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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2021

 

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
Common Stock, par value $0.0001   PTIX   Nasdaq Capital Market
Common Stock Purchase Warrant   PTIXW   Nasdaq Capital Market

 

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.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
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 ☒ No

 

As of November 12, 2021 there were 16,955,817 shares of common stock outstanding.

 

 

 

 

 

 

PROTAGENIC THERAPEUTICS, INC.

Form 10-Q Report

For the Fiscal Quarter Ended September 30, 2021

TABLE OF CONTENTS

 

    Page
Part I. Financial Information  
     
Item 1 Financial Statements:  
     
  Consolidated Balance Sheets at September 30, 2021 (unaudited) and December 31, 2020 3
     
  Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2021 and 2020 (unaudited) 4
     
  Consolidated Statements of Changes in Stockholders’ Deficit for the three and nine months ended September 30, 2021 and 2020 (unaudited) 5
     
  Consolidated Statements of Cash Flows for nine months ended September 30, 2021 and 2020 (unaudited) 7
     
  Notes to Consolidated Financial Statements (unaudited) 8
     
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
     
Item 3 Quantitative and Qualitative Disclosures about Market Risk 19
     
Item 4 Controls and Procedures 20
     
Part II. Other Information  
     
Item 1 Legal Proceedings 21
     
Item 1A Risk Factors 21
     
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 21
     
Item 3 Defaults upon Senior Securities 21
     
Item 4 Mine Safety Disclosures 21
     
Item 5 Other Information 21
     
Item 6 Exhibits 22
     
Signatures 23

 

2

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   September 30, 2021   December 31, 2020 
ASSETS          
           
CURRENT ASSETS          
           
Cash  $460,115   $671,091 
Marketable securities   10,394,573    - 
Prepaid expenses   802,417    208,156 
           
TOTAL CURRENT ASSETS   11,657,105    879,247 
           
TOTAL ASSETS  $11,657,105   $879,247 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)          
           
CURRENT LIABILITIES          
           
Accounts payable and accrued expenses  $724,417   $571,517 
Derivative liability   -    83,670 
           
TOTAL CURRENT LIABILITIES   724,417    655,187 
           
PIK convertible notes payable, net of debt discount   441,435    1,081,384 
PIK convertible notes payable, net of debt discount - related parties   120,654    292,412 
           
TOTAL LIABILITIES   1,286,506    2,028,983 
           
STOCKHOLDERS’ EQUITY (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; 0 and 872,766 shares issued and outstanding at September 30, 2021, and December 31, 2020   -    1 
Common stock, $.0001 par value, 100,000,000 shares authorized, 16,955,817 and 10,360,480 shares issued and outstanding at September 30, 2021, and December 31, 2020   1,697    1,036 
Additional paid-in-capital   31,872,763    16,719,749 
Accumulated deficit   (21,331,483)   (17,698,936)
Accumulated other comprehensive loss   (172,378)   (171,586)
           
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)   10,370,599    (1,149,736)
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)  $11,657,105   $879,247 

 

See accompanying notes to the unaudited consolidated financial statements

 

3

 

 

PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

                     
   For the three months ended
September 30,		   For the nine months ended
September 30,		 
   2021   2020   2021   2020 
OPERATING AND ADMINISTRATIVE EXPENSES                    
Research and development   257,279    539,770    990,222    657,737 
General and administrative   506,892    552,246    2,288,972    1,356,990 
                     
TOTAL OPERATING AND ADMINISTRATIVE EXPENSES   764,171    1,092,016    3,279,194    2,014,727 
                     
LOSS FROM OPERATIONS   (764,171)   (1,092,016)   (3,279,194)   (2,014,727)
                     
OTHER (EXPENSE) INCOME                    
                     
Interest income   336    17    568    494 
Interest expense   (114,464)   (58,827)   (437,591)   (152,757)
Change in fair value of derivative liability   -    104,718    83,670    141,907 
                     
TOTAL OTHER INCOME (EXPENSES)   (114,128)   45,908    (353,353)   (10,356)
                     
LOSS BEFORE TAX   (878,299)   (1,046,108)   (3,632,547)   (2,025,083)
                     
INCOME TAX EXPENSE   -    -    -    - 
                     
NET LOSS  $(878,299)  $(1,046,108)  $(3,632,547)  $(2,025,083)
                     
COMPREHENSIVE LOSS                    
                     
Other Comprehensive Loss - net of tax                    
Net unrealized loss on marketable securities   (974)   -    (974)   - 
Foreign exchange translation income (loss)   (791)   736    182    (599)
                     
TOTAL COMPREHENSIVE LOSS  $(880,064)  $(1,045,372)  $(3,633,339)  $(2,025,682)
                     
Net loss per common share - Basic and Diluted  $(0.05)  $(0.10)  $(0.26)  $(0.20)
                     
Weighted average common shares - Basic and Diluted   16,521,882    10,275,758    13,939,400    10,274,005 

 

See accompanying notes to the unaudited consolidated financial statements

 

4

 

 

PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

For the Three and Nine Months Ended September 30, 2021 and 2020

(Unaudited)

 

                                         
   Series B Convertible           Additional       Accumulated Other     
   Preferred Stock   Common Stock   Paid-in-   Accumulated   Comprehensive   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Deficit   Loss   Deficit 
                                 
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 
Stock compensation – warrants   -    -    -    -    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)

 

5

 

 

BALANCE - September 30, 2020   872,766   $1    10,360,480   $1,036   $16,326,490   $(17,175,284)  $(172,963)  $(1,020,720)
                                         
For the nine months ended September 30, 2021                                        
                                         
BALANCE -December 31, 2020   872,766   $1    10,360,480   $1,036   $16,719,749   $(17,698,936)  $(171,586)  $(1,149,736)
                                         
Foreign currency translation gain   -    -    -    -    -    -    491    491 
Stock compensation - stock options   -    -    -    -    345,975    -    -    345,975 
Exercise of options   -    -    10,000    1    (1)   -    -    - 
Exercise of warrants   -    -    240,123    24    27,101    -    -    27,125 
                                         
Net loss   -    -    -    -    -    (1,206,452)   -    (1,206,452)
                                         
BALANCE -March 31, 2021   872,766   $1    10,610,603   $1,061   $17,092,824   $(18,905,388)  $(171,095)  $(1,982,597)
                                         
Foreign currency translation gain   -    -    -    -    -    -    482    482 
Issuance of shares and warrants from offering, net of offering costs   -    -    3,180,000    318    11,707,721    -    -    11,708,039 
Stock compensation - stock options   -    -    -    -    722,966    -    -    722,966 
Exercise of options   -    -    360,000    36    542,464    -    -    542,500 
Exercise of warrants   -         836,558    84    299,916    -    -    300,000 
Conversion of preferred stock   (436,749)        436,749    44    (44)   -    -    - 
Conversion of notes and interest             839,724    84    1,054,460    -    -    1,054,544 
                                         
Net loss   -    -    -    -    -    (1,547,796)   -    (1,547,796)
                                         
BALANCE - June 30, 2021   436,017   $1    16,263,634   $1,627   $31,420,307   $(20,453,184)  $(170,613)  $10,798,138 
                                         
Foreign currency translation loss   -    -    -    -    -    -    (791)   (791)
Unrealized loss on marketable securities   -    -    -    -    -    -    (974)   (974)
Stock compensation - stock options   -    -    -    -    231,649    -    -    231,649 
Conversion of preferred stock   (436,017)   (1)   436,017    44    (43)   -    -    - 
Conversion of notes and interest   -    -    176,666    18    220,858    -    -    220,876 
Shares issued to underwriter as stock issuance costs   -    -    79,500    8    (8)   -    -    - 
                                         
Net loss   -    -         -    -    (878,299)   -    (878,299)
                                         
BALANCE - September 30, 2021   -   $-    16,955,817   $1,697   $31,872,763   $(21,331,483)  $(172,378)  $10,370,599 

 

See accompanying notes to the unaudited consolidated financial statements

 

6

 


 

PROTAGENIC THERAPEUTICS, INC., AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

           
   For the nine months ended September 30, 
   2021   2020 
         
CASH FLOWS FROM OPERATING ACTIVITIES          
Net Loss  $(3,632,547)  $(2,025,083)
Adjustments to reconcile net loss to net cash used in operating activities          
Depreciation expense   -    249 
Stock based compensation   1,300,590    1,243,151 
Change in fair value of the derivative liability   (83,670)   (141,907)
Amortization of debt discount   378,293    104,169 
Modification of warrants   -    5,861 
Changes in operating assets and liabilities          
Prepaid expenses   (594,260)   29,949 
Accounts payable and accrued expenses   238,069    (244,300)
           
NET CASH USED IN OPERATING ACTIVITIES   (2,393,525)   (1,027,911)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
           
Purchase of marketable securities   (10,395,547)   - 
           
NET CASH USED IN INVESTING ACTIVITIES   (10,395,547)   - 
           
CASH FLOWS FROM FINANCING ACTIVITIES          
           
Exercise of warrants for cash   327,125    - 
Exercise of options for cash   542,500    - 
Issuance of shares and warrants from offering, net of offering costs   11,708,039    - 
Proceeds from notes payable   100,000    - 
Repayment of notes payable   (100,000)   - 
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   12,577,664    1,223,410 
           
Effect of exchange rate on cash   432    (5,548)
           
NET INCREASE (DECREASE) IN CASH   (210,976)   189,951 
           
CASH, BEGINNING OF THE PERIOD   671,091    798,623 
           
CASH, END OF THE PERIOD  $460,115   $988,574 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION          
Cash paid for interest expense  $-   $- 
Cash paid for income taxes  $-   $- 
           
NONCASH FINANCING AND INVESTING TRANSACTIONS          
Shares issued for conversion of notes and interest  $1,275,420   $- 
Debt discount from beneficial conversion feature  $-   $104,204 
Debt discount from warrants issued to placement agents  $-   $192,162 
Issuance of options for settlement of accrued payroll  $-   $93,950 
Unrealized loss on marketable securities  $974   $- 

 

See accompanying notes to the unaudited consolidated financial statements

 

7

 


 

PROTAGENIC THERAPEUTICS, INC. & SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

September 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 September 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 SIGNIFICANT 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 September 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”).

 

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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 nine months ended September 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 September 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 September 30, 2021 and December 31, 2020, the Company did not have any cash equivalents.

 

Marketable Securities

 

The Company accounts for marketable debt securities, the only type of securities it owns, in accordance with the FASB Accounting Standards Codification 320, Investments – Debt and Equity Securities (“ASC 320”).

 

Pursuant to ASC 320-10-35-1, investments in debt securities that are classified as available for sale shall be measured subsequently at fair value in the condensed consolidated balance sheets at each balance sheet date. Unrealized holding gains and losses for available-for-sale securities (including those classified as current assets) shall be excluded from earnings and reported in other comprehensive income until realized.

 

During the nine months ended September 30, 2021 the Company purchased $10,395,547 and sold $0 in marketable securities with a realized gain of $0 and an unrealized loss of $974. As of September 30, 2021 and December 31, 2020, the Company owned marketable securities with a total value of $10,394,573 and $0, respectively.

 

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;

 

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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 September 30, 2021.

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

   Carrying   Fair Value Measurement Using 
   Value   Level 1   Level 2   Level 3   Total 
Marketable securities  $10,394,573   $10,394,573   $—   $—   $10,394,573 
Derivative warrants liabilities  $—   $—   $—   $—   $— 

 

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

 

   Carrying   Fair Value Measurement Using 
   Value   Level 1   Level 2   Level 3   Total 
Marketable securities  $—   $—   $—   $—   $— 
Derivative warrants liabilities  $83,670   $—   $—   $83,670   $83,670 

 

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, 2021 and the year ended December 31, 2020:

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

   Fair Value Measurement Using Level 3 
   Inputs Total 
Balance, December 31, 2020  $83,670 
Change in fair value of derivative warrants liabilities   (83,670)
Balance, September 30, 2021  $- 

 

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:

 

   December 31, 2020 
Exercise price   1.25 
Risk free interest rate   0.09%
Dividend yield   0.00%
Expected volatility   169%
Contractual term   0.14 Years 

 

10

 

 

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, 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 $141,907 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.

 

11

 

 SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE

   Potentially Outstanding
Dilutive Common Shares		 
   For the Nine Months Ended September 30, 2021   For the Nine Months Ended September 30, 2020 
         
Conversion Feature Shares          
           
Common shares issuable under the conversion feature of preferred shares   -    872,766 
           
Stock Options   5,530,861    4,391,472 
           
Warrants   6,132,630    4,007,058 
           
Convertible Notes   646,000    1,598,000 
           
Total potentially outstanding dilutive common shares   12,309,491    10,869,296 

 

Research and Development

 

Research and development expenses are charged to operations as incurred.

 

Foreign Currency Translation

 

The Company follows ASC 830, Foreign Currency Matters (“ASC 830”) 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. ASC 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 ASC 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.

 

12

 

 

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

   September 30, 2021   December 31, 2020 
         
Accounting  $62,911   $36,161 
Research and development   383,368    393,496 
Legal   4,500    - 
Other   273,638    141,860 
Total  $724,417   $571,517 

 

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, 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 was due on February 28, 2026 and accrued interest at a rate of 5% per annum or 7.5% per annum in the case of default. Since the Company completed a financing of no less than $7.5 million, the note holder was 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 have a term of five years. During the nine months ended September 30, 2021, the Company paid off the balance of this note’s principal and accrued interest.

 

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

 

Convertible Notes Payable

 

During the nine months ended September 30, 2021 and 2020, the Company amortized $99,659 and $63,342 of the debt discount, respectively. At September 30, 2021 and December 31, 2020, the Company had an unamortized debt discount of $166,065 and $516,116, respectively.

 

During the nine months ended September 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.

 

13

 

 

As of September 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

Maturity Date of Notes for Twelve Months Ending September 30, 2021,  Amount due 
2022  $- 
2023   - 
2024   607,500 
2025   - 
2026   - 
Total  $607,500 

 

Convertible Notes Payable – Related Parties

 

During the nine months ended September 30, 2021 and 2020, the Company amortized $28,242 and $28,344 of the debt discount, respectively. At September 30, 2021 and December 31, 2020, the Company had an unamortized debt discount of $79,346 and $107,588, respectively.

 

During the nine months ended September 30, 2021, a total of 176,666 shares of the Company’s common stock was issued for the conversion of notes and interest. A total of $200,000 in principal and $20,876 in accrued interest was converted. As part of this conversion, the Company also expensed $63,607 in unamortized debt discount related to these converted notes.

 

As of September 30, 2021 and December 31, 2020, the Company owes $200,000 and $400,000 on the outstanding Convertible Notes, respectively.

 

 SCHEDULE OF MATURITY DATE OF NOTES

Maturity Date of Notes for Twelve Months Ending September 30, 2021,   Amount due  
2022   $ -  
2023     -  
2024     200,000  
2025     -  
2026     -  
Total   $ 200,000  

 

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. In connection with the Offering, the Company issued 79,500 shares to the underwriter which were recognized as stock issuance costs.

 

During the nine months ended September 30, 2021, a total of 872,766 shares of the Company’s Series B preferred stock was converted to 872,766 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 September 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.

 

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There were 5,530,861 options outstanding as of September 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

Exercise price  $1.96-5.60 
Expected dividend yield   0%
Risk free interest rate   0.81%-1.58%
Expected life in years   5-10 
Expected volatility   147%-158%

 

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:

 

      
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%

 

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

 SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS, ACTIVITY

      

Weighted

Average

  

Weighted

Average

 
   Number   Exercise Price   Remaining Life 
Stock Options               
                
Outstanding December 31, 2020   5,597,861   $1.47    6.48 
Granted   583,000   $4.77    9.38 
Expired   (280,000)  $1.00    - 
Exercised   (370,000)  $1.48    - 
Outstanding September 30, 2021   5,530,861   $1.84    6.56 

 

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

 SCHEDULE OF SHARE-BASED COMPENSATION NONVESTED SHARES

Nonvested Options  Options  

Weighted-

Average
Exercise Price

 
Nonvested at December 31, 2020   862,833   $1.75 
Granted   583,000   $4.77 
Vested   (540,104)  $3.15 
Forfeited   -   $- 
Nonvested at September 30, 2021   905,729   $3.03 

 

As of September 30, 2021, the Company had 5,530,861 shares issuable under options outstanding at a weighted average exercise price of $1.84 and an intrinsic value of $1,837,818.

 

The total number of options granted during the nine months ended September 30, 2021 and 2020 was 583,000 and 1,762,495, respectively. The exercise price for these options ranges from $1.96 to $5.60 per share.

 

The Company recognized compensation expense related to options issued of $231,649 and $458,567 during the three months ended September 30, 2021 and 2020, respectively, in which $230,173 and $458,091 is included in general and administrative expenses and $1,476 and $1,476 in research and development expenses, respectively. For the three months ended September 30, 2021, $53,966 of the stock compensation was related to employees and $177,683 was related to non-employees.

 

15

 

 

The Company recognized compensation expense related to options issued of $1,300,590 and $1,123,151 during the nine months ended September 30, 2021 and 2020, respectively, in which $1,296,162 and $1,052,294 is included in general and administrative expenses and $4,428 and $70,857 in research and development expenses, respectively. For the nine months ended September 30, 2021, $718,366 of the stock compensation was related to employees and $582,224 was related to non-employees.

 

As of September 30, 2021, the unamortized stock option expense was $2,385,046 with $289,828 being related to employees and $2,095,218 being related to non-employees. As of September 30, 2021, the weighted average period for the unamortized stock compensation to be recognized is 3.37 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.

 

On July 26, 2021, the Company issued a total of 32,000 options to purchase shares of the Company’s common stock. These options had a grant date fair value of $65,626. These options have an exercise price of $2.09, a term of 10 years, and vest over 48 months.

 

On August 10, 2021, the Company issued a total of 5,000 options to purchase shares of the Company’s common stock. These options had a grant date fair value of $9,615. These options have an exercise price of $1.96, a term of 10 years, and vest over 48 months.

 

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:

      

Weighted

Average

  

Weighted

Average

 
   Number   Exercise Price   Remaining Life 
Warrants               
                
Outstanding December 31, 2020   4,007,058   $1.06    1.86 
Granted   3,657,000    4.98    4.83 
Expired   (150,249)   1.25    - 
Exercised   (1,381,179)   1.13    - 
Outstanding September 30, 2021   6,132,630   $3.38    3.40 

 

As of September 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 $2,129,482.

 

During the three months ended March 31, 2021, 373,042 warrants were exercised for 240,123 shares of the Company’s common stock. The Company received $27,125 from these exercises.

 

During the three months ended June 30, 2021, the Company issued 836,558 shares of the Company’s common stock for the net exercise of 1,008,137 warrants. 231,277 of these shares of common stock were issued to a related party. The Company received proceeds of $300,000 from the exercise.

 

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NOTE 7 - COLLABORATIVE AGREEMENTS

 

The Company and the University of Toronto (the “University”) entered into an agreement effective April 1, 2014 (the “New Research Agreement”) for the performance of a research project titled “Teneurin C-terminal Associated Peptide (“TCAP”) mediated stress attenuation in vertebrates: Establishing the role of organismal and intracellular energy and glucose regulation and metabolism” (the “New Project”). The New Project is to perform research related to work done by Dr. David A. Lovejoy, a professor at the University and stockholder of the Company, in regard to TCAP mediated stress attenuation in vertebrates: Establishing the role of organismal and intracellular energy and glucose regulation and metabolism. In addition to the New Research Agreement, Dr. Lovejoy entered into an agreement with the University in order to commercialize certain technologies. The New Research Agreement expired on March 30, 2016. In February 2017, the New Research Agreement was extended to December 31, 2017. The extension allowed for further development of the technologies and use of their applications. On April 10, 2018, the agreement was amended and the research agreement has been further extended to December 31, 2023.

 

Prior to January 1, 2016, the University has been granted 25,000 stock options which are fully vested at the exercise price of $1.00 exercisable over a ten year period which ends on April 1, 2022. As of September 30, 2021, Dr. David Lovejoy of the University has been granted 553,299 stock options, of which 439,862 are fully vested and 100,000 have expired. 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 $0 for the nine months ended September 30, 2021 and 2020, respectively.

 

NOTE 8 - COMMITMENTS AND CONTINGENCIES

 

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, 2021 and 2020 and therefore was not subject to paying any royalties.

 

In the event the Company fails to provide the University with semi-annual reports on the progress or fails to continue to make reasonable commercial efforts towards obtaining regulatory approval for products based on the Technologies, the University may convert our exclusive license into a non-exclusive arrangement. Interest on any amounts owed under the License Agreement and amendment will be at 3% per annum. All intellectual property rights resulting from the Technologies or improvements thereon will remain the property of the other inventors and/or Dr. Lovejoy, and/or the University, as the case may be. The Company has agreed to pay all out-of- pocket filing, prosecution and maintenance expenses in connection with any patents relating to the Technologies. In the case of infringement upon any patents relating to the Technologies, the Company may elect, at its own expense, to bring a cause of action asserting such infringement. In such a case, after deducting any legal expenses the Company may incur, any settlement proceeds will be subject to the 2.5% royalty payment owed to the University under the License Agreement and amendment.

 

The patent applications were made in the name of Dr. Lovejoy and other inventors, but the Company’s exclusive, worldwide rights to such patent applications are included in the License Agreement and its amendment with the University. The Company maintains exclusive licensing agreements and it currently controls the five intellectual patent properties.

 

Legal Proceedings

 

From time to time we may be named in claims arising in the ordinary course of business. Currently, no legal proceedings, government actions, administrative actions, investigations or claims are pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.

 

NOTE 9 – 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.

 

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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 Quarterly Report on Form 10-Q and other written and oral statements we make from time to time contain certain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). You can identify these forward-looking statements by the fact they use words such as “could,” “expect,” “anticipate,” “estimate,” “target,” “may,” “project,” “guidance,” “intend,” “plan,” “believe,” “will,” “potential,” “opportunity,” “future” and other words and terms of similar meaning and expression in connection with any discussion of future operating or financial performance. You can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes to differ materially from current expectations. These statements relate to, among other things, our business strategy, our research and development, our product development efforts, our ability to commercialize our product candidates, the activities of our licensees, our prospects for initiating partnerships or collaborations, the timing of the introduction of products, the effect of new accounting pronouncements, uncertainty regarding our future operating results and our profitability, anticipated sources of funds as well as our plans, objectives, expectations, and intentions.

 

We have included more detailed descriptions of these risks and uncertainties and other risks and uncertainties applicable to our business that we believe could cause actual results to differ materially from any forward-looking statements in Part II-Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q. We encourage you to read those descriptions carefully. Although we believe we have been prudent in our plans and assumptions, no assurance can be given that any goal or plan set forth in forward-looking statements can be achieved. We caution investors not to place significant reliance on forward-looking statements contained in this document; such statements need to be evaluated in light of all the information contained in this document. Furthermore, the statements speak only as of the date of this document, and we undertake no obligation to update or revise these statements.

 

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below. We base these estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We expect to continue to incur significant expenses and minimal positive net cash flows from operations or negative net cash flows from operations for the foreseeable future, and those expenses and losses may fluctuate significantly from quarter-to-quarter and year-to-year. We anticipate that our expenses will fluctuate substantially as we:

 

  ● continue our ongoing preclinical studies, clinical trials and our product development activities for our pipeline of product candidates;
     
  ● seek regulatory approvals for any product candidates that successfully complete clinical trials;
     
  ● continue research and preclinical development and initiate clinical trials of our other product candidates;
     
  ● seek to discover and develop additional product candidates either internally or in partnership with other pharmaceutical companies;
     
  ● adapt our regulatory compliance efforts to incorporate requirements applicable to marketed products;
     
  ● maintain, expand and protect our intellectual property portfolio; and
     
  ● incur additional legal, accounting and other expenses in operating as a public company.

 

18

 

 

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, 2021, we incurred a loss from operations of $764,171 as compared to $1,092,016 for the three months ended September 30, 2020. The decrease in the loss is due to a decrease in research and development expense of $282,491 from $539,770 for the three months ended September 30, 2020 to $257,279 for the three months ended September 30, 2021, and by a decrease in general and administrative expenses of $45,354 from $552,246 for the three months ended September 30, 2020 to $506,892 for the three months ended September 30, 2021.

 

During the nine months ended September 30, 2021, we incurred a loss from operations of $3,279,194 as compared to $2,014,727 for the nine months ended September 30, 2020. The increase in the loss is due to an increase in research and development expense of $332,485 from $657,737 for the nine months ended September 30, 2020 to $990,222 for the nine months ended September 30, 2021, and by an increase in general and administrative expenses of $931,982 from $1,356,990 for the nine months ended September 30, 2020 to $2,288,972 for the nine months ended September 30, 2021.

 

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, 2021, we had cash of $460,115 and working capital of $10,932,688. We anticipate further losses from the development of our business. Based on its cash resources as of September 30, 2021, the Company has sufficient resources to fund its operations at least until the end of the second quarter of 2023. 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 2023. Because of these factors, the Company believes that this alleviates substantial doubt in connection with the Company’s ability to continue as a going concern.

 

Operating activities used $2,393,525 and $1,027,911 in cash for the nine months ended September 30, 2021 and 2020, respectively. The use of cash in operating activities during the nine months ended September 30, 2021, primarily comprised of $3,632,547 net loss, $1,300,590 in stock compensation expense, $83,670 of change in the fair value of the derivative liability since December 31, 2020, an increase in prepaid expenses of $594,260, and a $238,069 increase of accounts payable and accrued expenses, which included payments to tax penalties, legal and accounting professionals, payments to consultants, and other administrative expenses.

 

Investing activities used $10,395,547 and $0 in cash for the nine months ended September 30, 2021 and 2020, respectively. The use of cash in investing activities was due to the purchase of marketable securities.

 

Financing activities provided $12,577,664 and $1,223,410 in cash the nine months ended September 30, 2021 and 2020. The cash provided by operations came from proceeds from issuance of shares and warrants from the offering net of offering costs of $11,708,039, exercise of options of $542,500, and exercise of warrants of $327,125.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

19

 

 

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, 2021. Based on this evaluation, we have identified material weaknesses in our internal control over financial reporting. Due to material weaknesses, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act, including this Quarterly Report on Form 10-Q, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that our disclosure and controls are not designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Material Weakness in Internal Control Over Financial Reporting

 

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

 

The material weaknesses we identified are 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.

 

These 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.

 

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Part II: Other Information

 

Item 1. Legal Proceedings

 

From time to time we may be named in claims arising in the ordinary course of business. Currently, no legal proceedings, government actions, administrative actions, investigations or claims are pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.

 

Item 1A. Risk Factors

 

This Quarterly Report on Form 10-Q contains forward-looking information based on our current expectations. Because our actual results may differ materially from any forward-looking statements made by or on behalf of us, this section includes a discussion of important factors that could affect our actual future results, including our revenues, expenses, operating results, cash flows and net loss per share. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. You should carefully consider these risk factors, together with all of the other information included in this Quarterly Report on Form 10-Q as well as our other publicly available filings with the U.S. Securities and Exchange Commission, or SEC.

 

There have been no material changes to our risk factors from those disclosed under “Risk Factors” in Part I, Item 1A of the 2020 Form 10-K. The risks and uncertainties described below and in the 2020 Form 10-K are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also materially adversely affect our business, financial condition, or results of operations.

 

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

 

During the three months ended March 31, 2021, 373,042 warrants were exercised for 240,123 shares of the Company’s common stock. The Company received $27,125 from these exercises.

 

During the three months ended March 31, 2021, 10,000 options were exercised for 10,000 shares of the Company’s common stock

 

During the three months ended June 30, 2021, the Company issued 836,558 shares of the Company’s common stock for the net exercise of 1,008,137 warrants. 231,277 of these shares of common stock were issued to a related party. The Company received proceeds of $300,000 from the exercise.

 

During the nine months ended September 30, 2021, a total of 827,766 shares of the Company’s preferred stock was converted to 827,766 shares of the Company’s common stock.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

21

 

 

Item 6. Exhibits

 

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

 

Exhibit   Description
     
31.1   Chief Executive Officer Certification as required under section 302 of the Sarbanes Oxley Act (€)
     
31.2   Chief Financial Officer Certification as required under section 302 of the Sarbanes Oxley Act (€)
     
32.1   Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes Oxley Act *
     
101.INS   Inline XBRL Instance Document (€)
     
101.CAL   Inline XBRL Taxonomy Extension Schema Document (€)
     
101.SCH   Inline XBRL Taxonomy Extension Calculation Linkbase Document (€)
     
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document (€)
     
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document (€)
     
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document (€)
     
104   Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

(€) - Filed herewith.

 

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

 

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SIGNATURES

 

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

 

November 15, 2021 Protagenic Therapeutics, Inc.
   
  By: /s/ Alexander K. Arrow
    Chief Financial Officer

 

23