UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

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(Mark One)

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2017

or

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _________to___________

 

Commission File Number: 000-51353

 

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PROTAGENIC THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

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Delaware	06-1390025
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

                                   

149 Fifth Avenue, Suite 500, New York, New York 10010

(Address of Principal Executive Office) (Zip Code)

 

(212) 994-8200

Registrant’s Telephone Number Including Area Code

 

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer (Do not check if a smaller reporting company) Emerging Growth Company	☐   ☐	Smaller reporting company	☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 126-2 of the Exchange Act).

☐Yes ☒ No

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

 

As of November 13, 2017, there were 10,261,419 shares of common stock outstanding.

 

 

PROTAGENIC THERAPEUTICS, INC.

Form 10-Q Report

For the Fiscal Quarter Ended September 30, 2017

TABLE OF CONTENTS

 

			Page
Part I.	Financial Information
Item 1	Financial Statements:
		Condensed Consolidated Balance Sheets at September 30, 2017 (unaudited) and December 31, 2016	4
		Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016 (unaudited)	5
		Condensed Consolidated Statements of Cash Flows for nine months ended September 30, 2017 and 2016 (unaudited)	6
		Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3	Quantitative and Qualitative Disclosures about Market Risk		20
Item 4	Controls and Procedures		20
Part II.	Other Information
Item 1	Legal Proceedings		22
Item 1A	Risk Factors		22
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 3	Defaults upon Senior Securities		22
Item 4	Mine Safety Disclosures		22
Item 5	Other Information		22
Item 6	Exhibits		22
Signatures			23

 

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

 

PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

		September 30,				December 31,
		2017				2016
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	952,134			$	3,100,398
Marketable securities			1,151,701				-
Prepaid expenses			114,792				60,417
TOTAL CURRENT ASSETS			2,218,627				3,160,815
EQUIPMENT - NET			1,125				1,097
TOTAL ASSETS		$	2,219,752			$	3,161,912
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses			101,561				167,987
Derivative liability			435,361				516,870
TOTAL CURRENT LIABILITIES			536,922				684,857
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.000001 par value; 20,000,000 shares authorized; 872,766 shares issued and outstanding in the following classes:
Preferred stock; par value $0.000001; 2,000,000 shares authorized; none issued and outstanding			-				-
Series B convertible preferred stock, $0.000001 par value; 18,000,000 shares authorized; 872,766 shares issued and outstanding at September 30, 2017, and December 31, 2016, respectively			1				1
Common stock, $.0001 par value, 100,000,000 shares authorized, 10,261,419 shares issued and outstanding at September 30, 2017, and at December 31, 2016			1,026				1,026
Additional paid-in-capital			11,994,275				11,239,786
Accumulated deficit			(10,145,635	)			(8,582,123	)
Accumulated other comprehensive loss			(166,837	)			(181,635	)
TOTAL STOCKHOLDERS' EQUITY			1,682,830				2,477,055
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY		$	2,219,752			$	3,161,912

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

 

PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

 

 

		For the three months ended September 30,								For the nine months ended September 30,
		2017				2016				2017				2016
REVENUE		$	-			$	-			$	-			$	-
OPERATING AND ADMINISTRATIVE EXPENSES
Research and development			150,619				110,821				409,611				338,633
General and administrative			376,413				344,006				1,246,930				934,423
Goodwill impairment			-				-				-				404,169
TOTAL OPERATING AND ADMINISTRATIVE EXPENSES			527,032				454,827				1,656,541				1,677,225
LOSS FROM OPERATIONS			(527,032	)			(454,827	)			(1,656,541	)			(1,677,225	)
OTHER (EXPENSE) INCOME
Interest income			2,445				332				10,557				611
Interest expense - stockholder			-				-				-				(7,161	)
Realized loss on foreign exchange transactions			-				(43	)			-				(6,642	)
Realized gain on marketable securities			1,055				-				963				-
Change in fair value of derivative liability			68,965				(938	)			81,509				(29,332	)
TOTAL OTHER (EXPENSE) INCOME			72,465				(649	)			93,029				(42,524	)
NET LOSS		$	(454,567	)		$	(455,476	)		$	(1,563,512	)		$	(1,719,749	)
COMPREHENSIVE LOSS
Other Comprehensive Income - net of tax
Net unrealized gain (loss) on marketable securities			1,165				-				(1,998	)			-
Foreign exchange translation gain (loss)			5,850				(47,750	)			16,796				(25,457	)
TOTAL COMPREHENSIVE LOSS		$	(447,552	)		$	(503,226	)		$	(1,548,714	)		$	(1,745,206	)
Net loss per share - Basic and Diluted		$	(0.04	)		$	(0.06	)		$	(0.15	)		$	(0.45	)
Weighted average common shares - Basic and Diluted			10,261,419				7,956,625				10,261,419				3,826,068

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

 

PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

		For the nine months ended September 30,
		2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss		$	(1,563,512	)		$	(1,719,749	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation expense			61				379
Goodwill impairment			-				404,169
Stock based compensation			654,707				450,566
Accretion to bridge loan			-				7,162
Legal fees satisfied through issuance of Series B preferred stock			-				150,000
Change in fair value of the derivative liability			(81,509	)			29,332
Gain on sale of marketable securities			(963	)			-
Modification of warrants			99,782
Changes in operating assets and liabilities
Prepaid expenses			(54,375	)			(96,667	)
Other receivables			-				6,428
Accounts payable and accrued expenses			(17,262	)			(30,131	)
NET CASH USED IN OPERATING ACTIVITIES			(963,071	)			(798,511	)
CASH FLOWS USED IN INVESTING ACTIVITIES
Sale of marketable securities			1,695,000				-
Purchase of marketable securities			(2,847,736	)			-
NET CASH USED IN INVESTING ACTIVITIES			(1,152,736	)			-
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bridge loan			-				19,000
Proceeds from issuance of Series B Preferred Stock			-				4,283,437
NET CASH PROVIDED BY FINANCING ACTIVITIES			-				4,302,437
Effect of exchange rate on cash and cash equivalents			(32,457	)			(18,291	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(2,148,264	)			3,485,635
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			3,100,398				3,343
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	952,134			$	3,488,978
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest expense		$	-			$	-
Cash paid for income taxes		$	-			$	-
NONCASH TRANSACTIONS
Unrealized loss on marketable securities		$	1,998			$	-
Warrants issued to placement agent		$	-			$	146,641
Warrants issued for Atrinsic debt settlement and conversion		$	-			$	340,784
Debt settled with issuance of Series B preferred stock		$	-			$	425,265
Reclassification of warrants to derivative liabilities from equity		$	-			$	487,425
Goodwill recognized in connection with reverse business combination		$	-			$	404,169
Accrued liabilities paid through the issuances of Series B preferred stock		$	-			$	125,000
Series B Preferred stock converted to common stock		$	-			$	8

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

 

PROTAGENIC THERAPEUTICS, INC & SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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”), which is a corporation formed in 2006 under the laws of the Province of Ontario, Canada.

 

The Company was formerly known as Atrinsic, Inc., a company that, in 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 (the “Merger”). On June 17, 2016, Protagenic Therapeutics, Inc. (the then wholly-owned subsidiary of Atrinsic, Inc.) was merged with and into Atrinsic, Inc. Atrinsic, Inc. was the surviving corporation in this merger and changed its name from Atrinsic, Inc. to Protagenic Therapeutics, Inc.

 

The Company is a biotechnology company focused on the discovery, research and development of pre-clinical studies for developing novel, naturally occurring, human neuropeptide-based, brain-active therapeutics for treatment of depression, mood, anxiety and other neurodegenerative disorders. The Company is also interested in acquiring exclusive intellectual property rights for peptide-based therapeutics for the treatment of neurological and mood disorders.

 

NOTE 2 - LIQUIDITY

 

The Company continually projects anticipated cash requirements, predominantly from the ongoing funding requirements of our neuropeptide drug development program. The majority of these expenses relate to paying external vendors such as Contract Research Organizations (CROs) and peptide synthesizer companies. They could also include business combinations, capital expenditures, and new drug development working capital requirements. As shown in the accompanying consolidated condensed financial statements, the Company incurred a net loss of $1,563,512 and $1,719,749 for the nine months ended September 30, 2017 and 2016, respectively. The Company has incurred losses since inception resulting in an accumulated deficit of $10,145,635 as of September 30, 2017. The Company anticipates further losses in the development of its business. The Company had a net working capital of $1,681,705 at September 30, 2017. Based on its current forecast and budget, Management believes that its cash resources will be sufficient to fund its operations at least until 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.

 

 

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 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, 2017 and 2016. 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, 2016, which contains the audited financial statements and notes thereto, for the years ended December 31, 2016 and 2015 included within the Company’s Form 10-K/A filed with the SEC on May 8, 2017. The interim results for the nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ended December 31, 2017 or for any future interim periods.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant estimates underlying the consolidated financial statements include the allocation of the fair value of acquired assets and liabilities associated with the Merger, income tax provisions, impairment of goodwill, valuation of stock options and warrants and assessment of deferred tax asset valuation allowance.

 

Reclassification

 

Certain prior period amounts have been reclassified to conform to current period presentation.

 

Concentrations of Credit Risk

 

The Company maintains its cash accounts at financial institutions which are insured by the Federal Deposit Insurance Corporation. At times, the Company may have deposits in excess of federally insured limits.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. As of September 30, 2017 and December 31, 2016, the Company did not have any cash equivalents.

 

 

Marketable Securities

 

The Company accounts for marketable debt and equity securities, available for sale, in accordance with sub-topic 320-10 of the FASB Accounting Standards Codification (“Sub-topic 320-10”).

 

Pursuant to Paragraph 320-10-35-1, investments in debt securities that are classified as available for sale and equity securities that have readily determinable fair values that are classified as available for sale shall be measured subsequently at fair value in the consolidated balance sheets at each balance sheet date. Unrealized holding gains and losses for available-for-sale securities (including those classified as current assets) shall be excluded from earnings and reported in other comprehensive income until realized except an available-for-sale security that is designated as being hedged in a fair value hedge, from which all or a portion of the unrealized holding gain and loss of shall be recognized in earnings during the period of the hedge, pursuant to paragraphs 815-25-35-1 through 815-25-35-4.

 

During the nine months ended September 30, 2017 the Company purchased $2,847,736 and sold $1,695,000 in marketable securities with a realized gain of $963 and an unrealized loss of $1,998. As of September 30, 2017, the Company owns marketable securities with a total value of $1,151,701.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The Company is required to perform impairment reviews annually and more frequently in certain circumstances. The Company performs the annual assessment on December 31.

 

In accordance with ASC 350–20 “Goodwill”, the Company is able to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two–step goodwill impairment test. If the Company concludes that it is more likely than not that the fair value of a reporting unit is not less than its carrying amount it is not required to perform the two–step impairment test for that reporting unit. 

 

Atrinsic’s assets and liabilities acquired in the Merger had a minimal value therefore the Company recorded the fair value of shares given to predecessor stockholders as goodwill. Immediately subsequent to the merger the Company fully impaired the goodwill.

 

The allocation of the consideration transferred is as follows:

 

Shares issued in connection with Merger:
Atrinsic 25,867 shares Common stock		$	32,334
Atrinsic Series A preferred stock as converted to Series B preferred stock, 297,468 shares			371,835
Total value of shares issued to Atrinsic on Merger			404,169
Fair value of net assets identified			-
Goodwill			404,169
Net value of consideration		$	-

 

Goodwill impairment for the year ended December 31, 2016 was $404,169. As of September 30, 2017, the goodwill was $0.

 

 

Fair Value Measurements

 

ASC 820, “Fair Value Measurements and Disclosure,” defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

 

The three levels are described below:

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that is accessible by the Company;

Level 2 Inputs – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly;

Level 3 Inputs – Unobservable inputs for the asset or liability including significant assumptions of the Company and other market participants.

 

The carrying amount of the Company’s financial assets and liabilities, such as cash, accounts payable and accrued expenses approximate their fair value because of the short maturity of those instruments.

 

Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.

 

The assets or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. The following table provides a summary of financial instruments that are measured at fair value as of September 30, 2017.

 

		Carrying				Fair Value Measurement Using
		Value				Level 1				Level 2				Level 3				Total
Marketable securities			1,151,701				—				1,151,701				—				1,151,701
Derivative warrants liabilities		$	(435,361	)		$	—			$	—			$	(435,361	)		$	(435,361	)

 

 

The following table provides a summary of financial instruments that are measured at fair value as of December 31, 2016.

 

		Carrying				Fair Value Measurement Using
		Value				Level 1				Level 2				Level 3				Total
Derivative warrants liabilities		$	(516,870	)		$	—			$	—			$	(516,870	)		$	(516,870	)

 

 

The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the interim period ended September 30, 2017:

 

		Fair Value Measurement Using Level 3 Inputs
		Total
Balance, December 31, 2016		$	516,870
Change in fair value of derivative warrants liabilities			(81,509	)
Balance, September 30, 2017		$	435,361

 

The fair value of the derivative feature of the 127,346 and 295,945 warrants to the placement agent of the private offering and to Strategic Bio Partners for debt cancellation, respectively on the issuance dates and at the balance sheet date were calculated using a Black-Scholes option model valued with the following assumptions:

 

		February 12, 2016				December 31, 2016				September 30, 2017
Exercise price		$	1.25			$	1.25			$	1.25
Risk free interest rate			1.20	%			1.93	%			1.62	%
Dividend yield			0.00	%			0.00	%			0.00	%
Expected volatility			156	%			219	%			145	%
Contractual term (in years)		5.0				4.25				3.5

 

Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar expected term on the date of the grant.

 

Dividend yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.

 

Volatility: The Company calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s peer group stock price for a period consistent with the warrants’ contractual term.

 

Contractual term: The Company’s contractual term is based on the remaining contractual maturity of the warrants. 

 

The use of a Monte Carlo or lattice model for these calculations would not have resulted in a material difference.

 

During the three months ended September, 2017 and 2016, the Company marked the derivative feature of the warrants to fair value and recorded a gain of $68,965 and a loss of $938, respectively, relating to the change in fair value. During the nine months ended September, 2017 and 2016, the Company marked the derivative feature of the warrants to fair value and recorded a gain of $81,509 and a loss of $29,332, respectively, relating to the change in fair value.

 

 

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 liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.

 

Stock-Based Compensation

 

The Company accounts for stock based compensation costs under the provisions of ASC 718, “Compensation—Stock Compensation,” which requires the measurement and recognition of compensation expense related to the fair value of stock based compensation awards that are ultimately expected to vest. Stock based compensation expense recognized includes the compensation cost for all stock based payments granted to employees, officers, and directors based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC. 718 is also applied to awards modified, repurchased, or canceled during the periods reported.

 

Stock-Based Compensation for Non-Employees

 

The Company accounts for warrants and options issued to non-employees under ASC 505-50, Equity – Equity Based Payments to Non-Employees, using the Black-Scholes option-pricing model. The value of such non-employee awards unvested are re-measured over the vesting terms 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 Nine Months Ended September 30, 2017				For the Nine Months Ended September 30, 2016
Conversion Feature Shares
Common shares issuable under the conversion feature of preferred shares			872,766				2,796,929
Stock Option Shares			2,613,299				2,592,229
Warrant Shares			3,826,658				3,826,658
Total potentially outstanding dilutive common shares			7,312,723				9,215,816

 

 

 

NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consist of the following at:

 

		September 30, 2017				December 31, 2016
Legal		$	-			$	1,190
Accounting			508				-
Patent expense			-				37,142
Research and development			87,384				116,255
Other			13,669				13,400
		$	101,561			$	167,987

 

NOTE 5 - DERIVATIVE LIABILITIES

 

In connection with the consummation of the Merger completed on February 12, 2016, the Company issued warrants to purchase 295,945 shares of Series B Preferred Stock at $1.25 per share to Strategic Bio Partners for debt cancellation. In addition, upon the closing of the private placement transactions in April 2016, the Company issued 127,346 warrants, to the placement agent of the private offering 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 derivative liabilities.

 

 

NOTE 6 - STOCKHOLDERS’ EQUITY

 

Stock-Based Compensation

 

In connection with the consummation of the Merger completed on February 12, 2016, we adopted the pre-merger Protagenic Therapeutics, Inc.'s 2006 Employee, Director and Consultant Stock Plan (the “2006 Plan”). On June 17, 2016, our stockholders adopted our 2016 Equity Compensation Plan (the “2016 Plan”) and, as a result, we terminated the 2006 Plan. We will not grant any further awards under the 2006 Plan. All outstanding grants under the 2006 Plan will continue in effect in accordance with the terms of the particular grant and the 2006 Plan.

 

Pursuant to the 2016 Plan, the Company’s Compensation Committee may grant awards to any employee, officer, director, consultant, advisor or other individual service provider of the Company or any subsidiary. On January 1, 2017, pursuant to an annual “evergreen” provision contained in the 2016 Plan, the number of shares reserved for future grants was increased by 564,378 shares. As a result of this increase, as of January 1, 2017, the aggregate number of shares of common stock available for awards under the 2016 Plan is 2,712,678. Options issued under the 2016 Plan are exercisable for up to 10 years from the date of issuance.

 

As of December 31, 2016, there were 2,484,445 options outstanding under the 2006 Plan and 2016 Plan. The fair value of each stock option granted was estimated using the Black-Scholes assumptions and or factors as follows:

 

Exercise price	$.26	-	$1.25
Expected dividend yield		0%
Risk free interest rate	1.01%	-	2.43%
Expected life in years		5
Expected volatility	85%	-	213%

                  

As of September 30, 2017, there were 2,613,299 options outstanding under the 2006 Plan and 2016 Plan. 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 2006 and 2016 Plans:

 

						Weighted Average				Weighted Average
		Number				Exercise Price				Remaining Life
Stock Options
Outstanding January 1, 2017			2,484,445			$	1.18				9.82
Granted			150,000				1.25				3.86
Expired			(21,146	)			1.00
Outstanding September 30, 2017			2,613,299			$	1.18				7.66
Exercisable September 30, 2017			1,853,892			$	1.16				7.12

 

 

As of September 30, 2017 and December 31, 2016, the options outstanding had an intrinsic value of $181,537 and $171,537, respectively.

 

The total number of options granted during the nine months ended September, 2017 and 2016 under the 2006 plan was 0 and 100,000, respectively. The exercise price for these options was $1.25 per share.

 

The total number of options granted during the nine months ended September, 2017 and 2016 under the 2016 plan was 150,000 and 1,201,084, respectively. The exercise price for these options was $1.25 per share.

 

The Company recognized compensation expense related to options issued of $153,830 and $273,674 for the three month periods ended September 30, 2017 and 2016, respectively and $654,707 and $450,566 for the nine month periods ended September 30, 2017 and 2016, respectively, which is included in general and administrative expenses.

 

As of September 30, 2017, the unamortized stock option expense was $880,075.

 

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 common 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 common Stock at $1.25 per share. Placement Agent Warrants to purchase 127,346 shares of common 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 common stock have been recorded as derivative liabilities.

 

A summary of warrant issuances are as follows:

 

						Weighted Average				Weighted Average
		Number				Exercise Price				Remaining Life
Warrants
Outstanding January 1, 2017			3,826,658			$	1.02				5.72
Outstanding September 30, 2017			3,826,658			$	1.05				4.94
Exercisable September 30, 2017			3,826,658			$	1.05

 

As of September 30, 2017 the Company had 3,826,658 shares issuable under warrants outstanding at a weighted average exercise price of $1.05 and an intrinsic value of $763,342.

 

During the nine months ended September 30, 2017 the Company extended warrants to purchase an aggregate of 100,000 common shares of the Company from January 2, 2017 to January 2, 2020. All other warrant terms remain the same. The Company recognized compensation expense related to the extended warrants of $99,782 during the nine months ended September 30, 2017, which is included in general and administrative expenses. Compensation expense related to the extended warrants was calculated as the fair value of the extended warrants minus the fair value of the warrants just prior to the extension.

 

 

NOTE 7 - COLLABORATIVE AGREEMENTS

 

The Company and the University of Toronto (the “University”), a stockholder of the Company, entered into an agreement effective December 14, 2004 (the “Research Agreement”) for the performance of a research project titled “Evidence for existence of Teneurin C-terminal Associated Peptide (“TCAP”) receptors in neurons” (the “Project”). The Research Agreement expired on March 31, 2013.

 

The Company and the University entered into a new agreement effective April 1, 2014 (the “New Research Agreement”) for the performance of a research project titled “TCAP mediated stress attenuation in vertebrates: Establishing the role of organismal and intracellular energy and glucose regulation and metabolism” (the “New Project”). The purpose of 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. In connection to the New Research Agreement, the Professor entered into an agreement with the University in order to commercialize certain technologies. In February 2017, the term of the New Research Agreement was extended to December 31, 2017, 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.

 

The University has been granted 25,000 stock options which are fully vested at the exercise price of $1.00 exercisable over a 10-year period which ends on April 1, 2022. The Professor has been granted 483,299 stock options, of which 275,000 are fully vested, at an exercise price of $1.00 exercisable over 10 or 13 year periods from the date of grant, which end on either March 30, 2021, December 1, 2022, April 15, 2026 or March 1, 2027.

 

The sponsorship research and development expenses pertaining to the Research Agreements were $23,314 and $3,000 for the three month periods ended September 30, 2017 and 2016, respectively and $69,943 and $4,500 for the nine month periods ended September 30, 2017 and 2016, 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 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 three and nine months ended September 30, 2017 and 2016 and therefore was not subject to paying any royalties.

 

 

In the event the Company fails to provide the University with semi-annual reports on the progress or fails to continue to make reasonable commercial efforts towards obtaining regulatory approval for products based on the Technologies, and the Company fails to respond to notice of such failure from the University within the Cure period, the University may convert our exclusive license into a non-exclusive arrangement. As of September 30, 2017, based on its communication with the University, the Company believes it is in compliance with its reporting obligations to the University. 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 Agreements

 

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 US dollars of $0 and $13,076 during the three and nine months ended September 30, 2017, respectively.

 

 

PTI Canada entered into a consulting agreement with a stockholder of the Company (the “Consultant”) which, which as amended, expires on December 31, 2017. Pursuant to the consulting agreement, the Consultant is responsible for overseeing i) design and development of enzyme-linked immunosorbent assay (“ELISA”), assays for measuring TCAP, ii) evaluation of TCAP exposure biomarker assay, iii) development of pipeline peptides, and iv) development of clinically compatible formulations for TCAP, as well as all of the bench research and development of formulation and extraction methods. The Consultant has been granted 150,000 stock options, which are fully vested at exercise prices of $1.00 and $1.25, exercisable over 10 year periods which end either on March 30, 2021 or March 1, 2025. The Consultant is paid the Canadian equivalent of approximately US$2,370 per month. Either party may terminate the consulting agreement either (a) immediately at any time upon written notice to the other party in the event of a breach of the agreement by the other party which cannot be cured (i.e. breach of the confidentiality obligations) or (b) at any time without cause upon not less than fifteen (15) days’ prior written notice to the other party. Upon expiration or termination, neither the Company nor Consultant will have any further obligations under the consulting agreement.

 

The Company has accrued $0 to pay the Consultant for research and development projects and paid the equivalent in US dollars of $6,892 and $20,675 during the three and nine months ended September 30, 2017, respectively.

 

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 - SUBSEQUENT EVENTS

 

On October 5, 2017 the company held a meeting of the Board of Directors where the Board approved the issuance of a total of 953,000 shares of stock options for an exercise price of $1.75. These stock option are to be issues to 16 recipients both employees and non-employees. These stock options vest between 18 months and 48 months.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

 

Historical 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”), which is a corporation formed in 2006 under the laws of the Province of Ontario, Canada.

 

The Company was formerly known as Atrinsic, Inc., a company that, in 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 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.

 

 

Results of Operations

 

Three months ended September 30, 2017 compared to the three months ended September 30, 2016

 

During the three months ended September 30, 2017, we incurred a loss from operations of $527,032 as compared to $454,827 for three months ended September 30, 2016. The increase in the loss is due to an increase in research and development expense of $39,798 from $110,821 to $150,619, and an increase in general and administrative expenses of $32,407 from $344,006 to $376,413.

 

Nine months ended September 30, 2017 compared to the nine months ended September 30, 2016

 

During the nine months ended September 30, 2017, we incurred a loss from operations of $1,656,541 as compared to $1,677,225 for nine months ended September 30, 2016. The decrease in the loss is due to an increase in research and development expense of $70,978 from $338,633 to $409,611, and an increase in general and administrative expenses of $312,507 from $934,423 to $1,246,930 offset by a decrease in impairment of goodwill to $0 from $404,169.

 

Liquidity and Going Concern

 

We continually project anticipated cash requirements, predominantly from the ongoing funding requirements of our neuropeptide drug development program. The majority of these expenses relate to paying external vendors such as Contract Research Organizations (CROs) and peptide synthesizer companies. They could also include business combinations, capital expenditures, and new drug development working capital requirements. As of September 30, 2017, we had cash of $952,134 and working capital of $1,681,705. The Company currently has a derivative liability on the books in the amount of $435,361 and we don’t expect to settle this liability in cash. Removing the derivative liability from the working capital calculation would increase our working capital to $2,117,066. We anticipate further losses in the development of our business. Based on our current forecast and budget, Management believes that our cash resources will be sufficient to fund our operations, anticipated capital expenditures and working capital for less than two years from the date of this quarterly report. Absent generation of sufficient revenue from the execution of the Company’s business plan, we will need to obtain debt or equity financing by the fourth quarter of 2018.

 

Operating activities used $963,071 and $798,511 in cash for the nine months ended September 30, 2017 and 2016, respectively. The use of cash in operating activities during the nine months ended September 30, 2017, primarily comprised of $1,563,512 net loss, $654,707 in stock compensation expense, $81,509 of change in the fair value of the derivative liability since December 31, 2016, an increase in prepaid expenses of $54,375, $963 from a gain on the sale of marketable securities, and a $17,262 decrease of accounts payable and accrued expenses, which included payments to tax penalties, legal and accounting professionals, payments to consultants, and other administrative expenses.

 

Investing activities used $1,152,736 and $0 in cash for the nine months ended September 30, 2017 and 2016, respectively.

 

 

We did not have financing activities for the nine months ended September 30, 2017. Our financing activities provided cash of $4,302,437 for the nine months ended September 30, 2016. From all three closings of our 2016 private placement offering of our Series B Preferred Stock, we raised total gross proceeds of $4,635,575 and total net proceeds of $4,283,438 (or total gross proceeds of $5,135,575 and total net proceeds of $4,783,438, including the conversion of the $350,000 in principal and interest of stockholder debt and $150,000 of legal expenses incurred by predecessor stockholders as allowed by the Merger agreement). We paid $332,000 in closing costs, including $125,000 paid on accrued liabilities.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act, as of September 30, 2017. Based on this evaluation, we have identified a material weakness in our internal control over financial reporting. Due to this material weakness, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act, including this Quarterly Report on Form 10-Q, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that our disclosure and controls are not designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Material Weakness in Internal Control Over Financial Reporting

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

The material weakness we identified is described below:

 

1)

We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

 

This material weaknesses could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

 

Remediation Plan

 

To address the material weakness described above the Company has engaged an independent third party to enhance our segregation of duties.

 

We believe the action described above will be sufficient to remediate the identified material weakness and strengthen our internal control over financial reporting.

 

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met. The design of any system of controls is also based in part on certain assumptions regarding the likelihood of certain events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Given these and other inherent limitations of control systems, these are only reasonable assurances that our controls will succeed in achieving their stated goals under all potential future conditions.

 

Changes in Internal Control over Financial Reporting

 

Other than as discussed above, there were no changes in our internal controls over financial reporting that occurred during the quarter covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

Part II: Other Information

 

Item 1. 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.

 

Item 1A. Risk Factors

 

Not applicable.

 

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

 

Item 6. Exhibits

 

The following is a complete list of exhibits filed as part of this Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K.

 

Exhibit

Description

 

 

31.1		Chief Executive Officer Certification as required under section 302 of the Sarbanes Oxley Act (€)
31.2		Chief Financial Officer Certification as required under section 302 of the Sarbanes Oxley Act (€)
32.1		Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes Oxley Act *

 

101.INS			XBRL Instance Document (€)
101.CAL			XBRL Taxonomy Extension Schema Document (€)
101.SCH			XBRL Taxonomy Extension Calculation Linkbase Document (€)
101.LAB			XBRL Taxonomy Extension Label Linkbase Document (€)
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document (€)
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document (€)

 

(€)	- Filed herewith.

(*)	- Furnished, not filed, in accordance with item 601(32)(ii) of Regulation S-K.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: November 13, 2017	Protagenic Therapeutics, Inc.
	By:	/s/ Alexander K. Arrow
		Chief Financial Officer

 

 

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