Protagenic Therapeutics, Inc.\new - Quarter Report: 2019 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2019
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
PROTAGENIC THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
| 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
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Ticker symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
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 [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes [X] 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 | [X] | Smaller reporting company | [X] |
| Emerging Growth 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 [X] No
As of November 14, 2019, there were 10,261,419 shares of common stock outstanding.
PROTAGENIC THERAPEUTICS, INC.
Form 10-Q Report
For the Fiscal Quarter Ended September 30, 2019
TABLE OF CONTENTS
| 2 |
PART I - FINANCIAL INFORMATION
PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 277,386 | $ | 362,486 | ||||
| Marketable securities | - | 250,388 | ||||||
| Prepaid expenses | 9,531 | 83,399 | ||||||
| TOTAL CURRENT ASSETS | 286,917 | 696,273 | ||||||
| EQUIPMENT - NET | 374 | 611 | ||||||
| TOTAL ASSETS | $ | 287,291 | $ | 696,884 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued expenses | 316,055 | 231,688 | ||||||
| Derivative liability | 334,972 | 676,079 | ||||||
| TOTAL CURRENT LIABILITIES | 651,027 | 907,767 | ||||||
| STOCKHOLDERS’ DEFICIT | ||||||||
| 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, 2019, and December 31, 2018 | 1 | 1 | ||||||
| Common stock, $.0001 par value, 100,000,000 shares authorized, 10,261,419 shares issued and outstanding at September 30, 2019, and December 31, 2018 | 1,026 | 1,026 | ||||||
| Additional paid-in-capital | 14,208,687 | 13,357,920 | ||||||
| Accumulated deficit | (14,400,335 | ) | (13,399,290 | ) | ||||
| Accumulated other comprehensive loss | (173,115 | ) | (170,540 | ) | ||||
| TOTAL STOCKHOLDERS’ DEFICIT | (363,736 | ) | (210,883 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 287,291 | $ | 696,884 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 3 |
PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| For
the three months ended September 30, | For
the nine months ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| OPERATING AND ADMINISTRATIVE EXPENSES | ||||||||||||||||
| Research and development | 31,153 | 163,071 | 291,828 | 687,347 | ||||||||||||
| General and administrative | 158,469 | 334,999 | 1,057,073 | 1,102,532 | ||||||||||||
| TOTAL OPERATING AND ADMINISTRATIVE EXPENSES | 189,622 | 498,070 | 1,348,901 | 1,789,879 | ||||||||||||
| LOSS FROM OPERATIONS | (189,622 | ) | (498,070 | ) | (1,348,901 | ) | (1,789,879 | ) | ||||||||
| OTHER (EXPENSE) INCOME | ||||||||||||||||
| Interest income | 1,108 | 1,044 | 2,314 | 2,694 | ||||||||||||
| Realized gain on marketable securities | - | - | 4,435 | 1,568 | ||||||||||||
| Change in fair value of derivative liability | 65,207 | (474 | ) | 341,107 | 17,748 | |||||||||||
| TOTAL OTHER INCOME (EXPENSES) | 66,315 | 570 | 347,856 | 22,010 | ||||||||||||
| LOSS BEFORE TAX | (123,307 | ) | (497,500 | ) | (1,001,045 | ) | (1,767,869 | ) | ||||||||
| INCOME TAX EXPENSE | - | - | ||||||||||||||
| NET LOSS | $ | (123,307 | ) | $ | (497,500 | ) | $ | (1,001,045 | ) | $ | (1,767,869 | ) | ||||
| COMPREHENSIVE LOSS | ||||||||||||||||
| Other Comprehensive Loss - net of tax | ||||||||||||||||
| Net unrealized loss on marketable securities | - | 1,781 | - | 5,247 | ||||||||||||
| Foreign exchange translation loss | (20 | ) | (2,266 | ) | (7,398 | ) | (2,590 | ) | ||||||||
| TOTAL COMPREHENSIVE LOSS | $ | (123,327 | ) | $ | (497,985 | ) | $ | (1,008,443 | ) | $ | (1,765,212 | ) | ||||
| Weighted average common shares - Diluted | ||||||||||||||||
| Net loss per share - Basic and Diluted | $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.10 | ) | $ | (0.17 | ) | ||||
| Weighted average common shares - Basic and Diluted | 10,261,419 | 10,261,419 | 10,261,419 | 10,261,419 | ||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 4 |
PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STOCKHOLDERS’ EQUITY (DEFICIT)
For the Nine Months Ended September 30, 2018 and the Nine Months Ended September 30, 2019
(Unaudited)
| Series B Convertible Preferred Stock | Common Stock | Additional Paid-in- | Accumulated | Accumulated Other Comprehensive | Stockholders’ (Deficit) | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | (Deficit) | Loss | Equity | |||||||||||||||||||||||||
| For the nine months ended September 30, 2018 | ||||||||||||||||||||||||||||||||
| BALANCE -December 31, 2017 | 872,766 | $ | 1 | 10,261,419 | $ | 1,026 | $ | 12,227,849 | $ | (10,841,759 | ) | $ | (167,805 | ) | $ | 1,219,312 | ||||||||||||||||
| Unrealized loss on marketable securities | (75 | ) | (75 | ) | ||||||||||||||||||||||||||||
| Foreign currency translation loss | (827 | ) | (827 | ) | ||||||||||||||||||||||||||||
| Stock compensation - stock options | 344,647 | 344,647 | ||||||||||||||||||||||||||||||
| Net loss | (598,159 | ) | (598,159 | ) | ||||||||||||||||||||||||||||
| BALANCE -March 31, 2018 | 872,766 | $ | 1 | 10,261,419 | $ | 1,026 | $ | 12,572,496 | $ | (11,439,918 | ) | $ | (168,707 | ) | $ | 964,898 | ||||||||||||||||
| Unrealized gain on marketable securities | 3,541 | 3,541 | ||||||||||||||||||||||||||||||
| Foreign currency translation gain | 503 | 503 | ||||||||||||||||||||||||||||||
| Stock compensation - stock options | 263,148 | 263,148 | ||||||||||||||||||||||||||||||
| Net loss | (672,210 | ) | (672,210 | ) | ||||||||||||||||||||||||||||
| BALANCE -June 30, 2018 | 872,766 | $ | 1 | 10,261,419 | $ | 1,026 | $ | 12,835,644 | $ | (12,112,128 | ) | $ | (164,663 | ) | $ | 559,880 | ||||||||||||||||
| Unrealized gain on marketable securities | 1,781 | 1,781 | ||||||||||||||||||||||||||||||
| Foreign currency translation loss | (2,266 | ) | (2,266 | ) | ||||||||||||||||||||||||||||
| Stock compensation - stock options | 261,138 | 261,138 | ||||||||||||||||||||||||||||||
| Net loss | (497,500 | ) | (497,500 | ) | ||||||||||||||||||||||||||||
| BALANCE -September 30, 2018 | 872,766 | $ | 1 | 10,261,419 | $ | 1,026 | $ | 13,096,782 | $ | (12,609,628 | ) | $ | (165,148 | ) | $ | 323,033 | ||||||||||||||||
| For the nine months ended September 30, 2019 | ||||||||||||||||||||||||||||||||
| BALANCE - December 31, 2018 | 872,766 | $ | 1 | 10,261,419 | $ | 1,026 | $ | 13,357,920 | $ | (13,399,290 | ) | $ | (170,540 | ) | $ | (210,883 | ) | |||||||||||||||
| Unrealized gain on marketable securities | 4,823 | 4,823 | ||||||||||||||||||||||||||||||
| Foreign currency translation loss | (7,669 | ) | (7,669 | ) | ||||||||||||||||||||||||||||
| Stock compensation - stock options | 451,141 | 451,141 | ||||||||||||||||||||||||||||||
| Net loss | (599,232 | ) | (599,232 | ) | ||||||||||||||||||||||||||||
| BALANCE -March 31, 2019 | 872,766 | $ | 1 | 10,261,419 | $ | 1,026 | $ | 13,809,061 | $ | (13,998,522 | ) | $ | (173,386 | ) | $ | (361,820 | ) | |||||||||||||||
| Foreign currency translation gain | 291 | 291 | ||||||||||||||||||||||||||||||
| Stock compensation - stock options | 260,560 | 260,560 | ||||||||||||||||||||||||||||||
| Net loss | (278,506 | ) | (278,506 | ) | ||||||||||||||||||||||||||||
| BALANCE -June 30, 2019 | 872,766 | $ | 1 | 10,261,419 | $ | 1,026 | $ | 14,069,621 | $ | (14,277,028 | ) | $ | (173,095 | ) | $ | (379,475 | ) | |||||||||||||||
| Foreign currency translation loss | (20 | ) | (20 | ) | ||||||||||||||||||||||||||||
| Stock compensation - stock options | 139,066 | 139,066 | ||||||||||||||||||||||||||||||
| Net loss | (123,307 | ) | (123,307 | ) | ||||||||||||||||||||||||||||
| BALANCE -September 30, 2019 | 872,766 | $ | 1 | 10,261,419 | $ | 1,026 | $ | 14,208,687 | $ | (14,400,335 | ) | $ | (173,115 | ) | $ | (363,736 | ) | |||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 5 |
PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the nine months ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Loss | $ | (1,001,045 | ) | $ | (1,767,869 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation expense | 254 | 262 | ||||||
| Stock based compensation | 850,767 | 868,933 | ||||||
| Change in fair value of the derivative liability | (341,107 | ) | (17,748 | ) | ||||
| Gain on sale of marketable securities | (4,435 | ) | (1,568 | ) | ||||
| Changes in operating assets and liabilities | ||||||||
| Prepaid expenses | 73,867 | 30,589 | ||||||
| Accounts payable and accrued expenses | 83,129 | 124,005 | ||||||
| NET CASH USED IN OPERATING ACTIVITIES | (338,570 | ) | (763,396 | ) | ||||
| CASH FLOWS PROVIDED BY INVESTING ACTIVITIES | ||||||||
| Sale of marketable securities | 250,000 | 3,170,000 | ||||||
| Purchase of marketable securities | - | (2,369,839 | ) | |||||
| NET CASH PROVIDED BY INVESTING ACTIVITIES | 250,000 | 800,161 | ||||||
| Effect of exchange rate on cash and cash equivalents | 3,470 | (4,520 | ) | |||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (85,100 | ) | 32,245 | |||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 362,486 | 399,687 | ||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 277,386 | $ | 431,932 | ||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
| Cash paid for interest expense | $ | - | $ | - | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| NONCASH TRANSACTIONS | ||||||||
| Unrealized (gain) loss on marketable securities | $ | 4,823 | $ | (6,674 | ) | |||
See accompanying notes to the unaudited condensed consolidated financial statements
| 6 |
PROTAGENIC THERAPEUTICS, INC & SUBSIDIARY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
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 (which at the time was named Atrinsic, Inc.), merged (the “Merger”) with and into Prior Protagenic. Prior Protagenic was the surviving corporation of the Merger. As a result of the Merger, the Company acquired the business of Prior Protagenic and 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 condensed consolidated financial statements, the Company incurred a net loss of $1,001,045 and $1,767,869 for the nine months ended September 30, 2019 and 2018, respectively. The Company has incurred losses since inception resulting in an accumulated deficit of $14,400,335 as of September 30, 2019. The Company anticipates further losses in the development of its business. The Company had a net working capital deficit of $364,110 as of September 30, 2019 as a result of the continuing operations of the Company. Based on its current forecast and budget, management believes that its cash resources will be sufficient to fund its operations at least until the end of the fourth quarter of 2019 . Absent generation of sufficient revenue from the execution of the Company’s business plan, the Company will need to obtain debt or equity financing by the first quarter of 2020.
As reflected in the condensed consolidated financial statements, the Company had an accumulated deficit at September 30, 2019, a net loss, and net cash used in operating activities for the nine months ended September 30, 2019. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
NOTE 3 - SUMMARY OF SIGNFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC” for interim financial information. In the opinion of the Company’s management, the accompanying condensed consolidated financial statements reflect all adjustments, consisting of normal, recurring adjustments, considered necessary for a fair presentation of the results for the interim periods ended September 30, 2019 and 2018. 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.
| 7 |
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s financial statements for the year ended December 31, 2018, which contains the audited financial statements and notes thereto, for the years ended December 31, 2018 and 2017 included within the Company’s Form 10-K filed with the SEC on March 29, 2019. The interim results for the nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ended December 31, 2019 or for any future interim periods.
Principles of consolidation
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 the condensed consolidated financial statements.
Use of estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant estimates underlying the condensed consolidated financial statements include the allocation of the fair value of acquired assets and liabilities associated with the Merger, income tax provisions, valuation of stock options and warrants and assessment of deferred tax asset valuation allowance.
Concentrations of Credit Risk
The Company maintains its cash accounts at financial institutions which are insured by the Federal Deposit Insurance Corporation. At times, the Company may have deposits in excess of federally insured limits.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. 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, 2019, and December 31, 2018, the Company did not have any cash equivalents.
Equipment
Equipment is stated at cost less accumulated depreciation. Cost includes expenditures for computer equipment. Maintenance and repairs are charged to expense as incurred. When assets are sold, retired, or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations. The cost of equipment is depreciated using the straight-line method over the estimated useful lives of the related assets which is three years. Depreciation expense was not material for the nine months ended September 30, 2019 and 2018.
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 condensed consolidated balance sheets at each balance sheet date. Unrealized holding gains and losses for available-for-sale securities (including those classified as current assets) shall be excluded from earnings and reported in other comprehensive income until realized.
| 8 |
During the nine months ended September 30, 2019 the Company purchased $0 and sold $250,000 in marketable securities with a realized gain of $4,435 and an unrealized gain of $0. As of September 30, 2019 and December 31, 2018, the Company owned marketable securities with a total value of $0 and $250,388, respectively.
As of September 30, 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 as of September 30, 2019.
| Carrying | Fair Value Measurement Using | |||||||||||||||||||
| Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Marketable securities | — | — | — | — | — | |||||||||||||||
| Derivative warrants liabilities | $ | (334,972 | ) | $ | — | $ | — | $ | (334,972 | ) | $ | (334,972 | ) | |||||||
The following table provides a summary of financial instruments that are measured at fair value as of December 31, 2018.
| Carrying | Fair Value Measurement Using | |||||||||||||||||||
| Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Marketable securities | 250,388 | 250,388 | — | — | 250,388 | |||||||||||||||
| Derivative warrants liabilities | $ | (676,079 | ) | $ | — | $ | — | $ | (676,079 | ) | $ | (676,079 | ) | |||||||
| 9 |
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, 2019 and the year ended December 31, 2018:
Fair Value Measurement Using Level 3 | ||||
| Inputs Total | ||||
| Balance, December 31, 2017 | $ | 425,838 | ||
| Change in fair value of derivative warrants liabilities | 250,241 | |||
| Balance, December 31, 2018 | 676,079 | |||
| Change in fair value of derivative warrants liabilities | (341,107 | ) | ||
| Balance, September 30, 2019 | $ | 334,972 | ||
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 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, 2018 | September 30, 2019 | |||||||
| Exercise price | 1.25 | 1.25 | ||||||
| Risk free interest rate | 2.46 | % | 1.63 | % | ||||
| Dividend yield | 0.00 | % | 0.00 | % | ||||
| Expected volatility | 152 | % | 123 | % | ||||
| Contractual term | 2.15 Years | 1.40 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, 2019 and 2018, the Company marked the derivative feature of the warrants to fair value and recorded a gain of $341,107 and a gain of $17,748 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 condensed consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then the related fair value is reclassified to equity.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.
| 10 |
Stock-Based Compensation
The Company accounts for stock based compensation costs under the provisions of ASC 718, “Compensation—Stock Compensation”, which requires the measurement and recognition of compensation expense related to the fair value of stock based compensation awards that are ultimately expected to vest. Stock based compensation expense recognized includes the compensation cost for all stock based payments granted to employees, officers, and directors based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC. 718 is also applied to awards modified, repurchased, or canceled during the periods reported.
If any award granted under the 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.
Stock-Based Compensation for Non-Employees
The Company accounts for warrants and options issued to non-employees under AUS 2018-07, Equity – Equity Based Payments to Non-Employees, using the Black-Scholes option-pricing model.
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 | For
the Nine Months Ended | |||||||
| Conversion Feature Shares | ||||||||
| Common shares issuable under the conversion feature of preferred shares | 872,766 | 872,766 | ||||||
| Stock Options | 3,972,866 | 3,846,299 | ||||||
| Warrants | 3,826,658 | 3,826,658 | ||||||
| Total potentially outstanding dilutive common shares | 8,672,290 | 8,545,723 | ||||||
Research and Development
Research and development expenses are charged to operations as incurred.
Foreign Currency Translation
The Company follows Section 830-10-45 of the FASB Accounting Standards Codification (“Section 830-10-45”) for foreign currency translation to translate the financial statements of the foreign subsidiary from the functional currency, generally the local currency, into U.S. Dollars. Section 830-10-45 sets out the guidance relating to how a reporting entity determines the functional currency of a foreign entity (including of a foreign entity in a highly inflationary economy), re-measures the books of record (if necessary), and characterizes transaction gains and losses. Pursuant to Section 830-10-45, the assets, liabilities, and operations of a foreign entity shall be measured using the functional currency of that entity. An entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment, or local currency, in which an entity primarily generates and expends cash.
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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 condensed consolidated statements of income and comprehensive income (loss). If the Company disposes of foreign subsidiaries, then any cumulative translation gains or losses would be recorded into the condensed consolidated statements of income and comprehensive income (loss). If the Company determines that there has been a change in the functional currency of a subsidiary to the U.S. Dollar, any translation gains or losses arising after the date of change would be included within the statement of income and comprehensive income (loss).
Based on an assessment of the factors discussed above, the management of the Company determined its subsidiary’s local currency (i.e. the Canadian dollar) to be the functional currency for its foreign subsidiary.
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at:
September 30, 2019 | December 31, 2018 | |||||||
| Accounting | $ | 36,161 | $ | 52,365 | ||||
| Research and development | 207,489 | 137,114 | ||||||
| Legal | 7,500 | 32,161 | ||||||
| Other | 64,905 | 10,048 | ||||||
| Total | $ | 316,055 | $ | 231,688 | ||||
NOTE 5 - DERIVATIVE LIABILITIES
Upon closing of the private placement transactions in 2016, the Company issued 127,346 and 295,945 warrants, to the placement agent of the private 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 have a cashless exercise feature that requires the Company to classify the warrants as a derivative liability.
NOTE 6 - STOCKHOLDERS’ EQUITY (DEFICIT)
Stock-Based Compensation
In connection with the consummation of the Merger completed on February 12, 2016, we adopted 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.
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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 and January 1, 2019, 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 1,128,756 shares. As a result of this increase, as of September 30, 2019, the aggregate number of shares of common stock available for awards under the 2016 Plan was 3,739,867 shares. Options issued under the 2016 Plan are exercisable for up to ten years from the date of issuance.
There were 3,972,866 options outstanding as of September 30, 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 | % |
There were 3,846,299 options outstanding as of December 31, 2018. The fair value of each stock option granted was estimated using the Black-Scholes assumptions and or factors as follows:
| Exercise price | $ | 1.25 - $1.75 | ||
| Expected dividend yield | 0 | % | ||
| Risk free interest rate | 2.73% - 2.85 | % | ||
| Expected life in years | 3.75-9.40 | |||
| Expected volatility | 139% - 146 | % |
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, 2017 | 3,566,299 | $ | 1.33 | 8.05 | ||||||||
| Granted | 280,000 | $ | 1.75 | 9.15 | ||||||||
| Expired | - | |||||||||||
| Outstanding December 31, 2018 | 3,846,299 | $ | 1.36 | 7.20 | ||||||||
| Granted | 126,567 | $ | 1.15 | 9.70 | ||||||||
| Expired | - | |||||||||||
| Outstanding September 30, 2019 | 3,972,866 | $ | 1.36 | 6.52 | ||||||||
A summary of the status of the Company’s nonvested option as of September 30, 2019, and changes during the nine months ended September 30, 2019, is presented below:
| Nonvested Options | Options | Weighted- Average Exercise Price | ||||||
| Nonvested at December 31, 2017 | 1,492,861 | $ | 1.54 | |||||
| Granted | 280,000 | $ | 1.75 | |||||
| Vested | (972,651 | ) | $ | 1.29 | ||||
| Forfeited | - | - | ||||||
| Nonvested at December 31, 2018 | 800,210 | $ | 1.63 | |||||
| Granted | 126,567 | $ | 1.15 | |||||
| Vested | (544,187 | ) | $ | 1.35 | ||||
| Forfeited | - | - | ||||||
| Nonvested at September 30, 2019 | 382,590 | $ | 1.43 | |||||
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As of September 30, 2019, the Company had 3,972,866 shares issuable under options outstanding at a weighted average exercise price of $1.36 and an intrinsic value of $168,572.
The total number of options granted during the nine months ended September 30, 2019 and 2018 was 126,567 and 280,000, respectively. The exercise price for these options was $1.00 per share or $1.25 per share.
The Company recognized compensation expense related to options issued of $139,066 and $261,138 during the three months ended September 30, 2019 and 2018, respectively, which is included in general and administrative expenses and research and development expenses. For the three months ended September 30, 2019, $74,005 of the stock compensation was related to employees and $65,061 was related to non-employees.
The Company recognized compensation expense related to options issued of $850,767 and $868,933 during the nine months ended September 30, 2019 and 2018, respectively, which is included in general and administrative expenses and research and development expenses. For the nine months ended September 30, 2019, $524,739 of the stock compensation was related to employees and $326,028 was related to non-employees.
As of September 30, 2019, the unamortized stock option expense was $582,235 with $255,159 being related to employees and $327,076 being related to non-employees. As of September 30, 2019, the weighted average period for the unamortized stock compensation to be recognized is 2.87 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.
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.
Warrants:
In connection with the Merger, all of the issued and outstanding warrants to purchase shares of Prior Protagenic common stock, converted, on a 1 for 1 basis, into new warrants (the “New Warrants”) to purchase shares of our Series B Preferred Stock.
Simultaneous with the Merger and the Private Offering, New Warrants to purchase 3,403,367 shares of Series B Preferred Stock at an average exercise price of approximately $1.05 per share were issued to holders of Prior Protagenic warrants; additionally, 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. Placement Agent Warrants to purchase 127,346 shares of Series B Preferred Stock at an exercise price of $1.25 per share were issued in connection with the Private offering. These warrants to purchase 423,291 shares of Series B Preferred Stock have been recorded as derivative liabilities. 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, 2017 | 3,826,658 | $ | 1.05 | 4.69 | ||||||||
| Granted | - | - | - | |||||||||
| Outstanding December 31, 2018 | 3,826,658 | $ | 1.05 | 3.69 | ||||||||
| Granted | - | - | - | |||||||||
| Outstanding September 30, 2019 | 3,826,658 | $ | 1.05 | 2.94 | ||||||||
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As of September 30, 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 $3,633,335.
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, 2016. The extension allowed for further development of the technologies and use of their applications. This new 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, 2019, Dr. David Lovejoy of the University has been granted 533,299 stock options, of which 478,384 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 or on October 16, 2027.
The sponsorship research and development expenses pertaining to the Research Agreements were $63,787 and $0 for the nine months ended September 30, 2019 and 2018, 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, 2019 and 2018 and therefore was not subject to paying any royalties.
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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 six 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 - SUBSEQUENT EVENTS
On November 5, 2019, the Company entered into a convertible note with a related part. The convertible note has principle of $50,000. The note accrues 6% interest per year that increases to 12% per year in the case of the note entering default. The loan is due on November 5, 2023. The note is convertible into shares of the Company’s common stock with an exercise price of $1.25 per share.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential” and other similar words and expressions of the future. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. As a result, you should not place undue reliance on any forward-looking statements. Except to the limited extent required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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
We are a development stage company currently performing clinical trials to obtain FDA approval and commercialization of our product.
During the three months ended September 30, 2019, we incurred a loss from operations of $189,622 as compared to $498,070 for the three months ended September 30, 2018. The decrease in the loss is due to a decrease in research and development expense of $131,918 from $163,071 for the three months ended September 30, 2018 to $31,153 for the three months ended September 30, 2019, and a decrease in general and administrative expenses of $176,530 from $334,999 for the three months ended September 30, 2018 to $158,469 for the three months ended September 30, 2019 due to an decrease in stock compensation expense.
During the nine months ended September 30, 2019, we incurred a loss from operations of $1,348,901 as compared to $1,789,879 for the nine months ended September 30, 2018. The decrease in the loss is due to a decrease in research and development expense of $395,519 from $687,347 for the nine months ended September 30, 2018 to $291,828 for the nine months ended September 30, 2019, and a decrease in general and administrative expenses of $45,459 from $1,102,532 for the nine months ended September 30, 2018 to $1,057,073 for the nine months ended September 30, 2019 due to an decrease in stock compensation expense.
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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 and peptide synthesizer companies. These expenses could also include business combinations, capital expenditures, and new drug development working capital requirements. As of September 30, 2019, we had cash of $277,386 and working capital deficit of $364,110. The Company currently has a derivative liability on the books in the amount of $334,972 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 deficit to $29,138. We anticipate further losses from the development of our business. Based on its current forecast and budget, management believes that the Company’s cash resources will be sufficient to fund its operations at least until the end of the fourth quarter of 2019. Absent generation of sufficient revenue from the execution of the Company’s business plan, the Company will need to obtain debt or equity financing by the first quarter of 2020.
Operating activities used $338,570 and $763,396 in cash for the nine months ended September 30, 2019 and 2018, respectively. The use of cash in operating activities during the nine months ended September 30, 2019, primarily comprised of $1,001,045 net loss, $850,767 in stock compensation expense, $341,107 of change in the fair value of the derivative liability since December 31, 2018, an decrease in prepaid expenses of $73,867, $4,435 from a gain on the sale of marketable securities, and a $83,129 increase 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 provided $250,000 and $800,161 in cash for the nine months ended September 30, 2019 and 2018, respectively. The cash provided by investing activities consisted of $250,000 from the sale of marketable securities. The cash provided by investing activities during the nine months ended September 30, 2018 consisted of the sale of marketable securities of $3,170,000 and the purchase of marketable securities of $2,369,839.
We did not have any financing activities for the nine months ended September 30, 2019 and 2018.
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, 2019. 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.
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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 condensed 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.
Since we remain a small Company, with limited segregation of duties, the third party has identified certain areas where we can layer in added controls and procedures. Management intends to implement such controls and procedures in the future.
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.
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.
Not applicable.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
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Item 4. Mine Safety Disclosures
Not applicable.
None.
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. |
| 20 |
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 14, 2019 | Protagenic Therapeutics, Inc. | |
| By: | /s/ Alexander K. Arrow | |
| Chief Financial Officer | ||
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