Except as otherwise set forth herein, during the last two fiscal years, we have not entered into any material transactions or series of transactions that would be considered material in which any officer, director or beneficial owner of 5% or more of any class of our capital stock, or any immediate family member of any of the preceding persons, had a direct or indirect material interest. There are no transactions presently proposed, except as follows:
In July 2013 CJY Holdings purchased 6,666,660 shares of our common stock and warrants to purchase an aggregate of 3,333,320 shares of our common stock for an aggregate purchase price of $2,000,000 in the private placement conducted by us between July and September 2013. The warrants have an exercise price of $0.50 per share, are currently exercisable and have a five year term.
Between July 3, 2009 and May 7, 2012, David Platt, our Chairman and Chief Executive Officer and then Chief Financial Officer and Ken Tassey, our former President, loaned an aggregate of $297,820 to us and, prior to its merger with us, to our predecessor Boston Therapeutics, Inc., a New Hampshire corporation (or BTHENH), to fund start-up costs and current operations of our company and BTHENH pursuant to a series of unsecured promissory notes. We assumed BTHENH’s obligations on the notes issued by BTHENH to Dr. Platt when BTHENH merged into us in November 2009. The notes carry interest at 6.5%. The notes initially became due and payable at various times between March 31, 2011 and June 30, 2012. On August 6, 2012, the maturity dates of each of the notes were extended to June 29, 2014. On August 2, 2013, the maturity dates of each of the notes were further extended to June 29, 2015. Effective June 30, 2014, the outstanding notes were amended to extend the maturity date to June 30, 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. OnIn May 27, 2014, the Board agreed toapproved a $50,000 increase in indemnification support, solely for the indemnification cap by $50,000 to coverpayment of outside expenseslegal expenses. The Company recorded a total of $182,697 in costs associated with Dr. Platt’s indemnification, of which $119,401 was recorded in the arbitration hearings. As ofyear ended December 31, 2013 the Company recorded legal expense associated with this indemnification of $119,401. The remaining $30,599and $63,296 was recorded as legal expense duringin the three monthsyear ended MarchDecember 31, 2014. The Company recorded an additional $32,697 related to the increased indemnification during the three months ended June 30, 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 voted to rescind the requirement that Dr. Platt reimburse the Company the entire $182,697. The Board determined that interest should be charged to Dr. Platt from the time he received the funds in July 2014, to the date of the board meeting and that this amount would be offset against interest the Company owes Dr. Platt. The remaining amount would be considered settled in full by the Company.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning the ownership of the our common stock as of the date of this prospectus with respect to: (i) each person known to us to be the beneficial owner of more than five percent of our common stock; (ii) all directors; (iii) all named executive officers; and (iv) all directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the SEC that deem shares to be beneficially owned by any person who has voting or investment power with respect to such shares. Shares of common stock subject to options or warrants that are exercisable as of the date of this prospectus or are exercisable within 60 days of such date are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of calculating the percentage ownership of such person but are not treated as outstanding for the purpose of calculating the percentage ownership of any other person.
| | | Number of Shares | | | | Percent of Class | (1 | ) |
| | | | | | | | | ) |
Kenneth A. Tassey, Jr. 226 Karatzas Avenue #309 Manchester, NH 03108 | | | | | | | | | |
Jonathan Rome 50 Tice Boulevard Suite A35 Woodcliff Lake, NJ 07677 | | | | | | | | | ) |
Offer Binder Via Armand Fedeli 121 Perugia PG 06132 Italy | | | | | | | | | |
Harold Solomon Parnes 1525 Voorhies Avenue Brooklyn, NY 11235 | | | | | | | | | |
Advance Pharmaceutical Company Ltd.(5) Rm A 2- 3F, Dai Fu Street Tai Po Industrial Est. Tai Po, New Territories, Hong Kong | | | | | | | | | ) |
CJY Holdings Limited 7B Jonsim Place 288 Queens Road East Wanchai, Hong Kong | | | | | | | | | ) |
Idan Sahar 12 Nissim Aloni Tel Aviv, Israel | | | | | | | | | ) |
| | | | | | | | | ) |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | (12 | ) | | | | |
Conroy Chi-Heng Cheng(2)** | | | | | | | | | ) |
All Officers and Directors as a Group (7 persons) | | | | | | | | | |
| | | | | | | | | (1 | ) |
| | | 8,575,985 | | (3 | ) | | | 21.9 | % | | (3 | ) |
Kenneth A. Tassey, Jr. 226 Karatzas Avenue #309 Manchester, NH 03108 | | | 3,043,450 | | | | | | 7.9 | % | | | |
Jonathan Rome 50 Tice Boulevard Suite A35 Woodcliff Lake, NJ 07677 | | | 4,383,000 | | (4 | ) | | | 10.5 | % | | (4 | ) |
Offer Binder Via Armand Fedeli 121 Perugia PG 06132 Italy | | | 2,000,000 | | | | | | 5.2 | % | | | |
Harold Solomon Parnes 1525 Voorhies Avenue Brooklyn, NY 11235 | | | 2,020,000 | | | | | | 5.2 | % | | | |
Advance Pharmaceutical Company Ltd.(5) Rm A 2- 3F, Dai Fu Street Tai Po Industrial Est. Tai Po, New Territories, Hong Kong | | | 1,823,800 | | (5 | ) | | | 4.7 | % | | (5 | ) |
CJY Holdings Limited 7B Jonsim Place 288 Queens Road East Wanchai, Hong Kong | | | 10,749,980 | | (6 | ) | | | 25.5 | % | | (6 | ) |
Idan Sahar 12 Nissim Aloni Tel Aviv, Israel | | | 1,999,996 | | (7 | ) | | | 5.1 | % | | (7 | ) |
| | | 934,350 | | (8 | ) | | | 2.4 | % | | (8 | ) |
| | | 135,100 | | (9 | ) | | | * | | | | |
| | | 76,100 | | (10 | ) | | | * | | | | |
| | | 241,000 | | (11 | ) | | | * | | | | |
| | | 59,100 | | (12 | ) | | | * | | | | |
| | | 5,000 | | | | | | * | | | | |
Conroy Chi-Heng Cheng(2)** | | | 1,823,800 | | (13 | ) | | | 4.7 | % | | (13 | ) |
All Officers and Directors as a Group (8 persons) | | | 11,850,435 | | | | | | 28.9 | % | | | |
* Less than 1%
** Directors and Officers
(1) | Except as expressly stated, the percentages in the table are based on 38,556,50838,597,008 shares of common stock outstanding as February 5,April 21, 2015. |
| |
(2) | The business address for these individuals is 1750 Elm Street, Suite 103, Manchester, NH 03104. |
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(3) | Includes 520,000 shares owned by Dr. Platt’s wife and 350,000500,000 shares issuable pursuant to outstanding stock options currently exercisable. Excludes 20,000 shares held by Dr. Platt’s daughter as to which Dr. Platt disclaims beneficial ownership. Excludes 20,000 shares held by Dr. Platt’s son as to which Dr. Platt disclaims beneficial ownership. |
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(4) | Includes 2,500,000 shares issuable pursuant to an outstanding stock option currently exercisable. Includes 625,000 shares issuable pursuant to an outstanding warrant to purchase common stock currently exercisable. |
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(5) | Consists of 1,799,800 shares owned by SUGARDOWN Co., LTD., a wholly-owned subsidiary of Advance Pharmaceutical Company Ltd. Conroy Chi-Heng Cheng, a director of Boston Therapeutics, Inc., exercises voting and investment control over these securities. Includes 24,000 shares issuable pursuant to an outstanding stock option currently exercisable. |
| |
(6) | Includes 3,583,320 shares issuable pursuant to outstanding warrants to purchase common stock currently exercisable. Cheng Chi Him exercises voting and investment control over these securities. |
| |
(7) | Includes 666,664 shares issuable pursuant to outstanding warrants to purchase common stock currently exercisable. |
| |
(8) | Includes 600,000750,000 shares issuable pursuant to outstanding stock options currently exercisable. Includes 50,000 shares issuable pursuant to an outstanding warrant to purchase common stock currently exercisable. Includes 6,000 shares owned by Mr. Squeglia’s wife. Excludes 10,000 shares owned, and 5,000 shares issuable pursuant to an outstanding warrant to purchase common stock held by Mr. Squeglia’s son as to which Mr. Squeglia disclaims beneficial ownership. Excludes 75,000 shares issuable pursuant to an outstanding stock option currently exercisable held by Mr. Squeglia’s son as to which Mr. Squeglia disclaims beneficial ownership. |
| |
(9) | Includes 133,000 shares issuable pursuant to outstanding stock options currently exercisable. |
| |
(10) | Includes 76,000 shares issuable pursuant to outstanding stock options currently exercisable. |
| |
(11) | Includes 228,000 shares issuable pursuant to outstanding stock options currently exercisable. |
| |
(12) | Includes 59,000 shares issuable pursuant to an outstanding stock option currently exercisable. |
| |
(13) | Consists of 1,799,800 shares owned by SUGARDOWN Co., LTD., a wholly-owned subsidiary of Advance Pharmaceutical Company Ltd. Conroy Chi-Heng Cheng exercises voting and investment control over these securities. Includes 24,000 shares issuable pursuant to an outstanding stock option currently exercisable. |
DESCRIPTION OF SECURITIES
The total authorized shares of capital stock of our company currently consists of (1) 200,000,000 shares of common stock, par value $0.001 per share, and (2) 5,000,000 shares of preferred stock, par value $0.001 per share. As of the date of this prospectus, 38,556,50838,597,008 shares of our common stock were issued and outstanding and no shares of preferred stock were issued or outstanding.
We are authorized under our 2010 Stock Option Plan to issue options to purchase up to 7,500,000 shares of our common stock and we are authorized under our 2011 Stock Option Plan to issue 17,500,000 shares of our common stock. As of the date of this prospectus, stock options were granted to purchase 6,483,4008,192,400 shares of common stock from our 2010 and 2011 Plans at a weighted average exercise price of $0.47$0.41 per share outstanding.
As of the date of this prospectus, there are (i) warrants held by investors and consultants to purchase 1,878,336 shares of common stock at a weighted average exercise price of $0.88, (ii) warrants held by investors to purchase 8,829,484 shares of common stock at an exercise price of $0.50 per share, and (iii) warrants held by former placement agents to purchase 1,716,849 shares of common stock at an exercise price of $0.30 per share outstanding.outstanding and (iv) warrants issued in conjunction with our recent convertible debt financing to purchase 979,965 shares of common stock at a weighted average exercise price of $0.30. The Company is required to reserve approximately 25,900,000 shares of common stock in connection with the convertible promissory note agreements entered into March 2015. If the holders of the Company’s convertible note agreements are to exercise the conversion features, the Company could be obligated to issue a significant amount of shares of common stock in accordance to each agreement, subject to conversion rate adjustments.
Common Stock
Each share of our common stock entitles the holder to receive notice of and to attend all meetings of our stockholders with the entitlement to one vote. Holders of common stock are entitled, subject to the rights, privileges, restrictions and conditions attaching to any other class of shares ranking in priority to the common stock, to receive any dividend declared by the Board of Directors. If we are voluntarily or involuntarily liquidated, dissolved or wound-up, the holders of common stock will be entitled to receive, after distribution in full of the preferential amounts, if any, all of the remaining assets available for distribution ratably in proportion to the number of shares of common stock held by them. Holders of common stock have no redemption or conversion rights. The rights, preferences and privileges of holders of shares of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock issued and outstanding or that we may designate and issue in the future.
Dividends
We have not paid any cash dividends on our common stock and do not plan to pay any such dividends in the foreseeable future. We currently intend to use all available funds to develop our business. We can give no assurances that we will ever have excess funds available to pay dividends.
Preferred Stock
Our authorized preferred stock consists of 5,000,000 shares of preferred stock, par value $0.001 per share. As of the date of this prospectus, no shares of preferred stock have been issued. Our Board of Directors has the authority, without any vote or action by the stockholders, to create one or more series of preferred stock up to the limit of our authorized but unissued shares of preferred stock and to fix the number of shares constituting such series and the designation of such series, the voting powers (if any) of the shares of such series and the relative participating, option or other special rights (if any), and any qualifications, preferences, limitations or restrictions pertaining to such series which may be fixed by the Board of Directors pursuant to a resolution or resolutions providing for the issuance of such series adopted by the Board of Directors.
Warrants Being Issued in this Offering
We are offering 12,500,000 warrants in this offering. Each warrant is exercisable for one share of our common stock, at an exercise price of $0.30 per share. The warrants will become exercisable immediately after the date of issuance and may be exercised until 5 years after the date of issuance. |
Outstanding Warrants
At February 5,April 21, 2015, the following warrants were outstanding:
2013 Private Placement Warrants
In connection with a private placement, we issued to investors warrants to purchase an aggregate of 8,829,484 shares of common stock at an exercise price of $0.50 per share, all of which are currently exercisable, as follows:
| · | Warrants to purchase an aggregate of 3,333,320 shares of common stock, expiring on July 23, 2018. |
| · | Warrants to purchase an aggregate of 1,414,113 shares of common stock expiring on August 6, 2018. |
| · | Warrants to purchase an aggregate of 1,130,223 shares of common stock expiring on August 30, 2018. |
| · | Warrants to purchase an aggregate of 2,951,828 shares of common stock expiring on September 30, 2018. |
We may call these warrants for redemption if the volume weighted average price of our common stock is at or above $2.00 for 15 consecutive trading days. During the 45 days following a redemption call, holders of the warrants may choose to exercise the warrants, or a portion thereof, by paying the then applicable exercise price. Any warrants subject to the redemption call that are unexercised during such 45-day period will be cancelled. We may call warrants that are covered by an effective registration statement from the time of the call through the end of the 45-day period only.
In connection with the private placement, we issued to the placement agent warrants to purchase 1,808,849 shares of common stock at an exercise price of $0.30 per share, all of which are exercisable. In January 2015, 92,000 warrants were exercised on a cashless basis. The remaining 1,716,849 warrants may be exercised on a cashless basis and expire on August 30, 2018.
Other Warrants
We have issued warrants to certain investors and to consultants after purchase of the aggregate of 1,878,336 shares of Common Stock; all of these warrants are exercisable at prices between $0.50 and $1.15 per share (“Other Warrants”). In addition, we issued a warrant in conjunction with our recent convertible note financings to purchase 979,965 shares of common stock at an exercise price of $0.30 per share.
The exercise price and number of shares of Common Stock to be received upon the exercise of the Investor Warrants, Placement Agent Warrants and Other Warrants are subject to adjustment upon the occurrence of certain events, such as stock splits, stock dividends or recapitalization.
Holders of the Investor Warrants have no voting, pre-emptive, subscription or other rights of stockholders in respect of the Investor Warrants, Placement Agent Warrants and Other Warrants, nor shall the holders of such warrants be entitled to receive dividends.
Convertible Promissory Note Agreements
During March 2015, the Company entered into four separate promissory note agreements with total proceeds of $432,000, net of discounts and fees. Under such agreements, the Company is required to reserve approximately 25,900,000 shares of common stock for potential conversion of these notes into common stock. If the holders of the Company’s convertible note agreements are to exercise the conversion features, the Company could be obligated to issue a significant amount of shares of common stock in accordance to each agreement, subject to conversion rate adjustments.
Delaware Anti-Takeover Law and Provisions of Certificate of Incorporation and By-Laws
Delaware Anti-Takeover Law
We are subject to Section 203 of the Delaware General Corporation Law. Section 203 generally prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless:
| · | prior to the date of the transaction, the Board of Directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; |
| · | upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding specified shares; or |
| · | at or subsequent to the date of the transaction, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3 % of the outstanding voting stock which is not owned by the interested stockholder. |
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Section 203 defines a "business combination" to include: |
| · | any merger or consolidation involving the corporation and the interested stockholder; |
| · | any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 10% or more of the assets of the corporation to or with the interested stockholder; |
| · | subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; |
| · | subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or |
| · | the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. |
In general, Section 203 defines an "interested stockholder" as any person that is:
| · | the owner of 15% or more of the outstanding voting stock of the corporation; |
| · | an affiliate or associate of the corporation who was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the relevant date; or |
| · | the affiliates and associates of the above. |
Under specific circumstances, Section 203 makes it more difficult for an "interested stockholder" to effect various business combinations with a corporation for a three-year period, although thestockholders may, by adopting an amendment to the corporation's certificate of incorporation or bylaws, elect not to be governed by this section, effective 12 months after adoption.
Our certificate of incorporation and bylaws do not exclude us from the restrictions of Section 203. We anticipate that the provisions of Section 203 might encourage companies interested in acquiring us to negotiate in advance with our Board of Directors since the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder.
Certificate of Incorporation and Bylaws
Provisions of our certificate of incorporation and bylaws to be in effect upon the consummation of this offering may delay or discourage transactions involving an actual or potential change of control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these provisions could adversely affect the price of our common stock. Among other things, our certificate of incorporation and bylaws will:
| · | permit our Board of Directors to issue up to shares of preferred stock, with any rights, preferences and privileges as they may designate; |
| · | provide that all vacancies on our Board of Directors, including as a result of newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum; |
| · | require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent; |
| · | provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide advance notice in writing, and also specify requirements as to the form and content of a stockholder's notice; |
| · | not provide for cumulative voting rights, thereby allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election; and |
| · | provide that special meetings of our stockholders may be called only by the Board of Directors or by such person or persons requested by a majority of the Board of Directors to call such meetings. |
SHARES AVAILABLE FOR FUTURE SALE
We cannot predict what effect, if any, market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock prevailing from time to time. Nevertheless, sales of substantial amounts of common stock, including shares issued upon the exercise of outstanding options or warrants, in the public market, or the perception that such sales could occur, could materially and adversely affect the market price of our common stock and could impair our future ability to raise capital through the sale of our equity or equity-related securities at a time and price that we deem appropriate.
Assuming that all 6,521,73925,000,000 common shares in this offering are issued and sold, we will have 45,078,24763,597,008 shares of common stock outstanding. Of the outstanding shares, the shares sold in our initial public offering, subsequent public offering, and this offering will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by our “affiliates”, as that term is defined under Rule 144, may be sold only in compliance with the limitations described below. In addition, as of February 5,April 21, 2015 there were 12,424,66913,404,634 shares issuable upon the exercise of warrants with a weighted average exercise price of $0.53$0.51 per share and 6,843,4008,192,400 shares issuable upon the exercise of stock options with a weighted average exercise price of $0.47$0.41 per share. In addition, in connection with the promissory note agreements, the Company is required to reserve approximately 25,900,000 shares of common stock. If the notes are converted at the option of the holders, a significant amount of shares of common stock could be issued in accordance with each agreement, subject to conversion rate adjustments.The resale of such shares, following the exercise of such warrants and options by the holders thereof, has been registered. The remaining outstanding shares of common stock will be deemed “restricted securities” as that term is defined under Rule 144. Restricted securities may be sold in the public market only if they are registered or if they qualify for an exemption from registration, including the exemptions under Rule 144, which we summarize below. The restricted shares held by our affiliates will be available for sale in the public market at various times after the date of this prospectus pursuant to Rule 144.
Rule 144
Rule 144 governs resale of “restricted securities” for the account of any person (other than an issuer), and restricted and unrestricted securities for the account of an “affiliate” of the issuer. Restricted securities generally include any securities acquired directly or indirectly from an issuer or its affiliates which were not issued or sold in connection with a public offering registered under the Securities Act. An affiliate of the issuer is any person who directly or indirectly controls, is controlled by, or is under common control with, the issuer. Affiliates of ours may include its directors, executive officers, and persons directly or indirectly owning 10% or more of the outstanding common stock. Under Rule 144, non-affiliates are able to sell restricted securities pursuant to Rule 144, after six months, subject to certain conditions, including if we are current in itsour reporting obligations with the Commission and remainsremain current for an additional period of six months, and thereafter after one year, with no volume or reporting obligations.
Under Rule 144, affiliates are able to sell restricted securities pursuant to Rule 144 after six months, subject to certain conditions, including if we are current in itsour reporting obligations with the SEC and remain current for an additional period of six months, as well as other requirements described below. Resales by our affiliates of restricted and unrestricted common stock are subject to volume limitation, aggregation, broker transaction, notice filing requirements, and requirements concerning publicly available information about our company. The volume limitations provide that a person (or persons who must aggregate their sales) cannot, within any three-month period, sell more than the greater of one percent of the then outstanding shares, or the average weekly reported trading volume during the four calendar weeks preceding each such sale.
Registration Rights
The holders of an aggregate of 17,659,007 shares of our common stock are entitled to rights with respect to the registration of their shares under the Securities Act. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates, immediately upon the effectiveness of the registration statement of which this prospectus is a part. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.
Equity Incentive Plans
We filed a registration statement Amended and Restated 2010 Stock Plan and 2011 Amended and Restated Non-Restricted Stock Plan on Form S-8 under the Securities Act. Accordingly, shares registered under the registration statement are available for sale in the open market subject to Rule 144 volume limitations.
PLAN OF DISTRIBUTION
We are offering up to6,521,739 25,000,000 shares of our common stock on a self-underwritten “best efforts” basis for aggregate gross proceeds of up to $3 $5 million andat an assumed public offeringestimated price of $0.46 0.20per share.share, to be issued in one or more closings. There can be no assurance that the offering will be fully subscribed. Accordingly, we may sell substantially less than $3$5 million of our shares of common stock, in which case our gross proceeds would be substantially reduced.
We expect to enter into securities purchase or subscriptionssubscription agreements directly with investors in connection with this offering, and we will only sell to investors who have entered into such agreement with us.
This prospectus forms a part of a registration statement that permits our officers and directors to sell the shares directly to the public, with no commission or other remuneration payable to them for any shares they sell. There are no plans or arrangements to enter into any contracts or agreements to sell the shares with a broker or dealer. In offering the securities on our behalf, our officers and directors will rely on the safe harbor from broker/dealer registration set out in Rule 3a4-1 under the Exchange Act, which sets forth those conditions under which a person associated with an issuer may participate in the offering of the issuer’s securities and not be deemed to be a broker/dealer.
There is no requirement to sell any specific number or dollar amount of securities and we may raise substantially less than the $3$5 million in common stock offered hereby. Our officers will use their best efforts to sell the securities offered. We will pay all expenses incurred in this offering. We will conduct one closing for the sale of our securities pursuant to this offering. However, we reserve the right to utilize the services of FINRA-registered investment banks as finders for potential investors in this offering, for which we will pay market standard fees. Unless we utilize the services of a FINRA-registered investment bank, proceeds that we receive from this offering will not be placed into escrow.
The assumed number of shares offered hereby as reflected in this prospectus is based on the last reported sale price of our common stock on February 5,April 21, 2015. However, this final public offering price will be a negotiated price and the final number of shares offered hereby will be based on such negotiated offering price.
The offering will close on _______, 2015, 90 days after the effectiveness of the registration statement of which this prospectus is a part, unless all the securities are sold before that date, we extend the offering another 90 days or we otherwise decide to close the offering early or cancel it, in each case in our sole discretion. If we extend the offering, we will provide that information in an amendment to this prospectus. If we close the offering early or cancel it, including during any extended offering period, we may do so without notice to investors, although if we cancel the offering we will promptly return any funds investors may already have paid.
There is no minimum number of shares that we must sell in this offering. Because there is no minimum offering amount required as a condition to closing in this offering, the actual public offering amount and proceeds to us, if any, are not presently determinable and may be substantially less than all of the securities offered hereby. As a result, the actual amount of gross proceeds from the sale of shares, if any, might not be sufficient to cover the expenses of the offering. Funds raised pursuant to this offering will not be held in any escrow account and all funds raised regardless of the amount will be available to us. In the event that we do not raise sufficient capital to implement our planned operations, your entire investment could be lost.
In connection with this offering, we will issue 1 warrant for every share of common stock purchased. Each warrant entitles the holder to purchase one half of one (1/2) share of common stock at an exercise price of $0.30 per share. After the expiration of the 5 year exercise period, warrant holders will have no further rights to exercise such warrants.
The warrants may be exercised only for full shares of common stock. We will not issue fractional shares of common stock or cash in lieu of fractional shares of common stock. Warrant holders do not have any voting or other rights as a stockholder of our company. The exercise price and the number of shares of common stock purchasable upon the exercise of each warrant are subject to adjustment upon the happening of certain events, such as stock dividends, distributions, and splits.
LEGAL MATTERS
Certain legal matters with respect to the shares of common stock offered hereby will be passed upon by Ellenoff Grossman & Schole LLP, New York, New York.
EXPERTS
The financial statements for the years ended December 31, 20132014 and 2012,2013, appearing in this Prospectus and Registration Statement have been audited by McGladrey LLP, an independent registered public accounting firm, as stated in their report appearing elsewhere herein, (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's ability to continue as a going concern) and are included in reliance upon such report and upon the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and Exchange Commission (SEC) for our common stock offered in this offering. This prospectus does not contain all of the information set forth in the registration statement. You should refer to the registration statement and its exhibits for additional information. Whenever we make references in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete and you should refer to the exhibits attached to the registration statement for the copies of the actual contract, agreement or other document.
Our fiscal year ends on December 31. We are a reporting company and file annual, quarterly, and current reports, and other information with the SEC. You may read and copy any reports, statements, or other information we file at the SEC’s public reference room at 100 F. Street, N.E., Washington D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our SEC filings are also available to the public on the SEC’s Internet site at http\\www.sec.gov. We maintain a website at www.bostonti.com. Information contained in or accessible through our website is not and should not be considered a part of this prospectus and you should not rely on that information in deciding whether to invest in our common stock, unless that information is also in or incorporated by reference in this prospectus.
INDEX TO FINANCIAL STATEMENTS
| Page |
Audited Financial Statements For the Years Ended December 31, 20132014 and 2012: 2013: | |
| Report of Independent Registered Public Accounting Firm | |
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| | |
| Statements of Changes in Stockholders’ Equity | |
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| Notes to Financial Statements | |
| Page |
Unaudited CondensedAudited Financial Statements For the ThreeYears Ended December 31, 2013 and Nine Months Ended September 30, 2014 and 2013:2012:
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| |
| Balance Sheets
Report of Independent Registered Public Accounting Firm | |
| Statements of OperationsBalance Sheets | |
| | |
| Statements of Changes in Stockholders’ Equity | |
| | |
| Notes to Financial Statements | |
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| | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Boston Therapeutics, Inc.
Manchester, New Hampshire
We have audited the accompanying balance sheets of Boston Therapeutics, Inc. as of December 31, 20132014 and 2012,2013, and the related statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Boston Therapeutics, Inc. as of December 31, 20132014 and 2012,2013, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s limited cash resources, recurring cash used in operations and operating losses raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ McGladrey LLP
Boston, Massachusetts
March 14, 201427, 2015
Boston Therapeutics, Inc. |
Balance Sheets |
December 31, 2014 and 2013 |
Boston Therapeutics, Inc.
Balance Sheets
December 31, 2013 and 2012
| | | December 31, | | | December 31, | |
| | December 31, 2013 | | December 31, 2012 | | | 2014 | | | 2013 | |
ASSETS | | | | | | | | | | | |
Cash and cash equivalents | | | | | | | | | $ | 157,278 | | | $ | 3,387,428 | |
| | | | | | | | - | | | | 99,786 | |
Prepaid expenses and other current assets | | | | | | | | 89,408 | | | | 153,681 | |
| | | | | | | | | | 197,969 | | | | 110,625 | |
| | | | | | | | 444,655 | | | | 3,751,520 | |
| | | | | | | | | | | | | |
Property and equipment, net | | | | | | | | 14,417 | | | | 15,176 | |
| | | | | | | | 632,143 | | | | 696,429 | |
| | | | | | | | 69,782 | | | | 69,782 | |
| | | | | | | | | | 2,125 | | | | 2,125 | |
| | | | | | | | | $ | 1,163,122 | | | $ | 4,535,032 | |
| | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | $ | 410,787 | | | $ | 170,977 | |
Accrued expenses and other current liabilities | | | | | | | | | | 278,177 | | | | 720,965 | |
| | | | 101,675 | | | | - | |
Total current liabilities | | | | | | | | 790,639 | | | | 891,942 | |
| | | | | | | | | | | | | |
Notes payable - related parties | | | | | | | | | | 297,820 | | | | 297,820 | |
| | | | | | | | | | 1,088,459 | | | | 1,189,762 | |
| | | | | | | | | | | | | |
COMMITMENTS AND CONTINGENCIES (Note 10) | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Preferred stock, $0.001 par value, 5,000,000 shares authorized, | | | | | | | | | | | | | |
none issued and outstanding | | | | | | | | - | | | | - | |
Common stock, $0.001 par value, 200,000,000 and 100,000,000 shares authorized, | | | | | | |
37,362,160 and 18,745,706 shares issued and outstanding | | | | | | |
at December 31, 2013 and 2012, respectively | | | | | | |
Common stock, $0.001 par value, 200,000,000 shares authorized, | | | | | | | | | |
38,512,516 and 37,362,160 shares issued and outstanding | | | | | | | | | |
at December 31, 2014 and 2013, respectively | | | | 38,512 | | | | 37,362 | |
Additional paid-in capital | | | | | | | | 12,034,992 | | | | 10,606,810 | |
| | | | | | | | | | | (11,998,841 | ) | | | (7,298,902 | ) |
Total stockholders’ equity | | | | | | | | | | 74,663 | | | | 3,345,270 | |
| | | | | | | | | | | | | |
Total liabilities and stockholders’ equity | | | | | | | | | $ | 1,163,122 | | | $ | 4,535,032 | |
The accompanying notes are an integral part of these financial statements.
Boston Therapeutics, Inc. |
Statements of Operations |
For the Years Ended December 31, 20132014 and 20122013 |
| | | December 31, | | | December 31, | |
| | December 31, 2013 | | December 31, 2012 | | | 2014 | | | 2013 | |
| | | | | | | | | | | |
| | | | | | | | | $ | 199,582 | | | $ | 323,412 | |
| | | | | | | | | | 175,829 | | | | 278,205 | |
| | | | | | | | |
| | | | 23,753 | | | | 45,207 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | 1,432,669 | | | | 542,492 | |
| | | | | | | | 320,353 | | | | 329,218 | |
General and administrative | | | | | | | | | | 2,945,078 | | | | 3,753,742 | |
| | | | | | |
| | | | | | | | | | 4,698,100 | | | | 4,625,452 | |
| | | | | | | | |
| | | | | | | | | | | (4,674,347 | ) | | | (4,580,245 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | (20,009 | ) | | | (19,692 | ) |
| | | | | | |
| | | | (4,749 | ) | | | 1,505 | |
| | | | | | | | | | | (834 | ) | | | (3,071 | ) |
| | | | | | | | | | $ | (4,699,939 | ) | | $ | (4,601,503 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Net loss per share- basic and diluted | | | | | | | | | | $ | (0.12 | ) | | $ | (0.18 | ) |
| | | | | | | | | | | | | |
Weighted average shares outstanding basic and diluted | | | | | | | | 38,192,363 | | | | 25,370,626 | |
The accompanying notes are an integral part of these financial statements.
Boston Therapeutics, Inc. |
Statement of Changes in Stockholders' Equity |
For the Years Ended December 31, 20132014 and 20122013 |
| | | | | Additional | | | Accumulated | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | Paid-in | | | Earnings | | | | | | | | | | | | | | | | | | | |
| | | | | Amount | | | Capital | | | (Deficit) | | | Total | | |
Balance at December 31, 2011 | | | 16,223,206 | | | $ | 16,223 | | | $ | 1,621,756 | | | $ | (1,213,284 | ) | | $ | 424,695 | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | 2,270,000 | | | | 2,270 | | | | 1,011,957 | | | | - | | | | 1,014,227 | | |
Issuance of common stock warrants | | | - | | | | - | | | | 132,773 | | | | - | | | | 132,773 | | |
Issuance of common stock in exchange | | | | | | | | | | | | | | | | | | |
| | | 252,500 | | | | 253 | | | | 128,522 | | | | - | | | | 128,775 | | |
| | | - | | | | - | | | | 480,108 | | | | - | | | | 480,108 | | |
| | | - | | | | - | | | | - | | | | (1,484,115 | ) | | | (1,484,115 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2012 | | | 18,745,706 | | | | 18,746 | | | | 3,375,116 | | | | (2,697,399 | ) | | | 696,463 | | | | 18,745,706 | | | $ | 18,746 | | | $ | 3,375,116 | | | $ | (2,697,399 | ) | | $ | 696,463 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock, net of issuance costs | | | 18,312,341 | | | | 18,312 | | | | 3,551,056 | | | | - | | | | 3,569,368 | | | | 18,312,341 | | | | 18,312 | | | | 3,551,056 | | | | - | | | | 3,569,368 | |
Issuance of common stock warrants | | | - | | | | - | | | | 1,616,062 | | | | - | | | | 1,616,062 | | | | - | | | | - | | | | 1,616,062 | | | | - | | | | 1,616,062 | |
Issuance of common stock in exchange | Issuance of common stock in exchange | | | | | | | | | | | | | | | | | | Issuance of common stock in exchange | | | | | | | | | | | | | | | | | |
| | | 291,009 | | | | 291 | | | | 226,775 | | | | - | | | | 227,066 | | | | 291,009 | | | | 291 | | | | 226,775 | | | | - | | | | 227,066 | |
Issuance of common stock warrants in | Issuance of common stock warrants in | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
exchange for consulting services | | | - | | | | - | | | | 282,901 | | | | - | | | | 282,901 | | | | - | | | | - | | | | 282,901 | | | | - | | | | 282,901 | |
Cashless exercise of common stock options | | | 13,104 | | | | 13 | | | | (13 | ) | | | - | | | | - | | | | 13,104 | | | | 13 | | | | (13 | ) | | | - | | | | - | |
| | | - | | | | - | | | | 1,554,913 | | | | - | | | | 1,554,913 | | | | - | | | | - | | | | 1,554,913 | | | | - | | | | 1,554,913 | |
| | | - | | | | - | | | | - | | | | (4,601,503 | ) | | | (4,601,503 | ) | | | - | | | | - | | | | - | | | | (4,601,503 | ) | | | (4,601,503 | ) |
Balance at December 31, 2013 | | | 37,362,160 | | | $ | 37,362 | | | $ | 10,606,810 | | | $ | (7,298,902 | ) | | $ | 3,345,270 | | | | 37,362,160 | | | | 37,362 | | | | 10,606,810 | | | | (7,298,902 | ) | | | 3,345,270 | |
| | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock, net of issuance costs | | | | 833,340 | | | | 833 | | | | 373,916 | | | | - | | | | 374,749 | |
Issuance of common stock warrants | | | | - | | | | - | | | | 161,087 | | | | - | | | | 161,087 | |
Issuance of common stock in exchange | | Issuance of common stock in exchange | | | | | | | | | | | | | | | | | |
| | | | 233,000 | | | | 233 | | | | 130,758 | | | | - | | | | 130,991 | |
Exercise of common stock options | | | | 5,000 | | | | 5 | | | | 495 | | | | - | | | | 500 | |
Cashless exercise of common stock options | | | | 79,016 | | | | 79 | | | | (79 | ) | | | - | | | | - | |
| | | | - | | | | - | | | | 762,005 | | | | - | | | | 762,005 | |
| | | | - | | | | - | | | | - | | | | (4,699,939 | ) | | | (4,699,939 | ) |
Balance at December 31, 2014 | | | | 38,512,516 | | | $ | 38,512 | | | $ | 12,034,992 | | | $ | (11,998,841 | ) | | $ | 74,663 | |
The accompanying notes are an integral part of these financial statements.
Boston Therapeutics, Inc. |
Statements of Cash Flows |
For the Years Ended December 31, 20132014 and 20122013 |
| | December 31, 2013 | | December 31, 2012 | | | December 31, 2014 | | December 31, 2013 | |
Cash flows from operating activities: | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | |
Depreciation and amortization | | | | | | | | | | |
Loss on disposal of property and equipment | | | | | | |
| | | | | | | | | | |
Issuance of common stock and common stock warrants for consulting services | | | | | | | | | | |
Issuance of common stock warrants | | | | | | |
Changes in operating assets and liabilities: | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | |
Prepaid expenses and other current assets | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net cash used in operating activities | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | |
Purchase of property and equipment | | | | | | | | | | | | | | | | |
Net cash used in investing activities | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | |
Proceeds from notes payable - related parties | | | | | | |
Proceeds from issuance of common stock upon option exercises | | | | | | |
Proceeds from issuance of common stock and common stock warrants (net of issuance costs) | | | | | | | | | | | | | | |
Net cash provided by financing activities | | | | | | | | | | | | | | |
| | | | | | | | | | |
Net increase in cash and cash equivalents | | | | | | |
Cash and cash equivalents, beginning of period | | | | | | | | |
Cash and cash equivalents, end of period | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | | | | | |
Cash and cash equivalents, beginning of year | | | | | | | | |
Cash and cash equivalents, end of year | | | | | | | | |
| | | | | | | | | | |
Supplemental disclosure of cash flow information | | | | | | | | | | |
Cash paid during the period for: | | | | | | |
Cash paid during the year for: | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | |
| | | | | | | | | | | | | | |
Non-cash financing activities: | | | | | | |
Issuance of common stock for stock subscription received in 2013 | | | | | | | | |
Value of common stock issued to settle accrued liabilities | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 20132014 and 2012 2013
1. GENERAL ORGANIZATION AND BUSINESS
Boston Therapeutics, Inc. (the “Company”) was formed as a Delaware corporation on August 24, 2009, under the name Avanyx Therapeutics, Inc. On November 10, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Boston Therapeutics, Inc., a New Hampshire corporation (“BTI”) providing for the merger of BTI into the Company with the Company being the surviving entity (the “Merger”), the issuance by the Company of 4,000,000 shares of common stock to the stockholders of BTI in exchange for 100% of the outstanding common stock of BTI, and the change of the Company’s name to Boston Therapeutics, Inc. David Platt, the Company’s Chief Executive Officer, is a founder of BTI and was a director and minority stockholder of BTI at the time of the Merger. Dr. Platt received 400,000 shares of the Company’s common stock in connection with the Merger. Kenneth A. Tassey, Jr., who became the Company’s former President, shortly after the Merger, was the Chief Executive Officer, President and principal stockholder of BTI at the time of the Merger. Mr. Tassey received 3,200,000 shares of our common stock in connection with the Merger.
The Company’s primary business is the development, manufacture and commercialization of therapeutic drugs with a focus on complex carbohydrate chemistry to address unmet medical needs in diabetes and inflammatory diseases. We have brought one product, SUGARDOWN®, to market and have begun to make initial sales. We are currently focused on the development of two additional drug products: BTI320,BTI-320, a non-systemic, non-toxic, tablet for reduction of post-meal blood glucose in people living with diabetes that is fully developed, and IPOXYN, an injectable anti-necrosis, anti-hypoxia drug that we are currently developing.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has limited cash resources, recurring cash used in operations and operating losses history. As shown in the accompanying financial statements, the Company has an accumulated deficit of approximately $7.3$12 million as of December 31, 20132014 and used cash in operations of approximately $2.3$3.5 million during the year ended December 31, 2013.2014.
The Company has incurred recurring operating losses since inception as it has worked to bring its SUGARDOWN® product to market and develop BTI320BTI-320 and IPOXYN. Management expects such operating losses will continue until such time that substantial revenues are received from SUGARDOWN® or the regulatory and clinical development of BTI320BTI-320 or IPOXYN is completed. The Company has $157,000 cash on hand at December 31, 2014. In March 2015, the Company entered into four different convertible promissory note agreements with an aggregate proceeds balance of $432,000, net of discounts and fees, as referenced in Note 11. Management anticipates that the Company’sour cash resources will be sufficient to fund itsour planned operations intothrough the second halfquarter of 2015 as a result of additional cost cutting measures surrounding the use of consultants and payroll associated costs reduced by the Company during the fourth quarter of fiscal 2014.2014 and into fiscal 2015. Management plans to seek additional capital through private placements and public offerings of the Company’s common stock. In addition, management may seek to raise additional capital through public or private debt or equity financings in order to fund its operations. 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 curtail or cease operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES
Basis of Presentation
The financial statements have been prepared in conformity with accounting principles generally accepting in the United States of America (“US GAAP”).
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.
Segment Information
Operating segments are identified as components of an enterprise about which separate, discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business as one operating segment.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 20132014 and 2012 2013
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES - continued
Cash and Cash Equivalents
For purposes of reporting within the statement of cash flows, the Company considers all cash on hand, cash accounts not subject to withdrawal restrictions or penalties, and all highly liquid investments with original maturities of 90 days or less at the time of acquisition to be cash equivalents. The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation.
Revenue Recognition
The Company generates revenues from sales of SUGARDOWN®. Revenue is recognized when there is persuasive evidence that an arrangement exists, the price is fixed and determinable, the product is shipped in accordance with the customers’ Free On Board (FOB) shipping point terms and collectability is reasonably assured. Revenue is recognized as product is shipped from an outside fulfillment operation. 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.
DuringAs disclosed in Note 7, Advance Pharmaceutical Company Ltd., a related party, accounted for 91% and 97%, during the years ended December 31, 2014 and 2013, and 2012, one customer accounted for 97% and 40%, respectively, of the Company’s revenue. During the year ended December 31, 2012, one additional customer accounted for 35% of the Company's revenue.respectively.
Accounts Receivable
Accounts receivable is stated at the amount management expects to collect from outstanding balances. Management establishes a reserve for doubtful accounts based on its assessment of the current status of individual accounts. Balances that remain outstanding after management has used reasonable collection efforts are written off against the allowance. There were no allowances for doubtful accounts as of December 31, 20132014 and 2012.2013. At December 31, 2014, there were no accounts receivable. At December 31, 2013, and 2012, the Company hashad one customer that accountsaccounted for 100% of its accounts receivable. The Company believes there is minimal risk associated with this receivable.
Inventory
Inventory consists of raw materials, work-in-process 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.
Property and Equipment
Property and equipment is depreciated using the straight-line method over the following estimated useful lives:
Asset Category | Estimated Useful Life |
Office Furniture and Equipment | |
Computer Equipment and Software | |
The Company begins to depreciate assets when they are placed in service. The costs of repairs and maintenance are expensed as incurred; major renewals and betterments are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the statement of operations. For the years ended December 31, 20132014 and 2012,2013, the Company recorded depreciation expense of $2,818$6,662 and $682,$2,818, respectively.
Intangible Assets
Intangible assets consist of identifiable finite-lived assets acquired in business acquisitions. Acquired intangible assets are recorded at fair value on the date of acquisition and are amortized over their economic useful lives on a straight line basis.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 20132014 and 2012 2013
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES - continued
Goodwill
The Company follows the guidance of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350, Goodwill and Other Intangible Assets. Under ASC 350, goodwill and certain other intangible assets with indefinite lives are not amortized, but instead are reviewed for impairment at least annually.
As the Company operates its business in one operating segment and one reporting unit, the Company’s goodwill is assessed at the Company level for impairment in the fourth quarter of each year or more frequently if events or changes in circumstances indicate that impairment may exist. The Company has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step impairment test. If the Company’s qualitative assessment reveals that goodwill impairment is more likely than not, the Company performs the two-step impairment test. Alternatively, the Company may bypass the qualitative test and initiate goodwill impairment testing with the first step of the two-step goodwill impairment test.
During the first step of the goodwill impairment test, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, then the Company concludes that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test to measure possible goodwill impairment loss. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.
The Company performed its impairment review of goodwill utilizing the qualitative assessment method for the yearyears ended December 31, 2014 and 2013, and concluded that no impairment existed. The Company performed its impairment review of goodwill utilizing the quantitative assessment method for the year ended December 31, 2012 and concluded no impairment existed.
Impairment of Long-lived Assets
The Company reviews long-lived assets, which include the Company’s intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. Future undiscounted cash flows of the underlying assets are compared to the assets’ carrying values. Adjustments to fair value are made if the sum of expected future undiscounted cash flows is less than book value. To date, no adjustments for impairment have been made.
Loss per Share
Basic net loss per share is computed based on the net loss for the period divided by the weighted average actual shares outstanding during the period. Diluted net loss per share is computed based on the net loss for the period divided by the weighted average number of common shares and common equivalent shares outstanding during each period unless the effect of such common equivalent shares would be anti-dilutive. Common stock equivalents represent the dilutive effect of the assumed exercise of certain outstanding stock options using the treasury stock method. The weighted average number of common shares for the year ended December 31, 20132014 did not include 5,741,4006,483,400 and 11,974,99912,516,669 options and warrants, respectively, because of their anti-dilutive effect. The weighted average number of common shares for the year ended December 31, 20122013 did not include 7,708,4005,741,400 and 645,00011,974,999 options and warrants, respectively, because of their anti-dilutive effect.
Income TaxesPreferred Stock
Our authorized preferred stock consists of 5,000,000 shares of preferred stock, par value $0.001 per share. As of the date of this prospectus, no shares of preferred stock have been issued. Our Board of Directors has the authority, without any vote or action by the stockholders, to create one or more series of preferred stock up to the limit of our authorized but unissued shares of preferred stock and to fix the number of shares constituting such series and the designation of such series, the voting powers (if any) of the shares of such series and the relative participating, option or other special rights (if any), and any qualifications, preferences, limitations or restrictions pertaining to such series which may be fixed by the Board of Directors pursuant to a resolution or resolutions providing for the issuance of such series adopted by the Board of Directors.
Warrants Being Issued in this Offering
We are offering 12,500,000 warrants in this offering. Each warrant is exercisable for one share of our common stock, at an exercise price of $0.30 per share. The warrants will become exercisable immediately after the date of issuance and may be exercised until 5 years after the date of issuance. |
Outstanding Warrants
At April 21, 2015, the following warrants were outstanding:
2013 Private Placement Warrants
In connection with a private placement, we issued to investors warrants to purchase an aggregate of 8,829,484 shares of common stock at an exercise price of $0.50 per share, all of which are currently exercisable, as follows:
| · | Warrants to purchase an aggregate of 3,333,320 shares of common stock, expiring on July 23, 2018. |
| · | Warrants to purchase an aggregate of 1,414,113 shares of common stock expiring on August 6, 2018. |
| · | Warrants to purchase an aggregate of 1,130,223 shares of common stock expiring on August 30, 2018. |
| · | Warrants to purchase an aggregate of 2,951,828 shares of common stock expiring on September 30, 2018. |
We may call these warrants for redemption if the volume weighted average price of our common stock is at or above $2.00 for 15 consecutive trading days. During the 45 days following a redemption call, holders of the warrants may choose to exercise the warrants, or a portion thereof, by paying the then applicable exercise price. Any warrants subject to the redemption call that are unexercised during such 45-day period will be cancelled. We may call warrants that are covered by an effective registration statement from the time of the call through the end of the 45-day period only.
In connection with the private placement, we issued to the placement agent warrants to purchase 1,808,849 shares of common stock at an exercise price of $0.30 per share, all of which are exercisable. In January 2015, 92,000 warrants were exercised on a cashless basis. The remaining 1,716,849 warrants may be exercised on a cashless basis and expire on August 30, 2018.
Other Warrants
We have issued warrants to certain investors and to consultants after purchase of the aggregate of 1,878,336 shares of Common Stock; all of these warrants are exercisable at prices between $0.50 and $1.15 per share (“Other Warrants”). In addition, we issued a warrant in conjunction with our recent convertible note financings to purchase 979,965 shares of common stock at an exercise price of $0.30 per share.
The exercise price and number of shares of Common Stock to be received upon the exercise of the Investor Warrants, Placement Agent Warrants and Other Warrants are subject to adjustment upon the occurrence of certain events, such as stock splits, stock dividends or recapitalization.
Holders of the Investor Warrants have no voting, pre-emptive, subscription or other rights of stockholders in respect of the Investor Warrants, Placement Agent Warrants and Other Warrants, nor shall the holders of such warrants be entitled to receive dividends.
Convertible Promissory Note Agreements
During March 2015, the Company entered into four separate promissory note agreements with total proceeds of $432,000, net of discounts and fees. Under such agreements, the Company is required to reserve approximately 25,900,000 shares of common stock for potential conversion of these notes into common stock. If the holders of the Company’s convertible note agreements are to exercise the conversion features, the Company could be obligated to issue a significant amount of shares of common stock in accordance to each agreement, subject to conversion rate adjustments.
Delaware Anti-Takeover Law and Provisions of Certificate of Incorporation and By-Laws
Delaware Anti-Takeover Law
We are subject to Section 203 of the Delaware General Corporation Law. Section 203 generally prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless:
| · | prior to the date of the transaction, the Board of Directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; |
| · | upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding specified shares; or |
| · | at or subsequent to the date of the transaction, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3 % of the outstanding voting stock which is not owned by the interested stockholder. |
Section 203 defines a "business combination" to include:
| · | any merger or consolidation involving the corporation and the interested stockholder; |
| · | any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 10% or more of the assets of the corporation to or with the interested stockholder; |
| · | subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; |
| · | subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or |
| · | the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. |
In general, Section 203 defines an "interested stockholder" as any person that is:
| · | the owner of 15% or more of the outstanding voting stock of the corporation; |
| · | an affiliate or associate of the corporation who was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the relevant date; or |
| · | the affiliates and associates of the above. |
Under specific circumstances, Section 203 makes it more difficult for an "interested stockholder" to effect various business combinations with a corporation for a three-year period, although the stockholders may, by adopting an amendment to the corporation's certificate of incorporation or bylaws, elect not to be governed by this section, effective 12 months after adoption.
Our certificate of incorporation and bylaws do not exclude us from the restrictions of Section 203. We anticipate that the provisions of Section 203 might encourage companies interested in acquiring us to negotiate in advance with our Board of Directors since the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder.
Certificate of Incorporation and Bylaws
Provisions of our certificate of incorporation and bylaws to be in effect upon the consummation of this offering may delay or discourage transactions involving an actual or potential change of control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these provisions could adversely affect the price of our common stock. Among other things, our certificate of incorporation and bylaws will:
| · | permit our Board of Directors to issue up to shares of preferred stock, with any rights, preferences and privileges as they may designate; |
| · | provide that all vacancies on our Board of Directors, including as a result of newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum; |
| · | require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent; |
| · | provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide advance notice in writing, and also specify requirements as to the form and content of a stockholder's notice; |
| · | not provide for cumulative voting rights, thereby allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election; and |
| · | provide that special meetings of our stockholders may be called only by the Board of Directors or by such person or persons requested by a majority of the Board of Directors to call such meetings. |
SHARES AVAILABLE FOR FUTURE SALE
We cannot predict what effect, if any, market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock prevailing from time to time. Nevertheless, sales of substantial amounts of common stock, including shares issued upon the exercise of outstanding options or warrants, in the public market, or the perception that such sales could occur, could materially and adversely affect the market price of our common stock and could impair our future ability to raise capital through the sale of our equity or equity-related securities at a time and price that we deem appropriate.
Assuming that all 25,000,000 common shares in this offering are issued and sold, we will have 63,597,008 shares of common stock outstanding. Of the outstanding shares, the shares sold in our initial public offering, subsequent public offering, and this offering will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by our “affiliates”, as that term is defined under Rule 144, may be sold only in compliance with the limitations described below. In addition, as of April 21, 2015 there were 13,404,634 shares issuable upon the exercise of warrants with a weighted average exercise price of $0.51 per share and 8,192,400 shares issuable upon the exercise of stock options with a weighted average exercise price of $0.41 per share. In addition, in connection with the promissory note agreements, the Company is required to reserve approximately 25,900,000 shares of common stock. If the notes are converted at the option of the holders, a significant amount of shares of common stock could be issued in accordance with each agreement, subject to conversion rate adjustments.The resale of such shares, following the exercise of such warrants and options by the holders thereof, has been registered. The remaining outstanding shares of common stock will be deemed “restricted securities” as that term is defined under Rule 144. Restricted securities may be sold in the public market only if they are registered or if they qualify for an exemption from registration, including the exemptions under Rule 144, which we summarize below. The restricted shares held by our affiliates will be available for sale in the public market at various times after the date of this prospectus pursuant to Rule 144.
Rule 144
Rule 144 governs resale of “restricted securities” for the account of any person (other than an issuer), and restricted and unrestricted securities for the account of an “affiliate” of the issuer. Restricted securities generally include any securities acquired directly or indirectly from an issuer or its affiliates which were not issued or sold in connection with a public offering registered under the Securities Act. An affiliate of the issuer is any person who directly or indirectly controls, is controlled by, or is under common control with, the issuer. Affiliates of ours may include its directors, executive officers, and persons directly or indirectly owning 10% or more of the outstanding common stock. Under Rule 144, non-affiliates are able to sell restricted securities pursuant to Rule 144, after six months, subject to certain conditions, including if we are current in our reporting obligations with the Commission and remain current for an additional period of six months, and thereafter after one year, with no volume or reporting obligations.
Under Rule 144, affiliates are able to sell restricted securities pursuant to Rule 144 after six months, subject to certain conditions, including if we are current in our reporting obligations with the SEC and remain current for an additional period of six months, as well as other requirements described below. Resales by our affiliates of restricted and unrestricted common stock are subject to volume limitation, aggregation, broker transaction, notice filing requirements, and requirements concerning publicly available information about our company. The volume limitations provide that a person (or persons who must aggregate their sales) cannot, within any three-month period, sell more than the greater of one percent of the then outstanding shares, or the average weekly reported trading volume during the four calendar weeks preceding each such sale.
Registration Rights
The Company accounts for income taxesholders of an aggregate of 17,659,007 shares of our common stock are entitled to rights with respect to the registration of their shares under the assetSecurities Act. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates, immediately upon the effectiveness of the registration statement of which this prospectus is a part. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.
Equity Incentive Plans
We filed a registration statement Amended and liability method. Under this method, deferred tax assetsRestated 2010 Stock Plan and liabilities2011 Amended and Restated Non-Restricted Stock Plan on Form S-8 under the Securities Act. Accordingly, shares registered under the registration statement are recognizedavailable for sale in the future tax consequences attributableopen market subject to differences betweenRule 144 volume limitations.
PLAN OF DISTRIBUTION
We are offering up to 25,000,000 shares of our common stock on a self-underwritten “best efforts” basis for aggregate gross proceeds of up to $5 million at an estimated price of $0.20 per share, to be issued in one or more closings. There can be no assurance that the financial statement carrying amountsoffering will be fully subscribed. Accordingly, we may sell substantially less than $5 million of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the yearour shares of common stock, in which case our gross proceeds would be substantially reduced.
We expect to enter into securities purchase or subscription agreements directly with investors in connection with this offering, and we will only sell to investors who have entered into such agreement with us.
This prospectus forms a part of a registration statement that permits our officers and directors to sell the shares directly to the public, with no commission or other remuneration payable to them for any shares they sell. There are no plans or arrangements to enter into any contracts or agreements to sell the shares with a broker or dealer. In offering the securities on our behalf, our officers and directors will rely on the safe harbor from broker/dealer registration set out in Rule 3a4-1 under the Exchange Act, which sets forth those temporary differences are expectedconditions under which a person associated with an issuer may participate in the offering of the issuer’s securities and not be deemed to be recovereda broker/dealer.
There is no requirement to sell any specific number or dollar amount of securities and we may raise substantially less than the $5 million in common stock offered hereby. Our officers will use their best efforts to sell the securities offered. We will pay all expenses incurred in this offering.
The assumed number of shares offered hereby as reflected in this prospectus is based on the last reported sale price of our common stock on April 21, 2015. However, this final public offering price will be settled. a negotiated price and the final number of shares offered hereby will be based on such negotiated offering price.
The effectoffering will close on deferred tax assets and liabilities of a change in tax rates is recognized in income in_______, 2015, 90 days after the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portioneffectiveness of the registration statement of which this prospectus is a part, unless all the securities are sold before that date, we extend the offering another 90 days or we otherwise decide to close the offering early or cancel it, in each case in our sole discretion. If we extend the offering, we will provide that information in an amendment to this prospectus. If we close the offering early or cancel it, including during any extended offering period, we may do so without notice to investors, although if we cancel the offering we will promptly return any funds investors may already have paid.
There is no minimum number of shares that we must sell in this offering. Because there is no minimum offering amount required as a condition to closing in this offering, the actual public offering amount and proceeds to us, if any, are not presently determinable and may be substantially less than all of the securities offered hereby. As a result, the actual amount of gross deferred tax assetproceeds from the sale of shares, if any, might not be sufficient to cover the expenses of the offering. Funds raised pursuant to this offering will not be realized. held in any escrow account and all funds raised regardless of the amount will be available to us. In the event that we do not raise sufficient capital to implement our planned operations, your entire investment could be lost.
In connection with this offering, we will issue 1 warrant for every share of common stock purchased. Each warrant entitles the holder to purchase one half of one (1/2) share of common stock at an exercise price of $0.30 per share. After the expiration of the 5 year exercise period, warrant holders will have no further rights to exercise such warrants.
The Company records interest and penalties related to income taxeswarrants may be exercised only for full shares of common stock. We will not issue fractional shares of common stock or cash in lieu of fractional shares of common stock. Warrant holders do not have any voting or other rights as a componentstockholder of provision for income taxes.our company. The Company did not recognize any interestexercise price and penalty expensethe number of shares of common stock purchasable upon the exercise of each warrant are subject to adjustment upon the happening of certain events, such as stock dividends, distributions, and splits.
LEGAL MATTERS
Certain legal matters with respect to the shares of common stock offered hereby will be passed upon by Ellenoff Grossman & Schole LLP, New York, New York.
EXPERTS
The financial statements for the years ended December 31, 2014 and 2013, appearing in this Prospectus and 2012.Registration Statement have been audited by McGladrey LLP, an independent registered public accounting firm, as stated in their report appearing elsewhere herein, (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's ability to continue as a going concern) and are included in reliance upon such report and upon the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and Exchange Commission (SEC) for our common stock offered in this offering. This prospectus does not contain all of the information set forth in the registration statement. You should refer to the registration statement and its exhibits for additional information. Whenever we make references in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete and you should refer to the exhibits attached to the registration statement for the copies of the actual contract, agreement or other document.
Our fiscal year ends on December 31. We are a reporting company and file annual, quarterly, and current reports, and other information with the SEC. You may read and copy any reports, statements, or other information we file at the SEC’s public reference room at 100 F. Street, N.E., Washington D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our SEC filings are also available to the public on the SEC’s Internet site at http\\www.sec.gov. We maintain a website at www.bostonti.com. Information contained in or accessible through our website is not and should not be considered a part of this prospectus and you should not rely on that information in deciding whether to invest in our common stock, unless that information is also in or incorporated by reference in this prospectus.
INDEX TO FINANCIAL STATEMENTS
| Page |
Audited Financial Statements For the Years Ended December 31, 2014 and 2013: | |
| Report of Independent Registered Public Accounting Firm | |
| | |
| | |
| Statements of Changes in Stockholders’ Equity | |
| | |
| Notes to Financial Statements | |
| Page |
Audited Financial Statements For the Years Ended December 31, 2013 and 2012: | |
| Report of Independent Registered Public Accounting Firm | |
| | |
| | |
| Statements of Changes in Stockholders’ Equity | |
| | |
| Notes to Financial Statements | |
| | |
| | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Boston Therapeutics, Inc.
Manchester, New Hampshire
We have audited the accompanying balance sheets of Boston Therapeutics, Inc. as of December 31, 2014 and 2013, and the related statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Boston Therapeutics, Inc. as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s limited cash resources, recurring cash used in operations and operating losses raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ McGladrey LLP
Boston, Massachusetts
March 27, 2015
Boston Therapeutics, Inc. |
Balance Sheets |
December 31, 2014 and 2013 |
| | December 31, | | | December 31, | |
| | 2014 | | | 2013 | |
| | | | | | |
Cash and cash equivalents | | $ | 157,278 | | | $ | 3,387,428 | |
| | | - | | | | 99,786 | |
Prepaid expenses and other current assets | | | 89,408 | | | | 153,681 | |
| | | 197,969 | | | | 110,625 | |
| | | 444,655 | | | | 3,751,520 | |
| | | | | | | | |
Property and equipment, net | | | 14,417 | | | | 15,176 | |
| | | 632,143 | | | | 696,429 | |
| | | 69,782 | | | | 69,782 | |
| | | 2,125 | | | | 2,125 | |
| | $ | 1,163,122 | | | $ | 4,535,032 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | $ | 410,787 | | | $ | 170,977 | |
Accrued expenses and other current liabilities | | | 278,177 | | | | 720,965 | |
| | | 101,675 | | | | - | |
Total current liabilities | | | 790,639 | | | | 891,942 | |
| | | | | | | | |
Notes payable - related parties | | | 297,820 | | | | 297,820 | |
| | | 1,088,459 | | | | 1,189,762 | |
| | | | | | | | |
COMMITMENTS AND CONTINGENCIES (Note 10) | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Preferred stock, $0.001 par value, 5,000,000 shares authorized, | | | | | | | | |
none issued and outstanding | | | - | | | | - | |
Common stock, $0.001 par value, 200,000,000 shares authorized, | | | | | | | | |
38,512,516 and 37,362,160 shares issued and outstanding | | | | | | | | |
at December 31, 2014 and 2013, respectively | | | 38,512 | | | | 37,362 | |
Additional paid-in capital | | | 12,034,992 | | | | 10,606,810 | |
| | | (11,998,841 | ) | | | (7,298,902 | ) |
Total stockholders’ equity | | | 74,663 | | | | 3,345,270 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 1,163,122 | | | $ | 4,535,032 | |
The accompanying notes are an integral part of these financial statements.
Boston Therapeutics, Inc. |
Statements of Operations |
For the Years Ended December 31, 2014 and 2013 |
| | December 31, | | | December 31, | |
| | 2014 | | | 2013 | |
| | | | | | |
| | $ | 199,582 | | | $ | 323,412 | |
| | | 175,829 | | | | 278,205 | |
| | | 23,753 | | | | 45,207 | |
| | | | | | | | |
| | | | | | | | |
| | | 1,432,669 | | | | 542,492 | |
| | | 320,353 | | | | 329,218 | |
General and administrative | | | 2,945,078 | | | | 3,753,742 | |
| | | 4,698,100 | | | | 4,625,452 | |
| | | (4,674,347 | ) | | | (4,580,245 | ) |
| | | | | | | | |
| | | (20,009 | ) | | | (19,692 | ) |
| | | (4,749 | ) | | | 1,505 | |
| | | (834 | ) | | | (3,071 | ) |
| | $ | (4,699,939 | ) | | $ | (4,601,503 | ) |
| | | | | | | | |
| | | | | | | | |
Net loss per share- basic and diluted | | $ | (0.12 | ) | | $ | (0.18 | ) |
| | | | | | | | |
Weighted average shares outstanding basic and diluted | | | 38,192,363 | | | | 25,370,626 | |
The accompanying notes are an integral part of these financial statements.
Boston Therapeutics, Inc. |
Statement of Changes in Stockholders' Equity |
For the Years Ended December 31, 2014 and 2013 |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Balance at December 31, 2012 | | | 18,745,706 | | | $ | 18,746 | | | $ | 3,375,116 | | | $ | (2,697,399 | ) | | $ | 696,463 | |
| | | | | | | | | | | | | | | | | | | | |
Issuance of common stock, net of issuance costs | | | 18,312,341 | | | | 18,312 | | | | 3,551,056 | | | | - | | | | 3,569,368 | |
Issuance of common stock warrants | | | - | | | | - | | | | 1,616,062 | | | | - | | | | 1,616,062 | |
Issuance of common stock in exchange | | | | | | | | | | | | | | | | | |
| | | 291,009 | | | | 291 | | | | 226,775 | | | | - | | | | 227,066 | |
Issuance of common stock warrants in | | | | | | | | | | | | | | | | | | | | |
exchange for consulting services | | | - | | | | - | | | | 282,901 | | | | - | | | | 282,901 | |
Cashless exercise of common stock options | | | 13,104 | | | | 13 | | | | (13 | ) | | | - | | | | - | |
| | | - | | | | - | | | | 1,554,913 | | | | - | | | | 1,554,913 | |
| | | - | | | | - | | | | - | | | | (4,601,503 | ) | | | (4,601,503 | ) |
Balance at December 31, 2013 | | | 37,362,160 | | | | 37,362 | | | | 10,606,810 | | | | (7,298,902 | ) | | | 3,345,270 | |
| | | | | | | | | | | | | | | | | | | | |
Issuance of common stock, net of issuance costs | | | 833,340 | | | | 833 | | | | 373,916 | | | | - | | | | 374,749 | |
Issuance of common stock warrants | | | - | | | | - | | | | 161,087 | | | | - | | | | 161,087 | |
Issuance of common stock in exchange | | | | | | | | | | | | | | | | | |
| | | 233,000 | | | | 233 | | | | 130,758 | | | | - | | | | 130,991 | |
Exercise of common stock options | | | 5,000 | | | | 5 | | | | 495 | | | | - | | | | 500 | |
Cashless exercise of common stock options | | | 79,016 | | | | 79 | | | | (79 | ) | | | - | | | | - | |
| | | - | | | | - | | | | 762,005 | | | | - | | | | 762,005 | |
| | | - | | | | - | | | | - | | | | (4,699,939 | ) | | | (4,699,939 | ) |
Balance at December 31, 2014 | | | 38,512,516 | | | $ | 38,512 | | | $ | 12,034,992 | | | $ | (11,998,841 | ) | | $ | 74,663 | |
The accompanying notes are an integral part of these financial statements.
Boston Therapeutics, Inc. |
Statements of Cash Flows |
For the Years Ended December 31, 2014 and 2013 |
| | December 31, 2014 | | December 31, 2013 | |
Cash flows from operating activities: | | | | | |
| | | | | | | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization | | | | | | | | |
Loss on disposal of property and equipment | | | | | | | | |
| | | | | | | | |
Issuance of common stock and common stock warrants for consulting services | | | | | | | | |
Issuance of common stock warrants | | | | | | | | |
Changes in operating assets and liabilities: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Prepaid expenses and other current assets | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net cash used in operating activities | | | | | | | | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Purchase of property and equipment | | | | | | | | |
Net cash used in investing activities | | | | | | | | |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Proceeds from issuance of common stock upon option exercises | | | | | | | | |
Proceeds from issuance of common stock and common stock warrants (net of issuance costs) | | | | | | | | |
Net cash provided by financing activities | | | | | | | | |
| | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | | | | | | |
Cash and cash equivalents, beginning of year | | | | | | | | |
Cash and cash equivalents, end of year | | | | | | | | |
| | | | | | | | |
Supplemental disclosure of cash flow information | | | | | | | | |
Cash paid during the year for: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Non-cash financing activities: | | | | | | | | |
Issuance of common stock for stock subscription received in 2013 | | | | | | | | |
Value of common stock issued to settle accrued liabilities | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 20132014 and 2012 2013
1. GENERAL ORGANIZATION AND BUSINESS
Boston Therapeutics, Inc. (the “Company”) was formed as a Delaware corporation on August 24, 2009, under the name Avanyx Therapeutics, Inc. On November 10, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Boston Therapeutics, Inc., a New Hampshire corporation (“BTI”) providing for the merger of BTI into the Company with the Company being the surviving entity (the “Merger”), the issuance by the Company of 4,000,000 shares of common stock to the stockholders of BTI in exchange for 100% of the outstanding common stock of BTI, and the change of the Company’s name to Boston Therapeutics, Inc. David Platt, the Company’s Chief Executive Officer, is a founder of BTI and was a director and minority stockholder of BTI at the time of the Merger. Dr. Platt received 400,000 shares of the Company’s common stock in connection with the Merger. Kenneth A. Tassey, Jr., the Company’s former President, was the Chief Executive Officer, President and principal stockholder of BTI at the time of the Merger. Mr. Tassey received 3,200,000 shares of our common stock in connection with the Merger.
The Company’s primary business is the development, manufacture and commercialization of therapeutic drugs with a focus on complex carbohydrate chemistry to address unmet medical needs in diabetes and inflammatory diseases. We have brought one product, SUGARDOWN®, to market and have begun to make initial sales. We are currently focused on the development of two additional drug products: BTI-320, a non-systemic, non-toxic, tablet for reduction of post-meal blood glucose in people living with diabetes that is fully developed, and IPOXYN, an injectable anti-necrosis, anti-hypoxia drug that we are currently developing.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has limited cash resources, recurring cash used in operations and operating losses history. As shown in the accompanying financial statements, the Company has an accumulated deficit of approximately $12 million as of December 31, 2014 and used cash in operations of approximately $3.5 million during the year ended December 31, 2014.
The Company has incurred recurring operating losses since inception as it has worked to bring its SUGARDOWN® product to market and develop BTI-320 and IPOXYN. Management expects such operating losses will continue until such time that substantial revenues are received from SUGARDOWN® or the regulatory and clinical development of BTI-320 or IPOXYN is completed. The Company has $157,000 cash on hand at December 31, 2014. In March 2015, the Company entered into four different convertible promissory note agreements with an aggregate proceeds balance of $432,000, net of discounts and fees, as referenced in Note 11. Management anticipates that our cash resources will be sufficient to fund our planned operations through the second quarter of 2015 as a result of additional cost cutting measures surrounding the use of consultants and payroll associated costs reduced by the Company during the fourth quarter of fiscal 2014 and into fiscal 2015. Management plans to seek additional capital through private placements and public offerings of the Company’s common stock. In addition, management may seek to raise additional capital through public or private debt or equity financings in order to fund its operations. 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 curtail or cease operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES - continued
Advertising Costs
Advertising costs are expensed as incurred and are reported as a component of selling, general and administrative expenses in the selling and marketing expenses in the statements of operations. Advertising costs for the years ended December 31, 2013 and 2012 were $25,068 and $51,497, respectively.
Research and Development Costs
Research and development expenditures are charged to the statementBasis of operations as incurred. Such costs include proprietary research and development activities, purchased research and development, and expenses associated with research and development contracts, whether performed by the Company or contracted with independent third parties.
Fair Value of Financial InstrumentsPresentation
The Company’s financial instruments consiststatements have been prepared in conformity with accounting principles generally accepting in the United States of cash and cash equivalents, accounts payable, accrued expenses, and notes payable. The carrying value of cash and cash equivalents, accounts payable and accrued expenses approximates fair value due to their short-term nature.
The carrying value of the notes payable as of December 31, 2013 and 2012, is not materially different from the fair value of the notes payable.
Concentration of Credit RiskAmerica (“US GAAP”).
Financial instruments that potentially subject the Company to concentrationsUse of credit risk are principally cash and cash equivalents. The Company places its cash and cash equivalents in highly rated financial institutions. The Company maintains cash and cash equivalent balances with financial institutions that occasionally exceed federally insured limits. The Company has not experienced any losses related to these balances, and management believes its credit risk to be minimal.Estimates
Stock-Based Compensation
Stock–based compensation, including grantsThe preparation of employeefinancial statements in conformity with U.S. GAAP requires management to make estimates and non-employee stock optionsassumptions that affect the reported amounts of assets and modifications to existing stock options, is recognized inliabilities and disclosure of contingent assets and liabilities at the income statement based on the estimated fair valuedate of the awards. The Company usesfinancial statements and the Black-Scholes option pricing model to determinereported amounts of revenue and expenses during 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 its common stock and as such volatility is estimated using historical volatilities of similar public entities. 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 forfeituresreporting period. Actual results could 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.
Segment Information
Operating segments are identified as components of an enterprise about which separate, discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on how to allocate resources and assess performance. 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 arrangementviews its operations and therefore, the Company revalues the options periodically and records additional compensation expense related to these options over the remaining vesting period.manages its business as one operating segment.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 20132014 and 2012 2013
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES - continued
Recent Accounting PronouncementsCash and Cash Equivalents
For purposes of reporting within the statement of cash flows, the Company considers all cash on hand, cash accounts not subject to withdrawal restrictions or penalties, and all highly liquid investments with original maturities of 90 days or less at the time of acquisition to be cash equivalents. The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation.
Revenue Recognition
The Company generates revenues from sales of SUGARDOWN®. Revenue is recognized when there is persuasive evidence that an arrangement exists, the price is fixed and determinable, the product is shipped in accordance with the customers’ Free On Board (FOB) shipping point terms and collectability is reasonably assured. In Julypractice, 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 7, Advance Pharmaceutical Company Ltd., a related party, accounted for 91% and 97%, during the years ended December 31, 2014 and 2013, respectively.
Accounts Receivable
Accounts receivable is stated at the amount management expects to collect from outstanding balances. Management establishes a reserve for doubtful accounts based on its assessment of the current status of individual accounts. Balances that remain outstanding after management has used reasonable collection efforts are written off against the allowance. There were no allowances for doubtful accounts as of December 31, 2014 and 2013. At December 31, 2014, there were no accounts receivable. At December 31, 2013, the FASB issued ASU 2013-11, “Income Taxes, PresentationCompany had one customer that accounted for 100% of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). ASU 2013-11 states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in ASU 2013-11 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.its accounts receivable.
3. INVENTORIESInventory
Inventory consists of raw materials, work-in-process and finished goods of SUGARDOWN®. Inventories consist of material, labor and manufacturing overhead and are recordedstated at the lower of cost using the weighted average cost method,(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.
The components of inventories at December 31, 2013Property and 2012, net of inventory reserves, were as follows:Equipment
Property and equipment is depreciated using the straight-line method over the following estimated useful lives:
Asset Category | Estimated Useful Life |
Office Furniture and Equipment | |
Computer Equipment and Software | |
The Company periodically reviews quantitiesbegins to depreciate assets when they are placed in service. The costs of inventory on handrepairs and compares these amounts to expected usagemaintenance are expensed as incurred; major renewals and betterments are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the statement of each particular product or product line. Theoperations. For the years ended December 31, 2014 and 2013, the Company records, as a charge to costrecorded depreciation expense of sales, any amounts required to reduce the carrying value to net realizable value.$6,662 and $2,818, respectively.
4. ACCRUED EXPENSESIntangible Assets
The following table representsIntangible assets consist of identifiable finite-lived assets acquired in business acquisitions. Acquired intangible assets are recorded at fair value on the major componentsdate of accrued expenses at December 31, 2013acquisition and 2012:are amortized over their economic useful lives on a straight line basis.
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Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 20132014 and 2012 2013
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES - continued
Goodwill
The Company follows the guidance of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350, Goodwill and Other Intangible Assets. Under ASC 350, goodwill and certain other intangible assets with indefinite lives are not amortized, but instead are reviewed for impairment at least annually.
5. STOCKHOLDERS’ EQUITYAs the Company operates its business in one operating segment and one reporting unit, the Company’s goodwill is assessed at the Company level for impairment in the fourth quarter of each year or more frequently if events or changes in circumstances indicate that impairment may exist. The Company has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step impairment test. If the Company’s qualitative assessment reveals that goodwill impairment is more likely than not, the Company performs the two-step impairment test. Alternatively, the Company may bypass the qualitative test and initiate goodwill impairment testing with the first step of the two-step goodwill impairment test.
During the first step of the goodwill impairment test, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, then the Company concludes that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test to measure possible goodwill impairment loss. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.
The Company performed its impairment review of goodwill for the years ended December 31, 2014 and 2013, and concluded that no impairment existed.
Impairment of Long-lived Assets
The Company reviews long-lived assets, which include the Company’s intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. Future undiscounted cash flows of the underlying assets are compared to the assets’ carrying values. Adjustments to fair value are made if the sum of expected future undiscounted cash flows is authorized to issue up to 5,000,000less than book value. To date, no adjustments for impairment have been made.
Loss per Share
Basic net loss per share is computed based on the net loss for the period divided by the weighted average actual shares outstanding during the period. Diluted net loss per share is computed based on the net loss for the period divided by the weighted average number of its $0.001 par value preferredcommon 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 year ended December 31, 2014 did not include 6,483,400 and up to 200,000,00012,516,669 options and warrants, respectively, because of their anti-dilutive effect. The weighted average number of common shares of its $0.001 par value common stock. Duringfor the year ended December 31, 2013 the Company amended its certificatedid not include 5,741,400 and 11,974,999 options and warrants, respectively, because of incorporation to increase the number of common shares from 100,000,000 to 200,000,000. The amendment went into effect September 7, 2013.their anti-dilutive effect.
Preferred Stock
Our authorized preferred stock consists of 5,000,000 shares of preferred stock, par value $0.001 per share. As of the date of this prospectus, no shares of preferred stock have been issued. Our Board of Directors has the authority, without any vote or action by the stockholders, to create one or more series of preferred stock up to the limit of our authorized but unissued shares of preferred stock and to fix the number of shares constituting such series and the designation of such series, the voting powers (if any) of the shares of such series and the relative participating, option or other special rights (if any), and any qualifications, preferences, limitations or restrictions pertaining to such series which may be fixed by the Board of Directors pursuant to a resolution or resolutions providing for the issuance of such series adopted by the Board of Directors.
Warrants Being Issued in this Offering
We are offering 12,500,000 warrants in this offering. Each warrant is exercisable for one share of our common stock, at an exercise price of $0.30 per share. The warrants will become exercisable immediately after the date of issuance and may be exercised until 5 years after the date of issuance. |
Outstanding Warrants
At April 21, 2015, the following warrants were outstanding:
2013 Private Placement Warrants
In connection with a private placement, we issued to investors warrants to purchase an aggregate of 8,829,484 shares of common stock at an exercise price of $0.50 per share, all of which are currently exercisable, as follows:
| · | Warrants to purchase an aggregate of 3,333,320 shares of common stock, expiring on July 23, 2018. |
| · | Warrants to purchase an aggregate of 1,414,113 shares of common stock expiring on August 6, 2018. |
| · | Warrants to purchase an aggregate of 1,130,223 shares of common stock expiring on August 30, 2018. |
| · | Warrants to purchase an aggregate of 2,951,828 shares of common stock expiring on September 30, 2018. |
We may call these warrants for redemption if the volume weighted average price of our common stock is at or above $2.00 for 15 consecutive trading days. During the 45 days following a redemption call, holders of the warrants may choose to exercise the warrants, or a portion thereof, by paying the then applicable exercise price. Any warrants subject to the redemption call that are unexercised during such 45-day period will be cancelled. We may call warrants that are covered by an effective registration statement from the time of the call through the end of the 45-day period only.
In connection with the private placement, we issued to the placement agent warrants to purchase 1,808,849 shares of common stock at an exercise price of $0.30 per share, all of which are exercisable. In January 2015, 92,000 warrants were exercised on a cashless basis. The remaining 1,716,849 warrants may be exercised on a cashless basis and expire on August 30, 2018.
Other Warrants
We have issued warrants to certain investors and to consultants after purchase of the aggregate of 1,878,336 shares of Common Stock; all of these warrants are exercisable at prices between $0.50 and $1.15 per share (“Other Warrants”). In addition, we issued a warrant in conjunction with our recent convertible note financings to purchase 979,965 shares of common stock at an exercise price of $0.30 per share.
The exercise price and number of shares of Common Stock to be received upon the exercise of the Investor Warrants, Placement Agent Warrants and Other Warrants are subject to adjustment upon the occurrence of certain events, such as stock splits, stock dividends or recapitalization.
Holders of the Investor Warrants have no voting, pre-emptive, subscription or other rights of stockholders in respect of the Investor Warrants, Placement Agent Warrants and Other Warrants, nor shall the holders of such warrants be entitled to receive dividends.
Convertible Promissory Note Agreements
During March 2015, the Company entered into four separate promissory note agreements with total proceeds of $432,000, net of discounts and fees. Under such agreements, the Company is required to reserve approximately 25,900,000 shares of common stock for potential conversion of these notes into common stock. If the holders of the Company’s convertible note agreements are to exercise the conversion features, the Company could be obligated to issue a significant amount of shares of common stock in accordance to each agreement, subject to conversion rate adjustments.
Delaware Anti-Takeover Law and Provisions of Certificate of Incorporation and By-Laws
Delaware Anti-Takeover Law
We are subject to Section 203 of the Delaware General Corporation Law. Section 203 generally prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless:
| · | prior to the date of the transaction, the Board of Directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; |
| · | upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding specified shares; or |
| · | at or subsequent to the date of the transaction, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3 % of the outstanding voting stock which is not owned by the interested stockholder. |
Section 203 defines a "business combination" to include:
| · | any merger or consolidation involving the corporation and the interested stockholder; |
| · | any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 10% or more of the assets of the corporation to or with the interested stockholder; |
| · | subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; |
| · | subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or |
| · | the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. |
In general, Section 203 defines an "interested stockholder" as any person that is:
| · | the owner of 15% or more of the outstanding voting stock of the corporation; |
| · | an affiliate or associate of the corporation who was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the relevant date; or |
| · | the affiliates and associates of the above. |
Under specific circumstances, Section 203 makes it more difficult for an "interested stockholder" to effect various business combinations with a corporation for a three-year period, although the stockholders may, by adopting an amendment to the corporation's certificate of incorporation or bylaws, elect not to be governed by this section, effective 12 months after adoption.
Our certificate of incorporation and bylaws do not exclude us from the restrictions of Section 203. We anticipate that the provisions of Section 203 might encourage companies interested in acquiring us to negotiate in advance with our Board of Directors since the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder.
Certificate of Incorporation and Bylaws
Provisions of our certificate of incorporation and bylaws to be in effect upon the consummation of this offering may delay or discourage transactions involving an actual or potential change of control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these provisions could adversely affect the price of our common stock. Among other things, our certificate of incorporation and bylaws will:
| · | permit our Board of Directors to issue up to shares of preferred stock, with any rights, preferences and privileges as they may designate; |
| · | provide that all vacancies on our Board of Directors, including as a result of newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum; |
| · | require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent; |
| · | provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide advance notice in writing, and also specify requirements as to the form and content of a stockholder's notice; |
| · | not provide for cumulative voting rights, thereby allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election; and |
| · | provide that special meetings of our stockholders may be called only by the Board of Directors or by such person or persons requested by a majority of the Board of Directors to call such meetings. |
SHARES AVAILABLE FOR FUTURE SALE
We cannot predict what effect, if any, market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock prevailing from time to time. Nevertheless, sales of substantial amounts of common stock, including shares issued upon the exercise of outstanding options or warrants, in the public market, or the perception that such sales could occur, could materially and adversely affect the market price of our common stock and could impair our future ability to raise capital through the sale of our equity or equity-related securities at a time and price that we deem appropriate.
Assuming that all 25,000,000 common shares in this offering are issued and sold, we will have 63,597,008 shares of common stock outstanding. Of the outstanding shares, the shares sold in our initial public offering, subsequent public offering, and this offering will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by our “affiliates”, as that term is defined under Rule 144, may be sold only in compliance with the limitations described below. In addition, as of April 21, 2015 there were 13,404,634 shares issuable upon the exercise of warrants with a weighted average exercise price of $0.51 per share and 8,192,400 shares issuable upon the exercise of stock options with a weighted average exercise price of $0.41 per share. In addition, in connection with the promissory note agreements, the Company is required to reserve approximately 25,900,000 shares of common stock. If the notes are converted at the option of the holders, a significant amount of shares of common stock could be issued in accordance with each agreement, subject to conversion rate adjustments.The resale of such shares, following the exercise of such warrants and options by the holders thereof, has been registered. The remaining outstanding shares of common stock will be deemed “restricted securities” as that term is defined under Rule 144. Restricted securities may be sold in the public market only if they are registered or if they qualify for an exemption from registration, including the exemptions under Rule 144, which we summarize below. The restricted shares held by our affiliates will be available for sale in the public market at various times after the date of this prospectus pursuant to Rule 144.
Rule 144
Rule 144 governs resale of “restricted securities” for the account of any person (other than an issuer), and restricted and unrestricted securities for the account of an “affiliate” of the issuer. Restricted securities generally include any securities acquired directly or indirectly from an issuer or its affiliates which were not issued or sold in connection with a public offering registered under the Securities Act. An affiliate of the issuer is any person who directly or indirectly controls, is controlled by, or is under common control with, the issuer. Affiliates of ours may include its directors, executive officers, and persons directly or indirectly owning 10% or more of the outstanding common stock. Under Rule 144, non-affiliates are able to sell restricted securities pursuant to Rule 144, after six months, subject to certain conditions, including if we are current in our reporting obligations with the Commission and remain current for an additional period of six months, and thereafter after one year, with no volume or reporting obligations.
Under Rule 144, affiliates are able to sell restricted securities pursuant to Rule 144 after six months, subject to certain conditions, including if we are current in our reporting obligations with the SEC and remain current for an additional period of six months, as well as other requirements described below. Resales by our affiliates of restricted and unrestricted common stock are subject to volume limitation, aggregation, broker transaction, notice filing requirements, and requirements concerning publicly available information about our company. The volume limitations provide that a person (or persons who must aggregate their sales) cannot, within any three-month period, sell more than the greater of one percent of the then outstanding shares, or the average weekly reported trading volume during the four calendar weeks preceding each such sale.
Registration Rights
The holders of an aggregate of 17,659,007 shares of our common stock are entitled to rights with respect to the registration of their shares under the Securities Act. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates, immediately upon the effectiveness of the registration statement of which this prospectus is a part. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.
Equity Incentive Plans
We filed a registration statement Amended and Restated 2010 Stock Plan and 2011 Amended and Restated Non-Restricted Stock Plan on Form S-8 under the Securities Act. Accordingly, shares registered under the registration statement are available for sale in the open market subject to Rule 144 volume limitations.
PLAN OF DISTRIBUTION
We are offering up to 25,000,000 shares of our common stock on a self-underwritten “best efforts” basis for aggregate gross proceeds of up to $5 million at an estimated price of $0.20 per share, to be issued in one or more closings. There can be no assurance that the offering will be fully subscribed. Accordingly, we may sell substantially less than $5 million of our shares of common stock, in which case our gross proceeds would be substantially reduced.
We expect to enter into securities purchase or subscription agreements directly with investors in connection with this offering, and we will only sell to investors who have entered into such agreement with us.
This prospectus forms a part of a registration statement that permits our officers and directors to sell the shares directly to the public, with no commission or other remuneration payable to them for any shares they sell. There are no plans or arrangements to enter into any contracts or agreements to sell the shares with a broker or dealer. In offering the securities on our behalf, our officers and directors will rely on the safe harbor from broker/dealer registration set out in Rule 3a4-1 under the Exchange Act, which sets forth those conditions under which a person associated with an issuer may participate in the offering of the issuer’s securities and not be deemed to be a broker/dealer.
There is no requirement to sell any specific number or dollar amount of securities and we may raise substantially less than the $5 million in common stock offered hereby. Our officers will use their best efforts to sell the securities offered. We will pay all expenses incurred in this offering.
The assumed number of shares offered hereby as reflected in this prospectus is based on the last reported sale price of our common stock on April 21, 2015. However, this final public offering price will be a negotiated price and the final number of shares offered hereby will be based on such negotiated offering price.
The offering will close on _______, 2015, 90 days after the effectiveness of the registration statement of which this prospectus is a part, unless all the securities are sold before that date, we extend the offering another 90 days or we otherwise decide to close the offering early or cancel it, in each case in our sole discretion. If we extend the offering, we will provide that information in an amendment to this prospectus. If we close the offering early or cancel it, including during any extended offering period, we may do so without notice to investors, although if we cancel the offering we will promptly return any funds investors may already have paid.
There is no minimum number of shares that we must sell in this offering. Because there is no minimum offering amount required as a condition to closing in this offering, the actual public offering amount and proceeds to us, if any, are not presently determinable and may be substantially less than all of the securities offered hereby. As a result, the actual amount of gross proceeds from the sale of shares, if any, might not be sufficient to cover the expenses of the offering. Funds raised pursuant to this offering will not be held in any escrow account and all funds raised regardless of the amount will be available to us. In the event that we do not raise sufficient capital to implement our planned operations, your entire investment could be lost.
In connection with this offering, we will issue 1 warrant for every share of common stock purchased. Each warrant entitles the holder to purchase one half of one (1/2) share of common stock at an exercise price of $0.30 per share. After the expiration of the 5 year exercise period, warrant holders will have no further rights to exercise such warrants.
The warrants may be exercised only for full shares of common stock. We will not issue fractional shares of common stock or cash in lieu of fractional shares of common stock. Warrant holders do not have any voting or other rights as a stockholder of our company. The exercise price and the number of shares of common stock purchasable upon the exercise of each warrant are subject to adjustment upon the happening of certain events, such as stock dividends, distributions, and splits.
LEGAL MATTERS
Certain legal matters with respect to the shares of common stock offered hereby will be passed upon by Ellenoff Grossman & Schole LLP, New York, New York.
EXPERTS
The financial statements for the years ended December 31, 2014 and 2013, appearing in this Prospectus and Registration Statement have been audited by McGladrey LLP, an independent registered public accounting firm, as stated in their report appearing elsewhere herein, (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's ability to continue as a going concern) and are included in reliance upon such report and upon the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and Exchange Commission (SEC) for our common stock offered in this offering. This prospectus does not contain all of the information set forth in the registration statement. You should refer to the registration statement and its exhibits for additional information. Whenever we make references in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete and you should refer to the exhibits attached to the registration statement for the copies of the actual contract, agreement or other document.
Our fiscal year ends on December 31. We are a reporting company and file annual, quarterly, and current reports, and other information with the SEC. You may read and copy any reports, statements, or other information we file at the SEC’s public reference room at 100 F. Street, N.E., Washington D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our SEC filings are also available to the public on the SEC’s Internet site at http\\www.sec.gov. We maintain a website at www.bostonti.com. Information contained in or accessible through our website is not and should not be considered a part of this prospectus and you should not rely on that information in deciding whether to invest in our common stock, unless that information is also in or incorporated by reference in this prospectus.
INDEX TO FINANCIAL STATEMENTS
| Page |
Audited Financial Statements For the Years Ended December 31, 2014 and 2013: | |
| Report of Independent Registered Public Accounting Firm | |
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| Statements of Changes in Stockholders’ Equity | |
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| Notes to Financial Statements | |
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Audited Financial Statements For the Years Ended December 31, 2013 and 2012: | |
| Report of Independent Registered Public Accounting Firm | |
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| Statements of Changes in Stockholders’ Equity | |
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| Notes to Financial Statements | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Boston Therapeutics, Inc.
Manchester, New Hampshire
We have audited the accompanying balance sheets of Boston Therapeutics, Inc. as of December 31, 2014 and 2013, and the related statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Boston Therapeutics, Inc. as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s limited cash resources, recurring cash used in operations and operating losses raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ McGladrey LLP
Boston, Massachusetts
March 27, 2015
Boston Therapeutics, Inc. |
Balance Sheets |
December 31, 2014 and 2013 |
| | December 31, | | | December 31, | |
| | 2014 | | | 2013 | |
| | | | | | |
Cash and cash equivalents | | $ | 157,278 | | | $ | 3,387,428 | |
| | | - | | | | 99,786 | |
Prepaid expenses and other current assets | | | 89,408 | | | | 153,681 | |
| | | 197,969 | | | | 110,625 | |
| | | 444,655 | | | | 3,751,520 | |
| | | | | | | | |
Property and equipment, net | | | 14,417 | | | | 15,176 | |
| | | 632,143 | | | | 696,429 | |
| | | 69,782 | | | | 69,782 | |
| | | 2,125 | | | | 2,125 | |
| | $ | 1,163,122 | | | $ | 4,535,032 | |
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LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | $ | 410,787 | | | $ | 170,977 | |
Accrued expenses and other current liabilities | | | 278,177 | | | | 720,965 | |
| | | 101,675 | | | | - | |
Total current liabilities | | | 790,639 | | | | 891,942 | |
| | | | | | | | |
Notes payable - related parties | | | 297,820 | | | | 297,820 | |
| | | 1,088,459 | | | | 1,189,762 | |
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COMMITMENTS AND CONTINGENCIES (Note 10) | | | | | | | | |
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Preferred stock, $0.001 par value, 5,000,000 shares authorized, | | | | | | | | |
none issued and outstanding | | | - | | | | - | |
Common stock, $0.001 par value, 200,000,000 shares authorized, | | | | | | | | |
38,512,516 and 37,362,160 shares issued and outstanding | | | | | | | | |
at December 31, 2014 and 2013, respectively | | | 38,512 | | | | 37,362 | |
Additional paid-in capital | | | 12,034,992 | | | | 10,606,810 | |
| | | (11,998,841 | ) | | | (7,298,902 | ) |
Total stockholders’ equity | | | 74,663 | | | | 3,345,270 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 1,163,122 | | | $ | 4,535,032 | |
The accompanying notes are an integral part of these financial statements.
Boston Therapeutics, Inc. |
Statements of Operations |
For the Years Ended December 31, 2014 and 2013 |
| | December 31, | | | December 31, | |
| | 2014 | | | 2013 | |
| | | | | | |
| | $ | 199,582 | | | $ | 323,412 | |
| | | 175,829 | | | | 278,205 | |
| | | 23,753 | | | | 45,207 | |
| | | | | | | | |
| | | | | | | | |
| | | 1,432,669 | | | | 542,492 | |
| | | 320,353 | | | | 329,218 | |
General and administrative | | | 2,945,078 | | | | 3,753,742 | |
| | | 4,698,100 | | | | 4,625,452 | |
| | | (4,674,347 | ) | | | (4,580,245 | ) |
| | | | | | | | |
| | | (20,009 | ) | | | (19,692 | ) |
| | | (4,749 | ) | | | 1,505 | |
| | | (834 | ) | | | (3,071 | ) |
| | $ | (4,699,939 | ) | | $ | (4,601,503 | ) |
| | | | | | | | |
| | | | | | | | |
Net loss per share- basic and diluted | | $ | (0.12 | ) | | $ | (0.18 | ) |
| | | | | | | | |
Weighted average shares outstanding basic and diluted | | | 38,192,363 | | | | 25,370,626 | |
The accompanying notes are an integral part of these financial statements.
Boston Therapeutics, Inc. |
Statement of Changes in Stockholders' Equity |
For the Years Ended December 31, 2014 and 2013 |
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Balance at December 31, 2012 | | | 18,745,706 | | | $ | 18,746 | | | $ | 3,375,116 | | | $ | (2,697,399 | ) | | $ | 696,463 | |
| | | | | | | | | | | | | | | | | | | | |
Issuance of common stock, net of issuance costs | | | 18,312,341 | | | | 18,312 | | | | 3,551,056 | | | | - | | | | 3,569,368 | |
Issuance of common stock warrants | | | - | | | | - | | | | 1,616,062 | | | | - | | | | 1,616,062 | |
Issuance of common stock in exchange | | | | | | | | | | | | | | | | | |
| | | 291,009 | | | | 291 | | | | 226,775 | | | | - | | | | 227,066 | |
Issuance of common stock warrants in | | | | | | | | | | | | | | | | | | | | |
exchange for consulting services | | | - | | | | - | | | | 282,901 | | | | - | | | | 282,901 | |
Cashless exercise of common stock options | | | 13,104 | | | | 13 | | | | (13 | ) | | | - | | | | - | |
| | | - | | | | - | | | | 1,554,913 | | | | - | | | | 1,554,913 | |
| | | - | | | | - | | | | - | | | | (4,601,503 | ) | | | (4,601,503 | ) |
Balance at December 31, 2013 | | | 37,362,160 | | | | 37,362 | | | | 10,606,810 | | | | (7,298,902 | ) | | | 3,345,270 | |
| | | | | | | | | | | | | | | | | | | | |
Issuance of common stock, net of issuance costs | | | 833,340 | | | | 833 | | | | 373,916 | | | | - | | | | 374,749 | |
Issuance of common stock warrants | | | - | | | | - | | | | 161,087 | | | | - | | | | 161,087 | |
Issuance of common stock in exchange | | | | | | | | | | | | | | | | | |
| | | 233,000 | | | | 233 | | | | 130,758 | | | | - | | | | 130,991 | |
Exercise of common stock options | | | 5,000 | | | | 5 | | | | 495 | | | | - | | | | 500 | |
Cashless exercise of common stock options | | | 79,016 | | | | 79 | | | | (79 | ) | | | - | | | | - | |
| | | - | | | | - | | | | 762,005 | | | | - | | | | 762,005 | |
| | | - | | | | - | | | | - | | | | (4,699,939 | ) | | | (4,699,939 | ) |
Balance at December 31, 2014 | | | 38,512,516 | | | $ | 38,512 | | | $ | 12,034,992 | | | $ | (11,998,841 | ) | | $ | 74,663 | |
The accompanying notes are an integral part of these financial statements.
Boston Therapeutics, Inc. |
Statements of Cash Flows |
For the Years Ended December 31, 2014 and 2013 |
| | December 31, 2014 | | December 31, 2013 | |
Cash flows from operating activities: | | | | | |
| | | | | | | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization | | | | | | | | |
Loss on disposal of property and equipment | | | | | | | | |
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Issuance of common stock and common stock warrants for consulting services | | | | | | | | |
Issuance of common stock warrants | | | | | | | | |
Changes in operating assets and liabilities: | | | | | | | | |
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Prepaid expenses and other current assets | | | | | | | | |
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Net cash used in operating activities | | | | | | | | |
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Cash flows from investing activities: | | | | | | | | |
Purchase of property and equipment | | | | | | | | |
Net cash used in investing activities | | | | | | | | |
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Cash flows from financing activities: | | | | | | | | |
Proceeds from issuance of common stock upon option exercises | | | | | | | | |
Proceeds from issuance of common stock and common stock warrants (net of issuance costs) | | | | | | | | |
Net cash provided by financing activities | | | | | | | | |
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Net (decrease) increase in cash and cash equivalents | | | | | | | | |
Cash and cash equivalents, beginning of year | | | | | | | | |
Cash and cash equivalents, end of year | | | | | | | | |
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Supplemental disclosure of cash flow information | | | | | | | | |
Cash paid during the year for: | | | | | | | | |
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Non-cash financing activities: | | | | | | | | |
Issuance of common stock for stock subscription received in 2013 | | | | | | | | |
Value of common stock issued to settle accrued liabilities | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2014 and 2013
1. GENERAL ORGANIZATION AND BUSINESS
Boston Therapeutics, Inc. (the “Company”) was formed as a Delaware corporation on August 24, 2009, under the name Avanyx Therapeutics, Inc. On November 10, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Boston Therapeutics, Inc., a New Hampshire corporation (“BTI”) providing for the merger of BTI into the Company with the Company being the surviving entity (the “Merger”), the issuance by the Company of 4,000,000 shares of common stock to the stockholders of BTI in exchange for 100% of the outstanding common stock of BTI, and the change of the Company’s name to Boston Therapeutics, Inc. David Platt, the Company’s Chief Executive Officer, is a founder of BTI and was a director and minority stockholder of BTI at the time of the Merger. Dr. Platt received 400,000 shares of the Company’s common stock in connection with the Merger. Kenneth A. Tassey, Jr., the Company’s former President, was the Chief Executive Officer, President and principal stockholder of BTI at the time of the Merger. Mr. Tassey received 3,200,000 shares of our common stock in connection with the Merger.
The Company’s primary business is the development, manufacture and commercialization of therapeutic drugs with a focus on complex carbohydrate chemistry to address unmet medical needs in diabetes and inflammatory diseases. We have brought one product, SUGARDOWN®, to market and have begun to make initial sales. We are currently focused on the development of two additional drug products: BTI-320, a non-systemic, non-toxic, tablet for reduction of post-meal blood glucose in people living with diabetes that is fully developed, and IPOXYN, an injectable anti-necrosis, anti-hypoxia drug that we are currently developing.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has limited cash resources, recurring cash used in operations and operating losses history. As shown in the accompanying financial statements, the Company has an accumulated deficit of approximately $12 million as of December 31, 2014 and used cash in operations of approximately $3.5 million during the year ended December 31, 2014.
The Company has incurred recurring operating losses since inception as it has worked to bring its SUGARDOWN® product to market and develop BTI-320 and IPOXYN. Management expects such operating losses will continue until such time that substantial revenues are received from SUGARDOWN® or the regulatory and clinical development of BTI-320 or IPOXYN is completed. The Company has $157,000 cash on hand at December 31, 2014. In March 2015, the Company entered into four different convertible promissory note agreements with an aggregate proceeds balance of $432,000, net of discounts and fees, as referenced in Note 11. Management anticipates that our cash resources will be sufficient to fund our planned operations through the second quarter of 2015 as a result of additional cost cutting measures surrounding the use of consultants and payroll associated costs reduced by the Company during the fourth quarter of fiscal 2014 and into fiscal 2015. Management plans to seek additional capital through private placements and public offerings of the Company’s common stock. In addition, management may seek to raise additional capital through public or private debt or equity financings in order to fund its operations. 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 curtail or cease operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES
Basis of Presentation
The financial statements have been prepared in conformity with accounting principles generally accepting in the United States of America (“US GAAP”).
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.
Segment Information
Operating segments are identified as components of an enterprise about which separate, discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business as one operating segment.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2014 and 2013
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES - continued
Cash and Cash Equivalents
For purposes of reporting within the statement of cash flows, the Company considers all cash on hand, cash accounts not subject to withdrawal restrictions or penalties, and all highly liquid investments with original maturities of 90 days or less at the time of acquisition to be cash equivalents. The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation.
Revenue Recognition
The Company generates revenues from sales of SUGARDOWN®. Revenue is recognized when there is persuasive evidence that an arrangement exists, the price is fixed and determinable, the product is shipped in accordance with the customers’ Free On Board (FOB) shipping point terms and collectability is reasonably assured. In practice, the Company has not experienced or granted significant returns of product. Shipping fees charged to customers are included in revenue and shipping costs are included in costs of sales.
As disclosed in Note 7, Advance Pharmaceutical Company Ltd., a related party, accounted for 91% and 97%, during the years ended December 31, 2014 and 2013, respectively.
Accounts Receivable
Accounts receivable is stated at the amount management expects to collect from outstanding balances. Management establishes a reserve for doubtful accounts based on its assessment of the current status of individual accounts. Balances that remain outstanding after management has used reasonable collection efforts are written off against the allowance. There were no allowances for doubtful accounts as of December 31, 2014 and 2013. At December 31, 2014, there were no accounts receivable. At December 31, 2013, the Company had one customer that accounted for 100% of its accounts receivable.
Inventory
Inventory consists of raw materials, work-in-process 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.
Property and Equipment
Property and equipment is depreciated using the straight-line method over the following estimated useful lives:
Asset Category | Estimated Useful Life |
Office Furniture and Equipment | |
Computer Equipment and Software | |
The Company begins to depreciate assets when they are placed in service. The costs of repairs and maintenance are expensed as incurred; major renewals and betterments are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the statement of operations. For the years ended December 31, 2014 and 2013, the Company recorded depreciation expense of $6,662 and $2,818, respectively.
Intangible Assets
Intangible assets consist of identifiable finite-lived assets acquired in business acquisitions. Acquired intangible assets are recorded at fair value on the date of acquisition and are amortized over their economic useful lives on a straight line basis.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2014 and 2013
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES - continued
Goodwill
The Company follows the guidance of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350, Goodwill and Other Intangible Assets. Under ASC 350, goodwill and certain other intangible assets with indefinite lives are not amortized, but instead are reviewed for impairment at least annually.
As the Company operates its business in one operating segment and one reporting unit, the Company’s goodwill is assessed at the Company level for impairment in the fourth quarter of each year or more frequently if events or changes in circumstances indicate that impairment may exist. The Company has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step impairment test. If the Company’s qualitative assessment reveals that goodwill impairment is more likely than not, the Company performs the two-step impairment test. Alternatively, the Company may bypass the qualitative test and initiate goodwill impairment testing with the first step of the two-step goodwill impairment test.
During the first step of the goodwill impairment test, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, then the Company concludes that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test to measure possible goodwill impairment loss. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.
The Company performed its impairment review of goodwill for the years ended December 31, 2014 and 2013, and concluded that no impairment existed.
Impairment of Long-lived Assets
The Company reviews long-lived assets, which include the Company’s intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. Future undiscounted cash flows of the underlying assets are compared to the assets’ carrying values. Adjustments to fair value are made if the sum of expected future undiscounted cash flows is less than book value. To date, no adjustments for impairment have been made.
Loss per Share
Basic net loss per share is computed based on the net loss for the period divided by the weighted average actual shares outstanding during the period. Diluted net loss per share is computed based on the net loss for the period divided by the weighted average number of common shares and common equivalent shares outstanding during each period unless the effect of such common equivalent shares would be anti-dilutive. Common stock equivalents represent the dilutive effect of the assumed exercise of certain outstanding stock options using the treasury stock method. The weighted average number of common shares for the year ended December 31, 2014 did not include 6,483,400 and 12,516,669 options and warrants, respectively, because of their anti-dilutive effect. The weighted average number of common shares for the year ended December 31, 2013 did not include 5,741,400 and 11,974,999 options and warrants, respectively, because of their anti-dilutive effect.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or be settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion of the gross deferred tax asset will not be realized. The Company records interest and penalties related to income taxes as a component of provision for income taxes. The Company did not recognize any interest and penalty expense for the years ended December 31, 2014 and 2013.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2014 and 2013
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES - continued
Advertising Costs
Advertising costs are expensed as incurred and are reported as a component of selling, general and administrative expenses in the selling and marketing expenses in the statements of operations. The Company did not incur any advertising costs for the year ended December 31, 2014, primarily due to its marketing agreement with Benchworks who bears the expense for marketing initiatives. The Company incurred advertising costs of $25,068 for the year ended December 31, 2013.
Research and Development Costs
Research and development expenditures are charged to the statement of operations as incurred. Such costs include proprietary research and development activities, purchased research and development, and expenses associated with research and development contracts, whether performed by the Company or contracted with independent third parties.
Fair Value of Financial Instruments
Fair values determined by Level 1 inputs utilize observable data such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, which require the reporting entity to develop its own assumptions. The Company’s financial instruments consist of cash and cash equivalents, accounts payable, accrued expenses, and notes payable. The carrying value of cash and cash equivalents, 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 December 31, 2014 and 2013, evaluated using level 2 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.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are principally cash and cash equivalents. The Company places its cash and cash equivalents in highly rated financial institutions. The Company maintains cash and cash equivalent balances with financial institutions that occasionally exceed federally insured limits. The Company has not experienced any losses related to these balances, and management believes its credit risk to be minimal.
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 requisite service period, which is generally the vesting period of the award.
The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by the stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. The Company has a limited history of market prices of its common stock and as such volatility is estimated using historical volatilities of similar public entities. The expected life of the awards is estimated based on the simplified method. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our awards. The dividend yield assumption is based on history and expectation of paying no dividends. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense is recognized in the financial statements on a straight-line basis over the requisite service period, based on awards that are ultimately expected to vest.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2014 and 2013
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES - continued
Stock-Based Compensation - continued
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.
Recently Adopted Accounting Pronouncements
In July 2013, the FASB issued ASU 2013-11, “Income Taxes, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). ASU 2013-11 states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement is available under the tax law of the applicable taxing jurisdiction as of the balance sheet reporting date. The adoption of ASU 2013-11 in 2014 did not affect the Company's results of operations, cash flows, or financial position.
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 Standard 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 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.
3. 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 December 31, 2014 and 2013, net of inventory reserves, were as follows:
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 Financial Statements
For the Years Ended December 31, 2014 and 2013
4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following table represents the major components of accrued expenses and other current liabilities at December 31, 2014 and 2013:
| | | 2014 | | | 2013 | |
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| Other current liabilities | | | | | | | | |
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5. 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 September 7, 2013.
Preferred Stock
No shares of preferred stock have been issued and the terms of such preferred stock have not been designated by the Board of Directors.
Common Stock
On March 14, 2013, the Company issued 500,000 shares of its common stock at a price per share of $0.50 and issued a warrant to purchase 250,000 additional shares for $1.00 per share for gross proceeds of $250,000 to CJY Holdings Limited, a company controlled by Conroy Cheng's brother Cheng Chi Him. The warrant is exercisable immediately and has a five year term. The Company has evaluated these warrants for proper classification based on terms of the warrant agreement and has determined that equity classification is appropriate. The Company estimated the relative fair value of the warrant to be $35,457 using the Black Scholes model, which has been recorded as a component of permanent equity in additional paid in capital.
On April 29, 2013, the Company issued a warrant to purchase 100,000 of common stock for $1.00 per share in exchange for consulting services rendered. The warrant associated with the consulting agreement is exercisable immediately and has a five year term. The Company has evaluated these warrants for proper classification based on terms of the warrant agreement and has determined that equity classification is appropriate. The Company estimated the fair value of the warrant to be $19,865 using the Black Scholes model, which has been recorded as a component of permanent equity in additional paid in capital.
On April 30, 2013, the Company issued 52,000 shares of its common stock with a fair value of $28,080 in exchange for consulting services rendered during February through April 2013 in connection with two separate consulting agreements.
On June 28, 2013, the Company issued 40,000 shares of its common stock with a fair value of $14,000 in exchange for consulting services rendered during May and June in connection with two separate consulting agreements.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2014 and 2013
5. STOCKHOLDERS’ EQUITY - continued
Common Stock - continued
Between July and September 2013, the Company conducted four closings of its private placement of securities with accredited investors pursuant to which the investors purchased in aggregate 17,659,007 shares of the Company’s common stock and warrants to purchase an additional 8,829,484 shares of common stock at an exercise price of $0.50 per share (the Investor Warrants) for total gross proceeds of $5,297,698. In addition, the Company issued warrants to the Placement Agent in exchange for services to purchase in aggregate 1,808,849 shares for $0.30 per share (the Placement Agent Warrants). The Investor Warrants and Placement Agent Warrants are currently exercisable and have a five year term. The Company has evaluated these warrants for proper classification based on terms of the warrant agreements and has determined that equity classification is appropriate. The Company estimated the relative fair value of the Investor Warrants associated with the investor subscription agreements and Placement Agent Warrants as $1,279,093 and $288,101, respectively, using the Black Scholes model, which has been recorded as a component of permanent equity in additional paid in capital. In addition, issuance costs paid by the Company in connection with the private placement offering totaled $408,270. CJY Holdings Limited purchased 6,666,660 shares and 3,333,320 Investor Warrants included in this Private Placement on the same terms as the other participants purchasing shares in the transaction.
During September 2013, the Company issued 52,000 shares of its common stock with a fair value of $22,920 in exchange for consulting services rendered during July through September 2013 in connection with two separate consulting agreements.
During October 2013, the Company conducted an additional closing of its private placement of securities to related parties and affiliates resulting in the purchase of 153,334 shares of the Company’s common stock and warrants to purchase 76,666 additional shares of common stock at an exercise price of $0.50 per share for total gross proceeds of $46,000. The warrant associated with the subscription agreement is exercisable immediately and has a five year term. The Company estimated the relative fair value of the warrants as $13,411 using the Black Scholes model which has been recorded as a component of permanent equity in additional paid in capital.
During October 2013, the Company issued 43,860 shares of its common stock with a fair value of $61,404 in exchange for consulting services rendered during August through October 2013 in connection with a consulting agreement.
During October 2013, the Company entered into a consulting agreement under which it is required to pay the consultant a monthly fee consisting of $10,000 paid in cash and a warrant to purchase 265,000 shares of common stock at an exercise price of $0.50 per share. The warrant associated with the consulting agreement is exercisable immediately and has a five year term. The Company estimated the fair value of the warrant at $263,036 using the Black Scholes model which has been recorded as a component of permanent equity in additional paid in capital.
On November 18, 2013, the Company issued 22,000 shares of its common stock with a fair value of $32,120 in exchange for consulting services rendered during November 2013 in connection with a consulting agreement.
During December 2013, the Company issued 35,316 shares of its common stock with a fair value of $49,292 in exchange for consulting services rendered during September through December 2013 in connection with two separate consulting agreements.
During the year ended December 31, 2013, the Company received $270,000 of cash proceeds in connection with a potential private placement financing expected to be executed during 2014. As of December 31, 2013, the terms of the private placement were not secured and the Company had recorded the $270,000 of proceeds as a stock subscription in accrued expenses and other current liabilities within the accompanying balance sheet. Subsequent to the year ended December 31, 2013, the Company returned $20,000 of cash proceeds as the terms of the private placement were not secured.
During the three months ended March 31, 2014, the Company issued 99,000 shares of its common stock with a fair value of $74,160 in exchange for consulting services rendered during those periods in connection with three separate consulting agreements.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2014 and 2013
5. STOCKHOLDERS’ EQUITY - continued
Common Stock - continued
On March 31, 2014, the Company issued 833,340 shares of common stock at a price per share of $0.60 and issued warrants to purchase 416,670 additional shares of common stock with an exercise price of $1.00 per share for gross proceeds of $500,000. The Company had received $250,000 of these proceeds during the fourth quarter of 2013 which was recorded as a stock subscription in accrued expenses and other current liabilities in the accompanying balance sheet as of December 31, 2013. The warrants are exercisable immediately and have a five year term. The Company has evaluated these warrants for proper classification based on terms of the warrant agreement and has determined that equity classification is appropriate. The Company estimated the relative fair value of the warrant to be $125,251 using the Black Scholes model, which has been recorded as a component of permanent equity in additional paid in capital.
During the three months ended June 30, 2014, the Company issued 36,000 shares of its common stock with a fair value of $21,540 in exchange for consulting services rendered during those periods in connection with two separate consulting agreements.
In August 2014, the Company issued warrants to purchase 125,000 of common stock with an exercise price of $0.60 to the March 2014 common stock investors in lieu of their registration rights. The warrants are exercisable immediately and have a five year term. The Company has evaluated these warrants for proper classification based on terms of the warrant agreement to be $35,836 using the Black Scholes model, which has been recorded as a component of permanent equity in additional paid-in capital.
During the three months ended September 30, 2014, the Company issued 54,500 shares of its common stock with a fair value of $21,715 in exchange for consulting services rendered during those periods in connection with seven separate consulting agreements.
During the three months ended December 31, 2014, the Company issued 43,500 shares of its common stock with a fair value of $13,575 in exchange for consulting services rendered during those periods in connection with three separate consulting agreements.
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 December 31, 2014, the Company had 12,516,669 warrants outstanding which are all classified as equity instruments and are fully exercisable as of December 31, 2014. The following table summarizes outstanding and exercisable common stock warrants as of December 31, 2014:
Offering | | Number of Shares Issuable | | | Exercise Price | | | Expiration Date | |
March 2012 Private Placement | | | | | | | | | |
November 2012 Private Placement | | | | | | | | | |
February 2013 Issued to Consultant | | | | | | | | | |
February 2013 Private Placement | | | | | | | | | |
July 2013 Private Placement | | | | | | | | | |
August 2013 Private Placement | | | | | | | | | |
August 2013 Private Placement | | | | | | | | | |
August 2013 Issued to Placement Agent | | | | | | | | | |
September 2013 Private Placement | | | | | | | | | |
October 2013 Private Placement | | | | | | | | | |
October 2013 Issued to Consultant | | | | | | | | | |
March 2014 Private Placement | | | | | | | | | |
August 2014 Private Placement | | | | | | | | | |
| | | | | | | | | |
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2014 and 2013
6. 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 December 31, 2014 and December 31, 2013, there were 1,328,400 and 578,400 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 December 31, 2014 and December 31, 2013, there were 5,155,000 and 5,163,000 options outstanding under the 2011 Plan, respectively
Under the terms of the stock plans, the Board of Directors shall specify the exercise price and vesting period of each stock option on the grant date. Vesting of the options is typically three to four years and the options typically expire in five to seven years.
The fair value of stock options granted and revaluation of non-employee consultant options for years ended December 31, 2014 and 2013 was calculated with the following assumptions:
The weighted-average fair value of stock options granted during the years ended December 31, 2014 and 2013, under the Black-Scholes option pricing model was $0.68 and $0.21 per share, respectively. For the years ended December 31, 2014 and 2013, the Company recorded stock-based compensation expense of $762,005 and $1,554,913, respectively, in connection with share-based payment awards. As of December 31, 2014, there was approximately $171,000 of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized over a weighted-average period of 2.5 years.
The following table summarizes the Company’s stock option activity during the years ended December 31, 2014 and 2013:
| | | Shares | | | Exercise Price per Share | | | Weighted Average Exercise Price per Share | |
| Outstanding as of December 31, 2012 | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Options forfeited/cancelled | | | | | | | | | | | | |
| Outstanding as of December 31, 2013 | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Options forfeited/cancelled | | | | | | | | | | | | |
| Outstanding as of December 31, 2014 | | | | | | | | | | | | |
During the year ended December 31, 2014, the Company received a notice of cashless stock options exercise in which the holder elected to exercise 133,280 common stock options. The stock options which were exercised had an exercise price of $0.57 per share. Based upon the Company’s stock price on the date of exercise, as well as the cashless exercise formula, 79,016 shares were issued to the holder during the year ended December 31, 2014 with the remaining 54,264 options forfeited. In addition, the Company also received $500 in proceeds in connection with the exercise of 5,000 common stock options with an exercise price of $0.10 per share.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2014 and 2013
6. STOCK OPTION PLAN AND STOCK-BASED COMPENSATION - continued
During the year ended December 31, 2013, the Company received a notice of cashless stock options exercise in which the holder elected to exercise 20,000 vested options. The stock options which were exercised had an exercise price of $0.50 per share. Based upon the Company’s stock price on the date of exercise, as well as the cashless exercise formula, 13,104 shares were issued to the holder with the remaining 6,896 stock options forfeited during the year ended December 31, 2013.
The following table summarizes information about stock options that are vested or expected to vest at December 31, 2014:
Vested or Expected to Vest | | | Exercisable Options | |
| | | | | | Weighted | | | Weighted | | | | | | | | | Weighted | | | Weighted | | | | |
| | | | | | Average | | | Average | | | | | | | | | Average | | | Average | | | | |
| | | | | | Exercise | | | Remaining | | | Aggregate | | | | | | Exercise | | | Remaining | | | Aggregate | |
Exercise | | | Number of | | | Price Per | | | Contractual | | | Intrinsic | | | Number of | | | Price | | | Contractual | | | Intrinsic | |
Price | | | Options | | | Share | | | Life (Years) | | | Value | | | Options | | | Per Share | | | Life (Years) | | | Value | |
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The following table sets forth the status of the Company’s non-vested stock options as of December 31, 2014:
| | | Number of Options | | | Weighted-Average Grant-Date Fair Value | |
| Non-vested as of December 31, 2012 | | | | | | | | |
| | | | | | | | | |
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| Non-vested as of December 31, 2013 | | | | | | | | |
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| Non-vested as of December 31, 2014 | | | | | | | | |
The weighted-average remaining contractual life for options exercisable at December 31, 2014 is 3.56 years. At December 31, 2014 the Company has 12,247,880 and 6,171,600 options available for grant under the 2011 Plan and 2010 Plan, respectively.
The aggregate intrinsic value for fully vested, exercisable options was $1,518,880 and $5,061,256 at December 31, 2014 and 2013, respectively. The aggregate intrinsic value of options exercised during the years ended December 31, 2014 and 2013 was $71,083 and $12,449, respectively. The actual tax benefit realized from stock option exercises during the years ended December 31, 2014 and 2013 were $45,996 and $19,000, respectively.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2014 and 2013
7. RELATED PARTY TRANSACTIONS
Through December 31, 2011, Dr. 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 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. On August 6, 2012, the outstanding notes of $297,820 were amended to extend the maturity dates to June 29, 2014. On August 2, 2013, the outstanding notes of $297,820 were amended to extend the maturity dates to June 29, 2015. Effective June 30, 2014, the outstanding notes of $297,820 were amended to extend the maturity dates to June 30, 2016. As of December 31, 2014 and 2013, $82,760 and $63,447, respectively, of accrued interest had been included in accrued expenses and other current liabilities on 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. Revenue generated pursuant to the Agreement for the years ended December 31, 2014 and 2013 were $182,000 and $315,000, respectively.
On March 14, 2013 the Company issued 500,000 shares of its common stock at a price per share of $0.50 and issued a warrant to purchase 250,000 additional shares for $1.00 per share for gross proceeds of $250,000 to CJY Holdings Limited ("CJY"). The warrant is exercisable immediately and has a five year term. In July 2013 CJY Holdings Limited purchased 6,666,660 shares of the Company’s common stock and warrants to purchase an aggregate of 3,333,320 shares of the Company’s common stock for an aggregate purchase price of $2,000,000 in the private placement conducted by the Company between July 2013 and September 2013 discussed in Note 5. The warrants are exercisable immediately over a five year term with an exercise price of $0.50 per share. CJY is an entity that is controlled by the sibling of our Director Conroy Chi-Heng Cheng.
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 recorded in the year ended December 31, 2013 and $63,296 was recorded 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 voted to rescind the requirement that Dr. Platt reimburse the Company the entire $182,697. The Board determined that interest should be charged to Dr. Platt from the time he received the funds in July 2014, to the date of the board meeting and that this amount would be offset against interest the Company owes Dr. Platt. The remaining amount would be considered settled in full by the Company.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2014 and 2013
8. | INTANGIBLE ASSETS |
| |
| The SUGARDOWN® technology and patent applications, which were obtained through the acquisition of BTI in 2010, are being amortized on a straight-line basis over their estimated useful lives of 14 years. |
| |
| Intangible assets consist of the following as of December 31: |
| |
| | | 2014 | | | 2013 | |
| SUGARDOWN® technology and patent applications | | | | | | | | |
| Less accumulated amortization | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Amortization expense for each of the years ended December 31, 2014 and 2013 was $64,286 and $64,285, respectively. | | | | | | | | |
| | | | | | | | | |
| The estimated remaining amortization expense related to intangible assets with finite lives for each of the five succeeding years and thereafter is as follows: | |
9. | PROVISION FOR INCOME TAXES | | | | | | |
| | | | | | | |
| During the years ended December 31, 2014 and 2013, no provision for income taxes was recorded as the Company generated net operating losses of $3,965,123 and $2,680,473, respectively. | |
| | | | | | | |
| A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows: | | | | | | |
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| | | 2014 | | | 2013 | |
| Net operating loss carryforwards | | | | | | | | |
| State taxes, net of federal benefit | | | | | | | | |
| Federal research and development tax credit | | | | | | | | |
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| Change in deferred tax asset valuation allowance | | | | | | | | |
| Effective income tax rate | | | | | | | | |
| Net deferred tax assets as of December 31, 2014 and 2013 consisted of the following: | | | | | | |
| | | 2014 | | | 2013 | |
| Net operating loss carryforwards | | $ | 3,326,788 | | | $ | 1,781,334 | |
| | | | 72,685 | | | | 12,499 | |
| Non-qualified stock options | | | 1,006,472 | | | | 857,613 | |
| Other temporary differences | | | 194,895 | | | | 164,379 | |
| Gross deferred tax assets | | | 4,600,840 | | | | 2,815,825 | |
| | | | (4,600,840 | ) | | | (2,815,825 | ) |
| | | $ | - | | | $ | - | |
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| As of December 31, 2014, the Company had net operating loss carryforwards for federal and state income tax purposes of $8,398,858, which begin to expire in years 2029 and 2019, respectively. The Company also has available research and development tax credit carryforwards for federal income tax purposes of $72,685, which begin to expire in year 2032. | |
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2014 and 2013
9. PROVISION FOR INCOME TAXES - continued
Pursuant to the Internal Revenue Code Section 382 (“Section 382”), certain ownership changes may subject the net operating loss carryforwards (“carryforwards”) and research and development tax credit carryforwards to annual limitations which could reduce or defer the carryforwards. Section 382 imposes limitations on a corporation’s ability to utilize carryforwards if it experiences an ownership change. An ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. In the event of an ownership change, utilization of the carryforwards would be subject to an annual limitation under Section 382 determined by multiplying the value of its stock at the time of the ownership change by the applicable long-term tax-exempt rate. Any unused annual limitation may be carried over to later years. The imposition of this limitation on its ability to use the carryforwards to offset future taxable income could cause the Company to pay U.S. federal income taxes earlier than if such limitation were not in effect and could cause such carryforwards to expire unused, reducing or eliminating the benefit of such carryforwards. The Company has not completed a Section 382 study to determine if there have been one or more ownership changes due to the costs associated with such a study. Until a study is completed and the extent of the limitations, if any, is able to be determined, no additional amounts have been written off or are being presented as an uncertain tax position.
The Company provided a full valuation allowance for deferred tax assets generated since, based on the weight of available evidence; it is more likely than not that these benefits will not be realized. During the year ended December 31, 2014, the Company increased its valuation allowance by $1,785,015 due to the continued likelihood that realization of any future benefit from deductible temporary differences and net operating loss carryforwards cannot be sufficiently assured at December 31, 2014. Management reevaluates the positive and negative evidence at each reporting period.
The Company applies the provisions of ASC 740-10, Income Taxes. The Company has not recognized any liability for unrecognized tax benefits and does not believe there is any uncertainty with respect to its tax position. The Company’s policy with respect to unrecognized tax benefits is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending income tax examinations. The Company’s tax years are still open under statute from 2012 to the present. Earlier years may be examined to the extent that tax credit or net operating loss carryforwards are used in future periods. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision.
10. COMMITMENTS AND CONTINGENCIES
Leases
The Company entered into a three year lease agreement for their office lease facility commencing July 1, 2012, with escalating rental payments. On February 21, 2013, the Company amended the lease agreement to extend the lease through March 2018 and increase rental space. The effects of variable rent disbursements have been expensed on a straight-line basis over the life of the lease. The Company recognized rent expense of $57,524 and $73,752 during the years ended December 31, 2014 and 2013, respectively. As of December 31, 2014 and 2013, there was $22,810 and $25,381, respectively, of deferred rent included in accrued expenses and other current liabilities in the accompanying balance sheets.
Future minimum lease payments under all non-cancelable operating leases as of December 31, 2014, are as follows:
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2014 and 2013
10. COMMITMENTS AND CONTINGENCIES - continued
Marketing Agreement
On May 14, 2014, we 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, we have 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 is responsible and bears the expense for marketing and commercializing SUGARDOWN®, including the creation and payment for marketing, creative and promotional materials. The agreement defines certain minimum net sales levels that Benchworks must achieve to maintain exclusivity; and the agreement also provides 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.
11. SUBSEQUENT EVENTS
The Company has evaluated events and transactions that occurred from December 31, 2014 through March 27, 2015, the date these financial statements were issued, for possible disclosure and recognition in the financial statements. Except as discussed below, the Company did not have any material subsequent events that impact its financial statements or disclosures.
In January 2015, the Company issued 43,992 shares of common stock resulting from the cashless exercise of 92,000 placement agent warrants with an exercise price of $0.30. The remaining 48,008 common stock warrants were cancelled due to the cashless exercise.
In February 2015, the Company issued 30,000 shares of its common stock with a fair value of $9,900 in exchange for consulting services rendered during January and February 2015 in connection with a consulting agreement.
On March 12, 2015, the Company entered into a $225,000 convertible note agreement for $200,000 in net proceeds after discounts and fees. The note has an eleven month term with an annual interest rate of 10%. In connection with this convertible note, the Company issued a warrant to purchase 625,000 shares of the Company’s common stock. The warrant is immediately exercisable at an exercise price of $0.30 per share and expires in March 2020. The note is convertible into common stock at the Lender’s option pursuant to the conversion terms of the note agreement.
On March 13, 2015, the Company entered into a $100,000 convertible promissory note agreement for $94,000 in net proceeds after discounts and fees. The note has a twelve month term with an annual interest rate of 10%. Pursuant to the securities purchase agreement, the lender is obligated to enter into an additional convertible promissory note in the principal amount of $100,000 in May 2015 with an issuance discount of $10,000, unless the closing price of the Company’s common stock is below 50% of the closing price on the issuance date of March 13, 2015, in which case the lender may in its discretion determine not to fund all or any portion of the second convertible promissory note agreement. The promissory note is convertible into common stock at the Lender’s option at any time on or after June 12, 2015, pursuant to the conversion terms of the note.
On March 18, 2015, the Company entered into a $75,000 convertible promissory note agreement for $67,500 in net proceeds after issuance discounts. The promissory note has a two year term with an annual interest rate of 12%. The promissory note is convertible into common stock at the Lender’s option any time pursuant to the conversion terms of the note.
On March 20, 2015, the Company entered into a $79,000 convertible promissory note agreement for $70,500 in net proceeds after fees. The promissory note matures in December 2015 with an annual interest rate of 8%. The promissory note is convertible into common stock at the Lender’s option any time on or after September 20, 2015 pursuant to the conversion terms of the note.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Boston Therapeutics, Inc.
Manchester, New Hampshire
We have audited the accompanying balance sheets of Boston Therapeutics, Inc. as of December 31, 2013 and 2012, and the related statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Boston Therapeutics, Inc. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s limited resources and operating losses raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ McGladrey LLP
Boston, Massachusetts
March 14, 2014
Boston Therapeutics, Inc.
Balance Sheets
December 31, 2013 and 2012
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| | December 31, 2013 | | | December 31, 2012 | |
ASSETS | | | | | | |
Cash and cash equivalents | | | | | | | | |
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Prepaid expenses and other current assets | | | | | | | | |
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Property and equipment, net | | | | | | | | |
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LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
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Accrued expenses and other current liabilities | | | | | | | | |
Total current liabilities | | | | | | | | |
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Notes payable - related parties | | | | | | | | |
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COMMITMENTS AND CONTINGENCIES (Note 10) | | | | | | | | |
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Preferred stock, $0.001 par value, 5,000,000 shares authorized, | | | | | | | | |
none issued and outstanding | | | | | | | | |
Common stock, $0.001 par value, 200,000,000 and 100,000,000 shares authorized, | | | | | | | | |
37,362,160 and 18,745,706 shares issued and outstanding | | | | | | | | |
at December 31, 2013 and 2012, respectively | | | | | | | | |
Additional paid-in capital | | | | | | | | |
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Total stockholders’ equity | | | | | | | | |
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Total liabilities and stockholders’ equity | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
Boston Therapeutics, Inc.
Statements of Operations |
For the Years Ended December 31, 2013 and 2012 |
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| | December 31, 2013 | | | December 31, 2012 | |
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General and administrative | | | | | | | | |
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Net loss per share- basic and diluted | | | | | | | | |
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Weighted average shares outstanding basic and diluted | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
Boston Therapeutics, Inc.
Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 2013 and 2012
| | | | | Additional | | | Accumulated | | | | |
| | Common Stock | | | Paid-in | | | Earnings | | | | |
| | Shares | | | Amount | | | Capital | | | (Deficit) | | | Total | |
Balance at December 31, 2011 | | | 16,223,206 | | | $ | 16,223 | | | $ | 1,621,756 | | | $ | (1,213,284 | ) | | $ | 424,695 | |
| | | | | | | | | | | | | | | | | | | | |
| | | 2,270,000 | | | | 2,270 | | | | 1,011,957 | | | | - | | | | 1,014,227 | |
Issuance of common stock warrants | | | - | | | | - | | | | 132,773 | | | | - | | | | 132,773 | |
Issuance of common stock in exchange | | | | | | | | | | | | | | | | | |
| | | 252,500 | | | | 253 | | | | 128,522 | | | | - | | | | 128,775 | |
| | | - | | | | - | | | | 480,108 | | | | - | | | | 480,108 | |
| | | - | | | | - | | | | - | | | | (1,484,115 | ) | | | (1,484,115 | ) |
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Balance at December 31, 2012 | | | 18,745,706 | | | | 18,746 | | | | 3,375,116 | | | | (2,697,399 | ) | | | 696,463 | |
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Issuance of common stock, net of issuance costs | | | 18,312,341 | | | | 18,312 | | | | 3,551,056 | | | | - | | | | 3,569,368 | |
Issuance of common stock warrants | | | - | | | | - | | | | 1,616,062 | | | | - | | | | 1,616,062 | |
Issuance of common stock in exchange | | | | | | | | | | | | | | | | | |
| | | 291,009 | | | | 291 | | | | 226,775 | | | | - | | | | 227,066 | |
Issuance of common stock warrants in | | | | | | | | | | | | | | | | | |
exchange for consulting services | | | - | | | | - | | | | 282,901 | | | | - | | | | 282,901 | |
Cashless exercise of common stock options | | | 13,104 | | | | 13 | | | | (13 | ) | | | - | | | | - | |
| | | - | | | | - | | | | 1,554,913 | | | | - | | | | 1,554,913 | |
| | | - | | | | - | | | | - | | | | (4,601,503 | ) | | | (4,601,503 | ) |
Balance at December 31, 2013 | | | 37,362,160 | | | $ | 37,362 | | | $ | 10,606,810 | | | $ | (7,298,902 | ) | | | 3,345,270 | ) |
Boston Therapeutics, Inc.
Statements of Cash Flows
For the Years Ended December 31, 2013 and 2012
| | December 31, 2013 | | | December 31, 2012 | |
Cash flows from operating activities: | | | | | | |
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Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization | | | | | | | | |
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Issuance of common stock and common stock warrants for consulting services | | | | | | | | |
Changes in operating assets and liabilities: | | | | | | | | |
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Prepaid expenses and other current assets | | | | | | | | |
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Net cash used in operating activities | | | | | | | | |
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Cash flows from investing activities: | | | | | | | | |
Purchase of property and equipment | | | | | | | | |
Net cash used in investing activities | | | | | | | | |
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Cash flows from financing activities: | | | | | | | | |
Proceeds from notes payable - related parties | | | | | | | | |
Proceeds from issuance of common stock and common stock warrants (net of issuance costs) | | | | | | | | |
Net cash provided by financing activities | | | | | | | | |
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Net increase in cash and cash equivalents | | | | | | | | |
Cash and cash equivalents, beginning of period | | | | | | | | |
Cash and cash equivalents, end of period | | | | | | | | |
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Supplemental disclosure of cash flow information | | | | | | | | |
Cash paid during the period for: | | | | | | | | |
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Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2013 and 2012
1. GENERAL ORGANIZATION AND BUSINESS
Boston Therapeutics, Inc. (the “Company”) was formed as a Delaware corporation on August 24, 2009 under the name Avanyx Therapeutics, Inc. On November 10, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Boston Therapeutics, Inc., a New Hampshire corporation (“BTI”) providing for the merger of BTI into the Company with the Company being the surviving entity (the “Merger”), the issuance by the Company of 4,000,000 shares of common stock to the stockholders of BTI in exchange for 100% of the outstanding common stock of BTI, and the change of the Company’s name to Boston Therapeutics, Inc. David Platt, the Company’s Chief Executive Officer, is a founder of BTI and was a director and minority stockholder of BTI at the time of the Merger. Dr. Platt received 400,000 shares of the Company’s common stock in connection with the Merger. Kenneth A. Tassey, Jr., who became the Company’s President shortly after the Merger, was the Chief Executive Officer, President and principal stockholder of BTI at the time of the Merger. Mr. Tassey received 3,200,000 shares of our common stock in connection with the Merger.
The Company’s primary business is the development, manufacture and commercialization of therapeutic drugs with a focus on complex carbohydrate chemistry to address unmet medical needs in diabetes and inflammatory diseases. We have brought one product, SUGARDOWN®, to market and have begun to make initial sales. We are currently focused on the development of two additional drug products: BTI320, a non-systemic, non-toxic tablet for reduction of post-meal blood glucose in people living with diabetes that is fully developed, and IPOXYN, an injectable anti-necrosis, anti-hypoxia drug that we are currently developing.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has limited resources and operating history. As shown in the accompanying financial statements, the Company has an accumulated deficit of approximately $7.3 million as of December 31, 2013 and used cash in operations of approximately $2.3 million during the year ended December 31, 2013.
The Company has incurred recurring operating losses since inception as it has worked to bring its SUGARDOWN® product to market and develop BTI320 and IPOXYN. Management expects such operating losses will continue until such time that substantial revenues are received from SUGARDOWN® or the regulatory and clinical development of BTI320 or IPOXYN is completed. Management anticipates that the Company’s cash resources will be sufficient to fund its planned operations into the second half of fiscal 2014. Management plans to seek additional capital through private placements and public offerings of the Company’s common stock. In addition, the Company may seek to raise additional capital through public or private debt or equity financings in order to fund our operations. 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 curtail or cease operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES
Basis of Presentation
The financial statements have been prepared in conformity with accounting principles generally accepting in the United States of America (“US GAAP”).
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.
Segment Information
Operating segments are identified as components of an enterprise about which separate, discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business as one operating segment.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2013 and 2012
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES - continued
Cash and Cash Equivalents
For purposes of reporting within the statement of cash flows, the Company considers all cash on hand, cash accounts not subject to withdrawal restrictions or penalties, and all highly liquid investments with original maturities of 90 days or less at the time of acquisition to be cash equivalents. The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation.
Revenue Recognition
The Company generates revenues from sales of SUGARDOWN®. Revenue is recognized when there is persuasive evidence that an arrangement exists, the price is fixed and determinable, the product is shipped and collectability is reasonably assured. Revenue is recognized as product is shipped from an outside fulfillment operation. 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.
During the years ended December 31, 2013 and 2012, one customer accounted for 97% and 40%, respectively, of the Company’s revenue. During the year ended December 31, 2012, one additional customer accounted for 35% of the Company's revenue.
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 December 31, 2013 and 2012. At December 31, 2013 and 2012, the Company has one customer that accounts for 100% of its accounts receivable. The Company believes there is minimal risk associated with this receivable.
Inventory
Inventory consists of raw materials, work-in-process 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.
Property and Equipment
Property and equipment is depreciated using the straight-line method over the following estimated useful lives:
Asset Category | Estimated Useful Life |
Office Furniture and Equipment | |
Computer Equipment and Software | |
The Company begins to depreciate assets when they are placed in service. The costs of repairs and maintenance are expensed as incurred; major renewals and betterments are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the statement of operations. For the years ended December 31, 2013 and 2012, the Company recorded depreciation expense of $2,818 and $682, respectively.
Intangible Assets
Intangible assets consist of identifiable finite-lived assets acquired in business acquisitions. Acquired intangible assets are recorded at fair value on the date of acquisition and are amortized over their economic useful lives on a straight line basis.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2013 and 2012
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES - continued
Goodwill
The Company follows the guidance of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350, Goodwill and Other Intangible Assets. Under ASC 350, goodwill and certain other intangible assets with indefinite lives are not amortized, but instead are reviewed for impairment at least annually.
As the Company operates its business in one operating segment and one reporting unit, the Company’s goodwill is assessed at the Company level for impairment in the fourth quarter of each year or more frequently if events or changes in circumstances indicate that impairment may exist. The Company has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step impairment test. If the Company’s qualitative assessment reveals that goodwill impairment is more likely than not, the Company performs the two-step impairment test. Alternatively, the Company may bypass the qualitative test and initiate goodwill impairment testing with the first step of the two-step goodwill impairment test.
During the first step of the goodwill impairment test, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, then the Company concludes that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test to measure possible goodwill impairment loss. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.
The Company performed its impairment review of goodwill utilizing the qualitative assessment method for the year ended December 31, 2013 and concluded that no impairment existed. The Company performed its impairment review of goodwill utilizing the quantitative assessment method for the year ended December 31, 2012 and concluded no impairment existed.
Impairment of Long-lived Assets
The Company reviews long-lived assets, which include the Company’s intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. Future undiscounted cash flows of the underlying assets are compared to the assets’ carrying values. Adjustments to fair value are made if the sum of expected future undiscounted cash flows is less than book value. To date, no adjustments for impairment have been made.
Loss per Share
Basic net loss per share is computed based on the net loss for the period divided by the weighted average actual shares outstanding during the period. Diluted net loss per share is computed based on the net loss for the period divided by the weighted average number of common shares and common equivalent shares outstanding during each period unless the effect of such common equivalent shares would be anti-dilutive. Common stock equivalents represent the dilutive effect of the assumed exercise of certain outstanding stock options using the treasury stock method. The weighted average number of common shares for the year ended December 31, 2013 did not include 5,741,400 and 11,974,999 options and warrants, respectively, because of their anti-dilutive effect. The weighted average number of common shares for the year ended December 31, 2012 did not include 7,708,400 and 645,000 options and warrants, respectively, because of their anti-dilutive effect.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or be settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion of the gross deferred tax asset will not be realized. The Company records interest and penalties related to income taxes as a component of provision for income taxes. The Company did not recognize any interest and penalty expense for the years ended December 31, 2013 and 2012.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2013 and 2012
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES - continued
Advertising Costs
Advertising costs are expensed as incurred and are reported as a component of selling, general and administrative expenses in the selling and marketing expenses in the statements of operations. Advertising costs for the years ended December 31, 2013 and 2012 were $25,068 and $51,497, respectively.
Research and Development Costs
Research and development expenditures are charged to the statement of operations as incurred. Such costs include proprietary research and development activities, purchased research and development, and expenses associated with research and development contracts, whether performed by the Company or contracted with independent third parties.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, accounts payable, accrued expenses, and notes payable. The carrying value of cash and cash equivalents, accounts payable and accrued expenses approximates fair value due to their short-term nature.
The carrying value of the notes payable as of December 31, 2013 and 2012, is not materially different from the fair value of the notes payable.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are principally cash and cash equivalents. The Company places its cash and cash equivalents in highly rated financial institutions. The Company maintains cash and cash equivalent balances with financial institutions that occasionally exceed federally insured limits. The Company has not experienced any losses related to these balances, and management believes its credit risk to be minimal.
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 its common stock and as such volatility is estimated using historical volatilities of similar public entities. 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.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2013 and 2012
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES - continued
Recent Accounting Pronouncements
In July 2013, the FASB issued ASU 2013-11, “Income Taxes, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). ASU 2013-11 states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in ASU 2013-11 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
3. 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 December 31, 2013 and 2012, net of inventory reserves, were as follows:
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.
4. ACCRUED EXPENSES
The following table represents the major components of accrued expenses at December 31, 2013 and 2012:
| | 2013 | | | 2012 | |
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Other current liabilities | | | | | | | | |
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Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2013 and 2012
5. 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 September 7, 2013.
Preferred Stock
No shares of preferred stock have been issued and the terms of such preferred stock have not been designated by the Board of Directors.
Common Stock
On May 7, 2012 the Company issued 20,000 shares of common stock at a price per share of $1.10 and issued a warrant to purchase an additional 20,000 shares of common stock at $1.15 per share for gross proceeds of $22,000. The warrant is exercisable immediately and has a five year term. The Company has evaluated these warrants for proper classification based on terms of the warrant agreement and has determined that equity classification is appropriate. The Company estimated the relative fair value of the warrant to be $8,754 using the Black Scholes model, which has been recorded as a component of permanent equity in additional paid in capital.
During May 2012 the Company entered into a consulting agreement under which it is required to pay the consultant a monthly fee consisting of 25,000 shares of restricted common stock beginning May 21, 2012 through May 21, 2013. As of December 31, 2012 the Company had issued 150,000 shares due under this agreement for services rendered during June through November 2012 with a fair value of $76,500. An accrual in the amount of $14,000 representing the fair value of the 33,333 unissued shares for services rendered in December 2012 was included in the accompanying December 31, 2012 balance sheet. The 33,333 shares were subsequently issued during the year ended December 31, 2013. An additional 12,000 shares were issued in January 2013 for services performed in January. The agreement was terminated in January 2013.
During June 2012 the Company issued 80,000 shares of its common stock with a fair value of $40,800 in exchange for professional consulting services.
On June 29, 2012 the Company issued 1,000,000 shares to an affiliate of Advance Pharmaceutical Co., Ltd. (APC) in a private placement for net proceeds of $500,000. APC is licensed to distribute SUGARDOWN® in Hong Kong, China and Macau. The Company reviewed the private placement issuance and determined that the issuance price of $0.50 per share approximates fair value as of the date of issuance.
During July 2012 the Company entered into a consulting agreement under which it is required to pay the consultant a monthly fee consisting of $4,000 paid in cash and 7,500 shares of restricted common stock. As of December 31, 2012 the Company has issued the 22,500 total shares due under this agreement for services rendered during July, August and September 2012 with an aggregate fair value of $11,475. The agreement was terminated as of September 30, 2012.
On November 13, 2012 the Company issued 1,250,000 shares of its common stock at a price per share of $0.50 and issued a warrant to purchase 625,000 additional shares for $1.00 per share for gross proceeds of $625,000. The warrant is exercisable immediately and has a five year term. The Company has evaluated these warrants for proper classification based on terms of the warrant agreement and has determined that equity classification is appropriate. The Company estimated the relative fair value of the warrant to be $124,019 using the Black Scholes model, which has been recorded as a component of permanent equity in additional paid in capital.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2013 and 2012
5. STOCKHOLDERS’ EQUITY - continued
Common Stock - continued
On March 14, 2013 the Company issued 500,000 shares of its common stock at a price per share of $0.50 and issued a warrant to purchase 250,000 additional shares for $1.00 per share for gross proceeds of $250,000 to CJY Holdings Limited, a company controlled by Conroy Cheng's brother Cheng Chi Him. The warrant is exercisable immediately and has a five year term. The Company has evaluated these warrants for proper classification based on terms of the warrant agreement and has determined that equity classification is appropriate. The Company estimated the relative fair value of the warrant to be $35,457 using the Black Scholes model, which has been recorded as a component of permanent equity in additional paid in capital.
On April 29, 2013 the Company issued a warrant to purchase 100,000 of common stock for $1.00 per share in exchange for consulting services rendered. The warrant associated with the consulting agreement is exercisable immediately and has a five year term. The Company has evaluated these warrants for proper classification based on terms of the warrant agreement and has determined that equity classification is appropriate. The Company estimated the fair value of the warrant to be $19,865 using the Black Scholes model, which has been recorded as a component of permanent equity in additional paid in capital.
On April 30, 2013 the Company issued 52,000 shares of its common stock with a fair value of $28,080 in exchange for consulting services rendered during February through April 2013 in connection with two separate consulting agreements.
On June 28, 2013 the Company issued 40,000 shares of its common stock with a fair value of $14,000 in exchange for consulting services rendered during May and June in connection with two separate consulting agreements.
Between July and September 2013, the Company conducted four closings of its private placement of securities with accredited investors pursuant to which the investors purchased in aggregate 17,659,007 shares of the Company’s common stock and warrants to purchase an additional 8,829,484 shares of common stock at an exercise price of $0.50 per share (the Investor Warrants) for total gross proceeds of $5,297,698. In addition, the Company issued warrants to the Placement Agent in exchange for services to purchase in aggregate 1,808,849 shares for $0.30 per share (the Placement Agent Warrants). The Investor Warrants and Placement Agent Warrants are currently exercisable and have a five year term. The Company has evaluated these warrants for proper classification based on terms of the warrant agreements and has determined that equity classification is appropriate. The Company estimated the relative fair value of the Investor Warrants associated with the investor subscription agreements and Placement Agent Warrants as $1,279,093 and $288,101, respectively, using the Black Scholes model, which has been recorded as a component of permanent equity in additional paid in capital. In addition, issuance costs paid by the Company in connection with the private placement offering totaled $408,270. CJY Holdings Limited purchased 6,666,660 shares and 3,333,320 Investor Warrants included in this Private Placement on the same terms as the other participants purchasing shares in the transaction.
During September 2013 the Company issued 52,000 shares of its common stock with a fair value of $22,920 in exchange for consulting services rendered during July through September 2013 in connection with two separate consulting agreements.
During October 2013 the Company conducted an additional closing of its private placement of securities to related parties and affiliates resulting in the purchase of 153,334 shares of the Company’s common stock and warrants to purchase 76,666 additional shares of common stock at an exercise price of $0.50 per share for total gross proceeds of $46,000. The warrant associated with the subscription agreement is exercisable immediately and has a five year term. The Company estimated the relative fair value of the warrants as $13,411 using the Black Scholes model which has been recorded as a component of permanent equity in additional paid in capital.
During October 2013 the Company issued 43,860 shares of its common stock with a fair value of $61,404 in exchange for consulting services rendered during August through October 2013 in connection with a consulting agreement.
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2013 and 2012
5. STOCKHOLDERS’ EQUITY - continued
Common Stock - continued
During October 2013 the Company entered into a consulting agreement under which it is required to pay the consultant a monthly fee consisting of $10,000 paid in cash and a warrant to purchase 265,000 shares of common stock at an exercise price of $0.50 per share. The warrant associated with the consulting agreement is exercisable immediately and has a five year term. The Company estimated the fair value of the warrant at $263,036 using the Black Scholes model which has been recorded as a component of permanent equity in additional paid in capital.
On November 18, 2013 the Company issued 22,000 shares of its common stock with a fair value of $32,120 in exchange for consulting services rendered during November 2013 in connection with a consulting agreement.
During December 2013 the Company issued 35,316 shares of its common stock with a fair value of $49,292 in exchange for consulting services rendered during September through December 2013 in connection with two separate consulting agreements.
During the year ended December 31, 2013, the Company received $270,000 of cash proceeds in connection with a potential private placement financing expected to be executed during 2014. As of December 31, 2013, the terms of the private placement were not secured and the Company had recorded the $270,000 of proceeds as a stock subscription in accrued expenses and other current liabilities within the accompanying balance sheet.
6. 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 December 31, 2013 and December 31, 2012, there were 578,400 options outstanding under the 2010 Plan.
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 December 31, 2013 and December 31, 2012, there were 5,163,000 and 7,130,000 options outstanding under the 2011 Plan, respectively.
Under the terms of the stock plans, the Board of Directors shall specify the exercise price and vesting period of each stock option on the grant date. Vesting of the options is typically three to four years and the options typically expire in five to seven years.
The fair value of stock options granted for years ended December 31, 2013 and 2012 was calculated with the following assumptions:
Boston Therapeutics, Inc.
Notes to Financial Statements
For the Years Ended December 31, 2013 and 2012
6. STOCK OPTION PLAN AND STOCK-BASED COMPENSATION - continued
The weighted-average fair value of stock options granted during the years ended December 31, 2013 and 2012, under the Black-Scholes option pricing model was $0.21 and $0.30 per share, respectively. For the years ended December 31, 2013 and 2012, the Company recorded stock-based compensation expense of $1,554,913 and $480,108, respectively, in connection with share-based payment awards. As of December 31, 2013, there was approximately $173,000 of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized over a weighted-average period of 0.70 years.
The following table summarizes the Company’s stock option activity during the years ended December 31, 2013 and 2012:
| | Shares | | Exercise Price per Share | | Weighted Average Exercise Price per Share | | | Shares | | | Exercise Price per Share | | | Weighted Average Exercise Price per Share | |
Outstanding as of December 31, 2011 | | | | | | | | | | | | 1,578,400 | | | $ | 0.10-1.85 | | | $ | 0.19 | |
| | | | | | | | | | 6,130,000 | | | | 0.10-0.50 | | | | 0.48 | |
| | | | | | | | | | - | | | | - | | | | - | |
Options forfeited/cancelled | | | | | | | | | | | | | - | | | | - | | | | - | |
Outstanding as of December 31, 2012 | | | | | | | | | | | | 7,708,400 | | | $ | 0.10-1.85 | | | $ | 0.42 | |
| | | | | | | | | | 708,000 | | | | 0.42-1.00 | | | | 0.68 | |
| | | | | | | | | | | (13,104 | ) | | | 0.50 | | | | 0.50 | |
Options forfeited/cancelled | | | | | | | | | | | | | | (2,661,896 | ) | | | 0.42-1.00 | | | | 0.52 | |
Outstanding as of December 31, 2013 | | | | | | | | | | | | | 5,741,400 | | | $ | 0.10-1.85 | | | $ | 0.40 | |
During the year ended December 31, 2013, the Company received a notice of cashless stock options exercise in which the holder elected to exercise 20,000 vested options. The stock options which were exercised had an exercise price of $0.50 per share. Based upon the Company’s stock price on the date of exercise, as well as the cashless exercise formula, 13,104 shares were issued to the holder with the remaining 6,896 stock options forfeited during the year ended December 31, 2013.
Boston Therapeutics, Inc.
The following table sets forth the status of the Company’s non-vested stock options as of December 31, 2013:
The weighted-average remaining contractual life for options exercisable at December 31, 2013 is 3.89 years. At December 31, 2013 the Company has 12,337,000 and 6,921,600 options available for grant under the 2011 Plan and 2010 Plan, respectively.
The aggregate intrinsic value for fully vested, exercisable options was $5,061,256 and $418,000 at December 31, 2013 and 2012, respectively. The aggregate intrinsic value of options exercised during the year ended December 31, 2013 was $12,449. There were no options exercised during the year ended December 31, 2012. The actual tax benefit realized from stock option exercises during the year ended December 31, 2013 was $19,000. There was no actual tax benefit realized from stock options exercises during fiscal 2012.
Through December 31, 2011, Dr. Platt advanced $257,820 to BTI to fund start-up costs and operations of the Company. 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 President entered into promissory notes to advance to the Company an aggregate of $40,000. The notes accrue interest at 6.5% per year were due June 30, 2013. On August 6, 2012, the outstanding notes of $297,820 were amended to extend the maturity dates to June 29, 2014. On August 2, 2013, the outstanding notes of $297,820 were amended to extend the maturity dates to June 29, 2015. As of December 31, 2013 and 2012, $63,447 and $44,090, respectively, of accrued interest had been included in accrued expenses on 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 China. 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. Revenue generated pursuant to the Agreement for the years ended December 31, 2013 and 2012 were $315,000 and $17,000, respectively.
Boston Therapeutics, Inc.
On March 14, 2013 the Company issued 500,000 shares of its common stock at a price per share of $0.50 and issued a warrant to purchase 250,000 additional shares for $1.00 per share for gross proceeds of $250,000 to CJY Holdings Limited ("CJY"). The warrant is exercisable immediately and has a five year term. In July 2013 CJY Holdings Limited purchased 6,666,660 shares of the Company’s common stock and warrants to purchase an aggregate of 3,333,320 shares of the Company’s common stock for an aggregate purchase price of $2,000,000 in the private placement conducted by the Company between July 2013 and September 2013 discussed in Note 5. The warrants are exercisable immediately over a five year term with an exercise price of $0.50 per share. CJY is an entity that is controlled by the sibling of our Director Conroy Chi-Heng Cheng.
In December 2013, the Board of Directors agreed to indemnify Dr. Platt for legal costs incurred in connection with an arbitration 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 seeks 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 asserts he is owed and to be repaid all separation benefits paid to Dr. Platt to date. The Company capped the amount for which it will indemnify Dr. Platt at an initial maximum of $150,000 and Dr. Platt has 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, the potential impact of the arbitration on the Company and Dr. Platt’s agreement to reimburse the Company should he prevail. As of December 31, 2013, the Company recorded legal expense associated with this indemnification of $119,401.
The SUGARDOWN® technology and provisional patents, which were obtained through the acquisition of BTI in 2010, are being amortized on a straight-line basis over their estimated useful lives of 14 years.
Amortization expense for each of the years ended December 31, 2013 and 2012 was $64,285.
The estimated remaining amortization expense related to intangible assets with finite lives for each of the five succeeding years and thereafter is as follows:
Boston Therapeutics, Inc.
During the years ended December 31, 2013 and 2012, no provision for income taxes was recorded as the Company generated net operating losses of $2,680,473 and $943,849, respectively.
A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:
Net deferred tax assets as of December 31, 2013 and 2012 consisted of the following: