21
|
|
|
$
|
0.39
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options
forfeited/cancelled
|
|
|
(195,000
|
)
|
|
|
0.10
|
|
|
|
0.10
|
|
Outstanding
as of September 30, 2017
|
|
|
12,094,000
|
|
|
$
|
0.10-1.21
|
|
|
$
|
0.39
|
|
There
were no stock option exercises during the nine months ended September 30, 2017 or September 30, 2016.
The
following table summarizes information about stock options that are vested or expected to vest at September 30, 2017:
Vested
or Expected to Vest
|
|
|
Exercisable
Options
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
Number
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Aggregate
|
|
Exercise
|
|
|
Number
of
|
|
|
Price
Per
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
of
|
|
|
Price
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Price
|
|
|
Options
|
|
|
Share
|
|
|
Life
(Years)
|
|
|
Value
|
|
|
Options
|
|
|
Per
Share
|
|
|
Life
(Years)
|
|
|
Value
|
|
$
|
0.10
|
|
|
|
1,600,000
|
|
|
$
|
0.10
|
|
|
|
8.45
|
|
|
$
|
—
|
|
|
|
1,600,000
|
|
|
$
|
0.10
|
|
|
|
8.45
|
|
|
$
|
—
|
|
|
0.18
|
|
|
|
934,000
|
|
|
|
0.18
|
|
|
|
5.75
|
|
|
|
—
|
|
|
|
934,000
|
|
|
|
0.18
|
|
|
|
5.75
|
|
|
|
—
|
|
|
0.20
|
|
|
|
2,150,000
|
|
|
|
0.20
|
|
|
|
4.16
|
|
|
|
—
|
|
|
|
2,150,000
|
|
|
|
0.20
|
|
|
|
4.16
|
|
|
|
—
|
|
|
0.37
|
|
|
|
58,000
|
|
|
|
0.37
|
|
|
|
4.92
|
|
|
|
—
|
|
|
|
58,000
|
|
|
|
0.37
|
|
|
|
4.92
|
|
|
|
—
|
|
|
0.40
|
|
|
|
2,000,000
|
|
|
|
0.40
|
|
|
|
3.92
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.40
|
|
|
|
3.92
|
|
|
|
—
|
|
|
0.42
|
|
|
|
63,000
|
|
|
|
0.42
|
|
|
|
3.25
|
|
|
|
—
|
|
|
|
63,000
|
|
|
|
0.42
|
|
|
|
3.25
|
|
|
|
—
|
|
|
0.50
|
|
|
|
2,810,000
|
|
|
|
0.50
|
|
|
|
0.30
|
|
|
|
—
|
|
|
|
2,810,000
|
|
|
|
0.50
|
|
|
|
0.30
|
|
|
|
—
|
|
|
0.60
|
|
|
|
2,000,000
|
|
|
|
0.60
|
|
|
|
3.92
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.60
|
|
|
|
3.92
|
|
|
|
—
|
|
|
0.69
|
|
|
|
100,000
|
|
|
|
0.69
|
|
|
|
6.50
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
0.69
|
|
|
|
6.50
|
|
|
|
—
|
|
|
1.21
|
|
|
|
379,000
|
|
|
|
1.21
|
|
|
|
6.28
|
|
|
|
—
|
|
|
|
379,000
|
|
|
|
1.21
|
|
|
|
6.28
|
|
|
|
—
|
|
$
|
0.10-1.21
|
|
|
|
12,094,000
|
|
|
$
|
0.39
|
|
|
|
3.96
|
|
|
$
|
—
|
|
|
|
8,094,000
|
|
|
$
|
0.39
|
|
|
|
3.96
|
|
|
$
|
—
|
|
The
weighted-average remaining contractual life for stock options exercisable at September 30, 2017 is 3.96 years. At September 30,
2017, the Company has 5,656,000 and 7,250,000 options available for grant under the 2011 Plan and 2010 Plan, respectively. There
was $0 intrinsic value for fully vested, exercisable options at both September 30, 2017 and December 31, 2016. There were no options
exercised in the nine months ended September 30, 2017 or September 30, 2016. No actual tax benefit was realized from stock option
exercises during these periods.
As
of September 30, 2017, 8,094,000 of the stock options issued by the Company are fully vested and 4,000,000 remain unvested.
|
8.
|
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. Most recently, effective June 30, 2015, the outstanding
notes for Dr. Platt were amended to extend the maturity dates to June 30, 2017. During the second and third quarters of 2017,
the Company made principal payments totaling $16,288 against the shareholders notes, reducing the total balance of the outstanding
notes to $281,532. As of September 30, 2017, the notes are in default and are classified as current liabilities.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Financial Statements
For
the Three and Nine Months Ended September 30, 2017 and 2016
|
8.
|
RELATED
PARTY TRANSACTIONS - continued
|
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. 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, 2017 or 2016.
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 has recorded the reduction in accrued interest through equity during
the year ended December 31, 2015. As of September 30, 2017 and December 31, 2016, $34,337 and $35,542, 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.
In
June 2015, the Company received $200,000 of cash proceeds from CJY Holdings Limited, in connection with a potential future exercise
of its warrant. On November 12, 2015, the Company entered into a modification of a previously issued warrant agreement to CJY.
The Board approved the reduction in the common stock warrant exercise prices from $0.50 to $1.00 per share to $0.17 per share.
In connection with the June 2015 proceeds of $200,000 previously received by the Company and the reduction in the warrant exercise
price, the Board approved the issuance of 1,194,440 shares of Common Stock to CJY in connection with the modified warrant agreement.
These shares were issued on December 5, 2016. Prior to their issuance, $200,000 was recorded in common stock subscribed.
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 to $1,200,000
and was amended again in 2016 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 on, 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 $153,466 and $460,399 during the three months and nine months ended September 30, 2017, respectively. The Company
recorded amortization of the beneficial conversion feature as interest expense in the amount of $145,130 and $406,153 during the
three months and nine months ended September 30, 2016, respectively.
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.
Boston
Therapeutics, Inc.
Notes
to Unaudited Condensed Financial Statements
For
the Three and Six Months Ended September 30, 2017 and 2016
|
8.
|
RELATED
PARTY TRANSACTIONS - continued
|
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 $23,560 and $40,205 during the
three and nine months ended September 30, 2017, 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.
Convertible
notes payable – related party consist of the following at September 30, 2017 and December 31, 2016:
|
|
|
2017
|
|
|
|
2016
|
|
Principal
balance
|
|
$
|
1,952,000
|
|
|
$
|
1,752,000
|
|
Debt
discount
|
|
|
(683,863
|
)
|
|
|
(997,539
|
)
|
Outstanding,
net of debt discount
|
|
$
|
1,268,137
|
|
|
$
|
754,461
|
|
|
9.
|
COMMITMENTS
AND CONTINGENCIES
|
Leases
The
Company currently leases office space in Lawrence, MA under a month to month lease. Prior to this location, the Company leased
office space in Newton MA under a lease that expired July 31, 2016. The Company has no further obligation under that lease. The
Company recognized rent expense of $900 and $2,700 during the three and nine months ended September 30, 2017, respectively. The
Company recognized rent expense of $3,900 and $14,700 during the three and nine months ended September 30, 2016, respectively.
There
are no future minimum lease payments under non-cancelable operating leases as of September 30, 2017.
The
Company has evaluated events and transactions that occurred from October 1, 2017 through the date of filing, for possible disclosure
and recognition in the financial statements. See discussed below material subsequent events that impact its financial statements
or disclosures.
On
October 4, 2017, the Company issued 500,000 shares to a vendor under a settlement agreement for investor relations services performed.
On
October 6, 2017, in accordance with the terms of a Securities Purchase Agreement, the Company issued 10,000,000 shares to a related
party investor upon conversion of a note payable held by the investor for $750,000 including accrued interest of approximately
$150,000. The cost basis for the shares issued was $0.05.
On
October 24, 2017, the Company entered into Securities Purchase Agreements with an accredited investors. 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.