NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2018
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.
NOTE
2 - GOING CONCERN
As
shown in the accompanying unaudited condensed consolidated financial statements, the Company incurred a net loss of $1,270,369
and $1,108,945 for the six months ended June 30, 2018 and 2017, respectively. The Company has incurred losses since inception
resulting in an accumulated deficit of $12,112,128 as of June 30, 2018. The Company anticipates further losses in the development
of its business. The Company had a net working capital of $559,075 at June 30, 2018 as a result of the continuing operations of
the company. Based on its current forecast and budget, Management believes that its cash resources will be sufficient to fund
its operations at least until the end of the fourth 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 unaudited condensed consolidated financial statements, the Company had an accumulated deficit at June 30, 2018,
a net loss and net cash used in operating activities for the six months ended June 30, 2018. 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
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and
regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. In the opinion
of the Company’s management, the accompanying condensed consolidated financial statements reflect all adjustments, consisting
of normal, recurring adjustments, considered necessary for a fair presentation of the results for the interim periods ended June
30, 2018 and 2017. As this is an interim period financial statement, certain adjustments are not necessary as with a financial
period of a full year. Although management believes that the disclosures in these unaudited condensed consolidated financial statements
are adequate to make the information presented not misleading, certain information and footnote disclosures normally included
in financial statements that have been prepared in accordance U.S. GAAP have been condensed or omitted pursuant to the rules and
regulations of the SEC.
The
condensed 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.
The
accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s financial
statements for the year ended December 31, 2017, which contains the audited financial statements and notes thereto, for the years
ended December 31, 2017 and 2016 included within the Company’s Form 10-K/A filed with the SEC on April 5, 2018. The interim
results for the six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the year ended
December 31, 2018 or for any future interim periods.
Principles
of consolidation
The
unaudited condensed 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 unaudited condensed consolidated financial statements.
Use
of estimates
The
preparation of unaudited condensed 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 unaudited condensed 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 unaudited condensed
consolidated financial statements include the allocation of the fair value of acquired assets and liabilities associated with
the Merger, income tax provisions, valuation of stock options and warrants and assessment of deferred tax asset valuation allowance.
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 June 30, 2018, and December 31, 2017, 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 three
years. Depreciation expense was not material for the six months ended June 30, 2018 and 2017.
Marketable
Securities
The
Company accounts for marketable debt securities, the only type of securities it owns, 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 shall be measured subsequently
at fair value in the unaudited condensed 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.
During
the six months ended June 30, 2018 the Company purchased $1,777,355 and sold $2,220,000 in marketable securities with a realized
gain of $1,568 and an unrealized gain of $4,893. As of June 30, 2018 and December 31, 2017, the Company owns marketable securities
with a total value of $849,569 and 1,285,753, respectively.
As
of June 30, 2018, the marketable securities have maturity dates ranging from July 26, 2018 to August 23, 2018.
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 June 30, 2018.
|
|
Carrying
|
|
|
Fair Value Measurement Using
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
849,569
|
|
|
|
—
|
|
|
|
849,569
|
|
|
|
—
|
|
|
|
849,569
|
|
Derivative warrants liabilities
|
|
$
|
(407,616
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(407,616
|
)
|
|
$
|
(407,616
|
)
|
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
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 six months
ended June 30, 2018:
|
|
Fair Value Measurement
Using Level 3
|
|
|
|
Inputs Total
|
|
Balance, December 31, 2017
|
|
$
|
425,838
|
|
Change in fair value of derivative warrants liabilities
|
|
|
(18,222
|
)
|
Balance, June 30, 2018
|
|
$
|
407,616
|
|
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:
|
|
December 31, 2017
|
|
|
June 30, 2018
|
|
Exercise price
|
|
|
1.25
|
|
|
|
1.25
|
|
Risk free interest rate
|
|
|
1.98
|
%
|
|
|
2.63
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
144
|
%
|
|
|
145
|
%
|
Contractual term
|
|
|
3.15 Years
|
|
|
|
2.65 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
measurement.
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 six months ended June 30, 2018 and 2017, the Company marked the derivative feature of the warrants to fair value and recorded
a gain of $18,222 and a gain of $12,544 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 unaudited condensed 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 Six Months Ended
June 30, 2018
|
|
|
For the Year Ended
December 31, 2017
|
|
|
|
|
|
|
|
|
Conversion Feature Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issuable under the conversion feature of preferred shares
|
|
|
872,766
|
|
|
|
872,766
|
|
|
|
|
|
|
|
|
|
|
Stock Option
|
|
|
3,846,299
|
|
|
|
3,566,299
|
|
|
|
|
|
|
|
|
|
|
Warrant
|
|
|
3,826,658
|
|
|
|
3,826,658
|
|
|
|
|
|
|
|
|
|
|
Total potentially outstanding dilutive common shares
|
|
|
8,545,723
|
|
|
|
8,265,723
|
|
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 unaudited condensed 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 unaudited condensed 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
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 U.S. 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 unaudited condensed 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 adoption of
this principle did not have an effect on the Company’s Statement of Cash Flows.
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 unaudited condensed 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. 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. Based on the Company’s analysis the
Company did not identify a cumulative effect adjustment for initially applying the new revenue standards.
NOTE
4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consist of the following at:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Accounting
|
|
$
|
25,144
|
|
|
$
|
161
|
|
Research and development
|
|
|
92,995
|
|
|
|
124,728
|
|
Other
|
|
|
6,794
|
|
|
|
10,965
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
124,933
|
|
|
$
|
135,854
|
|
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, 2018, 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 ten years from the date of issuance.
There
were 3,846,299 options outstanding as of June 30, 2018. 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
|
|
|
2.73%
- 2.85
|
%
|
Expected
life in years
|
|
|
4.00-9.65
|
|
Expected
volatility
|
|
|
139%
- 146
|
%
|
There
were 2,613,299 options outstanding as of June 30, 2017. The fair value of each stock option granted was estimated using the Black-Scholes
assumptions and or factors as follows:
Exercise
price
|
|
$
|
1.00
- $1.25
|
|
Expected
dividend yield
|
|
|
0
|
%
|
Risk
free interest rate
|
|
|
1.89%
- 2.31
|
%
|
Expected
life in years
|
|
|
4.60
– 9.59
|
|
Expected
volatility
|
|
|
204%
- 258
|
%
|
The
following is an analysis of the stock option grant activity under the Plan:
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average Remaining
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Life
|
|
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2017
|
|
|
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
|
|
Granted
|
|
|
280,000
|
|
|
$
|
1.75
|
|
|
|
9.90
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2018
|
|
|
3,846,299
|
|
|
$
|
1.36
|
|
|
|
7.71
|
|
A
summary of the status of the Company’s nonvested shares as of June 30, 2018, and changes during the six months ended June
30, 2018, is presented below:
Nonvested Shares
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Nonvested at January 1, 2018
|
|
|
1,492,861
|
|
|
$
|
1.54
|
|
Granted
|
|
|
280,000
|
|
|
$
|
1.75
|
|
Vested
|
|
|
(520,684
|
)
|
|
$
|
1.25
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Nonvested at June 30, 2018
|
|
|
1,252,177
|
|
|
$
|
1.59
|
|
As
of June 30, 2018, the Company had 3,846,299 shares issuable under options outstanding at a weighted average exercise price of
$1.36 and an intrinsic value of $176,250.
There
were no options granted during the three months ended June 30, 2018 and 2017.
The
total number of options granted during the six months ended June 30, 2018 and 2017 was 280,000 and 150,000, respectively. The
exercise price for these options was $1.75 per share or $1.25 per share.
The
Company recognized compensation expense related to options issued of $263,148 and $145,541 during the three months ended June
30, 2018 and 2017, respectively, which is included in general and administrative expenses and research and development expenses.
For the three months ended June 30, 2018, $145,422 of the stock compensation was related to employees and $117,726 was related
to non-employees.
The
Company recognized compensation expense related to options issued of $607,795 and $500,877 during the six months ended June 30,
2018 and 2017, respectively, which is included in general and administrative expenses and research and development expenses. For
the six months ended June 30, 2018, $311,635 of the stock compensation was related to employees and $296,160 was related to non-employees.
As
of June 30, 2018, the unamortized stock option expense was $1,579,637 with $769,566 being related to employees and $810,071 being
related to non-employees. As of June 30, 2018, the weighted average period for the unamortized stock compensation to be recognized
is 2.66 years.
On
January 24, 2018, the Company entered into a consulting agreement (the “Agreement”) with NeuroAssets Sàrl (“Consultant”),
a Swiss company. As part of the agreement, 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 ten 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 ten years.
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 Remaining
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Life
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2018
|
|
|
3,826,658
|
|
|
$
|
1.05
|
|
|
|
4.69
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding June 30, 2018
|
|
|
3,826,658
|
|
|
$
|
1.05
|
|
|
|
4.19
|
|
As
of June 30, 2018 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.
NOTE
7 - 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 ten-year period which ends on April 1, 2022. As of June 30, 2018 the Professor has been granted 533,299
stock options, of which 396,451 are fully vested, at an exercise price of $1.00, $1.25 or 1.75 exercisable over ten or
thirteen year periods which end either on March 30, 2021, December 1, 2022, April 15, 2026, March 1, 2027 or on October
16, 2027.
The
sponsorship research and development expenses pertaining to the Research Agreements were $0 and $20,233 for the six months ended
June 30, 2018 and 2017, respectively.
NOTE
8 - 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 six months ended June 30, 2018 and 2017 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
9 - 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
$10,428 during the six months ended June 30, 2018.
Consulting
Agreement
PTI
Canada entered into a consulting agreement (the “PTI Canada Consulting Agreement”) with a stockholder of the
Company (the “Consultant”) which, as amended, expires on December 31, 2017. Pursuant to the PTI Canada 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 ten 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 PTI Canada Consulting Agreement either (a)
immediately at any time upon written notice to the other party in the event of a breach of such 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 PTI Canada Consulting Agreement. As of the first quarter of 2018, the
Company will no longer be making the fixed monthly payments and will instead be paying the Consultant for
their services on an as needed basis.
The
Company has accrued $0 to pay the Consultant for research and development projects during the six months ended June 30, 2018 and
paid $8,338 during the six months ended June 30, 2018.
On
January 24, 2018, the Company entered into a consulting agreement (the “Consulting Agreement”) with NeuroAssets
Sàrl (“NeuroAssets”), a Swiss company. Under the Consulting Agreement, NeuroAssets will
provide us with advisory services relating to introductions and presentations to pharmaceutical companies who could potentially
become our corporate partners. The Consulting Agreement may be terminated by either party at any time upon notice. The
Company plans to pay NeuroAssets $5,000 per month until such time as the Consulting Agreement is terminated.
The
Consulting 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 ten 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 NeuroAssets.
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.