NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September
30, 2020
NOTE
1 – ORGANIZATION AND NATURE OF BUSINESS
Company
Background
Protagenic
Therapeutics, Inc. (“we,” “our,” “Protagenic” or “the Company”), is a Delaware
corporation with one subsidiary named Protagenic Therapeutics Canada (2006) Inc. (“PTI Canada”), 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 Exchange Act
of 1934, 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. (“Prior Protagenic”) through a reverse merger.
On
February 12, 2016, Protagenic Acquisition Corp., a wholly-owned subsidiary of the Company, 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 has continued 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 consolidated financial statements, the Company has incurred significant reoccurring losses resulting
in an accumulated deficit. The Company anticipates further losses in the development of its business. The Company had negative
cash flows used in operations. These factors raise substantial doubt about the Company’s ability to continue as a going
concern.
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 third quarter of 2021. Absent generation of sufficient revenue from the execution of the Company’s
business plan and sales revenue is not anticipated before 2024, the Company will need to obtain debt or equity financing by the
third quarter of 2021. Management believes that actions presently being taken to obtain additional funding provide the opportunity
for the Company to continue as a going concern. The accompanying financial statements have been prepared assuming the Company
will continue as a going concern; no adjustments to the financial statements have been made to account for this uncertainty.
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 September
30, 2020 and 2019. 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 Securities and Exchange Commission (the “SEC”).
The
accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s financial
statements for the year ended December 31, 2019, which contain the audited financial statements and notes thereto, for the years
ended December 31, 2019 and 2018 included within the Company’s Form 10-K filed with the SEC on April 29, 2020. The interim
results for the nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the year
ending December 31, 2020 or for any future interim periods.
Principles
of consolidation
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 the consolidated financial statements.
Reclassifications:
Reclassifications of
prior periods have been made to conform with current year presentation
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 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.
While the Company’s marketable securities are cash equivalents it is the Company’s policy to present them separately
on the balance sheet. As of September 30, 2020 and December 31, 2019, 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 nominal for the three and nine months ended September 30, 2020 and 2019.
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 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 nine months ended September 30, 2020 and 2019, the Company purchased $0 and sold $250,000 in marketable securities, respectively.
As
of September 30, 2020 and December 31, 2019, the Company owned marketable securities with a total value of $0 and $0, respectively.
The Company recorded a realized gain on marketable securities of $0 and $4,435 for the nine months ended September 30, 2020 and
2019, respectively.
As
of September 30, 2020 and December 31, 2019, the Company held no marketable securities.
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 on a recurring basis as of September 30, 2020.
|
|
|
Carrying
|
|
|
Fair
Value Measurement Using
|
|
|
|
|
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative warrants
liabilities
|
|
$
|
190,315
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
190,315
|
|
|
$
|
190,315
|
|
The
following table provides a summary of financial instruments that are measured at fair value on a recurring basis as of
December 31, 2019.
|
|
|
Carrying
|
|
|
Fair
Value Measurement Using
|
|
|
|
|
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative warrants
liabilities
|
|
$
|
332,222
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
332,222
|
|
|
$
|
332,222
|
|
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 nine months
ended September 30, 2020 and the year ended December 31, 2019:
|
|
|
Fair
Value Measurement
Using
Level 3
|
|
|
|
|
Inputs
Total
|
|
|
Balance, December 31, 2018
|
|
|
676,079
|
|
|
Change in fair
value of derivative warrants liabilities
|
|
|
(343,857
|
)
|
|
Balance, December 31, 2019
|
|
$
|
332,222
|
|
|
Change in fair
value of derivative warrants liabilities
|
|
|
(141,907
|
)
|
|
Balance, September 30, 2020
|
|
$
|
190,315
|
|
The
fair value of the derivative feature of the 127,346 and 295,945 warrants issued to the placement agent of the Company’s
2016 private offering (the “2016 Offering”) and to a holder of its debt for debt cancellation in connection with the
Merger, 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, 2019
|
|
|
September
30, 2020
|
|
|
Exercise price
|
|
|
1.25
|
|
|
|
1.25
|
|
|
Risk free interest rate
|
|
|
1.59
|
%
|
|
|
0.10
|
%
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Expected volatility
|
|
|
133
|
%
|
|
|
169
|
%
|
|
Contractual term
|
|
|
1.15
Years
|
|
|
|
0.39
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 nine months ended September 30, 2020 and 2019, the Company marked the derivative feature of the warrants to fair value and
recorded a gain of $141,907 and a gain of $341,107 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, non-employees, 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 Company’s 2016 Equity Compensation Plan (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.
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. The effect of dilution on
net loss becomes anti-dilutive and therefore is not reflected on the income statement.
|
|
|
Potentially
Outstanding
Dilutive Common Shares
|
|
|
|
|
For
the nine Months
Ended
September 30, 2020
|
|
|
For
the Year Ended
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Conversion Feature Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issuable under
the conversion feature of preferred shares
|
|
|
872,766
|
|
|
|
872,766
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
4,391,472
|
|
|
|
3,835,366
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
4,007,058
|
|
|
|
3,826,658
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Notes
|
|
|
1,598,000
|
|
|
|
536,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total potentially outstanding dilutive
common shares
|
|
|
10,869,296
|
|
|
|
9,070,790
|
|
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 its subsidiary’s local currency
(i.e. the Canadian dollar) to be the functional currency for its foreign subsidiary.
Leases
In
February 2016, FASB issued Accounting Standards Update (“ASU”) 2016-02: Leases (Topic 842). The new guidance generally
requires an entity to recognize on its balance sheet operating and financing lease liabilities and corresponding right-of-use
assets. The standard will be effective for the first interim period within annual reporting periods beginning after December 15,
2018 and early adoption is permitted. The new standard requires a modified retrospective transition for existing leases to each
prior reporting period presented or entered into after, the beginning of the earliest comparative period presented in the financial
statements. This standard was adopted by the Company on January 1, 2018. The Company elected the package of practical expedients
permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward
the historical lease classification. The adoption of this standard did not have a material impact on the Company’s consolidated
financial statements and related disclosures.
Recent
Accounting Pronouncements
Management
does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material
effect on the Company’s financial statements.
NOTE
4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consist of the following at:
|
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
|
|
|
|
|
|
|
|
|
Accounting
|
|
$
|
24,161
|
|
|
$
|
36,161
|
|
|
Research and development
|
|
|
378,428
|
|
|
|
650,584
|
|
|
Legal
|
|
|
9,585
|
|
|
|
15,273
|
|
|
Other
|
|
|
109,661
|
|
|
|
163,029
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
521,835
|
|
|
$
|
865,047
|
|
On
October 1, 2019, the Company entered into an agreement with a consultant for toxicology studies. The consultant quoted a commitment
of approximately $988,000 as an estimate for the study. 50% of the total price was paid upon the signing of the agreement, 35%
of the total price is to be paid upon completion of the in-life study, and the remaining 15% of the total price is to be
paid upon the issuance of the report. If the Company cancels the study the Company will be required to pay a cancelation fee.
If the cancelation happens prior to the arrival of the test animals then the Company will need to pay between 20% and 50% of the
animal fees depending on when the cancellation happens. If the cancellation occurs after the animals arrive but before the study
begins then the Company will be responsible for paying 50% of the protocol price plus a fee of $7,000 per room/week for animal
husbandry until the animals can be relocated or disposed of. If the Company cancels the study after it has begun then the Company
will need to pay any fees for procured items for the study and any nonrecoverable expenses incurred by the consultant. As of September
30, 2020 and December 31, 2019, the Company has paid $174,106 and $0 and there is a balance of $319,799 and $493,905 due, respectively.
On
February 13, 2020, the Company issued 187,497 options to the Company’s CFO to settle $93,950 in accrued compensations. The
options are fully vested on issuance, have an exercise price of $1.75, and expire in 10 years from issuance.
NOTE
5 - DERIVATIVE LIABILITIES
Upon
closing of the private placement transactions in 2016, the Company issued 127,346 and 295,945 warrants, respectively, to the placement
agent of the 2016 Offering and to Strategic Bio Partners, a holder of the Company’s debt, 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. Upon the effectiveness
of our reverse stock split in July 2016, these became warrants to purchase our common stock on the same terms and conditions.
The warrants, if exercised under the cashless provision, do not have an explicit limit on the number of shares that will be issued.
NOTE
6 – CONVERTIBLE NOTE PAYABLE (PIK NOTES)
Convertible
Notes Payable
During
the fourth quarter of 2019, the Company entered into a series of unsecured convertible notes (the “Convertible Notes”).
The Convertible Notes have a total principal amount of $420,000. The Convertible Notes accrue 6% interest per year payable on
October 31, 2020 and on the end of each calendar year thereafter, payable by a corresponding increase in the principal amount
of each Convertible Note that increases to 12% per year (the Default Rate”) in the case a default. The Company will pay
(a “PIK Payment”) the interest due by adding such interest (including interest at the Default Rate) to the then-outstanding
principal amount of the Convertible Notes on each interest payment date and on the maturity date. Each PIK Payment will be preceded
by written notice from the Company to the Convertible Note holder setting forth in reasonable detail the amount of such PIK Payment
and the principal amount of the Convertible Note following such PIK Payment. The Convertible Notes are due on November 6, 2023.
The Convertible Notes are convertible into shares of the Company’s common stock with a conversion price of $1.25 per share,
subject to adjustment in certain circumstances.
During
the second quarter of 2020, the Company issued additional unsecured Convertible Notes in the aggregate principal amount of $850,000.
The notes accrue 6% interest per year payable on October 31, 2020 and on the end of each calendar year thereafter, payable by
a corresponding increase in the principal amount of each note that increases to 12% per year in the case of the notes entering
default. The Company will pay (a “PIK Payment”) the interest due by adding such interest (including interest at the
Default Rate) to the then-outstanding principal amount of the Notes on each interest payment date and on the Maturity Date. Each
PIK Payment will be preceded by written notice from the Company to the Note holder setting forth in reasonable detail the amount
of such PIK Payment and the principal amount of the Note following such PIK Payment. The notes are due on November 6, 2023. The
notes are convertible into shares of the Company’s common stock with an exercise price of $1.25 per share.
During
the third quarter of 2020, the Company issued additional unsecured Convertible Notes in the aggregate principal amount of $327,500.
The notes accrue 6% interest per year payable on October 31, 2020 and on the end of each calendar year thereafter, payable by
a corresponding increase in the principal amount of each note that increases to 12% per year in the case of the notes entering
default. The Company will pay (a “PIK Payment”) the interest due by adding such interest (including interest at the
Default Rate) to the then-outstanding principal amount of the Notes on each interest payment date and on the Maturity Date. Each
PIK Payment will be preceded by written notice from the Company to the Note holder setting forth in reasonable detail the amount
of such PIK Payment and the principal amount of the Note following such PIK Payment. The notes are due on November 6, 2023. The
notes are convertible into shares of the Company’s common stock with an exercise price of $1.25 per share.
The
Company has evaluated the terms of the Convertible Notes and determined that there are no derivative features in the Convertible
Notes. These Convertible Notes do have a beneficial conversion feature and recorded a total debt discount of $356,204 with $104,204
being recorded in the nine months ended September 30, 2020. During the nine months ended September 30, 2020 and 2019, the Company
amortized $63,342 and $0 of the debt discount, respectively. At September 30, 2020 and December 31, 2019, the Company had an unamortized
debt discount of $286,042 and $245,179, respectively.
Katalyst
Securities LLC acted as the Company’s placement agent (the “Placement Agent”) for the sale of the Convertible
Notes. The Company paid the Placement Agent, including its sub-agents, a commission of 10% of the funds raised from the investors
introduced by the Placement Agent. In addition, the Placement Agent will receive warrants to purchase a number of shares of Common
Stock equal to 10% of the shares of Common Stock issuable upon conversion of the Notes sold to the investors who were introduced
to us by the Placement Agent (See note 7). The Company recognized $104,090 in expenses related to the Placement Agent commission
for this offering which were recorded as a debt discount. This debt discount is being amortized over the life of the notes from
the private placement. Amortization for the nine months September 30, 2020 is nominal.
As
of September 30, 2020 and December 31, 2019, the Company owes $1,597,500 and $420,000 on the outstanding Convertible Notes, respectively.
|
Maturity
Date of Notes for Twelve Months Ending September 30,
|
|
Amount
due
|
|
|
2021
|
|
$
|
-
|
|
|
2022
|
|
|
-
|
|
|
2023
|
|
|
-
|
|
|
2024
|
|
|
1,597,500
|
|
|
2025
|
|
|
-
|
|
|
Total
|
|
$
|
1,597,500
|
|
Convertible
Notes Payable – Related Party
During
the fourth quarter of 2019, the Company issued unsecured Convertible Notes in the aggregate principal amount of $250,000 to related
parties. The notes accrue 6% interest per year payable on October 31, 2020 and on the end of each calendar year thereafter, payable
by a corresponding increase in the principal amount of each Convertible Note that increases to 12% per year in the case of the
notes entering default. The Company will pay (a “PIK Payment”) the interest due by adding such interest (including
interest at the Default Rate) to the then-outstanding principal amount of the Notes on each interest payment date and on the Maturity
Date. Each PIK Payment will be preceded by written notice from the Company to the Note holder setting forth in reasonable detail
the amount of such PIK Payment and the principal amount of the Note following such PIK Payment. The notes are due on November
6, 2023. The notes are convertible into shares of the Company’s common stock with an exercise price of $1.25 per share.
During
the second quarter of, 2020, the Company issued additional unsecured Convertible Notes in the aggregate principal amount of $50,000.
The notes accrue 6% interest per year payable on October 31, 2020 and on the end of each calendar year thereafter, payable by
a corresponding increase in the principal amount of each note that increases to 12% per year in the case of the notes entering
default. The Company will pay (a “PIK Payment”) the interest due by adding such interest (including interest at the
Default Rate) to the then-outstanding principal amount of the Notes on each interest payment date and on the Maturity Date. Each
PIK Payment will be preceded by written notice from the Company to the Note holder setting forth in reasonable detail the amount
of such PIK Payment and the principal amount of the Note following such PIK Payment. The notes are due on November 6, 2023. The
notes are convertible into shares of the Company’s common stock with an exercise price of $1.25 per share.
During
the third quarter of, 2020, the Company issued additional unsecured Convertible Notes in the aggregate principal amount of $100,000.
The notes accrue 6% interest per year payable on October 31, 2020 and on the end of each calendar year thereafter, payable by
a corresponding increase in the principal amount of each note that increases to 12% per year in the case of the notes entering
default. The Company will pay (a “PIK Payment”) the interest due by adding such interest (including interest at the
Default Rate) to the then-outstanding principal amount of the Notes on each interest payment date and on the Maturity Date. Each
PIK Payment will be preceded by written notice from the Company to the Note holder setting forth in reasonable detail the amount
of such PIK Payment and the principal amount of the Note following such PIK Payment. The notes are due on November 6, 2023. The
notes are convertible into shares of the Company’s common stock with an exercise price of $1.25 per share.
The
Company has evaluated the terms of the notes and determined that there are no derivative features in the note. The Convertible
Notes issued to related parties have a beneficial conversion feature and, accordingly, the Company recorded a debt discount of
$150,000 during the year ended December 31, 2019. No debt discount was recorded during the nine months ended September 30, 2020.
During the nine months ended September 30, 2020 and 2019, the Company amortized $28,344 and $0 of the debt discount, respectively,
on Convertible Notes issued to related parties. Additionally, a fee of $9,000 was expensed related to the notes. At September,
30, 2020 and December 31, 2019, the Company had an unamortized debt discount of $117,105 and $154,451, respectively, on Convertible
Notes issued to related parties.
As
of September 30, 2020 and December 31, 2019, the Company owes $400,000 and $250,000 on the outstanding notes, respectively, held
by related parties.
|
Maturity
Date of Notes for Twelve Months Ending September 30,
|
|
Amount
due
|
|
|
2021
|
|
$
|
-
|
|
|
2022
|
|
|
-
|
|
|
2023
|
|
|
-
|
|
|
2024
|
|
|
400,000
|
|
|
2025
|
|
|
-
|
|
|
Total
|
|
$
|
400,000
|
|
NOTE
7 - STOCKHOLDERS’ DEFICIT
Stock-Based
Compensation
In
connection with the consummation of the Merger completed on February 12, 2016, we adopted Prior Protagenic’s 2006 Employee,
Director and Consultant Stock Plan (the “2006 Plan”). On June 17, 2016, our stockholders adopted 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 each of January 1, 2017, January 1, 2019 and
January 1, 2020, 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, or a total of 1,693,134 shares. As a result of these increases, as of December
31, 2019 and September 30, 2020, the aggregate number of shares of common stock available for awards under the 2016 Plan was 4,304,245
shares and 4,868,623 shares, respectively. Options issued under the 2016 Plan are exercisable for up to ten years from the date
of issuance.
There
were 5,597,861 options outstanding as of September 30, 2020. The fair value of each stock option granted was estimated
using the Black-Scholes assumptions and or factors as follows:
|
Exercise price
|
|
$
|
1.75
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
Risk free interest rate
|
|
|
0.64%-1.61
|
%
|
|
Expected life in years
|
|
|
10
|
|
|
Expected volatility
|
|
|
140%-146
|
%
|
There
were 3,835,366 options outstanding as of December 31, 2019. The fair value of each stock option granted was estimated using the
Black-Scholes assumptions and or factors as follows:
|
Exercise price
|
|
$
|
1.00
- $1.75
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
Risk free interest rate
|
|
|
2.09%-2.70
|
%
|
|
Expected life in years
|
|
|
10
|
|
|
Expected volatility
|
|
|
137%-140
|
%
|
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 December 31, 2018
|
|
|
3,846,299
|
|
|
$
|
1.36
|
|
|
|
7.20
|
|
|
Granted
|
|
|
126,567
|
|
|
$
|
1.15
|
|
|
|
9.20
|
|
|
Expired
|
|
|
(137,500
|
)
|
|
$
|
1.75
|
|
|
|
|
|
|
Outstanding December 31, 2019
|
|
|
3,835,366
|
|
|
$
|
1.34
|
|
|
|
6.02
|
|
|
Granted
|
|
|
1,762,495
|
|
|
$
|
1.75
|
|
|
|
9.47
|
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Outstanding September 30, 2020
|
|
|
5,597,861
|
|
|
$
|
1.47
|
|
|
|
6.74
|
|
A
summary of the status of the Company’s nonvested options as of September 30, 2020, and changes during the nine months ended
September 30, 2020, is presented below:
|
Nonvested
Options
|
|
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Nonvested at December 31, 2018
|
|
|
800,210
|
|
|
$
|
1.63
|
|
|
Granted
|
|
|
126,567
|
|
|
$
|
1.15
|
|
|
Vested
|
|
|
(584,895
|
)
|
|
$
|
1.46
|
|
|
Forfeited
|
|
|
(137,500
|
)
|
|
$
|
1.75
|
|
|
Nonvested at December, 2019
|
|
|
204,382
|
|
|
$
|
1.74
|
|
|
Granted
|
|
|
1,762,495
|
|
|
$
|
1.75
|
|
|
Vested
|
|
|
(760,488
|
)
|
|
$
|
1.39
|
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
Nonvested at September 30, 2020
|
|
|
1,206,389
|
|
|
$
|
1.75
|
|
As
of September 30, 2020, the Company had 5,597,861 shares issuable under options outstanding at a weighted average exercise
price of $1.47 and an intrinsic value of $1,407,792.
As
of December 31, 2019, the Company had 3,835,366 shares issuable under options outstanding at a weighted average exercise price
of $1.34 and an intrinsic value of $635,536.
The
total number of options granted during the nine months ended September 30, 2020 and 2019 was 1,762,495 and 126,567, respectively.
The exercise price for these options was $1.00 per share or $1.75 per share.
The
Company recognized compensation expense related to options issued of $458,567 and $139,066 during the three months ended
September 30, 2020 and 2019, respectively, which is included in general and administrative expenses and research and development
expenses. For the three months ended September 30, 2020, $351,696 of the stock compensation was related to employees and
$106,871 was related to non-employees.
The
Company recognized compensation expense related to options issued of $1,123,151 and $850,767 during the nine months ended
September 30, 2020 and 2019, respectively, which is included in general and administrative expenses and research and development
expenses. For the nine months ended September 30, 2020, $858,884 of the stock compensation was related to employees and
$264,267 was related to non-employees.
As
of September 30, 2020, the unamortized stock option expense was $701,991 with $563,267 being related to employees and $138,724
being related to non-employees. As of September 30, 2020, the weighted average period for the unamortized stock compensation
to be recognized is 2.10 years.
On
February 25, 2019, the Company granted 101,567 options with an exercise price of $1.00 and a ten year term. 59,900 of these options
vest immediately and 41,667 vest bi-weekly over two months. These options have a Black-Scholes value of $199,807. The Company
issued 59,900 options for settlement of accounts payable totaling $29,850 and recorded a loss of $99,541 on the settlement of
the accounts payable.
On
June 17, 2019, the Company granted 25,000 options with an exercise price of $1.75 and a ten year term. These options vest immediately
and have a Black-Scholes value of $36,374.
On
February 21, 2020, the Company issued a total of 1,387,497 options to purchase shares of the Company’s common stock to sixteen
individuals with 1,362,497 option going to twelve related parties. These options had a grant date fair value of $1,901,724. From
these options, 187,497 options were used to settle $93,950 in accrued compensations. These options have an exercise price of $1.75.
187,497 of the options vest immediately, 510,000 of the options vest monthly over 12 months, 5,000 of the options vest monthly
over 24 months, 420,000 of the options vest monthly over 36 months, and 265,000 of the options vest monthly over 48 months. These
options were approved by the board of directors on February 13, 2020.
On
July 18, 2020, the Company issued 124,998 options to a related party. These options have an exercise price of $1.75 and a term
of ten years. These options vest immediately and the grant date fair value of these options was $142,607.
On
July 18, 2020, the Company issued 105,000 options. These options have an exercise price of $1.75 and a term of ten years. These
options vest monthly over four years and the grant date fair value of these options was $119,972.
On
July 18, 2020, the Board of Directors Increased the size of the Board from five directors to six directors and Appoint Jennifer
Buell, Ph.D. as a member of the Board, effective immediately, to fill the vacancy created by such increase and to serve until
the next annual meeting of shareholders. Dr. Buell was issued options to purchase 100,000 shares of the Company’s common
stock at an exercise price of $1.75 per share. The options vest as follows: monthly over 48 months. In recognition of her upcoming
service as a Director of the Company, Dr. Buell was issued 45,000 options that vest monthly over 12 months. In each case the vesting
commenced on the date of grant, July 18, 2020. These options had a grant date fair value of $165,426.
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.
Simultaneously
with the Merger and the 2016 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, the holder 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. Warrants to purchase 127,346 shares of Series B Preferred Stock at an exercise price of $1.25
per share were issued to the placement agent in connection with the 2016 Offering. These warrants to purchase 423,291 shares of
Series B Preferred Stock have been recorded as derivative liabilities. All of these warrants automatically converted into warrants
to purchase our common stock upon the effectiveness of our reverse stock split in July 2016. See Note 5.
A
summary of warrant issuances are as follows:
|
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
Average
Remaining
|
|
|
|
|
Number
|
|
|
Exercise
Price
|
|
|
Life
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2018
|
|
|
3,826,658
|
|
|
$
|
1.05
|
|
|
|
3.69
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding December 31, 2019
|
|
|
3,826,658
|
|
|
$
|
1.05
|
|
|
|
2.69
|
|
|
Granted
|
|
|
180,400
|
|
|
|
1.25
|
|
|
|
5.00
|
|
|
Outstanding September 30, 2020
|
|
|
4,007,058
|
|
|
$
|
1.06
|
|
|
|
2.12
|
|
As
of September 30, 2020, the Company had 4,007,058 shares issuable under warrants outstanding at a weighted average exercise price
of $1.06 and an intrinsic value of $643,130.
As
of December 31, 2019, 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 $1,375,990.
On
February 21, 2020, the Company extended the expiration date for 100,000 warrants to purchase shares of the Company’s common
stock. The expiration date was extended by two years from January 2, 2020 to January 2, 2022. These warrants have exercise price
of $1.25 and are fully vested. The company recognized $5,861 in stock compensation as part of this modification.
On
June 30, 2020, the Company issued 81,600 warrants to purchase shares of the Company’s common stock. These warrants vest
immediately, had an exercise price of $1.25 and a term of 5 years. These warrants have a Black-Scholes value of $86,968,
which is being amortized over the life of the notes from the private placement. These warrants were issued as compensation
to the placement agents in connection with the Company’s private placement offering of debt and recorded as a debt discount.
The Company recognized amortization of debt discount related to warrants issued of $6,643 and $0 during the nine months ended
September 30, 2020 and 2019, respectively, which is included in general and administrative expenses.
During
the third quarter of 2020, the Company issued 98,800 warrants to purchase shares of the Company’s common stock. These warrants
vest immediately, had an exercise price of $1.25 and a term of 5 years. These warrants have a Black-Scholes value of $105,194
which is being amortized over the life of the notes from the private placement. These warrants were issued as compensation
to the placement agents in connection with the Company’s private placement offering of debt. The Company recognized amortization
of debt discount related to warrants issued of $5,840 and $0 during the nine months ended September 30, 2020 and 2019, respectively,
which is included in general and administrative expenses.
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 Dr. David A. Lovejoy, a professor at
the University and stockholder of the Company, 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,
Dr. Lovejoy 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, 2017. The extension allowed
for further development of the technologies and use of their applications. On April 10, 2018, the agreement was amended and the
research agreement has been further extended to December 31, 2023.
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 September 30, 2020, Dr. David Lovejoy of the University
has been granted 553,299 stock options, of which 517,987 are fully vested. These have an exercise price of $1.00, $1.25 or 1.75
and are exercisable over ten or thirteen year periods which end either on March 30, 2021, December 1, 2022, April 15, 2026, March
1, 2027, October 16, 2027 or on February 13, 2030.
The
sponsorship research and development expenses pertaining to the Research Agreements were $0 and $63,787 for the nine months ended
September 30, 2020 and 2019, respectively.
NOTE
9 - 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 nine months ended September 30, 2020 and 2019 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 Dr. Lovejoy, 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 Dr. Lovejoy 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 five intellectual patent properties.
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
10 – RELATED PARTY TRANSACTIONS
The
Company is provided free office space consisting of a conference room by the Company Executive Chairman, Dr. Armen. The Company
does not pay any rent for the use of this space. This space is used for quarterly board meetings and our annual shareholder meeting.
On
February 13, 2020, the Company issued 50,000 options to purchase common stock to a related party. These options had an exercise
price of $1.75 and a term of 48 months. (See Note 7)
On
July 18, 2020, the Board of Directors increased the size of the Board from five directors to six directors and appointed
Jennifer Buell, Ph.D. as a member of the Board, effective immediately, to fill the vacancy created by such increase and to
serve until the next annual meeting of shareholders. Dr. Buell was issued options to purchase 100,000 shares of the Company’s
common stock at an exercise price of $1.75 per share. The options vest as follows: monthly over 48 months. In recognition of her
upcoming service as a Director of the Company, Dr. Buell was issued 45,000 options that vest monthly over 12 months. In each case
the vesting commenced on the date of grant, July 18, 2020. These options had a grant date fair value of $165,426. (See Note
7)