NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2017
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 previously 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.
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 - GOING CONCERN
As
shown in the accompanying consolidated financial statements, the Company incurred a net loss of $2,259,636 and $2,275,826 for
the years ended December 31, 2017 and 2016, respectively. The Company has incurred losses since inception resulting in an accumulated
deficit of $10,841,759 as of December 31, 2017. The net loss presented for the twelve months is attributed to an increase in research
and development expense and an increase in stock compensation expense. The net loss present for the prior period was attributed
to goodwill impairment, an increase in professional fees as related to the Merger, and an increase in stock compensation expense.
The Company anticipates further losses in the development of its business. The Company had a net working capital of $1,218,290
at December 31, 2017 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 fourth quarter of 2018.
As
reflected in the consolidated financial statements, the Company had an accumulated deficit at December 31, 2017, a net loss and
net cash used in operating activities for the year ended. These factors raise substantial doubt about the Company’s ability
to continue as a going concern.
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 (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission
(“SEC”).
The
consolidated financial statements include the accounts of Protagenic Therapeutics, Inc., and its wholly-owned Canadian subsidiary,
PTI Canada. All significant intercompany balances and transactions have been eliminated in consolidation.
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 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 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, income tax provisions, impairment of goodwill,
valuation of stock options and warrants and assessment of deferred tax asset valuation allowance.
Reclassification
Certain
prior period amounts have been reclassified to conform to current period presentation.
Concentrations
of Credit Risk
The
Company maintains its cash accounts at financial institutions which are insured by the Federal Deposit Insurance Corporation.
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, 2017, and 2016, 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, 2017 and 2016.
Marketable
Securities
The
Company accounts for marketable debt and equity securities, available for sale, in accordance with sub-topic 320-10 of the FASB
Accounting Standards Codification (“Sub-topic 320-10”).
Pursuant
to Paragraph 320-10-35-1, investments in debt securities that are classified as available for sale and equity securities that
have readily determinable fair values that are classified as available for sale shall be measured subsequently at fair value in
the consolidated balance sheets at each balance sheet date. Unrealized holding gains and losses for available-for-sale securities
(including those classified as current assets) shall be excluded from earnings and reported in other comprehensive income until
realized except an available-for-sale security that is designated as being hedged in a fair value hedge, from which all or a portion
of the unrealized holding gain and loss of shall be recognized in earnings during the period of the hedge, pursuant to paragraphs
815-25-35-1 through 815-25-35-4.
During
the year ended December 31, 2017 the Company purchased $3,431,414 and sold $2,145,000 in marketable securities with a realized
gain of $766 and an unrealized loss of $1,427. As of December 31, 2017, the Company owns marketable securities with a total value
of $1,285,753.
As
of December 31, 2017, the marketable securities have maturity dates ranging from January 4, 2018 to February 22, 2018.
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. As of December 31, 2017, the goodwill was $0.
Fair
Value Measurements
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, 2017.
|
|
Carrying
|
|
|
Fair
Value Measurement Using
|
|
|
|
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
1,285,753
|
|
|
|
—
|
|
|
|
1,285,753
|
|
|
|
—
|
|
|
|
1,285,753
|
|
Derivative
warrants liabilities
|
|
$
|
(425,838
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(425,838
|
)
|
|
$
|
(425,838
|
)
|
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, 2017:
|
|
Fair
Value Measurement
Using
Level 3 Inputs
|
|
|
|
Total
|
|
Balance,
December 31, 2016
|
|
$
|
516,870
|
|
Change
in fair value of derivative warrants liabilities
|
|
|
(91,032
|
)
|
Balance,
December 31, 2017
|
|
$
|
425,838
|
|
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 assumptions:
|
|
February
12, 2016
|
|
|
December
31, 2016
|
|
|
December
31, 2017
|
|
Exercise
price
|
|
$
|
1.25
|
|
|
$
|
1.25
|
|
|
|
1.25
|
|
Risk
free interest rate
|
|
|
1.20
|
%
|
|
|
1.93
|
%
|
|
|
1.98
|
%
|
Dividend
yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected
volatility
|
|
|
156
|
%
|
|
|
219
|
%
|
|
|
144
|
%
|
Contractual
term
|
|
|
5.0
years
|
|
|
|
4.25
years
|
|
|
|
3.15
Years
|
|
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, 2017 and 2016, the Company marked the derivative feature of the warrants to fair value and recorded
a loss of $91,032 and a gain of $29,445 relating to the change in fair value, respectively.
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.
If
any award granted under the 2016 Plan payable in shares of common stock is forfeited, cancelled, or returned for failure to satisfy
vesting requirements, otherwise terminates without payment being made, or if shares of common stock are withheld to cover withholding
taxes on options or other awards, the number of shares of common stock as to which such option or award was forfeited, or which
were withheld, will be available for future grants under the 2016 Plan. The company recognizes the impact of forfeitures when
they occur.
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 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, 2017
|
|
|
For
the Year
Ended
December 31, 2016
|
|
|
|
|
|
|
|
|
Conversion
Feature Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares issuable under the conversion feature of preferred shares
|
|
|
872,766
|
|
|
|
872,766
|
|
|
|
|
|
|
|
|
|
|
Stock
Option
|
|
|
3,566,299
|
|
|
|
2,484,445
|
|
|
|
|
|
|
|
|
|
|
Warrant
|
|
|
3,826,658
|
|
|
|
3,826,658
|
|
|
|
|
|
|
|
|
|
|
Total
potentially outstanding dilutive common shares
|
|
|
8,265,723
|
|
|
|
7,183,869
|
|
Research
and Development
Research
and development expenses are charged to operations as incurred.
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
January 2016, the FASB issued ASU No. 2016-01, “
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities”
. The update addresses certain aspects of recognition, measurement, presentation
and disclosure of financial instruments. For public business entities, the amendments in this update are effective for fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted only
for certain portions of the ASU related to financial liabilities. The Company is currently evaluating the impact of the provisions
of this new standard on the consolidated financial statements.
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.
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.
In
September 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-13,
Revenue
Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842).
The
new standards, among other things, provide additional implementation guidance with respect to Accounting Standards Codification
(ASC) Topic 606 and ASC Topic 842. ASU 2017-13 is effective for annual reporting periods beginning after December 15, 2017, including
interim reporting periods within that reporting period. The Company is currently evaluating the impact of the new standard, but
does not expect it to have a material impact on its implementation strategies or its consolidated financial statements upon adoption.
NOTE
4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consist of the following at:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Legal
|
|
$
|
-
|
|
|
$
|
1,190
|
|
Accounting
|
|
|
161
|
|
|
|
-
|
|
Patent
expense
|
|
|
-
|
|
|
|
37,142
|
|
Research
and development
|
|
|
124,728
|
|
|
|
116,255
|
|
Other
|
|
|
10,965
|
|
|
|
13,400
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
135,854
|
|
|
$
|
167,987
|
|
NOTE
5 - 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
6 - STOCKHOLDERS’ EQUITY (DEFICIT)
Stock-Based
Compensation
In
connection with the consummation of the Merger completed on February 12, 2016, we adopted the pre-merger Protagenic Therapeutics,
Inc.’s 2006 Employee, Director and Consultant Stock Plan (the “2006 Plan”). On June 17, 2016, our stockholders
adopted our 2016 Equity Compensation Plan (the “2016 Plan”) and, as a result, we terminated the 2006 Plan. We will
not grant any further awards under the 2006 Plan. All outstanding grants under the 2006 Plan will continue in effect in accordance
with the terms of the particular grant and the 2006 Plan.
Pursuant
to the 2016 Plan, the Company’s Compensation Committee may grant awards to any employee, officer, director, consultant,
advisor or other individual service provider of the Company or any subsidiary. On January 1, 2017, pursuant to an annual “evergreen”
provision contained in the 2016 Plan, the number of shares reserved for future grants was increased by 564,378 shares. As a result
of this increase, as of January 1, 2017, the aggregate number of shares of common stock available for awards under the 2016 Plan
is 2,712,678. Options issued under the 2016 Plan are exercisable for up to 10 years from the date of issuance.
There
were 3,566,299 options outstanding as of December 31, 2017. The fair value of each stock option granted was estimated using the
Black-Scholes assumptions and or factors as follows:
Exercise
price
|
|
$
|
1.25
- $1.75
|
|
Expected
dividend yield
|
|
|
0
|
%
|
Risk
free interest rate
|
|
|
1.54%
- 2.40
|
%
|
Expected
life in years
|
|
|
5
|
|
Expected
volatility
|
|
|
146%
- 266
|
%
|
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
|
|
$
|
0.26
- $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:
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
Average
|
|
|
|
Number
|
|
|
Exercise
Price
|
|
|
Remaining
Life
|
|
Stock
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
January 1, 2016
|
|
|
1,707,744
|
|
|
$
|
0.84
|
|
|
|
6.45
|
|
Granted
|
|
|
1,308,300
|
|
|
$
|
1.25
|
|
|
|
10.35
|
|
Expired
|
|
|
(506,599
|
)
|
|
$
|
0.26
|
|
|
|
|
|
Converted
|
|
|
(25,000
|
)
|
|
$
|
0.26
|
|
|
|
|
|
Outstanding
December 31, 2016
|
|
|
2,484,445
|
|
|
$
|
1.18
|
|
|
|
9.82
|
|
Granted
|
|
|
1,103,000
|
|
|
$
|
1.68
|
|
|
|
8.96
|
|
Expired
|
|
|
(21,146
|
)
|
|
$
|
1.00
|
|
|
|
|
|
Outstanding
December 31, 2017
|
|
|
3,566,299
|
|
|
$
|
1.33
|
|
|
|
8.05
|
|
A
summary of the status of the Company’s nonvested shares as of December 31, 2017, and changes during the year ended December
31, 2017, is presented below:
Nonvested
Shares
|
|
Shares
|
|
|
Weighted-Average
Grant-Date
Fair
Value
|
|
Nonvested
at January 1, 2017
|
|
|
1,211,463
|
|
|
$
|
1.25
|
|
Granted
|
|
|
1,103,000
|
|
|
$
|
1.68
|
|
Vested
|
|
|
(800,456
|
)
|
|
$
|
1.36
|
|
Forfeited
|
|
|
(21,146
|
)
|
|
$
|
1.00
|
|
Nonvested
at December 31, 2017
|
|
|
1,492,861
|
|
|
$
|
1.54
|
|
As
of December 31, 2017, the Company had 3,566,299 shares issuable under options outstanding at a weighted average exercise price
of $1.33 and an intrinsic value of $181,537.
The
total number of options granted during the year ended December 31, 2017 and 2016 was 1,103,000 and 1,308,300, respectively. The
exercise price for these options was $1.25 per share or $1.75 per share.
The
Company recognized compensation expense related to options issued of $888,281 and $546,134 during the years ended December 31,
2017 and 2016, respectively, which is included in general and administrative expenses. For the year ended December 31, 2017, $635,400
of the stock compensation was related to employee and $281,568 was related to non-employees.
As
of December 31, 2017, the unamortized stock option expense was $1,796,263 with $1,039,638 being related to employees and
$756,625 being related to non-employees. As of December 31, 2017, the weighted average period for the unamortized stock
compensation to be recognized is 8.19 years.
On
October 16, 2017, the Board granted 953,000 options to employees, consultants and Board members. These options shall have 10-year
expiration dates, 12 to 48 month vesting cycles, and a strike price of $1.75 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 5.
A
summary of warrant issuances are as follows:
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
Average
|
|
|
|
Number
|
|
|
Exercise
Price
|
|
|
Remaining
Life
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
January 1, 2017
|
|
|
3,826,658
|
|
|
$
|
1.05
|
|
|
|
5.61
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
December 31, 2017
|
|
|
3,826,658
|
|
|
$
|
1.05
|
|
|
|
4.69
|
|
As
of December 31, 2017 the Company had 3,826,658 shares issuable under warrants outstanding at a weighted average exercise price
of $1.05 and an intrinsic value of $763,342.
During
the year ended December 31, 2017, the expiration date for the 100,000 share warrant held by a former consultant was extended by
3 years from January 2, 2017 to January 2, 2020. Related to this warrant modification a compensation expense of $99,782 was recorded.
NOTE
7 – INCOME TAXES
The
components of loss before income taxes are as follows:
|
|
2017
|
|
|
2016
|
|
Domestic
|
|
|
(2,134,722
|
)
|
|
|
(2,182,114
|
)
|
Foreign
|
|
|
(124,914
|
)
|
|
|
(93,712
|
)
|
Loss
before income taxes
|
|
|
(2,259,636
|
)
|
|
|
(2,275,826
|
)
|
The
Company had no income tax expense due to operating losses incurred for the years ended December 31, 2017 and 2016.
For
the years ended December 31, 2017 and 2016, a reconciliation of the Company’s effective tax rate to the statutory U.S. Federal
rate is as follows:
|
|
2017
|
|
|
2016
|
|
Income
taxes at Federal statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State
income taxes, net of Federal income tax effect
|
|
|
(8.4
|
)%
|
|
|
(16.0
|
)%
|
Perm
difference
|
|
|
0.0
|
%
|
|
|
(7.0
|
)%
|
Foreign
tax rate differential
|
|
|
(0.2
|
)%
|
|
|
(0.2
|
)%
|
Change
in valuation allowance
|
|
|
42.6
|
)%
|
|
|
50.4
|
%
|
Other
|
|
|
0.0
|
)%
|
|
|
6.8
|
%
|
Income
tax provision
|
|
|
0.0
|
)%
|
|
|
0.0
|
%
|
In
December 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act makes changes to U.S. tax
law, including a reduction in the corporate tax rate from 35% to 21%. As a result of the enacted law, the Company was required
to revalue deferred tax assets and liabilities at the enacted rate. Due to the timing of the enactment and the complexity involved
in applying the provisions of the Tax Act, the Company has made reasonable estimates of the effects in its consolidated financial
statements as of December 31, 2017. As the Company collects and prepares necessary data and interprets the Tax Act and any additional
guidance issued by the U.S. Treasury Department, the IRS, the SEC, and other standard-setting bodies, it may make adjustments
to the provisional amounts. The accounting for the tax effects of the Tax Act will be completed in 2018.
The
tax effects of temporary differences that give rise to the Company’s deferred tax assets and liabilities are as follows:
|
|
2017
|
|
|
2016
|
|
U.S.
net operating loss carryforwards
|
|
|
2,168,000
|
|
|
|
1,899,000
|
|
Stock
compensation
|
|
|
472,000
|
|
|
|
449,000
|
|
Canadian
Provincial income tax losses
|
|
|
123,000
|
|
|
|
116,000
|
|
Canadian
Provincial scientific investment tax credits
|
|
|
-
|
|
|
|
56,000
|
|
|
|
|
2,763,000
|
|
|
|
2,520,000
|
|
Valuation
allowance
|
|
|
(2,763,000
|
)
|
|
|
(2,520,000
|
)
|
Net
deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
As
of December 31, 2017 and 2016, the Company had federal net operating loss carryforwards (“NOL”) of approximately $5,287,000
and $4,338,000, 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, 2017 and 2016, the Company had state and local net operating loss
carryforwards of approximately $5,272,000 and $4,331,000, respectively, to reduce future state tax liabilities also through 2035.
As
of December 31, 2017 and 2016, the Company had Canadian NOL of approximately $1,002,000 and $771,000, respectively. The Canadian
losses expire in stages beginning in 2026. As of December 31, 2017 and 2016, 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 $0
and $56,000 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, 2017 and 2016 was an increase of $243,000 and $1,148,000, 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, 2017 and 2016.
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
8 - 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. On October 16, 2017, the profession was granted
20,000 stock options which vest monthly for 48 months, has an exercise price of $1.75 and expires on October 16, 2027
The
sponsorship research and development expenses pertaining to the Research Agreements were $93,919 and $65,252 for the years ended
December 31, 2017 and 2016, 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, 2017 and 2016 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 a former officer (the “Former Officer”) which expired on December 31, 2015.
The employment agreement indicated a salary of $6,489 per month plus a bonus, including healthcare benefits. The Former Officer
was also granted 75,000 stock options, valued at $64,223 using the Black-Scholes calculation of which $53,519 was expensed in
2015.
Upon
the expiration of the employment agreement, the Company and Former Officer entered into a consulting agreement in its place, which
provides that the Company may retain the Former Officer as a consultant on an as-needed basis. As a consultant, the Former Officer
is responsible for Canadian financial reporting, data compilation, and document retrieval services, reporting to the Chief Financial
Officer, and to endeavor to secure Canadian non-dilutive grant funding for the Company. The Former Officer has been granted 250,000
stock options in total, 25,000 of which expired unexercised. The remaining 225,000 are fully vested, at exercise prices of $1.00
and $1.25, with certain options expiring on March 30, 2021, March 1, 2024 and March 9, 2025. Either party may terminate the agreement
either (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) 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 Former
Officer will have any further obligations under the consulting agreement.
The
Company has accrued $0 to the Former Officer for research and development projects and paid the equivalent in U.S. dollars of
$13,168 during the year ended December 31, 2017.
Consulting
Agreement
PTI
Canada entered into a consulting agreement with a stockholder of the Company (the “Consultant”) which, which as amended,
expires on December 31, 2017. Pursuant to the consulting agreement, 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 Consultant has 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 end either
on March 30, 2021 or March 1, 2025. The Consultant is paid the Canadian equivalent of approximately US$2,370 per month. Either
party may terminate the consulting agreement either (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) 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 $0 to pay the Consultant for research and development projects during the year ended December 31, 2017 and
paid $25,449 during the year ended December 31, 2017.
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
On
January 24, 2018, the company entered into a consulting agreement (the “Agreement”) with NeuroAssets Sàrl (“Consultant”),
a Swiss company. Under the Agreement, Consultant will provide us with advisory services relating to introductions and presentations
to pharmaceutical companies who could potentially become our corporate partners. The Agreement may be terminated by either party
at any time upon notice. The Company plans to pay Consultant $5,000 per month until such time as the Agreement is terminated.
The
Agreement also provided for the grant of options to Consultant. Accordingly, on February 20, 2018, the Compensation Committee
of the Company’s Board of Directors approved a grant of 200,000 options under our 2016 Equity Compensation Plan. The options
vest over 48 months in equal monthly installments with the first monthly vesting event scheduled to occur on March 20, 2018, have
a term of 10 years and are exercisable at a price of $1.75 per share. The vesting of the options will accelerate if a corporate
partnership results from an introduction made by Consultant.
During
the first quarter the company granted 80,000 stock options to four consultants. 50,000 of these options vest immediately and the
remaining 30,000 options vest monthly over 48 months, have an exercise price of $1.75, and have a term of 10 years.