Protagenic Therapeutics, Inc.\new - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2021

or

For the transition period from _________to___________

Commission File Number: 000-51353

PROTAGENIC THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

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:

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

Indicate by check mark whether the registrant has submitted electronically 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 ☒ 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.

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

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

☐ Yes ☒ No

As of August 13, 2021 there were 16,699,651 shares of common stock outstanding.

PROTAGENIC THERAPEUTICS, INC.

Form 10-Q Report

For the Fiscal Quarter Ended June 30, 2021

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying notes to the unaudited consolidated financial statements

PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

See accompanying notes to the unaudited consolidated financial statements

PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

For the Three and Six Months Ended June 30, 2021 and 2020

(Unaudited)

See accompanying notes to the unaudited consolidated financial statements

PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to the unaudited consolidated financial statements

PROTAGENIC THERAPEUTICS, INC & SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2021

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 - LIQUIDITY

As shown in the accompanying consolidated financial statements, the Company has incurred significant recurring losses resulting in an accumulated deficit. The Company anticipates further losses in the development of its business. The Company also 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 cash resources as of June 30, 2021, the Company has sufficient resources to fund its operations at least until the end of the third quarter of 2023. 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 2023. Because of these factors, the Company believes that this alleviates the substantial doubt in connection with the Company’s ability to continue as a going concern.

NOTE 3 - SUMMARY OF SIGNFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited 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 consolidated financial statements reflect all adjustments, consisting of normal, recurring adjustments, considered necessary for a fair presentation of the results for the interim periods ended June 30, 2021 and 2020. Although management believes that the disclosures in these unaudited condensed consolidated financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements that have been prepared in accordance U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s financial statements for the year ended December 31, 2020, which contain the audited financial statements and notes thereto, for the years ended December 31, 2020 and 2019 included within the Company’s Form 10-K filed with the SEC on March 25, 2021. The interim results for the six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 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.

Reclassifications:

Reclassifications of prior periods have been made to conform with current year presentation

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 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 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. As of June 30, 2021, the Company has bank balances that exceeds the federally insured limits. The Company has not experienced losses on these accounts and management believes, based upon the quality of the financial institutions, that the credit risk with regard to these deposits is not significant.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. As of June 30, 2021 and December 31, 2020, the Company did not have any cash equivalents.

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 term maturity of those instruments. The carrying value of long-term debt approximates fair value since the related rates of interest approximate current market rates.

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 June 30, 2021.

 SCHEDULE OF FAIR VALUE, ASSETS AND LIABILITIES MEASURED ON RECURRING BASIS

The following table provides a summary of financial instruments that are measured at fair value on a recurring basis as of December 31, 2020.

The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2021 and the year ended December 31, 2020:

 SCHEDULE OF FAIR VALUE, LIABILITIES MEASURED ON RECURRING BASIS, UNOBSERVABLE INPUT RECONCILIATION

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 dates were calculated using a Black-Scholes option model valued with the following assumptions:

 SCHEDULE OF FAIR VALUE MEASUREMENTS, RECURRING AND NONRECURRING, VALUATION TECHNIQUES

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

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

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

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

During the six months ended June 30, 2021 and 2020, the Company marked the derivative feature of the warrants to fair value and recorded a gain of $83,670 and a gain of $37,189 relating to the change in fair value, respectively. The warrants expired on February 21, 2021, resulting in the elimination of the derivative liability.

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 statements of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then the related fair value is reclassified to equity.

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.

Stock-Based Compensation

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

If any award granted under the Company’s 2016 Equity Compensation Plan (the “2016 Plan”) payable in shares of common stock is forfeited, cancelled, or returned for failure to satisfy vesting requirements, otherwise terminates without payment being made, or if shares of common stock are withheld to cover withholding taxes on options or other awards, the number of shares of common stock as to which such option or award was forfeited, or which were withheld, will be available for future grants under the 2016 Plan. The Company recognizes the impact of forfeitures when they occur.

Basic and Diluted Net (Loss) per Common Share

Basic (loss) per common share is computed by dividing the net (loss) by the weighted average number of shares of common stock outstanding for each period. Diluted (loss) per share is computed by dividing the net (loss) by the weighted average number of shares of common stock outstanding plus the dilutive effect of shares issuable through the common stock equivalents. The effect of dilution on net loss becomes anti-dilutive and therefore is not reflected on the condensed consolidated statements of operations.

SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE 

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 condensed consolidated statements of operations 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 operations 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 condensed consolidated statements of operations and comprehensive 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.

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:

SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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 June 30, 2021 and December 31, 2020, the Company has paid $174,106 and $174,106 to the consultant and there is a balance of $319,799 and $319,799 due, respectively.

NOTE 5 – NOTE PAYABLE AND CONVERTIBLE NOTE PAYABLE (PIK NOTES)

Note Payable

On March 1, 2021, the Company entered into a $100,000 promissory note. This note is due on February 28, 2026 and accrues interest at a rate of 5% per annum or 7.5% per annum in the case of default. In the event that the Company completes a financing of no less than $7.5 million, then the note holder will be issued warrants valued at $25,000 with an exercise price equal to 110% of the offering cost of the common stock in the financing. These warrants will have a term of five years. During the six months ended June 30, 2021, the Company paid off the balance of this note’s principal and accrued interest.

As of June 30, 2021 and December 31, 2020, the Company owes $0 and $0 on the outstanding note, respectively.

Convertible Notes Payable

During the six months ended June 30, 2021 and 2020, the Company amortized $72,110 and $40,095 of the debt discount, respectively. At June 30, 2021 and December 31, 2020, the Company had an unamortized debt discount of $257,221 and $516,116, respectively.

During the six months ended June 30, 2021, a total of 839,724 shares of the Company’s common stock was issued for the conversion of notes and interest. A total of $990,000 in principal and $64,544 in accrued interest was converted. As part of this conversion, the Company also expensed $186,785 in unamortized debt discount related to these converted notes.

As of June 30, 2021 and December 31, 2020, the Company owes $607,500 and $1,597,500 on the outstanding Convertible Notes, respectively.

SCHEDULE OF MATURITY DATE OF NOTES 

Convertible Notes Payable – Related Parties

During the six months ended June 30, 2021 and 2020, the Company amortized $18,724 and $18,828 of the debt discount, respectively. At June 30, 2021 and December 31, 2020, the Company had an unamortized debt discount of $88,864 and $107,588, respectively.

As of June 30, 2021 and December 31, 2020, the Company owes $400,000 and $400,000 on the outstanding Convertible Notes, respectively.

 SCHEDULE OF MATURITY DATE OF NOTES

NOTE 6 - STOCKHOLDERS’ DEFICIT

Common Stock

On April, 29, 2021, the Company completed a public offering (“the Offering”) to sell an aggregate of 3,180,000 shares of the Company’s common stock together with warrants to purchase an aggregate of 3,180,000 shares of common stock. The Company also granted the underwriters warrants to purchase an aggregate of 477,000 shares of Common Stock at the same price. Net proceeds from the Offering were approximately $11.7 million (excluding any sale of the Option Shares), after deducting underwriting discounts and commissions and public offering expenses payable by the Company.

During the six months ended June 30, 2021, a total of 436,749 shares of the Company’s Series B preferred stock was converted to 436,749 shares of the Company’s common stock.

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 June 30, 2021 and December 31, 2020, the aggregate number of shares of common stock available for awards under the 2016 Plan was 4,868,623 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 5,493,861 options outstanding as of June 30, 2021. The fair value of each stock option granted was estimated using the Black-Scholes assumptions and or factors as follows:

 SCHEDULE OF SHARE-BASED PAYMENT AWARD, STOCK OPTIONS, VALUATION ASSUMPTIONS

There were 5,597,861 options outstanding as of December 31, 2020. The fair value of each stock option granted was estimated using the Black-Scholes assumptions and or factors as follows:

The following is an analysis of the stock option grant activity under the Plan:

 SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS, ACTIVITY

A summary of the status of the Company’s nonvested options as of June 30, 2021, and changes during the six months ended June 30, 2021, is presented below:

SCHEDULE OF SHARE-BASED COMPENSATION NONVESTED SHARES

As of June 30, 2021, the Company had 5,493,861 shares issuable under options outstanding at a weighted average exercise price of $1.84 and an intrinsic value of $5,701,038

The total number of options granted during the six months ended June 30, 2021 and 2020 was 546,000 and 1,387,497, respectively. The exercise price for these options was $3.65 or $5.60 per share.

The Company recognized compensation expense related to options issued of $722,966 and $304,148 during the three months ended June 30, 2021 and 2020, respectively, in which $721,490 and $269,408 is included in general and administrative expenses and $1,476 and $34,740 in research and development expenses, respectively. For the three months ended June 30, 2021, $528,197 of the stock compensation was related to employees and $194,769 was related to non-employees.

The Company recognized compensation expense related to options issued of $1,068,941 and $751,552 during the six months ended June 30, 2021 and 2020, respectively, in which $1,065,988 and $595,202 is included in general and administrative expenses and $2,953 and $69,381 in research and development expenses, respectively. For the six months ended June 30, 2021, $664,400 of the stock compensation was related to employees and $404,541 was related to non-employees.

As of June 30, 2021, the unamortized stock option expense was $2,541,457 with $343,794 being related to employees and $2,197,663 being related to non-employees. As of June 30, 2021, the weighted average period for the unamortized stock compensation to be recognized is 3.58 years.

On February 25, 2021, the Company issued a total of 366,000 options to purchase shares of the Company’s common stock to five individuals, with 350,000 of these options being issued to related parties. These options had a grant date fair value of $2,009,063. These options have an exercise price of $5.60 and a term of 10 years or 5 years. 16,000 of the options vest immediately and 350,000 of the options vest monthly over 48 months.

On May 26, 2021, the Company issued a total of 180,000 options to purchase shares of the Company’s common stock to a related party. These options had a grant date fair value of $474,231. These options have an exercise price of $3.65, a term of 10 years, and vest immediately.

During the three months ended March 31, 2021, 10,000 options were exercised for 10,000 shares of the Company’s common stock. These options had an exercise price of $1.00.

During the three months ended June 30, 2021, the Company issued 360,000 shares of the Company’s common stock to a related party for the exercise of 360,000 options. The Company received proceeds of $532,500 from the exercise.

Warrants:

A summary of warrant issuances are as follows:

SUMMARY OF WARRANT ISSUANCES 

As of June 30, 2021, the Company had 6,132,630 shares issuable under warrants outstanding at a weighted average exercise price of $3.38 and an intrinsic value of $4,629,869.