Quarterly report pursuant to Section 13 or 15(d)

8. RELATED PARTY TRANSACTIONS

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8. RELATED PARTY TRANSACTIONS
9 Months Ended
Sep. 30, 2016
Notes to Financial Statements  
NOTE 8 - RELATED PARTY TRANSACTIONS

Through December 31, 2011, Dr. Platt, the Company’s former CEO and Chairman of the Board, advanced $257,820 to the Company to fund start-up costs and operations. Advances by Dr. Platt carry an interest rate of 6.5% and were due on June 29, 2013. On May 7, 2012, Dr. Platt and the Company's former President entered into promissory notes to advance to the Company an aggregate of $40,000. The notes accrue interest at 6.5% per year and were due June 30, 2013. The outstanding notes of $297,820 have been amended each year to extend the maturity dates.  Most recently, effective June 30, 2015, the outstanding notes for Dr. Platt were amended to extend the maturity dates to June 30, 2017. The maturity date for the Company's former President remained at June 30, 2016 and is currently in default. The notes have been classified as a current liability within the accompanying balance sheet.

 

On June 24, 2011, the Company entered into a definitive Licensing and Manufacturing Agreement (the "Agreement") with Advance Pharmaceutical Company Ltd. ("Advance Pharmaceutical"), a Hong Kong-based privately-held company.  Under terms of the Agreement, the Company manufactures and supplies product in bulk for Advance Pharmaceutical.  Advance Pharmaceutical is responsible for the packaging, marketing and distribution of SUGARDOWN® in certain territories within Asia.  Advance Pharmaceutical, through a wholly owned subsidiary, has purchased an aggregate 1,799,800 shares of the Company’s common stock in conjunction with the Company’s private placement offerings during the years ended December 31, 2012 and 2011.   The shares were purchased on the same terms as the other participants acquiring shares in the respective offerings.   Conroy Chi-Heng Cheng is a director of Advance Pharmaceutical and joined the Company’s Board in December 2013.  There has been no revenue generated pursuant to the Agreement during the first nine months of 2016.  Revenue generated pursuant to the Agreement for the three and nine month periods ended September 30, 2015, were $35,231 and $70,137, respectively.  

 

In June 2015, the Company received $200,000 of cash proceeds from CJY Holdings Limited, in connection with a potential future exercise of its warrant.  On November 12, 2015, the Company entered into a modification of a previously issued warrant agreement to CJY.  The Board approved the reduction in the common stock warrant exercise prices from $0.50 to $1.00 per share to $0.17 per share. In connection with the June 2015 proceeds of $200,000 previously received by the Company and the reduction in the warrant exercise price, the Board approved the issuance of 1,194,440 shares of Common Stock to CJY in connection with the modified warrant agreement.  As of September 30, 2016, the common stock has not been issued and the $200,000 remains in common stock subscribed.

 

During September 2015, the Company entered into a securities purchase agreement with CJY.  Pursuant to this agreement, the Company issued to CJY a convertible promissory note in the principal amount of $750,000. The Note was amended during the fourth quarter to $1,200,000 and in the first quarter of 2016 to $1,602,000. During the second quarter of 2016, the Note was amended again to $1,752,000.  This Note is intended to provide necessary bridge financing to the Company prior to an anticipated financing in the near future of an amount up to $1,500,000. Interest accrues at the rate of 10% per annum and is due upon maturity of the note in September 2018.  The Company may prepay this Note and any accrued interest at any time.  At any time, amounts outstanding under the CJY Note are convertible into the Company’s common stock, in whole or in part, at the option of the lender, at a conversion price of $0.05 per share. A beneficial conversion feature of $1,752,000 was calculated and capped at the value of the note pursuant to ASC 470 - 20. The Company recorded amortization of the beneficial conversion feature as interest expense in the amount of approximately $145,130 and $406,153 during the three and nine months ended September 30, 2016.

 

 

Convertible notes payable – related party consist of the following at September 30, 2016 and December 31, 2015:


 

    2016     2015  
Principal balance   $ 1,752,000     $ 1,200,000  
Debt discount     (1,142,670 )     (1,106,823 )
Outstanding, net of debt discount   $ 609,330     $ 93,177