Notes to Unaudited Condensed Financial Statements
For the Three and Nine Months Ended September 30, 2016 and 2015
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 diabetes: BTI-320, a non-systemic, non-toxic, therapeutic compound designed to reduce post-meal glucose elevation. In addition, a formulation of the material SUGARDOWN®, falls within the regulatory dietary supplement guidelines and is designed to reduce post-meal blood sugar increases. In its patent portfolio, the Company had laboratory practical development of a combination material called IPOXYN. In its initial phase, IPOXYN is a continuous intravenous drug for the prevention of necrosis and treatment of ischemia with a first target indication for assisting in the treatment of lower limb ischemia often associated with diabetes.
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. As shown in the accompanying unaudited condensed financial statements, the Company has an accumulated deficit of approximately $19.9 million and $923,000 cash on hand as of September 30, 2016. Management is restructuring and 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. During the third quarter of 2015 through June 30, 2016, the Company has received ongoing funding through a fixed price convertible note from a related party and significant shareholder. During the third quarter of 2016, the Company raised additional funding from third party investors through the sale of 6% Convertible Notes. See Note 4. Management anticipates that cash resources will be sufficient to fund our planned operations into the first quarter of 2017. The Company has entered into an advisory agreement with an investment banking firm whereby the Company hopes to receive appropriate performance supported funding for its operations. 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 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, 2015 included in its Form 10-K filed with the SEC on March 30, 2016. 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, 2016 and the results of operations for the three and nine month periods ended September 30, 2016 and 2015.
The year-end balance sheet data 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, 2016 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.
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
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Financial Statements
For the Three and Nine Months Ended September 30, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- continued
after management has used reasonable collection efforts are written off against the allowance. There were no allowances for doubtful accounts as of September 30, 2016 and December 31, 2015. At December 31, 2015, there were no accounts receivable.
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.
As disclosed in Note 8 of the Notes to Unaudited Condensed Financial Statements, Advance Pharmaceutical Company Ltd., a related party, accounted for 0% and 91% of the Company’s revenue during the three months ended September 30, 2016 and 2015, respectively. During the nine months ended September 30, 2016 and 2015, Advance Pharmaceutical accounted for 0% and 78% of the Company’s revenue, respectively.
Fair Value of Financial Instruments
Fair values determined by Level 1 inputs utilize observable data such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, which require the reporting entity to develop its own assumptions. The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and notes payable. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value due to their short-term nature using level 3 inputs as defined above. The carrying value of the notes payable as of September 30, 2016 and December 31, 2015, evaluated using level 3 inputs defined above based on quoted market prices on rates available to the Company for debt with similar terms and maturities, approximates the fair value.
Convertible Instruments
U.S. GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under applicable ASC 480-10.
When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.
Common Stock Purchase Warrants and Other Derivative Financial Instruments
The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) providing
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Financial Statements
For the Three and Nine Months Ended September 30, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
continued
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, 2016 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.
Based upon ASC 840-15-25, the Company has adopted a sequencing approach regarding the application of ASC 815-40 to its outstanding convertible notes. Pursuant to the sequencing approach, the Company evaluates its contracts based upon earliest issuance date.
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 three and nine month periods ended September 30, 2016 did not include 59,495,233, and 12,289,000 and 28,424,669 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 periods ended September 30, 2015 did not include 8,029,900 and 12,424,669 for options and warrants, respectively, because of their anti-dilutive effect.
Recent Adopted Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-03 “
Simplifying the Presentation of Debt Issuance Costs
,” which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of debt discounts or premiums. The ASU is effective for fiscal
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Financial Statements
For the Three and Nine Months Ended September 30, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
continued
years beginning after December 15, 2015, and interim periods within those fiscal years. The Company elected early adoption of this standard during the period ended March 31, 2015, which did not have a material impact on its financial statements.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09,
“Revenue from Contracts with Customers (Topic 606).”
ASU No 2014-09 supersedes the revenue recognition requirements in “Topic 605, Revenue Recognition” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective retrospectively for annual or interim reporting periods beginning after December 15, 2016, with early application not permitted. The Company is currently evaluating the impact of this standard on its financial statements.
In August 2014, the FASB issued Accounting Standards Update (ASU) 2014-15,
Presentation of Financial Statements – Going Concern
. The new standard addresses management’s responsibility to evaluate whether there is a substantial doubt about the Company’s ability to continue as a going concern. It requires management to perform interim and annual assessments of the Company’s ability to continue as a going concern and to provide related disclosures. The standard will be effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. The Company is currently evaluating the impact of this standard on its financial statements.
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, 2016 and December 31, 2015, net of inventory reserves, were as follows:
|
|
2016
|
|
|
2015
|
|
Raw materials
|
|
$
|
34,919
|
|
|
$
|
34,919
|
|
Finished goods
|
|
|
65,532
|
|
|
|
74,832
|
|
|
|
$
|
100,451
|
|
|
$
|
109,751
|
|
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.
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Financial Statements
For the Three and Nine Months Ended September 30, 2016 and 2015
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, 2016 and December 31, 2015:
|
|
2016
|
|
|
2015
|
|
SUGARDOWN® technology and patent applications
|
|
$
|
900,000
|
|
|
$
|
900,000
|
|
Less accumulated amortization
|
|
|
(380,357
|
)
|
|
|
(332,143
|
)
|
Intangible assets, net
|
|
$
|
519,643
|
|
|
$
|
567,857
|
|
Amortization expense was $48,214 for the nine months ended September 30, 2016 and 2015.
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, 2016 measured at fair value on a recurring basis are summarized below (none at December 31, 2015):
|
|
September 30,
2016
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Derivative liability
|
|
$
|
2,623,013
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,623,013
|
|
Warrant liability
|
|
|
2,157,978
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,157,978
|
|
Total
|
|
$
|
4,780,991
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,780,991
|
|
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, 2016 and 2015
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 weighted average assumptions during the nine months ended September 30, 2016:
Conversion option:
|
|
|
At
|
|
|
September 30,
|
|
|
|
|
Inception
|
|
|
2016
|
|
|
Common Stock Closing Price
|
|
$
|
0.0945
|
|
|
$
|
0.14
|
|
|
Conversion Price per Share
|
|
$
|
0.075
|
|
|
$
|
0.075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
212.53
|
%
|
|
|
214.57
|
%
|
|
|
|
|
0.725
|
%
|
|
|
0.77
|
%
|
|
|
|
|
|
|
|
|
Exercise option:
|
|
|
At
|
|
|
September 30,
|
|
|
|
|
Inception
|
|
|
2016
|
|
|
Common Stock Closing Price
|
|
$
|
0.0945
|
|
|
$
|
0.14
|
|
|
Conversion Price per Share
|
|
$
|
0.100
|
|
|
$
|
0.100
|
|
|
Conversion Shares
|
|
|
16,000,000
|
|
|
|
16,000,000
|
|
|
|
|
|
0.0929
|
|
|
|
0.1349
|
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
212.53
|
%
|
|
|
214.57
|
%
|
|
|
|
|
1.15
|
%
|
|
|
1.14
|
%
|
|
|
|
|
|
|
|
|
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.
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Financial Statements
For the Three and Nine Months Ended September 30, 2016 and 2015
4. FAIR VALUE OF FINANCIAL INSTRUMENTS – (Continued)
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 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, 2016:
|
|
Debt
|
|
|
Warrant
|
|
|
|
Derivative
|
|
|
Liability
|
|
Balance, December 31, 2015
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
Aggregate amount of derivative instruments issued
|
|
|
1,189,040
|
|
|
|
1,014,296
|
|
Change in fair value of derivative liabilities
|
|
|
1,433,973
|
|
|
|
1,143,682
|
|
Balance, September 30, 2016
|
|
$
|
2,623,013
|
|
|
$
|
2,157,978
|
|
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’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 4. The debt discount is amortized over the note’s maturity period as interest expense.
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Financial Statements
For the Three and Nine Months Ended September 30, 2016 and 2015
5.
CONVERTIBLE NOTES PAYABLE
– (Continued)
For the three and nine months ended September 30, 2016, the Company amortized $94,473 debt discount to operations as interest expense.
Convertible notes payable consist of the following at September 30, 2016 and December 31, 2015:
|
|
2016
|
|
|
2015
|
|
Principal balance
|
|
$
|
1,600,000
|
|
|
$
|
-
|
|
Debt discount
|
|
|
(1,232,828
|
)
|
|
|
-
|
|
Deferred finance costs
|
|
|
(256,185
|
)
|
|
|
-
|
|
Outstanding, net of debt discount
|
|
$
|
110,987
|
|
|
$
|
-
|
|
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 November 2, 2015, the Company’s Board of Directors voted to approve an increase in authorized common stock shares from 200,000,000 shares to 400,000,000 shares of the Company’s common stock. This increase is subject to shareholder approval.
Common Stock
In August 2016, the Company issued 1,188,889 shares of its common stock with a fair value of $118,889 to two vendors in exchange for services previously recorded.
In April 2016, the Company issued a total of 5,000,000 shares of its common stock with a fair value of $350,000 to two parties in exchange for investment advisory services.
During the three months ended March 31, 2015, the Company issued 40,500 shares of its common stock with a fair value of $12,105 in exchange for consulting services rendered during those periods in connection with two consulting agreements.
In May 2015, the Company’s Board of Directors approved up to 2,000,000 shares of the Company’s common stock to be available to the Company to satisfy vendor and consultant payments. In June 2015, the Company issued 158,428 shares of its common stock to two vendors in exchange for services previously recorded. The fair value of these shares was $22,179.
In June 2015, the Company issued 10,500 shares of its common stock with a fair value of $1,575 in exchange for consulting services rendered during the three months ended June 30, 2015 in connection with one consulting agreement.
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, 2016, the Company had 28,424,669 warrants outstanding which are all classified as equity instruments and are fully exercisable.
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Financial Statements
For the Three and Nine Months Ended September 30, 2016 and 2015
6.
STOCKHOLDERS’ EQUITY -
continued
The following table summarizes the Company’s common stock warrant activity during the nine months ended September 30, 2016:
|
|
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding as of December 31, 2015
|
|
|
12,424,669
|
|
|
$
|
0.53
|
|
Granted
|
|
|
16,000,000
|
|
|
|
0.10
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited/cancelled
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of September 30, 2016
|
|
|
28,424,669
|
|
|
$
|
0.29
|
|
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, 2016 and December 31, 2015, 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, 2016 and December 31, 2015, there were 12,039,000 and 6,039,000 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.
In March 2015, the Board of Directors approved a grant of non-qualified stock options to the independent directors of the Company to purchase an aggregate of 384,000 shares of the Company’s common stock at an exercise price of $0.18. The options were allocated among the directors based on service in, and chairmanship of the Company’s committees and service as lead independent director. The options vest as of December 31, 2015, provided that the directors remain directors on that date and have attended at least 75% of the scheduled meetings of the Board and the committees on which such directors serve during the 2015 calendar year. In addition, during the period ended March 31, 2015, the Company granted incentive stock options to members of management and non-management of the Company to purchase an aggregate of 700,000 shares of the Company’s common stock at exercises prices ranging from $0.18 to $0.20 per share, all of which vested immediately. The Company also granted non-qualified stock options to consultants of the Company to purchase an aggregate of 625,000 shares of the Company’s common stock at an exercise price of $0.18, all of which vested immediately.
During the three months ended June 30, 2015, the Company granted a non-qualified stock option, to a consultant to purchase an aggregate of 100,000 shares of the Company’s common stock at an exercise price of $0.20, which vested immediately.
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.
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Financial Statements
For the Three and Nine Months Ended September 30, 2016 and 2015
7.
STOCK OPTION PLAN AND STOCK-BASED COMPENSATION -
continued
The fair value of stock options granted or revalued for the nine months ended September 30, 2016 and 2015 was calculated with the following assumptions:
|
2016
|
|
2015
|
|
Risk-free interest rate
|
|
|
1.1
|
%
|
|
|
1.3% - 1.9
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility factor
|
|
|
213
|
%
|
|
|
79 – 91
|
%
|
Expected life of option
|
5 years
|
|
4.60 to 10 years
|
|
The weighted-average fair value of stock options granted during the nine month period ended September, 2016 and 2015, under the Black-Scholes option pricing model, was $0.06 and $0.14 per share, respectively.
The Company recognized $225,877 and $25,977 of stock-based compensation costs in the accompanying statement of operations for the three months ended September 30, 2016 and 2015, respectively. The Company recognized $225,877 and $267,224 of stock-based compensation costs in the accompanying statement of operations for the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, there was $244,634 of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized in future periods.
The following table summarizes the Company’s stock option activity during the nine months ended September 30, 2016:
|
|
Shares
|
|
|
Exercise Price per Share
|
|
|
Weighted Average
Exercise Price per Share
|
|
Outstanding as of December 31, 2015
|
|
|
6,289,000
|
|
|
$
|
0.10-1.21
|
|
|
$
|
0.37
|
|
Granted
|
|
|
6,000,000
|
|
|
$
|
0.20-0.60
|
|
|
$
|
0.40
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options forfeited/cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of September 30, 2016
|
|
|
12,289,000
|
|
|
$
|
0.10-1.21
|
|
|
$
|
0.39
|
|
There were no stock option exercises during the three and nine months ended September 30, 2016 or September 30, 2015.
The following table summarizes information about stock options that are vested or expected to vest at September 30, 2016:
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
|
|
|
|
1,795,000
|
|
|
$
|
0.10
|
|
|
|
1.00
|
|
|
$
|
-
|
|
|
|
1,795,000
|
|
|
$
|
0.10
|
|
|
|
1.00
|
|
|
$
|
-
|
|
|
|
0.18
|
|
|
|
934,000
|
|
|
|
0.18
|
|
|
|
6.75
|
|
|
|
-
|
|
|
|
934,000
|
|
|
|
0.18
|
|
|
|
6.75
|
|
|
|
-
|
|
|
|
0.20
|
|
|
|
2,150,000
|
|
|
|
0.20
|
|
|
|
5.24
|
|
|
|
-
|
|
|
|
2,150,000
|
|
|
|
0.20
|
|
|
|
5.24
|
|
|
|
-
|
|
|
|
0.37
|
|
|
|
58,000
|
|
|
|
0.37
|
|
|
|
5.93
|
|
|
|
-
|
|
|
|
58,000
|
|
|
|
0.37
|
|
|
|
5.93
|
|
|
|
-
|
|
|
|
0.40
|
|
|
|
2,000,000
|
|
|
|
0.40
|
|
|
|
4.92
|
|
|
|
122,798
|
|
|
|
-
|
|
|
|
0.40
|
|
|
|
4.92
|
|
|
|
-
|
|
|
|
0.42
|
|
|
|
63,000
|
|
|
|
0.42
|
|
|
|
4.26
|
|
|
|
-
|
|
|
|
63,000
|
|
|
|
0.42
|
|
|
|
4.26
|
|
|
|
-
|
|
|
|
0.50
|
|
|
|
2,810,000
|
|
|
|
0.50
|
|
|
|
1.35
|
|
|
|
-
|
|
|
|
2,810,000
|
|
|
|
0.50
|
|
|
|
1.35
|
|
|
|
-
|
|
|
|
0.60
|
|
|
|
2,000,000
|
|
|
|
0.60
|
|
|
|
4.92
|
|
|
|
121,836
|
|
|
|
-
|
|
|
|
040
|
|
|
|
4.92
|
|
|
|
-
|
|
|
|
0.69
|
|
|
|
100,000
|
|
|
|
0.69
|
|
|
|
7.63
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
0.69
|
|
|
|
7.63
|
|
|
|
-
|
|
|
|
1.21
|
|
|
|
379,000
|
|
|
|
1.21
|
|
|
|
7.57
|
|
|
|
-
|
|
|
|
379,000
|
|
|
|
1.21
|
|
|
|
7.57
|
|
|
|
-
|
|
|
$
|
0.10-1.21
|
|
|
|
12,289,000
|
|
|
$
|
0.39
|
|
|
|
4.34
|
|
|
$
|
244,634
|
|
|
|
8,289,000
|
|
|
$
|
0.33
|
|
|
|
4.03
|
|
|
$
|
-
|
|
The weighted-average remaining contractual life for stock options exercisable at September 30, 2016 is 4.34 years. At September 30, 2016, the Company has 5,461,000 and 7,250,000 options available for grant under the 2011 Plan and 2010 Plan, respectively. There was $244,634 and $0 intrinsic value for unvested, exercisable options at September 30, 2016 and December 31, 2015. There was $0 intrinsic value for fully vested exercisable options at September 30, 2016 and December 31, 2015. There were no options exercised in the three or nine months ended September 30, 2016 or September 30, 2015. No actual tax benefit was realized from stock option exercises during these periods.
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Financial Statements
For the Three and Nine Months Ended September 30, 2016 and 2015
7.
STOCK OPTION PLAN AND STOCK-BASED COMPENSATION -
continued
As of September 30, 2016, the Company has 4,000,000 of unvested shares.
8.
RELATED PARTY TRANSACTIONS
Through December 31, 2011, Dr. Platt, the Company’s former CEO and Chairman of the Board, 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 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 have been 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. The maturity date for the Company's former President remained at June 30, 2016 and is currently in default. The notes have been classified as a current liability within the accompanying balance sheet.
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. There has been no revenue generated pursuant to the Agreement during the first nine months of 2016. Revenue generated pursuant to the Agreement for the three and nine month periods ended September 30, 2015, were $35,231 and $70,137, respectively.
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. As of September 30, 2016, the common stock has not been issued and the $200,000 remains 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 in the first quarter of 2016 to $1,602,000. During the second quarter of 2016, the Note was amended again to $1,752,000. This Note is intended to provide necessary bridge financing to the Company prior to an anticipated financing in the near future of an amount up to $1,500,000. Interest accrues at the rate of 10% per annum and is due upon maturity of the note in September 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 $1,752,000 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 approximately $145,130 and $406,153 during the three and nine months ended September 30, 2016.
Convertible notes payable – related party consist of the following at September 30, 2016 and December 31, 2015:
|
|
2016
|
|
|
2015
|
|
Principal balance
|
|
$
|
1,752,000
|
|
|
$
|
1,200,000
|
|
Debt discount
|
|
|
(1,142,670
|
)
|
|
|
(1,106,823
|
)
|
Outstanding, net of debt discount
|
|
$
|
609,330
|
|
|
$
|
93,177
|
|
Boston Therapeutics, Inc.
Notes to Unaudited Condensed Financial Statements
For the Three and Nine Months Ended September 30, 2016 and 2015
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 4 month lease that expired July 31, 2016. The Company has no further obligation under that lease. The Company recognized rent expense of $1,800 and $14,381 during the three months ended September 30, 2016 and 2015, respectively. The Company recognized rent expense of $12,150 and $43,143 during the nine months ended September 30, 2016 and 2015, respectively
There are no future minimum lease payments under non-cancelable operating leases as of September 30, 2016.
Marketing Agreement
On May 14, 2014, the Company entered into a definitive Marketing Agreement with Benchworks SD, LLC (Benchworks), a company engaged in the marketing, promotion and offering for distribution and sale of pharmaceutical, healthcare and consumer products. Under the terms of the agreement, the Company granted Benchworks the exclusive right to promote, market, sell and distribute SUGARDOWN® in North America for an initial term of one year, subject to extension in accordance with the terms of the agreement. Benchworks was responsible and bears the expense for marketing and commercializing SUGARDOWN®, including the creation and payment for marketing, creative and promotional materials. The agreement defined certain minimum net sales levels that Benchworks must achieve to maintain exclusivity; and the agreement also provided for net sales splits with Benchworks receiving 65% of the first $10 million in net sales from the sale of SUGARDOWN® in North America, with a declining share to 50% for net sales in excess of $40 million. The agreement was terminated in July 2015. Revenue generated pursuant to the Marketing Agreement for the three and nine months ended September 30, 2015, were $0 and $19,122, respectively.
10. SUBSEQUENT EVENTS
The Company has evaluated events and transactions that occurred from September 30, 2016 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 13, 2016, the Company issued a press release that announced that the Company along with its partner company, Advance Pharmaceutical Co., Ltd., which holds a license for the Company’s products in Asia, received a grant from the Research and Development Cash Rebate Program of up to $400,000 (USD) from the Hong Kong Innovation and Technology Commision (ITC), which will be used for a feasibility study of a novel way to safely and accurately self
-
screen and facilitate risk management associated with the onset of diabetes and other vascular disease-related states including stroke and cardiovascular disease
.