NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
NOTE 1 –
ORGANIZATION AND NATURE OF BUSINESS
Company Background
Protagenic Therapeutics, Inc. (“we,” “our,” “Protagenic” or “the Company”), a Delaware corporation with one subsidiary named Protagenic Therapeutics Canada (2006) Inc., a corporation formed in 2006 under the laws of the Province of Ontario, Canada.
The Company was most recently known as Atrinsic, Inc., a company that was once a reporting company under the Securities Act, but that, in 2012 and 2013, reorganized under Chapter 11 of the United States Bankruptcy Code and emerged from bankruptcy. On February 12, 2016, the Company acquired Protagenic Therapeutics, Inc. through a reverse merger. On June 17, 2016, Protagenic Therapeutics, Inc. (the then wholly-owned subsidiary of Atrinsic, Inc.) was merged with and into Atrinsic, Inc. Atrinsic, Inc. was the surviving corporation in this merger and changed its name from Atrinsic, Inc. to Protagenic Therapeutics, Inc.
The Company originally incorporated as a Delaware corporation under the name Millbrook Acquisition Corp. in 1994. In 2007, Millbrook Acquisition Corp. changed its name to New Motion, Inc. In 2008, New Motion, Inc. merged with Traffix, Inc., pursuant to which Traffix, Inc. became a wholly-owned subsidiary of New Motion, Inc. In 2009, New Motion, Inc. changed its name to Atrinsic, Inc. On June 15, 2012, the Company filed Chapter 11 in the United States Bankruptcy Court in Southern District of New York (Case No. 12-12553). As of that date, the Company terminated all remaining employees and ceased normal business operations.
Prior to March 30, 2012, the Company was a reporting company under the Exchange Act, and filed periodic reports with the Securities and Exchange Commission (“SEC”). On March 30, 2012, the Company filed a Form 15 with the SEC, terminating its obligation to file periodic reports under Sections 13 and 15(d) of the Exchange Act. Prior to the filing of our Plan of Reorganization under Chapter 11 of the United States Bankruptcy Code on June 15, 2012 (the “Plan of Reorganization”), the Company was a marketer of direct-to-consumer subscription products and an Internet search marketing agency. The Company sold entertainment and lifestyle subscription products directly to consumers, which the Company marketed through the Internet. The Company also sold Internet marketing services to our corporate and advertising clients.
The Company emerged from Chapter 11 on June 26, 2013, at which time the Plan of Reorganization was conditionally confirmed by the United States Bankruptcy Court, Southern District of New York. The confirmation was subject to the consummation of the Company’s acquisition of a 51% controlling interest in MomSpot LLC (“MomSpot”), which was subsequently completed on July 12, 2013 (“Emergence Date”). MomSpot’s goal was to be the premier specialty retail affiliate marketing company targeting women between the ages of 24 and 45 who are either mothers or expecting their first child. The Emergence Date was the date the Company adopted fresh start accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 852. The adoption of fresh-start accounting resulted in the Company becoming a new entity for financial reporting purposes. At that time, our principal activities were conducted through MomSpot.
On February 12, 2016, the Company acquired Protagenic Therapeutics, Inc. (referred to herein as “Prior Protagenic”) through a reverse merger, pursuant to which all the issued and outstanding shares of Protagenic common stock converted on a 1-for-1 basis into shares of the Company’s Series B Preferred Stock, par value $0.000001 per share. Concurrently with the reverse merger, the Company conducted the first closing of a private offering of our Series B Preferred Stock.
Since the fourth quarter of the 2015 fiscal year, MomSpot’s development plans have been suspended pending receipt of incremental funding. On February 12, 2016, the Company sold its 51% interest of MomSpot to the remaining 49% interest holder through a split off agreement. Additionally, on February 12, 2016, the Company sold its equity interests in 29 wholly-owned subsidiaries.
Protagenic Therapeutics Canada (2006) Inc. (“PTI Canada”) was incorporated in 2006 in the Province of Ontario, Canada. PTI Canada was a wholly-owned subsidiary of Prior Protagenic, and following the Special Meeting, as defined in Note 7 below, it became a wholly-owned subsidiary of the Company. PTI Canada provides operational support and assistance for the implementation of corporate and operational activities conducted in Canada.
Reverse Business Combination (Merger)
On February 12, 2016 (“Closing Date”), Protagenic Acquisition Corp., a wholly-owned subsidiary of the Company (which at the time was named Atrinsic, Inc.), merged (the “Merger”) with and into Prior Protagenic. Prior Protagenic was the surviving corporation of the Merger. As a result of the Merger, the Company acquired the business of prior Protagenic and will continue the existing business operations of Prior Protagenic as a wholly-owned subsidiary. On June 17, 2016, Prior Protagenic merged with and into the Company with the Company as the surviving corporation in the merger. Immediately thereafter, the Company changed its name from Atrinsic, Inc. to Protagenic Therapeutics, Inc.
On the Closing Date, all of the issued and outstanding (6,612,838) shares of Prior Protagenic common stock converted, on a 1 for 1 basis, into shares of the Company’s Series B Convertible Preferred Stock, par value $0.000001 per share (“Series B Preferred Stock”). Also on the Closing Date, all of the issued and outstanding options to purchase shares of Prior Protagenic common stock, and all of the issued and outstanding warrants to purchase shares of Prior Protagenic common stock, converted, on a 1 for 1 basis, into options (the “New Options”) and warrants (the “New Warrants”) respectively, to purchase shares of Series B Preferred Stock. New Options to purchase 1,807,744 shares of Series B Preferred Stock, having an average exercise price of approximately $0.87 per share, were issued to Prior Protagenic optionees. New Warrants to purchase 3,403,367 shares of Series B Preferred Stock at an average exercise price of approximately $1.03 per share were issued to holders of Prior Protagenic warrants.
The common stockholders of Atrinsic, Inc. before the Merger (“Predecessor”) retained 25,867 shares of common stock, par value $0.0001 per share (the “Common Stock”). Upon the effectiveness of the Merger, the holders of the Predecessor’s Series A Preferred Stock exchanged all of the issued and outstanding Series A Preferred Stock for an aggregate of 297,468 shares of Series B Preferred Stock. In addition, the holders of options to purchase Predecessor common stock were issued options (“Predecessor Options”) to purchase 17,784 shares of Series B Preferred Stock at $1.25 per share. Warrants (“Predecessor Warrants”) to purchase 295,945 shares of Series B Preferred Stock at $1.25 per share were issued to Strategic Bio Partners, LLC, the designee (the “Designee”) of the holders of the Predecessor’s debt in consideration of the cancellation of such debt amounting to $665,000 in principal and $35,000 in interest.
The Merger is being accounted for as a “Reverse Business Combination,” and Prior Protagenic is deemed to be the accounting acquirer in the merger. Consequently, the assets and liabilities and the historical operations that will be reflected in the financial statements prior to the Merger will be those of Prior Protagenic, and the consolidated financial statements after completion of the Merger will include the assets and liabilities of Prior Protagenic, historical operations of Prior Protagenic and combined operations of Prior Protagenic, Predecessor and the Company from the Closing Date of the Merger. Further, as a result of the issuance of the shares of Series B Preferred Stock pursuant to the Merger, a change in control of the Company occurred as of the date of consummation of the Merger.
The Merger will be treated as a recapitalization of the Company for financial accounting purposes. The historical financial statements of Predecessor before the Merger will be replaced with the historical financial statements of Prior Protagenic before the Merger in all future filings with the Securities and Exchange Commission (the “SEC”).
At the closing of the Merger, Predecessor had a 51% interest in MomSpot, and the remaining 49% was held by B.E. Global LLC. Barry Eisenberg is the sole owner of B.E. Global LLC and is the Chief Executive Officer of MomSpot LLC. Immediately after the closing of the Merger, the Company split off its 51% membership interests in MomSpot. The split-off was accomplished through the transfer of all of its membership interests of MomSpot, having nominal value, to B.E. Global LLC via a split off agreement for nominal consideration.
Immediately after the closing of the Merger, the Company also split off all of its equity interest in 29 wholly-owned subsidiaries of Predecessor. The split-off was accomplished through the sale of all equity interests in these wholly-owned subsidiaries to Quintel Holdings, Inc. for nominal considerations via a split off agreement. These entities had nominal value.
Private Offering
Concurrently and a condition of the closing of the Merger, the Company conducted the first closing of an offering (the “Private Offering”) of our Series B Preferred Stock. At the first closing, we sold 2,775,000 shares of Series B Preferred Stock at a purchase price of $1.25 per share, for which we received total gross consideration of $3,468,750. Of this amount, $350,000 consisted of the conversion of outstanding stockholder debt held by Garo H. Armen, our chairman and a member of our board of directors, and $150,000 of legal expenses incurred by Strategic Bio Partners, LLC, on behalf of the stockholders of Predecessor, in conjunction with and as permitted under the terms of the Merger. On March 2, 2016, we completed the second closing of the Private Offering, at which we sold an additional 913,200 shares of Series B Preferred Stock, for total gross proceeds of $1,141,500. On April 15, 2016 we completed the final closing of the Private Offering, at which we issued an additional 420,260 shares of Series B Preferred Stock to accredited investors, for total gross proceeds of $525,325. The Company paid commissions, legal and miscellaneous fees aggregating $373,778 associated with these closings. We also issued Placement Agent Warrants to purchase 127,346 shares of Series B Preferred Stock valued at $146,641 using a Black-Scholes model at an exercise price of $1.25 per share to the Placement Agent and its selected dealers. The Company determined the fair value of the binomial lattice model and the Black-Scholes valuation model to be materially the same. For all three closings, the Company issued 4,108,460 shares of Series B Preferred Stock and raised total gross proceeds of $4,635,575 and total net proceeds of $4,261,797 (or total gross proceeds of $5,135,575 and total net proceeds of $4,761,797 , including the conversion of the $350,000 in principal of stockholder debt, and $150,000 of legal expenses incurred by the Predecessor’s stockholders.
Debt Exchange
Simultaneous with the Merger and the Private Offering, holders of $665,000 of Predecessor debt accompanied with $35,000 in accrued interest exchanged such debt for Predecessor Warrants to purchase 295,945 shares of Series B Preferred Stock at $1.25 per share. The Predecessor Warrants were valued at $340,784 (see Note 6).
Reverse Stock Split
On June 17, 2016, the Company held a Special Meeting of Stockholders (the “Special Meeting”). At the Special Meeting, the Company’s stockholders approved a third amendment and restatement (the “Third Amendment and Restatement”) to the Company’s Amended and Restated Certificate of Incorporation, effective July 27, 2016 (the “Effective Time”), to effect a one-for-15,463.7183 reverse split of the Company’s common stock (the “Reverse Stock Split”). Pursuant to the Reverse Stock Split, at the Effective Time, each 15,463.7183 shares of common stock owned by a stockholder were combined into one new share of common stock, with any fractional shares that would otherwise be issuable as a result of the Reverse Stock Split being rounded up to the nearest whole share. The Third Amendment and Restatement also effected (i) a reduction in the Company’s authorized shares of common stock from 100 billion shares to 100 million shares, (ii) an increase in the par value of the Company’s common stock from $0.000001 per share to $0.0001 per share and (iii) a reduction in the Company’s authorized shares of preferred stock from 5 billion shares to 20 million shares.
As a result of the Reverse Split, 400,000,000 shares of common stock were split into 25,867 shares of common stock. Additionally, as a result of the Reverse Split and in accordance with our certificate of designations for our Series B Preferred Stock, our Series B Preferred Stock immediately and automatically converted into our common stock on a 1-for-1 basis other than any Series B Preferred Stock (i) to the extent (but only to the extent) a Series B Preferred Stock holder would beneficially own greater than 9.99% of our common stock (the “Springing Blocker”) and (ii) such holder has notified the Company in writing that it wants the Springing Blocker to apply to such holder. On July 27, 2016, 10,146,000 of the Company’s 11,018,766 outstanding shares of Series B Preferred Stock were eligible to immediately convert into 10,146,000 shares of the Company’s common stock with 872,766 shares of Series B Preferred Stock remaining as a result of one holder exercising the Springing Blocker. As of December 31, 2016, 10,146,000 shares of the Series B Preferred Stock were converted into 10,146,000 shares of common stock on the records of the Company.
Any Series B Preferred Stock not converted as a result of this provision would automatically convert into common stock as soon as such conversion would not violate the Springing Blocker. Our Series B Preferred Stock will cease to be designated as a separate series of our preferred stock when all of such shares have converted into shares of our common stock.
All share and per share amounts for the common stock have been retroactively restated to give effect to the reverse split.
NOTE 2 - LIQUIDITY
As shown in the accompanying consolidated financial statements, the Company incurred a net loss of $2,275,826 and $1,023,442 for the years ended December 31, 2016 and 2015, respectively. The Company has incurred losses since inception resulting in an accumulated deficit of $8,582,123 as of December 31, 2016. The net loss presented for the twelve months is attributed to goodwill impairment, an increase in professional fees as related to the Merger, and an increase in stock compensation expense. The net loss present for the prior period was attributed to stock compensation expense and research and development expenses. The Company anticipates further losses in the development of its business. The Company had a net working capital of $2,475,958 at December 31, 2016 as a result of the Merger and simultaneous financings. Based on its current forecast and budget, Management believes that its cash resources will be sufficient to fund its operations at least until the third quarter of 2018. Absent generation of sufficient revenue from the execution of the Company’s business plan, it will need to obtain debt or equity financing by the third quarter of 2018.
NOTE 3 -
SUMMARY OF SIGNFICANT ACCOUNTING POLICIES
Basis of presentation
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”).
Principles of consolidation
The consolidated financial statements include the accounts of Atrinsic, Inc., and its wholly owned subsidiary, Protagenic Acquisition Corp, and Protagenic Therapeutics, Inc., which merged with and into Protagenic Acquisition Corp, on February 12, 2016, as well as Protagenic Therapeutics’ wholly-owned Canadian subsidiary, PTI Canada. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
Use of estimates
The preparation of consolidated financial statements in conformity with US 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 consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant estimates underlying the consolidated financial statements include the allocation of the fair value of acquired assets and liabilities associated with the Merger, assessment of goodwill and income tax provisions and allowances, impairment of goodwill, valuation of stock options and warrants and assessment of deferred tax valuation allowance. The Company also relies on estimates for the valuation of stock-based compensation expense and financial instruments.
Concentrations of Credit Risk
The Company maintains its cash accounts at financial institutions which are insured by the Federal Deposit Insurance Corporation ("FDIC"). At times, the Company may have deposits in excess of federally insured limits.
Cash
and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. As of December 31, 2016 and 2015, the Company did not have any cash equivalents.
Equipment
Equipment is stated at cost less accumulated depreciation. Cost includes expenditures for computer equipment. Maintenance and repairs are charged to expense as incurred. When assets are sold, retired, or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations. The cost of equipment is depreciated using the straight-line method over the estimated useful lives of the related assets which is 3 years. Depreciation expense was not material for the years ended December 31, 2016 and 2015.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The Company is required to perform impairment reviews annually and more frequently in certain circumstances. The Company performs the annual assessment on December 31.
In accordance with ASC 350–20 “
Goodwill
”, the Company is able to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two–step goodwill impairment test. If the Company concludes that it is more likely than not that the fair value of a reporting unit is not less than its carrying amount it is not required to perform the two–step impairment test for that reporting unit.
Atrinsic’s assets and liabilities acquired in the Merger had a minimal value therefore the Company recorded the fair value of shares given to predecessor stockholders as goodwill. Immediately subsequent to the merger the Company fully impaired the goodwill, in as the predecessor business had limited operations.
The allocation of the consideration transferred is as follows:
Shares issued in connection with Merger:
|
|
|
|
|
Atrinsic 25,867 shares Common stock
|
|
$
|
32,334
|
|
Atrinsic Series A preferred stock as converted to Series B preferred
stock, 297,468 shares
|
|
|
371,835
|
|
Total value of shares issued to Atrinsic on Merger
|
|
|
404,169
|
|
Fair value of net assets identified
|
|
|
-
|
|
|
|
|
|
|
Goodwill
|
|
|
404,169
|
|
Net value of consideration
|
|
$
|
-
|
|
Goodwill impairment for the year ended December 31, 2016 was $404,169.
Fair Value Measurements
Accounting Standards Codification ASC 820, “Fair Value Measurements and Disclosure,” defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels are described below:
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that is accessible by the Company;
Level 2 Inputs – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly;
Level 3 Inputs – Unobservable inputs for the asset or liability including significant assumptions of the Company and other market participants.
The carrying amount of the Company’s financial assets and liabilities, such as cash, accounts payable and accrued expenses approximate their fair value because of the short maturity of those instruments.
Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
The assets or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. The following table provides a summary of financial instruments that are measured at fair value as of December 31, 2016.
|
|
Carrying
|
|
|
Fair Value Measurement Using
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative warrants liabilities
|
|
$
|
516,870
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
516,870
|
|
|
$
|
516,870
|
|
The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the year ended December 31, 2016:
|
|
Fair Value
Measurement
Using Level 3
Inputs
|
|
|
|
Total
|
|
Balance, December 31, 2015
|
|
$
|
—
|
|
Issuance of derivative warrants liabilities
|
|
|
487,425
|
|
Change in fair value of derivative warrants liabilities
|
|
|
29,445
|
|
Balance, December 31, 2016
|
|
$
|
516,870
|
|
The fair value of the derivative feature of the 127,346 and 295,945 warrants to the placement agent of the private offering and to Strategic Bio Partners for debt cancellation, respectively on the issuance dates and at the balance sheet date were calculated using a Black-Scholes option model valued with the following average assumptions:
|
|
February 12, 2016
|
|
|
December 31, 2016
|
|
Exercise price
|
|
$
|
1.25
|
|
|
$
|
1.25
|
|
Risk free interest rate
|
|
|
1.20
|
%
|
|
|
1.93
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
156
|
%
|
|
|
219
|
%
|
Contractual term (in years)
|
|
|
5.0
|
|
|
|
4.25
|
|
Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar expected term on the date of the grant.
Dividend yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.
Volatility: The Company calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s peer group stock price for a period consistent with the warrants’ expected term.
Expected term: The Company’s expected term is based on the remaining contractual maturity of the warrants.
During the year ended December 31, 2016, the Company marked the derivative feature of the warrants to fair value and recorded a loss of $29,445 relating to the change in fair value.
During the year ended December 31, 2016, there was a full impairment of Goodwill which arose at the time of the reverse business combination in the amount of $404,169, a level 3 measurement.
Derivative Liability
The Company evaluates its options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-10-05-4 and 815-40-25. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then the related fair value is reclassified to equity.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.
Stock-Based Compensation
The Company accounts for stock based compensation costs under the provisions of ASC 718, “Compensation—Stock Compensation”, which requires the measurement and recognition of compensation expense related to the fair value of stock based compensation awards that are ultimately expected to vest. Stock based compensation expense recognized includes the compensation cost for all stock based payments granted to employees, officers, and directors, based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC. 718 is also applied to awards modified, repurchased, or canceled during the periods reported.
Stock-Based Compensation for Non-Employees
The Company accounts for warrants and options issued to non-employees under ASC 505-50,
Equity – Equity Based Payments to Non-Employees,
using the Black-Scholes option-pricing model. The value of such non-employee awards unvested are re-measured over the vesting terms and at each reporting date.
Basic and Diluted Net (Loss) per Common Share
Basic (loss) per common share is computed by dividing the net (loss) by the weighted average number of shares of common stock outstanding for each period. Diluted (loss) per share is computed by dividing the net (loss) by the weighted average number of shares of common stock outstanding plus the dilutive effect of shares issuable through the common stock equivalents.
|
|
Potentially Outstanding
Dilutive Common
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
December
31, 2016
|
|
|
For the Year
Ended
December
31, 2015
|
|
|
|
|
|
|
|
|
|
|
Conversion Feature Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issuable under the conversion feature of preferred shares
|
|
|
872,766
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stock Option
|
|
|
2,484,445
|
|
|
|
1,707,744
|
|
|
|
|
|
|
|
|
|
|
Warrant
|
|
|
3,826,658
|
|
|
|
3,403,367
|
|
|
|
|
|
|
|
|
|
|
Total potentially outstanding dilutive common shares
|
|
|
7,183,869
|
|
|
|
5,051,111
|
|
Foreign Currency Translation
The Company follows Section 830-10-45 of the FASB Accounting Standards Codification (“Section 830-10-45”) for foreign currency translation to translate the financial statements of the foreign subsidiary from the functional currency, generally the local currency, into U.S. Dollars. Section 830-10-45 sets out the guidance relating to how a reporting entity determines the functional currency of a foreign entity (including of a foreign entity in a highly inflationary economy), re-measures the books of record (if necessary), and characterizes transaction gains and losses. Pursuant to Section 830-10-45, the assets, liabilities, and operations of a foreign entity shall be measured using the functional currency of that entity. An entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment, or local currency, in which an entity primarily generates and expends cash.
The functional currency of each foreign subsidiary is determined based on management’s judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures, would be considered the functional currency, but any dependency upon the parent and the nature of the subsidiary’s operations must also be considered. If a subsidiary’s functional currency is deemed to be the local currency, then any gain or loss associated with the translation of that subsidiary’s financial statements is included in accumulated other comprehensive income. However, if the functional currency is deemed to be the U.S. Dollar, then any gain or loss associated with the re-measurement of these financial statements from the local currency to the functional currency would be included in the consolidated statements of income and comprehensive income (loss). If the Company disposes of foreign subsidiaries, then any cumulative translation gains or losses would be recorded into the consolidated statements of income and comprehensive income (loss). If the Company determines that there has been a change in the functional currency of a subsidiary to the U.S. Dollar, any translation gains or losses arising after the date of change would be included within the statement of income and comprehensive income (loss).
Based on an assessment of the factors discussed above, the management of the Company determined the relevant subsidiary’s local currency to be the functional currency for its foreign subsidiary.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. ASU 2014-09 also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The adoption of ASU 2014-09 is not expected to have any impact on the Company’s financial statement presentation or disclosures.
In August 2014, the FASB Accounting Standards Update (“ASU”) issued ASU No. 2014-15,
“Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.”
ASU 2014-15 provides guidance on management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued.
The amendments in ASU 2014-15 are effective for annual reporting periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company has elected to adopt the methodologies prescribed by ASU 2014-15. The adoption of ASU 2014-15 had no material effect on its financial position or results of operations.
In November 2015, the FASB issued ASU No 2015-17, Income Taxes (Topic 740). The amendments in ASU 2015-17 change the requirements for the classification of deferred taxes on the balance sheet. Currently, GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, the amendments in this ASU require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The pronouncement is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company does not believe the adoption of this standard will have a material effect on the Company’s consolidated financial position and results of operations.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The main provisions of ASU No. 2016-02 require management to recognize lease assets and lease liabilities for all leases. ASU 2016-02 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model, the effect of leases in the statement of comprehensive income and the statement of cash flows is largely unchanged from previous GAAP. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.
On March 30, 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation" which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. For public business entities, the ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. Early adoption will be permitted in any interim or annual period for which financial statements have not yet been issued or have not been made available for issuance. If early adoption is elected, all amendments in the ASU that apply must be adopted in the same period. In addition, if early adoption is elected in an interim period, any adjustments should be reflected as of the beginning of the annual period that includes that interim period. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”
(“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory”, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which requires application of the guidance for all periods presented. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.
In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”. The amendments in this Update affect the guidance in Update 2014-09, which is not yet effective. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, defers the effective date of Update 2014-09 by one year.
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Legal
|
|
$
|
1,190
|
|
|
$
|
186,936
|
|
Payroll and related
|
|
|
-
|
|
|
|
47,388
|
|
Patent expense
|
|
|
37,142
|
|
|
|
29,239
|
|
Research and development
|
|
|
116,255
|
|
|
|
8,128
|
|
Other
|
|
|
13,400
|
|
|
|
7,564
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
167,987
|
|
|
$
|
279,255
|
|
NOTE 5 – BRIDGE LOAN PAYABLE – STOCKHOLDER
During January 1, 2015 through February 12, 2016, the Company had entered into a series of bridge loan arrangements for total borrowings received and interest accrued of $425,265 ($399,103 at December 31, 2015) with a major Stockholder and Chairman. The proceeds were used to fund research, development and the general operating activity of the Company. The Company has guaranteed the payment of all principal and interest in the form of the Company’s common stock at a purchase price of $1.25 per share. The loan bears interest at a rate of 10% per annum. The Company recorded interest expense of $7,162 and $11,473 for the years ended December 31, 2016 and 2015, respectively. On February 12, 2016, the Company settled $350,000 of principal and interest by issuing shares of Series B Preferred Stock in the Private Offering at a price of $1.25 per share as part of its private offering. On June 17, 2016, the Company settled the remaining $75,265 in principal and accrued interest by issuing shares of Common Stock at a price of $1.25 per share.
NOTE 6 - DERIVATIVE LIABILITIES
Upon closing of the private placement transactions on February 12, 2016, the Company issued 127,346 and 295,945 warrants, to the placement agent of the private offering and to Strategic Bio Partners for debt cancellation, respectively, to purchase the Company’s Series B Preferred Stock with an exercise price of $1.25 and a five-year term. The warrants have a cashless exercise feature that requires the Company to classify the warrants as a derivative liability.
NOTE 7 - STOCKHOLDERS’ EQUITY (DEFICIT)
Stock-Based Compensation
In connection with the Merger, all of the issued and outstanding options to purchase shares of Prior Protagenic common stock converted, on a 1-for-1 basis, into options (the “
New Options
”), to purchase shares of our Series B Preferred Stock. The New Options will be administered under Prior Protagenic’s 2006 Employee, Director and Consultant Stock Plan (the “
2006 Plan
”), which the Company assumed and adopted.
The Plan is authorized to issue up to 2,000,000 stock options. In accordance with the Plan, the Company can grant to certain employees, directors or consultants options to purchase shares of the Company’s common stock which vest automatically or ranging from a one-year period to a five-year period. The shares are exercisable over a period of ten years from the date of grant. The Plan provides that qualified options be granted at an exercise price equal to the fair market value at the date of grant.
There were 2,484,445 options outstanding as of December 31, 2016. The fair value of each stock option granted was estimated using the Black-Scholes assumptions and or factors as follows:
Exercise price
|
|
|
$.26
|
-
|
$1.25
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
Risk free interest rate
|
|
|
1.01%
|
-
|
2.43%
|
|
Expected life in years
|
|
|
5
|
|
|
|
Expected volatility
|
|
|
85%
|
-
|
213%
|
|
The following is an analysis of the stock option grant activity under the Plan:
|
|
Number
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2016
|
|
|
1,707,744
|
|
|
$
|
0.84
|
|
|
|
6.45
|
|
Granted
|
|
|
1,193,300
|
|
|
$
|
1.25
|
|
|
|
10.35
|
|
Expired
|
|
|
(506,599
|
)
|
|
$
|
0.26
|
|
|
|
|
|
Converted
|
|
|
(25,000
|
)
|
|
$
|
0.26
|
|
|
|
|
|
Outstanding December 31, 2016
|
|
|
2,369,445
|
|
|
$
|
1.18
|
|
|
|
9.82
|
|
As of December 31, 2016 the Company had 2,484,445 shares issuable under options outstanding at a weighted average exercise price of $1.04 and an intrinsic value of $
$697,820.
On February 12, 2016, the Company issued 100,000 options under the 2006 Plan to its Chief Financial Officer as a sign-on bonus. These options have an exercise price of $1.25 per share, a ten-year term and vest over a three-year period in 35 monthly installments of 0.18 shares and a final installment of 2,778 shares. The terms of the option grant also include full vesting acceleration upon a change of control as defines. The Company recognized compensation expense related to this issuance of $25,696 for the year ended December 31, 2016.
On April 15, 2016, our Compensation Committee of our Board determined that each board member will be compensated an option grant of 40,000 options per year, plus 5,000 options for serving as the Chair of a committee. Options shall have 10-year expiration dates, 24-month vesting cycles, and a strike price of $1.25 per share, or more in future time periods to match the fair market value of the Company’s common stock. The aggregate amount granted was 175,000 options.
On April 15, 2016, the Board granted 1,009,300 options to employees and consultants. These options shall have 10-year expiration dates, 12 to 48 month vesting cycles, and a strike price of $1.25 per share. Having an aggregate fair market value of $1,261,625 on December 31, 2016.
During the year, 17,785 options were granted to former Atrinsic executives. These options have 3-year expiration dates, and a strike price of $1.25 per share. Having an aggregate fair market value of $22,231 on December 31, 2016.
The total number of options granted and vested during the year ended December 31, 2016 and 2015 was 1,308,300
and 1,272,982, respectively. The exercise price for these options was $1.25 per share.
The Company recognized compensation expense related to options issued of $546,134 and $477,868 during the years ended December 31, 2016 and 2015, respectively, which is included in general and administrative expenses.
On June 17, 2016, the stockholders of the Company approved the adoption of the 2016 equity compensation plan at the Special Meeting. No further options will be granted under the 2006 equity compensation plan, which we assumed in connection with the Merger.
On July 31, 2016 25,000 options were exercised into common stock of the Company for $6,500.
On October 26, 2016, the Board granted 25,000 options to an employee. These options shall have 10-year expiration dates, a 48 month vesting cycle with a one-year cliff, and a strike price of $1.25 per share.
Warrants:
In connection with the Merger, all of the issued and outstanding warrants to purchase shares of Prior Protagenic common stock, converted, on a 1 for 1 basis, into new warrants (the “
New Warrants
”) to purchase shares of our Series B Preferred Stock.
Simultaneous with the Merger and the Private Offering, New Warrants to purchase 3,403,367 shares of Series B Preferred Stock at an average exercise price of approximately $1.05 per share were issued to holders of Prior Protagenic warrants; additionally, holders of $665,000 of our debt and $35,000 of accrued interest exchanged such debt for five-year warrants to purchase 295,945 shares of Series B Preferred Stock at $1.25 per share. Placement Agent Warrants to purchase 127,346 shares of Series B Preferred Stock at an exercise price of $1.25 per share were issued in connection with the Private offering. These warrants to purchase 423,291 shares of Series B Preferred Stock have been recorded as derivative liabilities. See Note 6.
A summary of warrant issuances are as follows:
|
|
Number
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining
Life
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2016
|
|
|
3,403,367
|
|
|
$
|
1.03
|
|
|
|
5.80
|
|
Granted
|
|
|
423,291
|
|
|
$
|
1.25
|
|
|
|
4.12
|
|
Outstanding
December 31, 2016
|
|
|
3,826,658
|
|
|
$
|
1.05
|
|
|
|
5.61
|
|
As of December 31, 2016 the Company had 3,826,658 shares issuable under warrants outstanding at a weighted average exercise price of $1.07 and an intrinsic value of $763,342.
NOTE 8 –
INCOME TAXES
The components of (loss) income before income taxes are as follows:
|
|
201
6
|
|
|
201
5
|
|
Domestic
|
|
|
(2,182,114
|
)
|
|
|
(747,693
|
)
|
Foreign
|
|
|
(93,712
|
)
|
|
|
(275,729
|
)
|
(Loss) income before income taxes
|
|
|
(2,275,826
|
)
|
|
|
(1,023,422
|
)
|
The Company had no income tax expense due to operating losses incurred for the years ended December 31, 2016 and 2015.
For the years ended December 31, 2016 and 2015, a reconciliation of the Company’s effective tax rate to the statutory U.S. Federal rate is as follows:
|
|
201
6
|
|
|
201
5
|
|
Income taxes at Federal statutory rate
|
|
|
(34.0
|
%)
|
|
|
(34.0
|
%)
|
State income taxes, net of Federal income tax effect
|
|
|
(16.0
|
%
)
|
|
|
(13.0
|
%)
|
Perm difference
|
|
|
(7.0
|
%
)
|
|
|
0.0
|
%
|
Foreign tax rate differential
|
|
|
(0.2
|
%
)
|
|
|
2.4
|
%
|
Change in valuation allowance
|
|
|
50.4
|
%
|
|
|
43.5
|
%
|
Other
|
|
|
6.8
|
%
|
|
|
1.1
|
%
|
Income tax provision
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The tax effects of temporary differences that give rise to the Company’s deferred tax assets and liabilities are as follows:
|
|
201
6
|
|
|
201
5
|
|
U.S. net operating loss carryforwards
|
|
|
1,733,000
|
|
|
|
563,000
|
|
Stock compensation
|
|
|
(29,000
|
)
|
|
|
206,000
|
|
Canadian Provincial income tax losses
|
|
|
116,000
|
|
|
|
402,000
|
|
Canadian Provincial scientific investment tax credits
|
|
|
56,000
|
|
|
|
201,000
|
|
|
|
|
1,876,000
|
|
|
|
1,372,000
|
|
Valuation allowance
|
|
|
(1,876,000
|
)
|
|
|
(1,372,000
|
)
|
Net deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
As of December 31, 2016 and 2015, the Company had federal net operating loss carryforwards (“NOL”) of approximately $4,035,000 and $1,310,000, respectively. The losses expire beginning in 2024. The Company has not performed a detailed analysis to determine whether an ownership change under IRC Section 382 has occurred. The effect of an ownership change would be the imposition of annual limitation on the use of NOL carryforwards attributable to periods before the change Any limitation may result in expiration of a portion of the NOL before utilization. As of December 31, 2016 and 2015, the Company had state and local net operating loss carryforwards of approximately $4,027,000 and $1,303,000, respectively, to reduce future state tax liabilities also through 2035.
As of December 31, 2016 and 2015, the Company had Canadian NOL of approximately $1,174,000 and $1,256,000, respectively. The Canadian losses expire in stages beginning in 2026. As of December 31, 2016 and 2015, the Company also has unclaimed Canadian federal scientific research and development investment tax credits, which are available to reduce future federal taxes payable of approximately $56,000 and $201,000, respectively.
As a result of losses and uncertainty of future profit, the net deferred tax asset has been fully reserved. The net change in the valuation allowance during the years ended December 31, 2016 and 2015 was an increase of $242,000 and $445,000, respectively.
Foreign earnings are assumed to be permanently reinvested. U.S. Federal income taxes have not been provided on undistributed earnings of our foreign subsidiary.
The Company recognizes interest and penalties related to uncertain tax positions in selling, general and administrative expenses. The Company has not identified any uncertain tax positions requiring a reserve as of December 31, 2016 and 2015.
The Company is required to file U.S. federal and state income tax returns. These returns are subject to audit by tax authorities beginning with the year ended December 31, 2013.
NOTE 9 - COLLABORATIVE AGREEMENTS
The Company and the University of Toronto, a stockholder of the Company (the “University”) entered into an agreement effective December 14, 2004 (the “Research Agreement”) for the performance of a research project titled “Evidence for existence of TCAP receptors in neurons” (the “Project”). The Research Agreement expired on March 31, 2013.
The Company and the University entered into an agreement effective April 1, 2014 (the “New Research Agreement”) for the performance of a research project titled “Teneurin C-terminal Associated Peptide (“TCAP”) mediated stress attenuation in vertebrates: Establishing the role of organismal and intracellular energy and glucose regulation and metabolism" (the “New Project”). The New Project is to perform research related to work done by a professor at the University and stockholder of the Company (the “Professor”) in regard to TCAP mediated stress attenuation in vertebrates: Establishing the role of organismal and intracellular energy and glucose regulation and metabolism. In addition to the New Research Agreement, the Professor entered into an agreement with the University in order to commercialize certain technologies. The New Research Agreement expired on March 30, 2016. In February 2017, the New Research Agreement was extended to December 31, 2016 which allows for further development of the technologies and use of their applications. Upon expiration of the agreement, payments to the University and research support from the University will suspend until an agreement can be made.
Prior to January 1, 2016, the University has been granted 25,000 stock options which are fully vested at the exercise price of $1.00 exercisable over a 10 year period which ends on April 1, 2022. As of December 31, 2016, the Professor has been granted 483,299 stock options, of which 297,190 are fully vested, at an exercise price of $1.00 exercisable over 10 or 13 year periods which end either on March 30, 2021, December 1, 2022, April 15, 2026 or on March 1, 2027.
The sponsorship research and development expenses pertaining to the Research Agreements were $65,252 and $10,584 for the year ended December 31, 2016 and 2015, respectively.
NOTE 10 - LICENSING AGREEMENTS
On July 31, 2005, the Company had entered into a Technology License Agreement (“License Agreement”) with the University pursuant to which the University agreed to license to the Company patent rights and other intellectual property, among other things (the “Technologies”). The Technology License Agreement was amended on February 18, 2015 and currently does not provide for an expiration date.
Pursuant to the License Agreement and its amendment, the Company obtained an exclusive worldwide license to make, have made, use, sell and import products based upon the Technologies, or to sublicense the Technologies in accordance with the terms of the License Agreement and amendment. In consideration, the Company agreed to pay to the University a royalty payment of 2.5% of net sales of any product based on the Technologies. If the Company elects to sublicense any rights under the License Agreement and amendment, the Company agrees to pay to the University 10% of any up-front sub-license fees for any sub-licenses that occurred on or after September 9, 2006, and, on behalf of the sub-licensee, 2.5% of net sales by the sub-licensee of all products based on the Technologies. The Company had no sales revenue for the years ended December 31, 2016 and 2015 and therefore was not subject to paying any royalties.
In the event the Company fails to provide the University with semi-annual reports on the progress or fails to continue to make reasonable commercial efforts towards obtaining regulatory approval for products based on the Technologies, the University may convert our exclusive license into a non-exclusive arrangement. Interest on any amounts owed under the License Agreement and amendment will be at 3% per annum. All intellectual property rights resulting from the Technologies or improvements thereon will remain the property of the other inventors and/or the Professor, and/or the University, as the case may be. The Company has agreed to pay all out-of- pocket filing, prosecution and maintenance expenses in connection with any patents relating to the Technologies. In the case of infringement upon any patents relating to the Technologies, the Company may elect, at its own expense, to bring a cause of action asserting such infringement. In such a case, after deducting any legal expenses the Company may incur, any settlement proceeds will be subject to the 2.5% royalty payment owed to the University under the License Agreement and amendment.
The patent applications were made in the name of the Professor and other inventors, but the Company’s exclusive, worldwide rights to such patent applications are included in the License Agreement and its amendment with the University. The Company maintains exclusive licensing agreements and it currently controls the six intellectual patent properties.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Consulting Agreement
The Company had an employment agreement with its Officer/Related Party which expired on December 31, 2015. The employment agreement indicated a salary of $6,489 per month plus a bonus, other healthcare benefits and was granted stock options during the year ended December 31, 2015, the Officer/Related Party has been granted 75,000 stock options, valued at $64,223 using the Black-Scholes calculation of which $53,519 was expensed in 2015.
As the agreement above expired, the Company issued a consulting agreement in its place that extended the majority of the terms of the employment agreement on a month-to-month basis. As a consultant, he is responsible for financial reporting, data compilation, and document retrieval services, reporting to the Chief Financial Officer, and to endeavor to secure non-dilutive grant funding for the Company. Prior to January 1, 2016, the Consultant had been granted 250,000 stock options, which are fully vested, at exercise prices of $0.26, $1.00, and $1.25 exercisable over 10 year periods which ends either August 1, 2016 or March 9, 2025. The consultant will be paid $2,000 per month for the remainder of the year ended December 31, 2016 and is eligible for bonus payments both contingent and not contingent on obtaining non-dilutive grant financing for the Company. Either party may terminate the agreement (a) immediately at any time upon written notice to the other party in the event of a breach of the agreement by the other party which cannot be cured (i.e. breach of the confidentiality obligations) and or (b) at any time without cause upon not less than fifteen (15) days’ prior written notice to the other party. Upon expiration or termination, neither the Company nor Consultant will have any further obligations under the consulting agreement.
The Company has accrued $41,595 to the Consultant for research and development projects during the year ended December 31, 2016 and paid $0 during the year ended December 31, 2016.
Consulting Agreement
PTI Canada entered into a consulting agreement with a stockholder of the Company (the “Consultant”) which expired on December 31, 2015, pursuant to which the Consultant is responsible for overseeing i) design and development of enzyme-linked immunosorbent assay “(ELISA”), assays for measuring TCAP, ii) evaluation of TCAP exposure biomarker assay, iii) development of pipeline peptides, and iv) development of clinically compatible formulations for TCAP, as well as all of the bench research and development of formulation and extraction methods. The agreement has been extended through December 31, 2016 and updated accordingly. Prior to January 1, 2016, the Consultant had been granted 150,000 stock options which are fully vested at exercise prices of $1.00 and $1.25 exercisable over 10 year periods which ends either on March 30, 2021 or on March 1, 2025. The Consultant is paid approximately CA$3,000 per month. Either party may terminate the agreement (a) immediately at any time upon written notice to the other party in the event of a breach of the agreement by the other party which cannot be cured (i.e. breach of the confidentiality obligations) and or (b) at any time without cause upon not less than fifteen (15) days’ prior written notice to the other party. Upon expiration or termination, neither the Company nor Consultant will have any further obligations under the consulting agreement.
The Company has accrued $22,656 to pay the Consultant for research and development projects during the year ended December 31, 2016 and paid $10,861 during the year ended December 31, 2016.
Legal Proceedings
From time to time we may be named in claims arising in the ordinary course of business. Currently, no legal proceedings, government actions, administrative actions, investigations or claims are pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.
NOTE 12 - SUBSEQUENT EVENTS
The Company has evaluated the period after the balance sheet date up through the date that the condensed consolidated financial statements were filed, and determined that other than noted above, there were subsequent events or transactions that required recognition or disclosure in the condensed consolidated financial statements.
F-21