Protagenic Therapeutics, Inc.\new - Quarter Report: 2020 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, 2020
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 16, 2020, there were 10,360,480 shares of common stock outstanding.
PROTAGENIC THERAPEUTICS, INC.
Form 10-Q Report
For the Fiscal Quarter Ended September 30, 2020
TABLE OF CONTENTS
| 2 |
PART I - FINANCIAL INFORMATION
PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 988,574 | $ | 798,623 | ||||
| Prepaid expenses | 13,405 | 43,354 | ||||||
| TOTAL CURRENT ASSETS | 1,001,979 | 841,977 | ||||||
| Equipment - net | 35 | 296 | ||||||
| TOTAL ASSETS | $ | 1,002,014 | $ | 842,273 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued expenses | 521,835 | 865,047 | ||||||
| Derivative liability | 190,315 | 332,222 | ||||||
| TOTAL CURRENT LIABILITIES | 712,150 | 1,197,269 | ||||||
| PIK convertible notes payable, net of debt discount | 1,027,689 | 174,821 | ||||||
| PIK convertible notes payable, net of debt discount - related party | 282,895 | 104,549 | ||||||
| TOTAL LIABILITIES | 2,022,734 | 1,476,639 | ||||||
| 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, 2020, and December 31, 2019 | 1 | 1 | ||||||
| Common stock, $.0001 par value, 100,000,000 shares authorized, 10,360,480 and 10,261,419 shares issued and outstanding at September 30 2020, and December 31, 2019 | 1,036 | 1,026 | ||||||
| Additional paid-in-capital | 16,326,490 | 14,687,172 | ||||||
| Accumulated deficit | (17,175,284 | ) | (15,150,201 | ) | ||||
| Accumulated other comprehensive loss | (172,963 | ) | (172,364 | ) | ||||
| TOTAL STOCKHOLDERS’ DEFICIT | (1,020,720 | ) | (634,366 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 1,002,014 | $ | 842,273 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 3 |
PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| OPERATING AND ADMINISTRATIVE EXPENSES | ||||||||||||||||
| Research and development | 539,770 | 31,153 | 657,737 | 291,828 | ||||||||||||
| General and administrative | 552,246 | 158,469 | 1,356,990 | 1,057,073 | ||||||||||||
| TOTAL OPERATING AND ADMINISTRATIVE EXPENSES | 1,092,016 | 189,622 | 2,014,727 | 1,348,901 | ||||||||||||
| LOSS FROM OPERATIONS | (1,092,016 | ) | (189,622 | ) | (2,014,727 | ) | (1,348,901 | ) | ||||||||
| OTHER (EXPENSE) INCOME | ||||||||||||||||
| Interest income | 17 | 1,108 | 494 | 2,314 | ||||||||||||
| Interest expense | (58,827 | ) | - | (152,757 | ) | - | ||||||||||
| Realized gain on marketable securities | - | - | - | 4,435 | ||||||||||||
| Change in fair value of derivative liability | 104,718 | 65,207 | 141,907 | 341,107 | ||||||||||||
| TOTAL OTHER INCOME (EXPENSES) | 45,908 | 66,315 | (10,356 | ) | 347,856 | |||||||||||
| LOSS BEFORE TAX | (1,046,108 | ) | (123,307 | ) | (2,025,083 | ) | (1,001,045 | ) | ||||||||
| INCOME TAX EXPENSE | - | - | - | - | ||||||||||||
| NET LOSS | $ | (1,046,108 | ) | $ | (123,307 | ) | $ | (2,025,083 | ) | $ | (1,001,045 | ) | ||||
| COMPREHENSIVE LOSS | ||||||||||||||||
| Other Comprehensive Loss - net of tax | ||||||||||||||||
| Foreign exchange translation income (loss) | 736 | (20 | ) | (599 | ) | (7,398 | ) | |||||||||
| TOTAL COMPREHENSIVE LOSS | $ | (1,045,372 | ) | $ | (123,327 | ) | $ | (2,025,682 | ) | $ | (1,008,443 | ) | ||||
| Net loss per common share - Basic and Diluted | $ | (0.10 | ) | $ | (0.01 | ) | $ | (0.20 | ) | $ | (0.10 | ) | ||||
| Weighted average common shares - Basic and Diluted | 10,275,758 | 10,261,419 | 10,274,005 | 10,261,419 | ||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 4 |
PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
For the Nine Months Ended September 30, 2020 and the Nine Months Ended September 30, 2019
(Unaudited)
| Series B | Accumulated | |||||||||||||||||||||||||||||||
Convertible Preferred Stock | Common Stock | Additional Paid-in- | Accumulated | Other Comprehensive | Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Deficit | |||||||||||||||||||||||||
| 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 | ) | |||||||||||||||
| For the nine months ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| BALANCE -December 31, 2019 | 872,766 | $ | 1 | 10,261,419 | $ | 1,026 | $ | 14,687,172 | $ | (15,150,201 | ) | $ | (172,364 | ) | $ | (634,366 | ) | |||||||||||||||
| Foreign currency translation loss | - | - | - | - | - | - | (2,419 | ) | (2,419 | ) | ||||||||||||||||||||||
| Stock compensation - stock options | - | - | - | - | 360,436 | - | - | 360,436 | ||||||||||||||||||||||||
| Debt discount from beneficial conversion feature | - | - | - | - | 89,204 | - | - | 89,204 | ||||||||||||||||||||||||
| Issuance of options for settlement of accrued payroll | - | - | - | - | 93,950 | - | - | 93,950 | ||||||||||||||||||||||||
| Modification of warrants | - | - | - | - | 5,861 | - | - | 5,861 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (498,589 | ) | - | (498,589 | ) | ||||||||||||||||||||||
| BALANCE -March 31, 2020 | 872,766 | $ | 1 | 10,261,419 | $ | 1,026 | $ | 15,236,623 | $ | (15,648,790 | ) | $ | (174,783 | ) | $ | (585,923 | ) | |||||||||||||||
| Foreign currency translation gain | - | - | - | - | - | - | 1,084 | 1,084 | ||||||||||||||||||||||||
| Stock compensation - stock options | - | - | - | - | 304,148 | - | - | 304,148 | ||||||||||||||||||||||||
| Debt discount from warrants issued to placement agents- offering cost | - | - | - | - | 86,968 | - | - | 86,968 | ||||||||||||||||||||||||
| Debt discount from beneficial conversion feature | - | - | - | - | 15,000 | - | - | 15,000 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (480,386 | ) | - | (480,386 | ) | ||||||||||||||||||||||
| BALANCE -June 30, 2020 | 872,766 | $ | 1 | 10,261,419 | $ | 1,026 | $ | 15,642,739 | $ | (16,129,176 | ) | $ | (173,699 | ) | $ | (659,109 | ) | |||||||||||||||
| Foreign currency translation gain | - | - | - | - | - | - | 736 | 736 | ||||||||||||||||||||||||
| Stock compensation - stock options | - | - | - | - | 458,567 | - | - | 458,567 | ||||||||||||||||||||||||
| Stock issued for services | - | - | 99,061 | 10 | 119,990 | - | - | 120,000 | ||||||||||||||||||||||||
Debt discount from warrants issued to placement agents- offering cost | - | - | - | - | 105,194 | - | - | 105,194 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,046,108 | ) | - | (1,046,108 | ) | ||||||||||||||||||||||
| BALANCE -September 30, 2020 | 872,766 | $ | 1 | 10,360,480 | $ | 1,036 | $ | 16,326,490 | $ | (17,175,284 | ) | $ | (172,963 | ) | $ | (1,020,720 | ) | |||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 5 |
PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the nine months ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Loss | $ | (2,025,083 | ) | $ | (1,001,045 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation expense | 249 | 254 | ||||||
| Stock based compensation | 1,243,151 | 850,767 | ||||||
| Change in fair value of the derivative liability | (141,907 | ) | (341,107 | ) | ||||
| Gain on sale of marketable securities | - | (4,435 | ) | |||||
| Amortization of debt discount | 104,169 | - | ||||||
| Modification of warrants | 5,861 | - | ||||||
| Changes in operating assets and liabilities | ||||||||
| Prepaid expenses | 29,949 | 73,867 | ||||||
| Accounts payable and accrued expenses | (244,300 | ) | 83,129 | |||||
| NET CASH USED IN OPERATING ACTIVITIES | (1,027,911 | ) | (338,570 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Sale of marketable securities | - | 250,000 | ||||||
| NET CASH PROVIDED BY INVESTING ACTIVITIES | - | 250,000 | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Debt discount from issuance costs paid on PIK convertible notes | (104,090 | ) | - | |||||
| Proceeds from PIK convertible notes | 1,177,500 | - | ||||||
| Proceeds from PIK convertible notes - related party | 150,000 | - | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 1,223,410 | - | ||||||
| Effect of exchange rate on cash | (5,548 | ) | 3,470 | |||||
| NET INCREASE (DECREASE) IN CASH | 189,951 | (85,100 | ) | |||||
| CASH, BEGINNING OF PERIOD | 798,623 | 362,486 | ||||||
| CASH, END OF PERIOD | $ | 988,574 | $ | 277,386 | ||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
| Cash paid for interest expense | $ | - | $ | - | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| NONCASH FINANCING AND INVESTING TRANSACTIONS | ||||||||
| Unrealized (gain) loss on marketable securities | $ | - | $ | 4,823 | ||||
| Debt discount from beneficial conversion feature | $ | 104,204 | $ | - | ||||
| Debt discount from warrants issued to placement agents-offering cost | $ | 192,162 | $ | - | ||||
| Issuance of options for settlement of accrued payroll | $ | 93,950 | $ | - | ||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 6 |
PROTAGENIC THERAPEUTICS, INC & SUBSIDIARY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2020
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
Company Background
Protagenic Therapeutics, Inc. (“we,” “our,” “Protagenic” or “the Company”), is a Delaware corporation with one subsidiary named Protagenic Therapeutics Canada (2006) Inc. (“PTI Canada”), a corporation formed in 2006 under the laws of the Province of Ontario, Canada.
The Company was previously known as Atrinsic, Inc., a company that was once a reporting company under the Securities Exchange Act of 1934, but that, in 2012 and 2013, reorganized under Chapter 11 of the United States Bankruptcy Code and emerged from bankruptcy. On February 12, 2016, the Company acquired Protagenic Therapeutics, Inc. (“Prior Protagenic”) through a reverse merger.
On February 12, 2016, Protagenic Acquisition Corp., a wholly-owned subsidiary of the Company, merged (the “Merger”) with and into Prior Protagenic. Prior Protagenic was the surviving corporation of the Merger. As a result of the Merger, the Company acquired the business of Prior Protagenic and has continued the existing business operations of Prior Protagenic as a wholly-owned subsidiary. On June 17, 2016, Prior Protagenic merged with and into the Company with the Company as the surviving corporation in the merger. Immediately thereafter, the Company changed its name from Atrinsic, Inc. to Protagenic Therapeutics, Inc.
NOTE 2 - GOING CONCERN
As shown in the accompanying consolidated financial statements, the Company has incurred significant reoccurring losses resulting in an accumulated deficit. The Company anticipates further losses in the development of its business. The Company had negative cash flows used in operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
Based on its current forecast and budget, management believes that its cash resources will be sufficient to fund its operations at least until the end of the third quarter of 2021. Absent generation of sufficient revenue from the execution of the Company’s business plan and sales revenue is not anticipated before 2024, the Company will need to obtain debt or equity financing by the third quarter of 2021. Management believes that actions presently being taken to obtain additional funding provide the opportunity for the Company to continue as a going concern. The accompanying financial statements have been prepared assuming the Company will continue as a going concern; no adjustments to the financial statements have been made to account for this uncertainty.
NOTE 3 - SUMMARY OF SIGNFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC” for interim financial information. In the opinion of the Company’s management, the accompanying condensed consolidated financial statements reflect all adjustments, consisting of normal, recurring adjustments, considered necessary for a fair presentation of the results for the interim periods ended September 30, 2020 and 2019. As this is an interim period financial statement, certain adjustments are not necessary as with a financial period of a full year. Although management believes that the disclosures in these unaudited condensed consolidated financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements that have been prepared in accordance U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).
| 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, 2019, which contain the audited financial statements and notes thereto, for the years ended December 31, 2019 and 2018 included within the Company’s Form 10-K filed with the SEC on April 29, 2020. The interim results for the nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any future interim periods.
Principles of consolidation
The consolidated financial statements include the accounts of Protagenic Therapeutics, Inc., and its wholly owned Canadian subsidiary, PTI Canada. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
Reclassifications:
Reclassifications of prior periods have been made to conform with current year presentation
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant estimates underlying the consolidated financial statements include income tax provisions, valuation of stock options and warrants and assessment of deferred tax asset valuation allowance.
Concentrations of Credit Risk
The Company maintains its cash accounts at financial institutions which are insured by the Federal Deposit Insurance Corporation. At times, the Company may have deposits in excess of federally insured limits.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. While the Company’s marketable securities are cash equivalents it is the Company’s policy to present them separately on the balance sheet. As of September 30, 2020 and December 31, 2019, the Company did not have any cash equivalents.
Equipment
Equipment is stated at cost less accumulated depreciation. Cost includes expenditures for computer equipment. Maintenance and repairs are charged to expense as incurred. When assets are sold, retired, or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations. The cost of equipment is depreciated using the straight-line method over the estimated useful lives of the related assets which is three years. Depreciation expense was nominal for the three and nine months ended September 30, 2020 and 2019.
Marketable Securities
The Company accounts for marketable debt securities, the only type of securities it owns, in accordance with sub-topic 320-10 of the FASB Accounting Standards Codification (“Sub-topic 320-10”).
Pursuant to Paragraph 320-10-35-1, investments in debt securities that are classified as available for sale shall be measured subsequently at fair value in the consolidated balance sheets at each balance sheet date. Unrealized holding gains and losses for available-for-sale securities (including those classified as current assets) shall be excluded from earnings and reported in other comprehensive income until realized.
| 8 |
During the nine months ended September 30, 2020 and 2019, the Company purchased $0 and sold $250,000 in marketable securities, respectively.
As of September 30, 2020 and December 31, 2019, the Company owned marketable securities with a total value of $0 and $0, respectively. The Company recorded a realized gain on marketable securities of $0 and $4,435 for the nine months ended September 30, 2020 and 2019, respectively.
As of September 30, 2020 and December 31, 2019, the Company held no marketable securities.
Fair Value Measurements
ASC 820, “Fair Value Measurements and Disclosure,” defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels are described below:
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that is accessible by the Company;
Level 2 Inputs – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly;
Level 3 Inputs – Unobservable inputs for the asset or liability including significant assumptions of the Company and other market participants.
The carrying amount of the Company’s financial assets and liabilities, such as cash, accounts payable and accrued expenses approximate their fair value because of the short maturity of those instruments.
Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated.
The assets or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. The following table provides a summary of financial instruments that are measured at fair value on a recurring basis as of September 30, 2020.
| Carrying | Fair Value Measurement Using | |||||||||||||||||||
| Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Derivative warrants liabilities | $ | 190,315 | $ | — | $ | — | $ | 190,315 | $ | 190,315 | ||||||||||
The following table provides a summary of financial instruments that are measured at fair value on a recurring basis as of December 31, 2019.
| Carrying | Fair Value Measurement Using | |||||||||||||||||||
| Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Derivative warrants liabilities | $ | 332,222 | $ | — | $ | — | $ | 332,222 | $ | 332,222 | ||||||||||
| 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, 2020 and the year ended December 31, 2019:
Fair Value Measurement Using Level 3 | ||||
| Inputs Total | ||||
| Balance, December 31, 2018 | 676,079 | |||
| Change in fair value of derivative warrants liabilities | (343,857 | ) | ||
| Balance, December 31, 2019 | $ | 332,222 | ||
| Change in fair value of derivative warrants liabilities | (141,907 | ) | ||
| Balance, September 30, 2020 | $ | 190,315 | ||
The fair value of the derivative feature of the 127,346 and 295,945 warrants issued to the placement agent of the Company’s 2016 private offering (the “2016 Offering”) and to a holder of its debt for debt cancellation in connection with the Merger, respectively on the issuance dates and at the balance sheet date were calculated using a Black-Scholes option model valued with the following assumptions:
| December 31, 2019 | September 30, 2020 | |||||||
| Exercise price | 1.25 | 1.25 | ||||||
| Risk free interest rate | 1.59 | % | 0.10 | % | ||||
| Dividend yield | 0.00 | % | 0.00 | % | ||||
| Expected volatility | 133 | % | 169 | % | ||||
| Contractual term | 1.15 Years | 0.39 Years | ||||||
Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar expected term on the date of measurement.
Dividend yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.
Volatility: The Company calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s peer group stock price for a period consistent with the warrants’ expected term.
Expected term: The Company’s expected term is based on the remaining contractual maturity of the warrants.
During the nine months ended September 30, 2020 and 2019, the Company marked the derivative feature of the warrants to fair value and recorded a gain of $141,907 and a gain of $341,107 relating to the change in fair value, respectively.
Derivative Liability
The Company evaluates its options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-10-05-4 and 815-40-25. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then the related fair value is reclassified to equity.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.
| 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, non-employees, and directors based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC. 718 is also applied to awards modified, repurchased, or canceled during the periods reported.
If any award granted under the Company’s 2016 Equity Compensation Plan (the “2016 Plan”) payable in shares of common stock is forfeited, cancelled, or returned for failure to satisfy vesting requirements, otherwise terminates without payment being made, or if shares of common stock are withheld to cover withholding taxes on options or other awards, the number of shares of common stock as to which such option or award was forfeited, or which were withheld, will be available for future grants under the 2016 Plan. The Company recognizes the impact of forfeitures when they occur.
Basic and Diluted Net (Loss) per Common Share
Basic (loss) per common share is computed by dividing the net (loss) by the weighted average number of shares of common stock outstanding for each period. Diluted (loss) per share is computed by dividing the net (loss) by the weighted average number of shares of common stock outstanding plus the dilutive effect of shares issuable through the common stock equivalents. The effect of dilution on net loss becomes anti-dilutive and therefore is not reflected on the income statement.
| Potentially
Outstanding Dilutive Common Shares | ||||||||
| For
the nine Months Ended September 30, 2020 | For
the Year Ended December 31, 2019 | |||||||
| Conversion Feature Shares | ||||||||
| Common shares issuable under the conversion feature of preferred shares | 872,766 | 872,766 | ||||||
| Stock Options | 4,391,472 | 3,835,366 | ||||||
| Warrants | 4,007,058 | 3,826,658 | ||||||
| Convertible Notes | 1,598,000 | 536,000 | ||||||
| Total potentially outstanding dilutive common shares | 10,869,296 | 9,070,790 | ||||||
| 11 |
Research and Development
Research and development expenses are charged to operations as incurred.
Foreign Currency Translation
The Company follows Section 830-10-45 of the FASB Accounting Standards Codification (“Section 830-10-45”) for foreign currency translation to translate the financial statements of the foreign subsidiary from the functional currency, generally the local currency, into U.S. Dollars. Section 830-10-45 sets out the guidance relating to how a reporting entity determines the functional currency of a foreign entity (including of a foreign entity in a highly inflationary economy), re-measures the books of record (if necessary), and characterizes transaction gains and losses. Pursuant to Section 830-10-45, the assets, liabilities, and operations of a foreign entity shall be measured using the functional currency of that entity. An entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment, or local currency, in which an entity primarily generates and expends cash.
The functional currency of each foreign subsidiary is determined based on management’s judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures, would be considered the functional currency, but any dependency upon the parent and the nature of the subsidiary’s operations must also be considered. If a subsidiary’s functional currency is deemed to be the local currency, then any gain or loss associated with the translation of that subsidiary’s financial statements is included in accumulated other comprehensive income. However, if the functional currency is deemed to be the U.S. Dollar, then any gain or loss associated with the re-measurement of these financial statements from the local currency to the functional currency would be included in the consolidated statements of income and comprehensive income (loss). If the Company disposes of foreign subsidiaries, then any cumulative translation gains or losses would be recorded into the consolidated statements of income and comprehensive income (loss). If the Company determines that there has been a change in the functional currency of a subsidiary to the U.S. Dollar, any translation gains or losses arising after the date of change would be included within the statement of income and comprehensive income (loss).
Based on an assessment of the factors discussed above, the management of the Company determined its subsidiary’s local currency (i.e. the Canadian dollar) to be the functional currency for its foreign subsidiary.
Leases
In February 2016, FASB issued Accounting Standards Update (“ASU”) 2016-02: Leases (Topic 842). The new guidance generally requires an entity to recognize on its balance sheet operating and financing lease liabilities and corresponding right-of-use assets. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The new standard requires a modified retrospective transition for existing leases to each prior reporting period presented or entered into after, the beginning of the earliest comparative period presented in the financial statements. This standard was adopted by the Company on January 1, 2018. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at:
| September 30, 2020 | December 31, 2019 | |||||||
| Accounting | $ | 24,161 | $ | 36,161 | ||||
| Research and development | 378,428 | 650,584 | ||||||
| Legal | 9,585 | 15,273 | ||||||
| Other | 109,661 | 163,029 | ||||||
| Total | $ | 521,835 | $ | 865,047 | ||||
| 12 |
On October 1, 2019, the Company entered into an agreement with a consultant for toxicology studies. The consultant quoted a commitment of approximately $988,000 as an estimate for the study. 50% of the total price was paid upon the signing of the agreement, 35% of the total price is to be paid upon completion of the in-life study, and the remaining 15% of the total price is to be paid upon the issuance of the report. If the Company cancels the study the Company will be required to pay a cancelation fee. If the cancelation happens prior to the arrival of the test animals then the Company will need to pay between 20% and 50% of the animal fees depending on when the cancellation happens. If the cancellation occurs after the animals arrive but before the study begins then the Company will be responsible for paying 50% of the protocol price plus a fee of $7,000 per room/week for animal husbandry until the animals can be relocated or disposed of. If the Company cancels the study after it has begun then the Company will need to pay any fees for procured items for the study and any nonrecoverable expenses incurred by the consultant. As of September 30, 2020 and December 31, 2019, the Company has paid $174,106 and $0 and there is a balance of $319,799 and $493,905 due, respectively.
On February 13, 2020, the Company issued 187,497 options to the Company’s CFO to settle $93,950 in accrued compensations. The options are fully vested on issuance, have an exercise price of $1.75, and expire in 10 years from issuance.
NOTE 5 - DERIVATIVE LIABILITIES
Upon closing of the private placement transactions in 2016, the Company issued 127,346 and 295,945 warrants, respectively, to the placement agent of the 2016 Offering and to Strategic Bio Partners, a holder of the Company’s debt, for debt cancellation, respectively, to purchase the Company’s Series B Preferred Stock with an exercise price of $1.25 and a five-year term. Upon the effectiveness of our reverse stock split in July 2016, these became warrants to purchase our common stock on the same terms and conditions. The warrants, if exercised under the cashless provision, do not have an explicit limit on the number of shares that will be issued.
NOTE 6 – CONVERTIBLE NOTE PAYABLE (PIK NOTES)
Convertible Notes Payable
During the fourth quarter of 2019, the Company entered into a series of unsecured convertible notes (the “Convertible Notes”). The Convertible Notes have a total principal amount of $420,000. The Convertible Notes accrue 6% interest per year payable on October 31, 2020 and on the end of each calendar year thereafter, payable by a corresponding increase in the principal amount of each Convertible Note that increases to 12% per year (the Default Rate”) in the case a default. The Company will pay (a “PIK Payment”) the interest due by adding such interest (including interest at the Default Rate) to the then-outstanding principal amount of the Convertible Notes on each interest payment date and on the maturity date. Each PIK Payment will be preceded by written notice from the Company to the Convertible Note holder setting forth in reasonable detail the amount of such PIK Payment and the principal amount of the Convertible Note following such PIK Payment. The Convertible Notes are due on November 6, 2023. The Convertible Notes are convertible into shares of the Company’s common stock with a conversion price of $1.25 per share, subject to adjustment in certain circumstances.
During the second quarter of 2020, the Company issued additional unsecured Convertible Notes in the aggregate principal amount of $850,000. The notes accrue 6% interest per year payable on October 31, 2020 and on the end of each calendar year thereafter, payable by a corresponding increase in the principal amount of each note that increases to 12% per year in the case of the notes entering default. The Company will pay (a “PIK Payment”) the interest due by adding such interest (including interest at the Default Rate) to the then-outstanding principal amount of the Notes on each interest payment date and on the Maturity Date. Each PIK Payment will be preceded by written notice from the Company to the Note holder setting forth in reasonable detail the amount of such PIK Payment and the principal amount of the Note following such PIK Payment. The notes are due on November 6, 2023. The notes are convertible into shares of the Company’s common stock with an exercise price of $1.25 per share.
| 13 |
During the third quarter of 2020, the Company issued additional unsecured Convertible Notes in the aggregate principal amount of $327,500. The notes accrue 6% interest per year payable on October 31, 2020 and on the end of each calendar year thereafter, payable by a corresponding increase in the principal amount of each note that increases to 12% per year in the case of the notes entering default. The Company will pay (a “PIK Payment”) the interest due by adding such interest (including interest at the Default Rate) to the then-outstanding principal amount of the Notes on each interest payment date and on the Maturity Date. Each PIK Payment will be preceded by written notice from the Company to the Note holder setting forth in reasonable detail the amount of such PIK Payment and the principal amount of the Note following such PIK Payment. The notes are due on November 6, 2023. The notes are convertible into shares of the Company’s common stock with an exercise price of $1.25 per share.
The Company has evaluated the terms of the Convertible Notes and determined that there are no derivative features in the Convertible Notes. These Convertible Notes do have a beneficial conversion feature and recorded a total debt discount of $356,204 with $104,204 being recorded in the nine months ended September 30, 2020. During the nine months ended September 30, 2020 and 2019, the Company amortized $63,342 and $0 of the debt discount, respectively. At September 30, 2020 and December 31, 2019, the Company had an unamortized debt discount of $286,042 and $245,179, respectively.
Katalyst Securities LLC acted as the Company’s placement agent (the “Placement Agent”) for the sale of the Convertible Notes. The Company paid the Placement Agent, including its sub-agents, a commission of 10% of the funds raised from the investors introduced by the Placement Agent. In addition, the Placement Agent will receive warrants to purchase a number of shares of Common Stock equal to 10% of the shares of Common Stock issuable upon conversion of the Notes sold to the investors who were introduced to us by the Placement Agent (See note 7). The Company recognized $104,090 in expenses related to the Placement Agent commission for this offering which were recorded as a debt discount. This debt discount is being amortized over the life of the notes from the private placement. Amortization for the nine months September 30, 2020 is nominal.
As of September 30, 2020 and December 31, 2019, the Company owes $1,597,500 and $420,000 on the outstanding Convertible Notes, respectively.
| Maturity Date of Notes for Twelve Months Ending September 30, | Amount due | |||
| 2021 | $ | - | ||
| 2022 | - | |||
| 2023 | - | |||
| 2024 | 1,597,500 | |||
| 2025 | - | |||
| Total | $ | 1,597,500 | ||
Convertible Notes Payable – Related Party
During the fourth quarter of 2019, the Company issued unsecured Convertible Notes in the aggregate principal amount of $250,000 to related parties. The notes accrue 6% interest per year payable on October 31, 2020 and on the end of each calendar year thereafter, payable by a corresponding increase in the principal amount of each Convertible Note that increases to 12% per year in the case of the notes entering default. The Company will pay (a “PIK Payment”) the interest due by adding such interest (including interest at the Default Rate) to the then-outstanding principal amount of the Notes on each interest payment date and on the Maturity Date. Each PIK Payment will be preceded by written notice from the Company to the Note holder setting forth in reasonable detail the amount of such PIK Payment and the principal amount of the Note following such PIK Payment. The notes are due on November 6, 2023. The notes are convertible into shares of the Company’s common stock with an exercise price of $1.25 per share.
During the second quarter of, 2020, the Company issued additional unsecured Convertible Notes in the aggregate principal amount of $50,000. The notes accrue 6% interest per year payable on October 31, 2020 and on the end of each calendar year thereafter, payable by a corresponding increase in the principal amount of each note that increases to 12% per year in the case of the notes entering default. The Company will pay (a “PIK Payment”) the interest due by adding such interest (including interest at the Default Rate) to the then-outstanding principal amount of the Notes on each interest payment date and on the Maturity Date. Each PIK Payment will be preceded by written notice from the Company to the Note holder setting forth in reasonable detail the amount of such PIK Payment and the principal amount of the Note following such PIK Payment. The notes are due on November 6, 2023. The notes are convertible into shares of the Company’s common stock with an exercise price of $1.25 per share.
| 14 |
During the third quarter of, 2020, the Company issued additional unsecured Convertible Notes in the aggregate principal amount of $100,000. The notes accrue 6% interest per year payable on October 31, 2020 and on the end of each calendar year thereafter, payable by a corresponding increase in the principal amount of each note that increases to 12% per year in the case of the notes entering default. The Company will pay (a “PIK Payment”) the interest due by adding such interest (including interest at the Default Rate) to the then-outstanding principal amount of the Notes on each interest payment date and on the Maturity Date. Each PIK Payment will be preceded by written notice from the Company to the Note holder setting forth in reasonable detail the amount of such PIK Payment and the principal amount of the Note following such PIK Payment. The notes are due on November 6, 2023. The notes are convertible into shares of the Company’s common stock with an exercise price of $1.25 per share.
The Company has evaluated the terms of the notes and determined that there are no derivative features in the note. The Convertible Notes issued to related parties have a beneficial conversion feature and, accordingly, the Company recorded a debt discount of $150,000 during the year ended December 31, 2019. No debt discount was recorded during the nine months ended September 30, 2020. During the nine months ended September 30, 2020 and 2019, the Company amortized $28,344 and $0 of the debt discount, respectively, on Convertible Notes issued to related parties. Additionally, a fee of $9,000 was expensed related to the notes. At September, 30, 2020 and December 31, 2019, the Company had an unamortized debt discount of $117,105 and $154,451, respectively, on Convertible Notes issued to related parties.
As of September 30, 2020 and December 31, 2019, the Company owes $400,000 and $250,000 on the outstanding notes, respectively, held by related parties.
| Maturity Date of Notes for Twelve Months Ending September 30, | Amount due | |||
| 2021 | $ | - | ||
| 2022 | - | |||
| 2023 | - | |||
| 2024 | 400,000 | |||
| 2025 | - | |||
| Total | $ | 400,000 | ||
NOTE 7 - STOCKHOLDERS’ DEFICIT
Stock-Based Compensation
In connection with the consummation of the Merger completed on February 12, 2016, we adopted Prior Protagenic’s 2006 Employee, Director and Consultant Stock Plan (the “2006 Plan”). On June 17, 2016, our stockholders adopted the 2016 Plan and, as a result, we terminated the 2006 Plan. We will not grant any further awards under the 2006 Plan. All outstanding grants under the 2006 Plan will continue in effect in accordance with the terms of the particular grant and the 2006 Plan.
Pursuant to the 2016 Plan, the Company’s Compensation Committee may grant awards to any employee, officer, director, consultant, advisor or other individual service provider of the Company or any subsidiary. On each of January 1, 2017, January 1, 2019 and January 1, 2020, pursuant to an annual “evergreen” provision contained in the 2016 Plan, the number of shares reserved for future grants was increased by 564,378 shares, or a total of 1,693,134 shares. As a result of these increases, as of December 31, 2019 and September 30, 2020, the aggregate number of shares of common stock available for awards under the 2016 Plan was 4,304,245 shares and 4,868,623 shares, respectively. Options issued under the 2016 Plan are exercisable for up to ten years from the date of issuance.
There were 5,597,861 options outstanding as of September 30, 2020. The fair value of each stock option granted was estimated using the Black-Scholes assumptions and or factors as follows:
| Exercise price | $ | 1.75 | ||
| Expected dividend yield | 0 | % | ||
| Risk free interest rate | 0.64%-1.61 | % | ||
| Expected life in years | 10 | |||
| Expected volatility | 140%-146 | % |
| 15 |
There were 3,835,366 options outstanding as of December 31, 2019. The fair value of each stock option granted was estimated using the Black-Scholes assumptions and or factors as follows:
| Exercise price | $ | 1.00 - $1.75 | ||
| Expected dividend yield | 0 | % | ||
| Risk free interest rate | 2.09%-2.70 | % | ||
| Expected life in years | 10 | |||
| Expected volatility | 137%-140 | % |
The following is an analysis of the stock option grant activity under the Plan:
Weighted Average | Weighted Average Remaining | |||||||||||
| Number | Exercise Price | Life | ||||||||||
| Stock Options | ||||||||||||
| Outstanding December 31, 2018 | 3,846,299 | $ | 1.36 | 7.20 | ||||||||
| Granted | 126,567 | $ | 1.15 | 9.20 | ||||||||
| Expired | (137,500 | ) | $ | 1.75 | ||||||||
| Outstanding December 31, 2019 | 3,835,366 | $ | 1.34 | 6.02 | ||||||||
| Granted | 1,762,495 | $ | 1.75 | 9.47 | ||||||||
| Expired | - | $ | - | |||||||||
| Outstanding September 30, 2020 | 5,597,861 | $ | 1.47 | 6.74 | ||||||||
A summary of the status of the Company’s nonvested options as of September 30, 2020, and changes during the nine months ended September 30, 2020, is presented below:
| Nonvested Options | Options | Weighted- Average Exercise Price | ||||||
| Nonvested at December 31, 2018 | 800,210 | $ | 1.63 | |||||
| Granted | 126,567 | $ | 1.15 | |||||
| Vested | (584,895 | ) | $ | 1.46 | ||||
| Forfeited | (137,500 | ) | $ | 1.75 | ||||
| Nonvested at December, 2019 | 204,382 | $ | 1.74 | |||||
| Granted | 1,762,495 | $ | 1.75 | |||||
| Vested | (760,488 | ) | $ | 1.39 | ||||
| Forfeited | - | $ | - | |||||
| Nonvested at September 30, 2020 | 1,206,389 | $ | 1.75 | |||||
As of September 30, 2020, the Company had 5,597,861 shares issuable under options outstanding at a weighted average exercise price of $1.47 and an intrinsic value of $1,407,792.
As of December 31, 2019, the Company had 3,835,366 shares issuable under options outstanding at a weighted average exercise price of $1.34 and an intrinsic value of $635,536.
The total number of options granted during the nine months ended September 30, 2020 and 2019 was 1,762,495 and 126,567, respectively. The exercise price for these options was $1.00 per share or $1.75 per share.
The Company recognized compensation expense related to options issued of $458,567 and $139,066 during the three months ended September 30, 2020 and 2019, respectively, which is included in general and administrative expenses and research and development expenses. For the three months ended September 30, 2020, $351,696 of the stock compensation was related to employees and $106,871 was related to non-employees.
| 16 |
The Company recognized compensation expense related to options issued of $1,123,151 and $850,767 during the nine months ended September 30, 2020 and 2019, respectively, which is included in general and administrative expenses and research and development expenses. For the nine months ended September 30, 2020, $858,884 of the stock compensation was related to employees and $264,267 was related to non-employees.
As of September 30, 2020, the unamortized stock option expense was $701,991 with $563,267 being related to employees and $138,724 being related to non-employees. As of September 30, 2020, the weighted average period for the unamortized stock compensation to be recognized is 2.10 years.
On February 25, 2019, the Company granted 101,567 options with an exercise price of $1.00 and a ten year term. 59,900 of these options vest immediately and 41,667 vest bi-weekly over two months. These options have a Black-Scholes value of $199,807. The Company issued 59,900 options for settlement of accounts payable totaling $29,850 and recorded a loss of $99,541 on the settlement of the accounts payable.
On June 17, 2019, the Company granted 25,000 options with an exercise price of $1.75 and a ten year term. These options vest immediately and have a Black-Scholes value of $36,374.
On February 21, 2020, the Company issued a total of 1,387,497 options to purchase shares of the Company’s common stock to sixteen individuals with 1,362,497 option going to twelve related parties. These options had a grant date fair value of $1,901,724. From these options, 187,497 options were used to settle $93,950 in accrued compensations. These options have an exercise price of $1.75. 187,497 of the options vest immediately, 510,000 of the options vest monthly over 12 months, 5,000 of the options vest monthly over 24 months, 420,000 of the options vest monthly over 36 months, and 265,000 of the options vest monthly over 48 months. These options were approved by the board of directors on February 13, 2020.
On July 18, 2020, the Company issued 124,998 options to a related party. These options have an exercise price of $1.75 and a term of ten years. These options vest immediately and the grant date fair value of these options was $142,607.
On July 18, 2020, the Company issued 105,000 options. These options have an exercise price of $1.75 and a term of ten years. These options vest monthly over four years and the grant date fair value of these options was $119,972.
On July 18, 2020, the Board of Directors Increased the size of the Board from five directors to six directors and Appoint Jennifer Buell, Ph.D. as a member of the Board, effective immediately, to fill the vacancy created by such increase and to serve until the next annual meeting of shareholders. Dr. Buell was issued options to purchase 100,000 shares of the Company’s common stock at an exercise price of $1.75 per share. The options vest as follows: monthly over 48 months. In recognition of her upcoming service as a Director of the Company, Dr. Buell was issued 45,000 options that vest monthly over 12 months. In each case the vesting commenced on the date of grant, July 18, 2020. These options had a grant date fair value of $165,426.
Warrants:
In connection with the Merger, all of the issued and outstanding warrants to purchase shares of Prior Protagenic common stock converted, on a 1 for 1 basis, into new warrants (the “New Warrants”) to purchase shares of our Series B Preferred Stock.
Simultaneously with the Merger and the 2016 Offering, New Warrants to purchase 3,403,367 shares of Series B Preferred Stock at an average exercise price of approximately $1.05 per share were issued to holders of Prior Protagenic warrants; additionally, the holder of $665,000 of our debt and $35,000 of accrued interest exchanged such debt for five-year warrants to purchase 295,945 shares of Series B Preferred Stock at $1.25 per share. Warrants to purchase 127,346 shares of Series B Preferred Stock at an exercise price of $1.25 per share were issued to the placement agent in connection with the 2016 Offering. These warrants to purchase 423,291 shares of Series B Preferred Stock have been recorded as derivative liabilities. All of these warrants automatically converted into warrants to purchase our common stock upon the effectiveness of our reverse stock split in July 2016. See Note 5.
| 17 |
A summary of warrant issuances are as follows:
Weighted Average | Weighted Average Remaining | |||||||||||
| Number | Exercise Price | Life | ||||||||||
| Warrants | ||||||||||||
| Outstanding December 31, 2018 | 3,826,658 | $ | 1.05 | 3.69 | ||||||||
| Granted | - | - | - | |||||||||
| Outstanding December 31, 2019 | 3,826,658 | $ | 1.05 | 2.69 | ||||||||
| Granted | 180,400 | 1.25 | 5.00 | |||||||||
| Outstanding September 30, 2020 | 4,007,058 | $ | 1.06 | 2.12 | ||||||||
As of September 30, 2020, the Company had 4,007,058 shares issuable under warrants outstanding at a weighted average exercise price of $1.06 and an intrinsic value of $643,130.
As of December 31, 2019, the Company had 3,826,658 shares issuable under warrants outstanding at a weighted average exercise price of $1.05 and an intrinsic value of $1,375,990.
On February 21, 2020, the Company extended the expiration date for 100,000 warrants to purchase shares of the Company’s common stock. The expiration date was extended by two years from January 2, 2020 to January 2, 2022. These warrants have exercise price of $1.25 and are fully vested. The company recognized $5,861 in stock compensation as part of this modification.
On June 30, 2020, the Company issued 81,600 warrants to purchase shares of the Company’s common stock. These warrants vest immediately, had an exercise price of $1.25 and a term of 5 years. These warrants have a Black-Scholes value of $86,968, which is being amortized over the life of the notes from the private placement. These warrants were issued as compensation to the placement agents in connection with the Company’s private placement offering of debt and recorded as a debt discount. The Company recognized amortization of debt discount related to warrants issued of $6,643 and $0 during the nine months ended September 30, 2020 and 2019, respectively, which is included in general and administrative expenses.
During the third quarter of 2020, the Company issued 98,800 warrants to purchase shares of the Company’s common stock. These warrants vest immediately, had an exercise price of $1.25 and a term of 5 years. These warrants have a Black-Scholes value of $105,194 which is being amortized over the life of the notes from the private placement. These warrants were issued as compensation to the placement agents in connection with the Company’s private placement offering of debt. The Company recognized amortization of debt discount related to warrants issued of $5,840 and $0 during the nine months ended September 30, 2020 and 2019, respectively, which is included in general and administrative expenses.
NOTE 8 - COLLABORATIVE AGREEMENTS
The Company and the University of Toronto, a stockholder of the Company (the “University”) entered into an agreement effective December 14, 2004 (the “Research Agreement”) for the performance of a research project titled “Evidence for existence of TCAP receptors in neurons” (the “Project”). The Research Agreement expired on March 31, 2013.
The Company and the University entered into an agreement effective April 1, 2014 (the “New Research Agreement”) for the performance of a research project titled “Teneurin C-terminal Associated Peptide (“TCAP”) mediated stress attenuation in vertebrates: Establishing the role of organismal and intracellular energy and glucose regulation and metabolism” (the “New Project”). The New Project is to perform research related to work done by Dr. David A. Lovejoy, a professor at the University and stockholder of the Company, in regard to TCAP mediated stress attenuation in vertebrates: Establishing the role of organismal and intracellular energy and glucose regulation and metabolism. In addition to the New Research Agreement, Dr. Lovejoy entered into an agreement with the University in order to commercialize certain technologies. The New Research Agreement expired on March 30, 2016. In February 2017, the New Research Agreement was extended to December 31, 2017. The extension allowed for further development of the technologies and use of their applications. On April 10, 2018, the agreement was amended and the research agreement has been further extended to December 31, 2023.
| 18 |
Prior to January 1, 2016, the University has been granted 25,000 stock options which are fully vested at the exercise price of $1.00 exercisable over a ten year period which ends on April 1, 2022. As of September 30, 2020, Dr. David Lovejoy of the University has been granted 553,299 stock options, of which 517,987 are fully vested. These have an exercise price of $1.00, $1.25 or 1.75 and are exercisable over ten or thirteen year periods which end either on March 30, 2021, December 1, 2022, April 15, 2026, March 1, 2027, October 16, 2027 or on February 13, 2030.
The sponsorship research and development expenses pertaining to the Research Agreements were $0 and $63,787 for the nine months ended September 30, 2020 and 2019, respectively.
NOTE 9 - LICENSING AGREEMENTS
On July 31, 2005, the Company had entered into a Technology License Agreement (“License Agreement”) with the University pursuant to which the University agreed to license to the Company patent rights and other intellectual property, among other things (the “Technologies”). The Technology License Agreement was amended on February 18, 2015 and currently does not provide for an expiration date.
Pursuant to the License Agreement and its amendment, the Company obtained an exclusive worldwide license to make, have made, use, sell and import products based upon the Technologies, or to sublicense the Technologies in accordance with the terms of the License Agreement and amendment. In consideration, the Company agreed to pay to the University a royalty payment of 2.5% of net sales of any product based on the Technologies. If the Company elects to sublicense any rights under the License Agreement and amendment, the Company agrees to pay to the University 10% of any up-front sub-license fees for any sub-licenses that occurred on or after September 9, 2006, and, on behalf of the sub-licensee, 2.5% of net sales by the sub-licensee of all products based on the Technologies. The Company had no sales revenue for the nine months ended September 30, 2020 and 2019 and therefore was not subject to paying any royalties.
In the event the Company fails to provide the University with semi-annual reports on the progress or fails to continue to make reasonable commercial efforts towards obtaining regulatory approval for products based on the Technologies, the University may convert our exclusive license into a non-exclusive arrangement. Interest on any amounts owed under the License Agreement and amendment will be at 3% per annum. All intellectual property rights resulting from the Technologies or improvements thereon will remain the property of the other inventors and/or Dr. Lovejoy, and/or the University, as the case may be. The Company has agreed to pay all out-of- pocket filing, prosecution and maintenance expenses in connection with any patents relating to the Technologies. In the case of infringement upon any patents relating to the Technologies, the Company may elect, at its own expense, to bring a cause of action asserting such infringement. In such a case, after deducting any legal expenses the Company may incur, any settlement proceeds will be subject to the 2.5% royalty payment owed to the University under the License Agreement and amendment.
The patent applications were made in the name of Dr. Lovejoy and other inventors, but the Company’s exclusive, worldwide rights to such patent applications are included in the License Agreement and its amendment with the University. The Company maintains exclusive licensing agreements and it currently controls the five intellectual patent properties.
Legal Proceedings
From time to time we may be named in claims arising in the ordinary course of business. Currently, no legal proceedings, government actions, administrative actions, investigations or claims are pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.
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NOTE 10 – RELATED PARTY TRANSACTIONS
The Company is provided free office space consisting of a conference room by the Company Executive Chairman, Dr. Armen. The Company does not pay any rent for the use of this space. This space is used for quarterly board meetings and our annual shareholder meeting.
On February 13, 2020, the Company issued 50,000 options to purchase common stock to a related party. These options had an exercise price of $1.75 and a term of 48 months. (See Note 7)
On July 18, 2020, the Board of Directors increased the size of the Board from five directors to six directors and appointed Jennifer Buell, Ph.D. as a member of the Board, effective immediately, to fill the vacancy created by such increase and to serve until the next annual meeting of shareholders. Dr. Buell was issued options to purchase 100,000 shares of the Company’s common stock at an exercise price of $1.75 per share. The options vest as follows: monthly over 48 months. In recognition of her upcoming service as a Director of the Company, Dr. Buell was issued 45,000 options that vest monthly over 12 months. In each case the vesting commenced on the date of grant, July 18, 2020. These options had a grant date fair value of $165,426. (See Note 7)
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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 Food and Drug Administration (“FDA”) approval and commercialization of our product.
During the three months ended September 30, 2020, we incurred a loss from operations of $1,092,016 as compared to $189,622 for the three months ended September 30, 2019. The increase in the loss is due to an increase in research and development expense of $508,617 from $31,153 for the three months ended September 30, 2019 to $539,770 for the three months ended September 30, 2020, and by an increase in general and administrative expenses of $393,777 from $158,469 for the three months ended September 30, 2019 to $552,246 for the three months ended September 30, 2020.
During the nine months ended September 30, 2020, we incurred a loss from operations of $2,014,727 as compared to $1,348,901 for the nine months ended September 30, 2019. The increase in the loss is due to an increase in research and development expense of $365,909 from $291,828 for the nine months ended September 30, 2019 to $657,737 for the nine months ended September 30, 2020, and an increase in general and administrative expenses of $299,917 from $1,057,073 for the nine months ended September 30, 2019 to $1,356,990 for the nine months ended September 30, 2020.
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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, 2020, we had cash of $988,574 and working capital of $289,829. The Company currently has a derivative liability on the books in the amount of $190,315 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 $480,144. 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 third quarter of 2021 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 third quarter of 2021
Operating activities used $1,027,911 and $338,570 in cash for the nine months ended September 30, 2020 and 2019, respectively. The use of cash in operating activities during the nine months ended September 30, 2020, primarily comprised of $2,025,083 net loss, $1,243,151 in stock compensation expense, $141,907 of change in the fair value of the derivative liability since December 31, 2019, an increase in prepaid expenses of $29,949, and a $244,300 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 provided $0 and $250,000 in cash for the nine months ended September 30, 2020 and 2019, respectively.
Financing activities provided $1,223,410 and $0 in cash the nine months ended September 30, 2020 and 2019. The cash provided by operations came from proceeds from convertible notes of $1,327,500 of which $150,000 from a related party which is offset by debt discount form debt issuance cost paid of $104,090.
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 Securities Exchange Act of 1934 (the “Exchange Act), as of September 30, 2020. 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.
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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. | |
| 2) | Limited level of multiple reviews among those tasked with preparing the financial statements. |
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.
In December 2019, a novel strain of coronavirus, COVID-19, surfaced in Wuhan, China. This virus continues to spread around the world, resulting in business and social disruption. The coronavirus was declared a Public Health Emergency of International Concern by the World Health Organization on January 30, 2020. The operations and business results of the Company could be materially adversely affected. Employers are also required to prepare and increase as much as possible the capacity and arrangement for employees to work remotely. The extent to which the coronavirus may impact business activity or results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions required to contain the coronavirus or treat its impact, among others.
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Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
During the nine months ended September 30, 2020, the Company issued additional Convertible Notes in the aggregate principal amount of $1,327,500. (See Note 6)
Item 3. Defaults upon Senior Securities
None.
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. |
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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 16, 2020 | Protagenic Therapeutics, Inc. | |
| By: | /s/ Alexander K. Arrow | |
| Chief Financial Officer | ||
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