| ·• | the possible disruption of our abilityoperations due to grow our user baseterrorist activities and the frequency and level of user engagement; | | · | our ability to attract and retain Platform Partners and Advertisers; | | · | fluctuations in spending by our Advertisers,armed conflict, including as a result of seasonalitythe disruption of operation of our subsidiaries and extraordinary news events or other factors; | | · | the number of product or service engagements by users, whether with Platform Partners or Advertisers; | | · | the pricing of adsour customers, suppliers, distributors, couriers, collaborative partners, licensees and products and services available on or through our website; | | · | the development and introduction of new products or services or changes in features of existing products or services; | | · | the impact of competitors or competitive products and services; | | · | our ability to maintain or increase revenue; | | · | our ability to maintain or improve gross margins and operating margins; | | · | increases in research and development, marketing and sales and other operating expenses that we may incur to grow and expand our operations and to remain competitive; | | · | stock-based compensation expense; | | · | costs related to the acquisition of businesses, talent, technologies or intellectual property, including potentially significant amortization costs;clinical trial sites. |
| · | system failures resulting in the inaccessibility of our website; | | · | breaches of security or privacy, and the costs associated with remediating any such breaches; | | · | adverse litigation judgments, settlements or other litigation-related costs, and the fees associated with investigating and defending claims; | | · | changes in the legislative or regulatory environment, including with respect to security, privacy or enforcement by government regulators, including fines, orders or consent decrees; | | · | fluctuations in currency exchange rates and changes in the proportion of our revenue and expenses denominated in foreign currencies; | | · | seasonal factors; | | · | changes in U.S. generally accepted accounting principles; and | | · | changes in global business or macroeconomic conditions. |
Positive or timely results from preclinical studies and early clinical trials do not ensure positive or timely results in late stage clinical trials or product approval by the FDA or any other regulatory authority. Product candidates that show positive preclinical or early clinical results often fail in later stage clinical trials. Data obtained from preclinical and clinical activities is susceptible to varying interpretations, which could delay, limit, or prevent regulatory approvals. We have incurredlimited experience in conducting the clinical trials required to obtain regulatory approval. We may not be able to conduct clinical trials at preferred sites, enlist clinical investigators, enroll sufficient numbers of participants, or begin or successfully complete clinical trials in a timely fashion, if at all. Any failure to perform may delay or terminate the trials. Our current clinical trials may be insufficient to demonstrate that our potential products will be active, safe, or effective. Additional clinical trials may be required if clinical trial results are negative or inconclusive, which will require us to incur additional costs and significant operating losses indelays. If we do not receive the past,necessary regulatory approvals, we will not be able to generate product revenues and may not become profitable. The regulatory approval process is costly and lengthy and we may not be able to achieve or subsequently maintain profitability.successfully obtain all required regulatory approvals. Since emergingThe preclinical development, clinical trials, manufacturing, marketing and labeling of pharmaceuticals are all subject to extensive regulation by numerous governmental authorities and agencies in the United States and other countries. We must obtain regulatory approval for each of our product candidates before marketing or selling any of them. It is not possible to predict how long the approval processes of the FDA or any other applicable federal or foreign regulatory authority or agency for any of our products will take or whether any such approvals ultimately will be granted. The FDA and foreign regulatory agencies have substantial discretion in the drug approval process, and positive results in preclinical testing or early phases of clinical studies offer no assurance of success in later phases of the approval process. Generally, preclinical and clinical testing of products can take many years and require the expenditure of substantial resources, and the data obtained from bankruptcythese tests and trials can be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. If we encounter significant delays in July 2013, we have incurred significant operating losses. Asthe regulatory process that result in excessive costs, this may prevent us from continuing to develop our product candidates. Any delay in obtaining, or failure to obtain, approvals could adversely affect the marketing of June 30, 2014, we had an accumulated deficit of approximately $1,079,000. We believe that our future revenue growth will depend on, among other factors,products and our ability to attract users, Platform Partners and Advertisers; increase user engagement and ad engagement; increase our brand awareness; compete effectively; maximize our sales efforts; demonstrate a positive return on investment for Advertisers; and successfully develop new products and services. Accordingly, you should not rely ongenerate product revenue. The risks associated with the revenue growth of any quarterly or annual period as an indicationapproval process include:
failure of our future performance. We also expect our costsproduct candidates to increase in future periods as we continue to expend substantial financial resources on:meet a regulatory agency’s requirements for safety, efficacy and quality; | ·• | our technology infrastructure; | | · | research and developmentlimitation on the indicated uses for our products and services; | | · | sales and marketing; | | · | domestic and international expansion efforts; | | · | attracting and retaining talented employees; | | · | strategic opportunities, including commercial relationships and acquisitions; and | | · | general administration, including personnel costs and legal and accounting expenses related to beingwhich a public company.product may be marketed; |
| • | unforeseen safety issues or side effects; and |
These investments may not
governmental or regulatory delays and changes in regulatory requirements and guidelines. Even if we receive regulatory approvals for marketing our product candidates, if we fail to comply with continuing regulatory requirements, we could lose our regulatory approvals, and our business would be adversely affected. The FDA continues to review products even after they receive initial approval. If we receive approval to commercialize any product candidates, the manufacturing, marketing and sale of these drugs will be subject to continuing regulation, including compliance with quality systems regulations, good manufacturing practices, adverse event requirements, and prohibitions on promoting a product for unapproved uses. Enforcement actions resulting from our failure to comply with government and regulatory requirements could result in increased revenue or growth infines, suspension of approvals, withdrawal of approvals, product recalls, product seizures, mandatory operating restrictions, criminal prosecution, civil penalties and other actions that could impair the manufacturing, marketing and sale of our potential products and our ability to conduct our business. IfEven if we are unable to generate adequate revenue growth and to manage our expenses, we may continue to incur significant losses in the future and may not be able to achieve or maintain profitability.
Our business depends on continued and unimpeded access to our website by our users. If we or our users experience disruptions in Internet service or if Internet service providers are able to block, degrade or charge for access to our website, we could incur additional expenses and the loss of users.
We depend on the ability of our users to access the Internet seamlessly and at relatively low cost. Currently, this access is provided by companies that have significant market power in the broadband and Internet access marketplace, including incumbent telephone companies, cable companies, mobile communications companies, government-owned service providers, device manufacturers and operating system providers, any of whom could take actions that degrade, disrupt or increase the cost of user access to our website, which would, in turn, negatively impact our business. The adoption of any laws or regulations that adversely affect the growth, popularity or use of the Internet, including laws or practices limiting Internet neutrality, could decrease the demand for, or the use of, our website, increase our cost of doing business and adversely affect our operating results. We also rely on other companies to maintain reliable network systems that provide adequate speed, data capacity and security to us and our users. As the Internet continues to experience growth in the number of users, frequency of use and amount of data transmitted, the Internet infrastructure that we and our users rely on may be unable to support the demands placed upon it. The failure of the Internet infrastructure that we or our users rely on, even for a short period of time, could undermine our operations and harm our operating results.
In order to remain competitive and continue to attract users, Platform Partners and Advertisers, we will need to develop new products and services. If we fail to so, we may not be able to generate revenue or increase our revenue base.
Our ability to increase the size and engagement of our user base, attract advertisers and generate revenue will depend in part on our ability to create successful new products and services, both independently and in conjunction with third parties. In the future, we may invest in new products, services and initiatives to generate revenue, but there is no guarantee these approaches will be successful. We may not be successful in future efforts to generate revenue from our new products or services. If our strategic initiatives do not enhance our ability to monetize our existing products and services or enable us to develop new approaches to monetization, we may not be able to maintain or grow our revenue or recover any associated development costs and our operating results could be adversely affected. We cannot assure you that we will be able to improve or enhance our existing platform or develop or offer new products and services.
Spam could diminish the user experience on our platform, which could damage our reputation and deter our current and potential users from using our products and services.
“Spam” refers to a range of abusive activities that are prohibited by our terms of service and is generally defined as unsolicited, repeated actions that negatively impact other users with the general goal of drawing user attention to a given account, site, product or idea, misleading links (e.g., to malware or click-jacking pages) or other false or misleading content, adding users to lists and sending invitations. Our terms of service also prohibit the creation of serial or bulk accounts, both manually or using automation, for disruptive or abusive purposes. Spam detracts from the user experience. Accordingly, we will need to devote considerable resources to combat spam on our platform. Our actions to combat spam require the diversion of significant time and focus of our engineering team from improving our products and services. If spam increases on our platform, it could hurt our reputation for delivering relevant content or reduce user growth and user engagement and result in continuing operational cost to us.
If we fail to effectively manage our growth, our business and operating results could be harmed.
In order to compete successfully, we must make substantial investments to expand our operations, research and development, sales and marketing and general and administrative capabilities. We will face significant competition for employees, particularly engineers, designers and product managers, from other Internet and high-growth companies, which include both publicly-traded and privately-held companies, and we may not be able to hire new employees quickly enough to meet our needs. To attract highly skilled personnel, we will need to offer highly competitive compensation packages. As we grow, we run the risk of over-hiring, over-compensating our employees and over-expanding our operating infrastructure, and we must also face the challenges of integrating, developing and motivating a rapidly growing employee base. In addition, we may not be able to innovate or execute as quickly as a smaller, more efficient organization. If we fail to effectively manage our hiring needs and successfully integrate our new hires, our efficiency and ability to meet our operational and financial goals and our employee morale, productivity and retention could suffer, and our business and operating results could be adversely affected.
In addition, as we grow, we may need to significantly expand our operating lease commitments. Maintaining our platform and website will be costly and we expect our expenses to increase in the future as we broaden our user base and increase user engagement, as the number of users who visit our website increase and as we develop and implement new features, products and services that require more infrastructure. In addition, we expect our operating expenses, such as our research, development, sales and marketing expenses, will grow rapidly as our business expands. Rapid growth could also strain our ability to maintain reliable service levels for our users, develop and improve our operational, financial, legal and management controls, and enhance our reporting systems and procedures. As a public company we will incur significant legal, accounting, insurance and other expenses that we would not incur as a private company. Our expenses may grow faster than our revenue, and our expenses may be greater than we anticipate. Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, operating results and financial condition would be harmed.
We will need to hire highly skilled personnel to grow and operate our business, and if we are unable to hire, retain and motivate our personnel, we may not be able to grow effectively.
Our future success will depend upon our ability to identify, hire, develop, motivate and retain highly skilled personnel, including senior management, engineers, designers and product managers. Our ability to execute efficiently depends on contributions from our employees, in particular our senior management team. We do not have employment agreements with any of our existing employees, and we do not maintain key person life insuranceobtain regulatory approvals for any of our existing employees. In addition, from timeproduct candidates, if they exhibit harmful side effects after approval, our regulatory approvals could be revoked or otherwise negatively impacted, and we could be subject to time, therecostly and damaging product liability claims.
Even if we receive regulatory approval for our product candidates, we will have tested them in only a small number of patients during our clinical trials. If our applications for marketing are approved and more patients begin to use our product, new risks and side effects associated with our products may be changes in our senior management team thatdiscovered. As a result, regulatory authorities may be disruptive to our business. If our senior management team, including any new hires which we may make, fails to work together effectively and to execute our plans and strategies on a timely basis, our business could be harmed. Our growth strategy also depends on our ability to attract, hire and retain highly skilled personnel. Identifying, recruiting, training and integrating qualified individuals will require significant time, expense and attention. In addition to hiring new employees, we must continue to focus on retaining our best employees. Competition for highly skilled personnel is intense, particularly in the New York market where we are based. We may need to invest significant amounts of cash and equity to attract and retain new employees and we may never realize returns on these investments. If we are not able to effectively add and retain employees, our ability to achieve our strategic objectives will be adversely impacted, and our business will be harmed.
Our business and operating results may be harmed by a disruption in our service, or by our failure to timely and effectively scale and adapt our existing technology and infrastructure.
As an Internet company, we will inevitably experience service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors, hardware failure, capacity constraints due to an overwhelming number of people accessing our products and services simultaneously, computer viruses and denial of service or fraud or security attacks. We will rely on third-party hosting services, who may or may not haverevoke their own data centers. Accordingly, in the event of a significant issue at the data center supporting most of our network traffic, our website may become inaccessible to the public or the public may experience difficulties accessing our website. Any disruption or failure in our infrastructure could hinder our ability to handle existing or increased traffic on our platform, which could significantly harm our business.
As the number of users increases and as user engagement on our website increases,approvals; we may be required to expand and adapt our technology and infrastructure to continue to reliably service the increased traffic to and content on our website. It may become increasingly difficult to maintain and improve the performanceconduct additional clinical trials, make changes in labeling of our website, especially during peak usage times, asproduct, reformulate our product offerings become more complexor make changes and user traffic increases. In addition, we cannot assure you that we will be ableobtain new approvals for our and our suppliers’ manufacturing facilities. We might have to increasewithdraw or recall our data center infrastructure to meet user demand inproducts from the marketplace. We may also experience a timely manner, or on favorable economic terms. If our users are unable to access Momspot or we are not able to make information available rapidly on Momspot, users may seek other channels to obtain the information, and may not return to Momspot or use Momspot as oftensignificant drop in the future, or at all. This would negatively impact our ability to attract users and advertisers and increase engagementpotential sales of our users. We expectproduct if and when regulatory approvals for such product are obtained, experience harm to continueour reputation in the marketplace or become subject to make significant investments to maintain and improve the capacity, capability and reliabilitylawsuits, including class actions. Any of these results could decrease or prevent any sales of our infrastructure. Toapproved product or substantially increase the extent that we do not effectively address capacity constraints, upgradecosts and expenses of commercializing and marketing our systems as needed and continually develop our technology and infrastructure to accommodate actual and anticipated changes in technology, our business and operating results may be harmed.product.
If we are unable to maintain and promote our brand, our business and operating results may be harmed.
We believe that maintaining and promoting our brand is critical to expanding our base of users and Advertisers. Maintaining and promoting our brand will depend largely on our ability to continue to provide useful, reliable and innovative website, which we may not do successfully. We may introduce new features, products, services or terms of service that users, Platform Partners or Advertisers do not like, which may negatively affect our brand. Additionally, the actions of Platform Partners may affect our brand if users do not have a positive experience using third-party applications or websites integrated with Momspot or that make use of Momspot content. Our brand may also be negatively affected by the actions of users that are hostile or inappropriate to other people, by users impersonating other people, by users identified as spam, by users introducing excessive amounts of spam on our platform or by third parties obtaining control over users’ accounts. Maintaining and enhancing our brand may require us to make substantial investments and these investments may not achieve the desired goals. If we fail to successfully promote and maintain our brand or if we incur excessive expenses in this effort, our business and operating results could be adversely affected.
Negative publicityHealthcare reform measures could adversely affect our business and operating results..
Negative publicity aboutThe efforts of governmental and third-party payers to contain or reduce the costs of healthcare may adversely affect the business and financial condition of pharmaceutical companies. In the United States and in foreign jurisdictions there have been, and we expect that there will continue to be, a number of legislative and regulatory proposals aimed at changing the healthcare system. For example, in some countries other than the United States, pricing of prescription drugs is subject to government control, and we expect proposals to implement similar controls in the United States to continue. The pendency or approval of such proposals could result in a decrease in our company, including about the quality and reliability ofcommon stock value or limit our platform, changesability to raise capital or to enter into collaborations or license rights to our platform, privacy and security practices, litigation, regulatory activity,products.
New federal legislation may increase the actionspressure to reduce prices of our users or user experience with our platform, even if inaccurate, could adversely affect our reputation and the confidence in and the use of our platform. Such negative publicity could also have an adverse effect on the size, engagement and loyalty of our user base and result in decreased revenue,pharmaceutical products paid for by Medicare, which could adversely affect our business and operating results. revenues, if anyOur future performance depends in part on support from Platform Partners and Advertisers.. We believe user engagement with our websiteThe Medicare Prescription Drug Improvement and Modernization Act of 2003, or MMA, expanded Medicare coverage for drug purchases by the elderly and disabled beginning in 2006. The new legislation uses formularies, preferred drug lists and similar mechanisms that may limit the number of drugs that will depend,be covered in large part, onany therapeutic class or reduce the availability of products and services from our Platform Partners and, to a lesser extent, from our Advertisers. The availability of products and services depends on Platform Partners’ perceptions and analysisreimbursement for some of the relative benefitsdrugs in a class. More recently, the Patient Protection and Affordable Care Act of partnering2010 also contained certain provisions with us. If Platform Partners focus their efforts on other platforms, business may suffer. We cannot assure you that our Platform Partners will continuethe potential to offeraffect pricing of pharmaceutical products.
As a result of the expansion of legislation, including recent healthcare insurance legislation, and the expansion of federal coverage of drug products, and services through our website. If Platform Partners cease to offer products and services through our website, user engagement may decline. In addition, we expect that there will be additional pressure to generate revenue from licensingcontain and reduce costs. These cost reduction initiatives could decrease the coverage and price that we receive for our historical and real-time data to third parties. If any of these relationships are terminated or not renewed, or if we are unable to enter into similar relationshipsproducts in the future and could seriously harm our operating results could be adversely affected.business. While the MMA applies only to drug benefits for Medicare beneficiaries, private payers often follow Medicare coverage policy and payment limitations in setting their own reimbursement systems, and any limits on or reductions in reimbursement that occur in the Medicare program may result in similar limits on or reductions in payments from private payers. We will focusNew federal laws or regulations on product innovation and user engagement rather than short-term operating results.
We intend to focus on improving the user experience with our platform and on developing new and improved products and services for our platform. We will prioritize innovation and the user experience on our platform over short-term operating results. We anticipate that somedrug importation could make lower cost versions of our decisions may reduce our short-term operating results although they may be consistent with our goals to improve the user experience and performance for Platform Partners and Advertisers and to improve our operating results over the long term. These decisions may not be consistent with the short-term expectations of investors and may not produce the long-term benefits that we expect, in which case our user growth and user engagement, our relationships with Platform Partners and Advertisers, and our business and operating results could be harmed. In addition, our focus on the user experience may negatively impact our relationships with our existing or prospective Platform Partners and/or Advertisers. This could result in a loss of Platform Partners and/or Advertisers, which could harm our revenue and operating results.
Our platform may contain undetected software errors, which could harm our business and operating results.
Our platform will incorporate complex software and we will encourage employees to quickly develop and help us launch new and innovative features. Our software may contain errors, bugs or vulnerabilities. Some errors in our software code may only be discovered after the product or service has been released. Any errors, bugs or vulnerabilities discovered in our code after release could result in damage to our reputation, loss of users, loss of Platform Partners, loss of Advertisers or advertising revenue, or liability for damages, any offuture products available, which could adversely affect our business and operating results.revenues, if any.
User trust regarding privacyThe prices of some drugs are lower in other countries than in the United States because of government regulation and market conditions. Under current law, importation of drugs into the United States is importantgenerally not permitted unless the drugs are approved in the United States and the entity that holds that approval consents to the growthimportation. Various proposals have been advanced to permit the importation of usersdrugs from other countries to provide lower cost alternatives to the products available in the United States. In addition, the MMA requires the Secretary of Health and Human Services to promulgate regulations for drug re-importation from Canada into the increaseUnited States under some circumstances, including when the drugs are sold at a lower price than in user engagement on our platform, and privacy concerns relating to our products and services could damage our reputation and deter current and potential users and advertisers from using Momspot.the United States.
Privacy andIf the integritylaws or regulations are changed to permit the importation of personal information isdrugs into the United States in circumstances that are currently not permitted, such a major issue for Internet users. Any publicity relating to the disclosure and/or unauthorized use of personal information or other privacy-related matters of our users, even if unfounded, could damage our reputation, cause us to lose users and advertisers, and adversely affect our operating results. While our goal is to comply with applicable data protection laws and regulations, as well as our own posted privacy policies and other obligations we may have with respect to privacy and data protection, the failure or perceived failure to comply may result in negative publicity and damage to our reputation and brand, each of which could cause us to lose users, Platform Partners or Advertisers, which could have an adverse effect on our business. Any systems failure or compromise of our security that results in the unauthorized access to or release of personal information or data relating to our users, Platform Partners or Advertisers could significantly limit user engagement, as well as harm our reputation and brand and, therefore, our business. We expect to expend significant resources to protect against security breaches. The risk that these types of events could seriously harm our business is likely to increase as we expand the number of products and services we offer and increase the size of our user base.
If our security measures are breached, or if our website is subject to attacks that degrade or deny the ability of users to access our website, our website may be perceived as not being secure, users may curtail or stop using our website and our business and operating results could be harmed.
Our products and services involve the storage and transmission of personal information and data relating to users, and security breaches expose us to a risk of loss of this information, litigation and potential liability. We may experience cyber-attacks of varying degrees on a regular basis, and as a result, unauthorized parties may obtain access to our data or that of our users. Our security measures may also be breached due to employee error, malfeasance or otherwise. Additionally, outside parties may attempt to fraudulently induce employees and/or users to disclose sensitive information in order to gain access to our data or our users’ data or accounts, or may otherwise obtain access to such data or accounts. Since our users, may establish and maintain online identities on our website, use of these identities may damage their reputations and brands as well as ours. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation and a loss of confidence in the security of our website thatchange could have an adverse effect on our business and operating results. Because the techniques usedby making available lower priced alternatives to our future products.
Failure to obtain unauthorized access, disableregulatory and pricing approvals in foreign jurisdictions could delay or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed; we could lose users, and, as a result, Platform Partners and Advertisers; and we may also incur significant legal and financial exposure, including legal claims and regulatory fines and penalties. Any of these actions could have a material and adverse effect on our business, reputation and operating results. We may face lawsuits or incur liability as a result of content published or made available on our website.
We may face claims relating to products and services that are made available on or through our website. In particular, the nature of our business exposes us to claims related to intellectual property rights and personal injury torts. The law relating to the liability of providers of online products or services for activities of their users remains somewhat unsettled, both within the United States and internationally. In addition, the public nature of communications on our network exposes us to risks arising from the creation of impersonation accounts intended to be attributed to our users, Platform Partners or Advertisers. We could incur significant costs investigating and defending these claims. If we incur costs or liability as a result of these events occurring, our business, financial condition and operating results could be adversely affected.
We have limited intellectual property rights. However, we believe the intellectual property rights we do have are valuable, and if we don’t protect them effectively the valueprevent commercialization of our products services and brand could be adversely affected.abroad.
AtIf we succeed in developing any products, we intend to market them in the present time, our only intellectual property rights include our name – Momspot –European Union and our domain name –www.momspot.com. These rights are important as, in our view, they provide some protection against copycats.other foreign jurisdictions. In order to protect these rights,do so, we rely on trademark, trade dress, domain namemust obtain separate regulatory approvals and copyright laws. Effective protectioncomply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval abroad may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of trademarksthe risks associated with obtaining FDA approval and domain names is expensive and difficultadditional risks associated with requirements particular to maintain, both in termsthose foreign jurisdictions where we will seek regulatory approval of application and registration costs as well as the cost of defending and enforcing those rights.our products. We may be required to protect our rights in an increasing number of countries, a process that is expensive and may not be successful or which we may not pursue in every country in which our products and services are distributed or made available.
We may also rely on non-patented proprietary information and technology, such as trade secrets, confidential information, know-how and technical information. To protect this type of intellectual property we may relyobtain foreign regulatory approvals on a combination of trade secret laws as well as confidentialitytimely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and license agreements with employees, consultants andapproval by one foreign regulatory authority does not ensure approval by regulatory authorities in other third parties. Even if we enter into agreements with employees and third parties that place restrictions onforeign countries or by the use and disclosure of this intellectual property, these agreements may be breached or this intellectual property may otherwise be disclosed or become known to our competitors, which could cause us to lose any competitive advantage resulting from this intellectual property.
Significant impairments of our intellectual property rights and limitations on our ability to assert our intellectual property rights against others could harm our businessFDA. We and our ability to compete. Also, obtaining, maintaining and enforcing our intellectual property rights are costly and time consuming. Various events outside of our control pose a threat to our intellectual property rights as well as our products, services and technologies. For example, we may fail to obtain effective intellectual property protection, or effective intellectual property protection may not be available in every country in which our products and services are available. Also, the efforts we have taken to protect our existing intellectual property rights may not be sufficient or effective, and any of our intellectual property rights may be challenged, which could result in them being narrowed in scope or declared invalid or unenforceable. We cannot assure you that our intellectual property rights will be sufficient to protect against others offering products or services that are substantially similar to ours and compete with our business. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm our operating results.
We may, in the future, become party to intellectual property rights claims that are expensive and time consuming to defend, and, if resolved adversely, could have a significant adverse impact on our business, financial condition or operating results.
Unlike most other Internet and technology companies, we do not own or possess significant intellectual property rights. In order to build our website, we are relying on existing technologies for which we obtained licenses to the extent necessary. Nevertheless, we cannot assure you that we will not be a targeted for claims of violating the intellectual property rights of others. Many Internet and technology companies that own large portfolios of patents, trademarks, trade names and copyrights frequently enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual property or other rights. Many of these companies are substantially larger than we are and have significantly greater financial and human resources than we do, which could make us a target for litigation as wecollaborators may not be able to assert counterclaims against parties that sue usfile for patent or other intellectual property infringement. In addition, various “non-practicing entities” that own patents and other intellectual property rights often attempt to aggressively assert claims in order to extract value from technology companies. Further, from time to time we may introduce new products and services, including in areas where we currently do not have an offering, which could increase our exposure to patent and other intellectual property claims from competitors and non-practicing entities. In addition, some of our agreements with Advertisers, Platform Partners and Data Partners may require us to indemnify them for certain intellectual property claims against them, which could require us to incur considerable costs in defending such claims,regulatory approvals and may require usnot receive necessary approvals to pay significant damages in the event of an adverse ruling. Advertisers, Platform Partners and Data Partners may also discontinue use ofcommercialize our products services and technologies as a result of injunctions or otherwise, whichin any market outside the United States. The failure to obtain these approvals could result in loss of revenue and adversely impact our business.
There may be intellectual property or other rights held by others, including issued or pending patents, that cover significant aspects of our products and services, and we cannot be sure that we are not infringing or violating, and have not infringed or violated, any third-party intellectual property rights or that we will not be held to have done so or be accused of doing so in the future. Any claim or litigation alleging that we have infringed or otherwise violated intellectual property or other rights of third parties, with or without merit, and whether or not settled out of court or determined in our favor, could be time-consuming and costly to address and resolve, and could divert the time and attention of our management and technical personnel. The outcome of any litigation is inherently uncertain, and there can be no assurances that favorable final outcomes will be obtained in all cases. In addition, plaintiffs may seek, and we may become subject to, preliminary or provisional rulings in the course of any such litigation, including potential preliminary injunctions requiring us to cease some or all of our operations. We may decide to settle such lawsuits and disputes on terms that are unfavorable to us. Similarly, if any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that may not be reversed upon appeal. The terms of such a settlement or judgment may require us to cease some or all of our operations or pay substantial amounts to the other party. In addition, we may have to seek a license to continue practices found to be in violation of a third party’s rights. If we are required, or choose, to enter into royalty or licensing arrangements, such arrangements may not be available on reasonable terms, or at all, and may significantly increase our operating costs and expenses. As a result, we may also be required to develop or procure alternative non-infringing technology or discontinue use of the technology. The development or procurement of alternative non-infringing technology could require significant effort and expense or may not be feasible. An unfavorable resolution of the disputes and litigation referred to above couldmaterially adversely affect our business, financial condition and operating results.results of operations.
We will rely, in part, on Internet search enginesRisks Related to Our Common Stock and application marketplaces to drive traffic to our platform, and if we fail to appear high up in the search results or rankings, traffic to our platform could decline and our business and operating results could be adversely affected.Liquidity Risks
We will depend, in part, on Internet search engines, such as Google, Bing and Yahoo!,Our common stock is a “Penny Stock” subject to drive trafficspecific rules governing its sale to our website. For example, when a user types an inquiry into a search engine, we rely on a high organic search result ranking of our webpages in these search results to refer the user to our website. However, our ability to maintain high organic search result rankings is not within our control. Our competitors’ search engine optimization, or SEO, efforts may result in their websites receiving a higher search result page ranking than ours, or Internet search enginesinvestors that could revise their methodologies in a way that would adversely affect our search result rankings. For example, Google has integratedimpact its social networking offerings, including Google+, with some of its products, including search, which has negatively impacted the organic search ranking of our webpages. If Internet search engines modify their search algorithms in ways that are detrimental to us, or if our competitors’ SEO efforts are more successful than ours, the growth in our user base could slow. Based on our knowledge of how search engines work and experiences of other websites, we expect our website to also experience fluctuations in search result rankings, which could adversely impact the number of users visiting our website. Any reduction in the number of users directed to our mobile applications or website through application marketplaces and search engines could harm our business and operating results.
In the future, should we develop a mobile application for momspot.com, we will rely on application marketplaces, such as Apple’s App Store and Google’s Play, to drive downloads of our mobile applications. In the future, Apple, Google or other operators of application marketplaces may make changes to their marketplaces which make access to our platform more difficult.
More people are using devices other than personal computers to access the Internet and new platforms to produce and consume content. We need to develop and promote the adoption of our mobile applications, and our business and operating results may be harmed if we are unable to do so.liquidity.
The numberSEC has adopted Rule 15g-9 which establishes the definition of people who accessa “penny stock,” for the Internet through devices otherpurposes relevant to our common stock, as any equity security that has a market price of less than personal computers, including mobile phones, smartphones, handheld computers such as net books$5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require that a broker or dealer approve a person’s account for transactions in penny stocks; and tablets, video game consoles,the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and television set-top devices,quantity of the penny stock to be purchased. In order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience objectives of the person; and make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has increased dramaticallysufficient knowledge and experience in financial matters to be capable of evaluating the past few years. Our businessrisks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form sets forth the basis on which the broker or dealer made the suitability determination, and operating resultsstates that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be harmed if we failless willing to develop mobile applications or users do not install our mobile application when they change or upgrade their mobile device. Atexecute transactions in securities subject to the present time, we do not have the capital to develop a mobile application, which could be detrimental to our competitive position. In addition, as new devices and platforms are continually being released, users“penny stock” rules. This may consume content in a manner that ismake it more difficult to monetize. It is difficult to predict the problems we may encounter in adapting our products and services and developing competitive new products and services that are compatible with new devices or platforms. If we are unable to develop products and services that are compatible with new devices and platforms, or if we are unable to drive continued adoption of our mobile applications, our business and operating results may be harmed.
Natural disasters, including earthquakes, fire, power outages, floods and other catastrophic events, and man-made problems, such as acts of terrorism could have a material adverse impact on our operations.
A significant natural disaster, such as an earthquake, fire, flood or significant power outage, could have a material adverse impact on our business, operating results, and financial condition. In October 2012, Super Storm Sandy caused major damage along the Atlantic Coast, including New York City. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problem at our data centers could result in lengthy interruptions to our services. In addition, acts of terrorism and other geo-political unrest could cause disruptions in our business. All of the aforementioned risks may be further increased if our disaster recovery plans prove to be inadequate. Given the start-up nature of our business, we do not yet have a disaster recovery plan nor do we carry business interruption insurance to compensate us for the potentially significant losses, including the potential harm to our business, which may result from interruptions in our ability to provide our products and services.
We have determined that our disclosure controls and procedures and our internal control over financial reporting are currently not effective. The lack of effective internal controls could materially adversely affect our financial condition and ability to carry out our business plan.
Our management team for financial reporting, specifically, our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our internal controls. At June 30, 2014, because of the inability to sufficiently test the effectiveness of remediated internal controls, we concluded that our internal control over financial reporting was not effective. At June 30, 2014, we concluded that our disclosure controls and procedures were not effective at a reasonable assurance level because of the material weakness in our internal control over financial reporting that continued to exist. Until we are able to test the operating effectiveness of remediated internal controls and ensure the effectiveness of our disclosure controls and procedures, any material weaknesses may materially adversely affect our ability to report accurately our financial condition and results of operations in the future in a timely and reliable manner. In addition, although we continually review and evaluate internal control systems to allow management to report on the sufficiency of our internal controls, we cannot assure you that we will not discover additional weaknesses in our internal control over financial reporting. Any such additional weakness or failure to remediate the existing weakness could materially adversely affect our financial condition or ability to comply with applicable financial reporting requirements and the requirements of the Company’s various financing agreements.
Risks Related to Ownership of Our Common Stock
Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our amended and restated certificate of incorporation, our bylaws, and Delaware law contain or will contain provisions which could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our board of directors. Among other things, our amended and restated certificate of incorporation and our amended and restated bylaws will include provisions:
| · | authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock; |
| · | limiting the liability of, and providing indemnification to, our directors and officers; |
| · | limiting the ability of our stockholders to call and bring business before special meetings; |
| · | requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors; and |
| · | controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings. |
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents certain stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of at least two-thirds of our outstanding common stock not held by such 15% or greater stockholder.
Any provision of our amended and restated certificate of incorporation, our bylaws or Delaware law that has the effect of delaying, preventing or deterring a change in control could limit the opportunity for our stockholders to receive a premium for theirinvestors sell shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. While shares ofThere is no recent trading activity in our common stock areand there is no assurance that an active market will develop in the future.
Although our common stock is currently quoted on the OTC Pink, an active trading market for our common stock may never develop or be sustained. Our common stock is quoted on the OTC Pink, anOTCQB (an interdealer electronic quotation system operated by OTC Markets Group, Inc.) under the symbol “ATRNQ”. However, we cannot assure you“PTIX”, trading of our common stock may be extremely sporadic. For example, several days may pass before any shares may be traded. As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations of the price of our common stock. There can be no assurance that ana more active trading market for our common stock will develop, on the OTC Pink or elsewhere, or if developed,one should develop, there is no assurance that any marketit will be sustained. An illiquid trading market could make it more difficult for investors to sell their sharesThis severely limits the liquidity of our common stock, and could also adversely impactwould likely have a material adverse effect on the market price.price of our common stock and on our ability to raise additional capital.
The market price of our common stock may be volatile, and you could lose all or part of your investment.investment. Since there has not been a public offering for our stock, we are unable to predict the price at which shares of our common stock will trade or the volume that will trade. In addition, theThe market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control.
The market price of our common stock may fluctuate substantially and will depend on a number of factors many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock since you might be unable to sell your shares at or above the price you pay for the shares. Factors that could cause fluctuations in the market price of our common stock include, but are not necessarily limited to, the following: | ·• | price and volume fluctuations in the overall stock market from time to time; |
| ·• | volatility in the market prices and trading volumes of technologypharmaceutical and biotechnology stocks; |
| ·• | changes in operating performance and stock market valuations of other technologypharmaceutical and biotechnology companies generally, or those in our industry in particular; |
| ·• | sales of shares of our common stock by us or our stockholders; |
| ·• | failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors; |
the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections; | ·• | the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections; |
| · | announcements by us or our competitors of new products or services; |
| ·• | the public’s reaction to our press releases, other public announcements and filings with the SEC; |
| ·• | rumors and market speculation involving us or other companies in our industry; |
| ·• | actual or anticipated changes in our operating results or fluctuations in our operating results; |
| ·• | actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally; |
litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors; | ·• | litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors; |
| · | developments or disputes concerning our intellectual property or other proprietary rights; |
| ·• | announced or completed acquisitions of businesses or technologies by us or our competitors; |
| ·• | new laws or regulations or new interpretations of existing laws or regulations applicable to our business; |
| ·• | changes in accounting standards, policies, guidelines, interpretations or principles; |
| ·• | any significant change in our management; and |
| · | general economic conditions and slow or negative growth of our markets. |
general economic conditions and slow or negative growth of our markets. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources. Because we became public by means of a reverse business combination (merger) we may not be able to attract the attention of brokerage firms. Additional risks may exist since we became public through a “reverse business combination (merger).” Securities analysts of brokerage firms may not provide coverage of us since there is little incentive to brokerage firms to recommend the purchase of our common stock. No assurance can be given that brokerage firms will want to conduct any secondary offerings on our behalf in the future. In makingFINRA sales practice requirements may also limit your ability to buy and sell our common stock, which could depress the price of our shares.
FINRA rules require broker-dealers to have reasonable grounds for believing that an investment decision, you should understandis suitable for a customer before recommending that weinvestment to the customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status and investment objectives, among other things. Under interpretations of these rules, FINRA believes that there is a high probability such speculative low-priced securities will not be suitable for at least some customers. Thus, FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our shares once publicly traded, have not authorized anyan adverse effect on the market for our shares, and thereby depress our share price. Compliance with the reporting requirements of federal securities laws can be expensive. We are a public reporting company in the United States, and accordingly, subject to the information and reporting requirements of the Exchange Act and other partyfederal securities laws, and certain compliance obligations of the Sarbanes-Oxley Act. The costs of preparing and filing annual and quarterly reports and other information with the SEC and furnishing audited reports to stockholders are substantial. Applicable regulatory requirements, including those contained in and issued under the Sarbanes-Oxley Act of 2002, may make it difficult for us to retain or attract qualified officers and directors, which could adversely affect the management of its business and its ability to obtain or retain listing of our common stock. We may be unable to attract and retain those qualified officers, directors and members of board committees required to provide youfor effective management because of the rules and regulations that govern publicly held companies, including, but not limited to, certifications by principal executive officers. The enactment of the Sarbanes-Oxley Act has resulted in the issuance of a series of related rules and regulations and the strengthening of existing rules and regulations by the SEC, as well as the adoption of new and more stringent rules by the stock exchanges. The perceived increased personal risk associated with information concerningthese changes may deter qualified individuals from accepting roles as directors and executive officers. Further, some of these changes heighten the requirements for board or committee membership, particularly with respect to an individual’s independence from the corporation and level of experience in finance and accounting matters. We may have difficulty attracting and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified officers and directors, the management of our business and our ability to obtain or retain listing of our shares of common stock on any stock exchange (assuming we elect to seek and are successful in obtaining such listing) could be adversely affected. We may have undisclosed liabilities and any such liabilities could harm our business, prospects, financial condition and results of operations. Even though our pre-merger assets and liabilities were transferred in the split-off of MomSpot LLC (of which we owned a 51% interest) and 29 wholly-owned subsidiaries, we may be liable for any or all of such liabilities although we are unaware of any. Such liabilities that survived the Merger could harm our revenues, business, prospects, financial condition and results of operations upon our acceptance of responsibility for such liabilities. The transfer of our membership interests in MomSpot LLC and 29 of our wholly-owned subsidiaries, as well as associated assets and liabilities, will result in taxable income to us in an amount equal to the difference between the fair market value of the assets transferred and the pre-merger tax basis of the assets. Any gain recognized, to the extent not offset by our net operating loss carryforward, if any, will be subject to federal income tax at regular corporate income tax rates. If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or detect fraud. Consequently, investors could lose confidence in our financial reportingand this may decrease the trading price of our stock. We must maintain effective internal controls to provide reliable financial reports and detect fraud. We have been assessing our internal controls to identify areas that need improvement and will continue to monitor internal controls to improve them. Failure to implement these changes to our internal controls or any others that it identifies as necessary to maintain an effective system of internal controls could harm our operating results and cause investors to lose confidence in our reported financial information. Any such loss of confidence would have a negative effect on the trading price of our stock. As of December 31, 2016, management has not completed an effective assessment of the Company’s internal controls over financial reporting based on the 2013 Committee of Sponsoring Organizations (COSO) framework. Management has concluded that, during the period covered by this report, our internal controls and procedures were not effective to detect the inappropriate application of U.S. GAAP. Management identified the following material weaknesses set forth below in our internal control over financial reporting. | 1. | We lack the necessary corporate accounting resources to maintain adequate segregation of duties. |
| 2. | We did not perform an effective risk assessment or monitor internal controls over financial reporting. |
The price of our common stock may become volatile, which could lead to losses by investors and costly securities litigation. The trading price of our common stock is likely to be highly volatile and could fluctuate in response to factors such as: | • | actual or anticipated variations in our operating results; |
announcements of developments by us or our business.competitors; | • | the timing of IDE and/or NDA approval, the completion and/or results of our clinical trials; |
You should carefully evaluate all of the information in this annual report. We have not authorized any other party to provide you with information concerning
| • | regulatory actions regarding our products; |
announcements by us or our business.competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; adoption of new accounting standards affecting our industry; | • | additions or departures of key personnel; |
introduction of new products by us or our competitors; | • | sales of our common stock or other securities in the open market; and |
| • | other events or factors, many of which are beyond our control. |
The stock market is subject to significant price and volume fluctuations. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been initiated against such a company. Litigation initiated against us, whether or not successful, could result in substantial costs and diversion of our management’s attention and resources, which could harm our business and financial condition. IfInvestors may experience dilution of their ownership interests because of the future issuance of additional shares of our common stock.
In the future, we may issue additional authorized but previously unissued equity securities, or industry analysts do not publish or cease publishing research or reports about us,resulting in the dilution of the ownership interests of our business or our market, or if they change their recommendations regardingpresent stockholders. We may also issue additional shares of our common stock or other securities that are convertible into or exercisable for our common stock in connection with hiring or retaining employees, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes and some of these issuances may be at a price (or exercise prices) below the price at which shares of our common stock is currently quoted on the OTCQB. The future issuance of any such additional shares of common stock may create downward pressure on the trading price of our common stock. Ourcommon stock is controlled by insiders Our officers and directors beneficially own approximately 30% of our outstanding shares of common stock. Such concentrated control of our common stock may adversely affect the price of our common stock and trading volume could decline. The trading market forstock. Investors who acquire our common stock will be influencedmay have no effective voice in the management of our operations. Sales by our insiders or affiliates, along with any other market transactions, could affect the research and reports that securities or industry analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our common stock adversely, or provide more favorable relative recommendations about our competitors, the price of our common stock would likely decline. If any analyst whostock.
We do not intend to pay dividends for the foreseeable future and may cover us were to cease coverage of our company or fail to regularly publish reportsnever pay dividends. We have paid no dividends on us, we could lose visibility in the financial markets, which in turn could cause the price of our common stock or trading volume to decline. At the present time, we aredate and it is not aware of any analysts who plan to follow our stock. We do not expect to declareanticipated that any dividends in the foreseeable future.
We do not anticipate declaring any cash dividendswill be paid to holders of our common stock in the foreseeable future. Consequently, investorsWhile our future dividend policy will be based on the operating results and capital needs of our business, it is currently anticipated that any earnings will be retained to finance our future expansion and for the implementation of our business plan. As an investor, you should take note of the fact that a lack of a dividend can further affect the market value of our stock, and could significantly affect the value of any investment.
Our certificate of incorporation allows for our board to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock. Our board of directors has the authority to issue shares of our preferred stock, with such relative rights and preferences as the board of directors may needdetermine, without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to rely on salesholders special and unique rights, including without limitation, a preferred right to our assets upon liquidation, a right to receive dividend payments before dividends are distributed to the holders of their common stock afterand the right to convert into our common stock at a price appreciation,more favorable then the price at which you acquired our common stock. The issuance of any preferred stock could decrease the value of your common stock and relative voting power of our common stock or result in dilution to our existing stockholders. In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, or DGCL, which may, never occur, asunless certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of the only wayvoting rights on our common stock, from engaging in certain business combinations with us for a prescribed period of time. Item1B. Unresolved Staff Comments. Not applicable. Item2. Properties. Our principal offices are located at 149 Fifth Avenue, Suite 500, New York, New York 10010, in a conference room of Agenus, Inc. We utilize our principal office for quarterly board meetings and our annual shareholder meeting on a month to realizemonth basis at a nominal value. Our personnel and consultants all work remotely, the Company’s basic science laboratory work is conducted in the Lovejoy Lab at the University of Toronto, and its preclinical efficacy work is conducted at CROs. Hence the company does not have the need for a day-to-day physical office location other than a mailing address and conference room facility for meetings. For that reason, the Agenus conference room suits its purposes without imposing any inconveniences upon Agenus. Dr. Armen, our Executive Chairman, is also the Chairman and Chief Executive Officer of Agenus Inc. Item3. Legal Proceedings. From time to time we may be named in claims arising in the ordinary course of business. As of December 31, 2016, 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 We anticipate that we will expend significant financial and managerial resources in the defense of our intellectual property rights in the future gainsif we believe that our rights have been violated. We also anticipate that we will expend significant financial and managerial resources to defend against claims that our products and services infringe upon the intellectual property rights of third parties. Item4. Mine Safety Disclosures. Not applicable. PARTII Item5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock is currently available for trading in the over-the-counter market and is quoted on their investment. Investors seeking cash dividends should not purchasethe OTCQB under the symbol “PTIX.” There has been very limited market for our common stock and trading volume has been negligible. There is no guarantee that an active trading market will develop in our common stock. We are subject to the “penny stock” rules, which could adversely affect the trading volume and market price of our shares.
Trades ofin our common stock aremay be subject to the “penny stock” rules promulgated by the SEC underRule 15g-9 of the Exchange Act, which imposes certain requirements on broker/dealers who sell securities subject to the rulesrule to persons other than established customers and accredited investors. For transactions covered by the rules,rule, broker/dealers must make a special suitability determination for purchasers of the securities and receive the purchaser’s written agreement to the transaction prior tobefore the sale. The SEC also has other rules that regulate broker/dealer practices in connection with transactions in “penny stocks.” Penny stocks generally are equity securities with a price of less than $5.00 (other than securities listed on acertain national securities exchange,exchanges, provided that the current price and volume information with respect to transactions in that security is provided by the applicable exchange or system). The penny stock rules require a broker/dealer, prior tobefore effecting a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker/dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker/dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker/dealer and salesperson compensation information, must be given to the customer orally or in writing prior tobefore effecting the transaction, and must be given to the customer in writing before or with the customer’s confirmation. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for shares of our common stock. As a result of the foregoing,these rules, investors may find it difficult to sell their shares. ITEM 1B. Unresolved Staff Comments.
None.
Item 2. Properties
We do not own or rent any real property as all of our administrative functions, principally accounting, are outsourced to third parties. Momspot is headquartered in Boynton Beach, Florida.
Item 3. Legal Proceedings
At the present time we are not involved in nor are we are aware of any potential material legal proceedings, claims or government investigations. Future litigation may be necessary, among other things, to defend ourselves, our platform partners and our users by determining the scope, enforceability, and validity of third-party proprietary rights or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Item 4. Mine Safety Disclosure
Not applicable.
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder matters and Issuer Purchases of Securities.
Market Information
Our common stock iswas quoted on the OTC Pink tier of the OTC Markets Group (the “OTC”) under the symbol “ATRN” prior to July 27, 2016 and then under the symbol “PTIX” between July 27, 2016 and October 16, 2016. Commencing on October 17, 2016, our common stock is listed in the OTCQB under the symbol “PTIX”. The following table sets forth, for the periods indicated and as reported on the OTC Markets, the high and low bid prices for our common stock. Such quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions. | | High | | | Low | | | High | | | Low | | 2013(1) | | | | | | | | | | | | | | | | | | | | 2015 (1) | | | | | | | | | | First Quarter | | $ | 0.03 | | | | * | | | $ | * | | | $ | * | | Second Quarter | | | 0.01 | | | | * | | | $ | * | | | $ | * | | Third Quarter | | | 0.02 | | | | * | | | $ | * | | | $ | * | | Fourth Quarter | | | * | | | | * | | | $ | * | | | $ | * | | | | | | | | | | | | | | | | | | | 2014(1) | | | | | | | | | | First Quarter | | | * | | | | * | | | Second Quarter | | | * | | | | * | | | Third Quarter | | | * | | | | * | | | Fourth Quarter | | | * | | | | * | | | 2016(1) | | | | | | | | | | First Quarter(1) | | | $ | * | | | $ | * | | Second Quarter(1) | | | $ | * | | | $ | * | | Third Quarter(2) | | | $ | 250.00 | | | $ | 1.67 | | Fourth Quarter(3) | | | $ | 128.85 | | | $ | 128.85 | |
* Less than $0.01 per share (1) The prices for the fiscal yearsyear ended December 31, 2015 and the three month periods ended March 31, 2016 and June 30, 2013 and 20142016 are actual sale prices because the bid price information was not available. (2) The high and low bid prices for this quarter were reported by the OTC Pink marketplace. There was negligible trading volume during this period. (3) The high and low bid prices for this quarter were reported by the OTCQB marketplace. There was no trading volume during this period. Holders As of September 30, 2014,March 27, 2017, there were 333are approximately 433 record holders of record of our common stock. This does not reflect beneficial stockholders who hold their stock in nominee or “street” name through brokerage firms.and one holder of our Series B Preferred Stock. DividendsDividend Policy
We have not declared ornever paid any cash dividends on our common stock. We anticipate that we will retain funds and future earnings to support operations and to finance the growth and development of our business. Therefore, we do not intendexpect to pay anycash dividends in the foreseeable future. We intend to retain any future, earnings for use in the operation and expansion of our business.if at all. Any future decisiondetermination to pay dividends on our common stock will be at the discretion of our board of directors and will depend uponon our financial condition, results of operations, capital requirements and other factors that our board of directors deems relevant. In addition, the terms of any future debt or credit financings may deem relevant.preclude us from paying dividends.
Recent Sales of Unregistered Securities Original Issuances of Stock and Warrants
Sales by Our Predecessor, Atrinsic, Inc. Between February 11, 2014 and December 9, 2015, Atrinsic, Inc. issued Secured Convertible Notes in the aggregate principal amount of $665,000 to two of its shareholders. The Secured Convertible Notes, as revised and amended, had a maturity date of August 31, 2016 and bore interest at the rate of 5.0% per annum, payable at maturity. The outstanding principal and accrued interest of each Secured Convertible Note was convertible, subject to a 4.99% beneficial ownership cap, into shares of Atrinsic Inc.’s common stock at an initial conversion price of $5.00 per share (subject to adjustment), at the option of the respective holders. The Secured Convertible Notes were exchanged for 295,945 Predecessor Warrants simultaneously with the closing of the Merger and the instruments by which they were secured were simultaneously terminated. 2016 Private Placement In February, 2014,March and April 2016, we granted options, eachsold an aggregate of 4,108,460 shares of Series B Preferred Stock, par value $0.000001 per share (“Series B Preferred Stock”), at a price of $1.25 per share, for total gross proceeds of $4,635,575 and total net proceeds of $4,261,797 (or total gross proceeds of $5,135,575 and total net proceeds of $4,761,797, including the conversion of the $500,000 of debt). In connection with the 2016 Private Placement, the Placement Agent and its selected dealers were paid total cash commissions of $159,183 and the Placement Agent was paid an expense allowance of $15,000 and was issued (together with its selected dealers) Placement Agent Warrants to purchase 127,346 shares of Series B Preferred Stock at an exercise price of $.002$1.25 per share, for an aggregateshare.
Conversion of 275,000,000Debt to Equity Garo H. Armen, our Chairman and principal stockholder, purchased shares of our common stockSeries B Preferred Stock in the Private Offering in exchange for the cancellation of $350,000 of loans made by him, plus accrued and unpaid interest on these loans. During 2013 and 2012, Dr. Armen made loans to our officers and directors for services. Allus in the amount of $310,000. The proceeds of the options immediately vested onloans were used to fund research, development and general operating activity of Protagenic. The loans accrued interest at the daterate of grant10% per annum. In February 2013, in connection with a capital raise by Protagenic, the loans and expire on the fifth anniversary of the grant date. The optionsaccrued interest thereon, totaling $317,789, were granted in reliance upon the exemption from the registration requirements of the Securities Act pursuantconverted into Protagenic warrants to Section 4(a)(2) thereunder. Pursuant to the Plan of Reorganization approved in July 2013, we issued 300,000,000purchase 953,367 shares of our common stock to our former unsecured creditors in satisfaction of our then existing obligations to them and 4,600,000,000 shares of our Series A Convertible Preferred Stock to our former secured creditors. The issuance of these shares was exempt from the registration requirements of the Securities Act, pursuant to section 1145 of the Bankruptcy Code and section 3(a)(10) of the Securities Act.
Equity Compensation Plan Information
The following table summarizes our equity compensation plan information as of June 30, 2014:
Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) | | | | (a) | | | (b) | | | (c) | | Equity compensation plans approved by security holders | | | N/A | | | | N/A | | | | N/A | | | | | | | | | | | | | | | Equity compensation plans not approved by security holders – Stand Alone Option Grants | | | 275,000,000 | | | $ | .002 | | | | N/A | | Total | | | 275,000,000 | | | $ | .002 | | | | N/A | |
The options reflected in the table above were granted in February 2014 to our officers and directors for services and are exercisable for an aggregate of 275,000,000 shares of ourProtagenic common stock at an exercise price of $.002$1.00 per share. AllOther than with respect to the payment of the options immediately vestedpurchase price for the securities by the conversion of debt, Dr. Armen participated in this capital raise on the datesame terms as all other investors.
From April 15, 2015 through October 29, 2015, Dr. Armen made five loans to Protagenic. The proceeds of grantthe loans were used to fund research, development and expiregeneral operating activity of Protagenic. The loans accrued interest at the rate of 10% per annum. Principal and accrued interest on these loans, totaling approximately $350,000, were converted into shares of Series B Preferred Stock in the Private Offering at a price of $1.25 per share. On December 21, 2015, Alexander K. Arrow purchased 60,000 shares of common stock of Protagenic from Mark Berg at a per share purchase price equal to $0.50 for an aggregate purchase price of $30,000. In addition, Dr. Arrow purchased 58,260 shares of Series B Preferred Stock in the Private Offering, on the fifth anniversarysame terms as all other investors. Effective December 23, 2015, Dr. Armen entered into an additional loan agreement with Protagenic pursuant to which he agreed to loan Protagenic up to $150,000. The loans under this Agreement accrued interest at the rate of 10% per year. The principal and interest on these loans is convertible into common stock at a price of $1.25 per share. On December 23, 2015, Protagenic borrowed $37,628 of the grant date.$150,000 available Borrowings under the agreement. Effective June 17, 2016, the Board of Directors determined that it was in the best interest of the Company to convert the last remaining portion of debt owed to Dr. Armen into equity, per the terms of the loan agreements. The optionssum total of remaining debt and accumulated interest as of December 31, 2016 was $0. Securities Act Exemptions We deemed the transactions described above were grantedexempt from registration under the Securities Act in reliance upon the exemption from the registration requirementson Section 4(a)(2) of the Securities Act, including Regulation D and Rule 506 promulgated thereunder, relative to transactions by an issuer not involving a public offering. All purchasers of securities in transactions exempt from registration pursuant to Section 4(a)(2) thereunder.Regulation D represented to us that they were accredited investors and were acquiring the shares for investment purposes only and not with a view to, or for sale in connection with, any distribution thereof and that they could bear the risks of the investment and could hold the securities for an indefinite period of time. The purchasers received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration statement or an available exemption from such registration. All certificates representing the securities issued in the transactions described in this Item 6. Selected Financial Data15 included appropriate legends setting forth that the securities had not been offered or sold pursuant to a registration statement and describing the applicable restrictions on transfer of the securities. There were no underwriters employed in connection with any of the transactions set forth above, under the heading “Recent Sales of Unregistered Securities”.
Use of Proceeds from Registered Securities Our registration statement, SEC Registration No. 333-213671, effective on February 8, 2017, was filed on behalf of the selling stockholders named therein registering an aggregate of 4,485,806 shares of common stock of the Company for sale by the selling stockholders. The shares of common stock offered by the selling stockholders include 3,235,694 shares of common stock, 872,766 shares of common stock issuable upon conversion of our outstanding Series B Preferred Stock and 377,346 shares of our common stock underlying warrants with an exercise price of $1.25 per share. We are not selling any securities under the prospectus and will not receive any of the proceeds from the sale of the shares by the selling stockholders. The selling stockholders may sell their common stock on any stock exchange, market or trading facility on which the shares are traded or quoted, or in private transactions. These sales may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. We will not receive any of the proceeds from the sale of the common stock by the selling stockholders. All proceeds from the sale of the common stock will be paid directly to the selling stockholders. We would, however, receive proceeds upon the exercise of the warrants held by the selling stockholders which, if such warrants are exercised in full (and assuming no “cashless” exercise features are utilized), would be $471,683. Proceeds, if any, received from the exercise of such warrants will be used for working capital and general corporate purposes. No assurances can be given that any of such warrants will be exercised. We intend to keep the prospectus effective until February 8, 2018 or the earlier of (i) the date on which the shares may be resold by a “smaller reporting company” as defined by Regulation S-Kselling stockholder without registration and as such, is not required to provide the information contained in this itemwithout restriction pursuant to Regulation S-K.Rule 144 or (ii) such time as all of the shares have been sold.
Item6. Selected Financial Data. Not applicable. Item7. Management’s Discussion and Analysis of Financial Condition and PlanResults of OperationOperations. This Management’s DiscussionThe following discussion and Analysis of Financial Condition and Plan of Operation section analyzes the major elementsanalysis of our consolidated balance sheets, statementfinancial condition and results of operations and statement of cash flows. This section should be read in conjunction together with our consolidated financial statements and accompanyingthe related notes and other detailedfinancial information appearingincluded elsewhere in this Annual Report.report. Some of the information contained in this discussion and analysis or set forth elsewhere in thisreport, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements.” You should review the “Risk Factors” section of thisreport for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Historical BackgroundAs the result of the Merger transactions and the change in our business to a biotechnology company, a discussion of the past financial results of Predecessor is not pertinent, and the financial results of Protagenic, the accounting acquirer, are considered our financial results on a historical and going-forward basis.
We wereThe discussion and analysis of our financial condition and results of operations are based on Protagenic’s financial statements, which Protagenic has prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires Protagenic 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, Protagenic evaluates such estimates and judgments, including those described in greater detail below. Protagenic bases its estimates on historical experience and on various other factors that Protagenic believes 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.
Historical Background The Company was originally incorporated in Delaware on February 3, 1994 under the name Millbrook Acquisition Corp. The Company was the successor to The Millbrook Press Inc., on or aboutwhich was a wholly-owned subsidiary of Antia Publishing Company, a Delaware corporation, which in turn was a wholly-owned subsidiary of Groupe de la Cite International, a Societe Anonyme organized under French law. In February 3, 1994. In May, 2007,1994, the founders of the Company effected a management buyout by forming the Company which purchased substantially all of the assets of The Millbrook Acquisition Corp.Press Inc. For the next 10 years, the Company was involved in a variety of attempts at creating a profitable, sustainable business model in the publishing and retail sectors, none of which succeeded. On February 6, 2004, the Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Connecticut and changed its name to MPLC, Inc. Also in 2004, a biotechnology company called Protagenic Therapeutics, Inc. (referred to herein as “Protagenic”) was organized under the name Protagenic Therapeutics, Inc., with the goal of commercializing novel peptide drugs that had been discovered in the laboratory of Dr. David Lovejoy (“The Professor”) at the University of Toronto (UofT). The Company specializes in the discovery and development of therapeutics to treat central nervous system (CNS) disorders. PTI’s mission is to provide safe and effective treatments for mood, anxiety, depression and neurodegenerative disorders by using novel peptide-base, brain active therapeutics. The Company’s strategy is to develop, test and obtain regulatory approval for various applications of these brain active therapeutics. On January 31, 2007, MPLC, Inc. entered into an exchange agreement with New Motion, Inc. In February, 2008, , a Delaware corporation formed in March 2005 (“New Motion, Inc. merged with Traffix, Inc.Motion”), pursuant to which Traffix, Inc. became a wholly-owned subsidiarythe stockholders of New Motion (the "Stockholders"), and Trinad Capital Master Fund. On May 2, 2007, the Company changed its corporate name to New Motion, Inc. In As part of a corporate re-branding strategy, on June 25, 2009, New Motion, Inc. changed its name to Atrinsic, Inc. Prior to our bankruptcy filing in 2012, we wereIts new corporate image was as a marketerprovider of direct-to-consumer subscription products“digital advertising and an Internet search-marketing agency. We sold entertainment and lifestyle subscription products directly to consumers, which we marketed through the Internet. We also sold Internet marketing services, to our corporate” primarily digital music, casual games, interactive contests, and advertising clients. However, by early 2012, we had suspended all operationcommunities/lifestyles. Meanwhile, from 2006 through 2014, Prior Protagenic sponsored fundamental research & development work in the Professor’s lab at the UofT aimed at demonstrating the efficacy of these businesses. In addition, until March 30, 2012, we werePrior Protagenic’s lead drug candidate, known as Teneurin C-Terminus Associated Peptide, or TCAP-1, and elucidating its mechanism of action. This research resulted in a reporting company underdetailed understanding of the Exchange Actpeptide and filed periodic reportsits actions on neurons. Prior Protagenic’s worldwide exclusive technology license agreement with the SEC. On March 30, 2012, we filed a Form 15UofT gave it sole rights to commercialize and eventually sell drugs related to the TCAP family of proteins. By early 2015, it became clear that Prior Protagenic needed an influx of working capital in order to meet its goal of completing the process of applying for an Investigational New Drug (IND) application with the SEC, terminating our obligationU.S. Food and Drug Administration (FDA) to file periodic reports under Sections 13sell a commercial version of TCAP-1. To secure this capital, management of Prior Protagenic chose to pursue a reverse merger and 15(d)financing strategy, with the help of a placement agent. This resulted in the introduction of Prior Protagenic to the former Atrinsic, Inc., and the consummation of a memorandum of understanding (MOU) in mid-2015 that the two companies would merge and conduct an equity financing, with the former Prior Protagenic shareholders owning approximately 80% of the Exchange Act.pre-financing entity, and the former Atrinsic, Inc. shareholders owning the other 20%. On June 15, 2012, we filed for protection under Chapter 11February 12, 2016, Protagenic Therapeutics, Inc. merged into Protagenic Acquisition Corp., a wholly-owned subsidiary of Atrinsic, Inc., and raised gross proceeds of approximately $4.6 million in the 2016 Private Placement. All previous lines of business of Atrinsic, Inc. where theretofore dropped in favor of the U.S. Bankruptcy Codefield of neurologic drug development. On June 17, 2016, Protagenic Therapeutics, Inc. was merged with and terminated all remaining employees. Since then we have been managed by several outside legalinto Atrinsic. Atrinsic was the surviving corporation in this merger and financial professionals. In June 2013, the United States Bankruptcy Court, Southern Districtchanged its name from Atrinsic to Protagenic Therapeutics, Inc. Results of Reorganization subject to our acquisition of a 51% controlling equity interest in Momspot, which was completed on July 12, 2013. Pursuant to the terms of a Membership Interest Purchase Agreement, we acquired a 51% equity interest in Momspot in exchange for our commitment to contribute up to $165,000 of working capital to Momspot over a two-year period to fund its business development and operations. Simultaneous with the acquisition, we became a party to the Momspot Operating Agreement and the manager thereunder. Momspot isOperations We are a development stage company whose goal iscurrently performing clinical trials to be the premier specialty retail affiliate marketing company targeting women between the ages of 24 and 45 who are either mothers or expecting their first child. Momspot current constitutes our only business operation. Pursuant to the Plan of Reorganization, all outstanding debt was converted to equity with the secured creditors receiving 4,600,000,000 shares, $0.000001 par value per share, of our Series A Convertible Preferred Stock, general unsecured creditors receiving an aggregate of 300,000,000 shares of our Common Stock, par value $0.000001 per share, and pre-bankruptcy petition common stockholders having their pre-bankruptcy shares exchanged for an aggregate of 100,000,000 shares of Common Stock.
As of July 12, 2013, we adopted fresh start accounting in accordance with ASC 852. As a result, we are deemed a new entity for financial reporting purposes. Accordingly, the financial statements on or prior to July 12, 2013 are not comparable with the financial statements for periods after July 12, 2013. Operating activities between July 1, 2013 and July 11, 2013 were insignificant.
Results of Operations
obtain FDA approval. We have had no operations since May 2012. We have nominimal revenue. For
During the period from July 12, 2013 to June 30, 2014,year ended December 31, 2016, we incurred a loss from operations of approximately $975,000. It can be primarily attributed$2,233,501 as compared to stock-based compensation$1,025,038 for the year ended December 31, 2015. The increase in the loss is due to an increase in research and development expense ($274,909) asof $77,419 from $456,274 for the year ended December 31, 2015 to $533,693 for the year ended December 31, 2016 due to IND-preparatory preclinical experimentation conducted during 2016 that did not have precedent during 2015, and an increase in general and administrative expenses of $726,875 from $568,764 for the year ended December 31, 2015 to $1,295,639 for the year ended December 31, 2016, which included expenses relating to the equity stock offering that occurred in February through April 2016 and the new professional fee expenses associated with being a post-merger public company. In addition, during the year ended December 31, 2016, we incurred an impairment of goodwill of $404,169 with no such impairment in the prior year. The impairment was the result of the options issued in February 2014; insurance expensescurrent operating focus being shifted to the operations of approximately $83,000; and professional expenses of approximately $517,000 related to legal services, consulting services and accounting services. DuringProtagenic rather than the period, we recorded $204,000 of professional fees related to a post confirmation liquidation plan and approximately $49,000 of net loss attributable to non-controlling interest.pre-merger Atrinsic, Inc. Liquidity and Capital Resources We continually project anticipated cash requirements, which maypredominantly from the ongoing funding requirements of our neuropeptide drug development program. The majority of these expenses relate to paying external vendors such as Contract Research Organizations (CROs) and peptide synthesizer companies. They could also include business combinations, capital expenditures, and new drug development working capital requirements. In accordance with the Plan of Reorganization, all of our pre-bankruptcy filing accounts payable were converted into equity, which has a favorable impact on liquidity. As of June 30, 2013,December 31, 2016, we had cash of approximately $717,000$3,100,398 and negative working capital of approximately $17,226,000. As$2,475,958. We anticipate further losses in the development of June 30, 2014, we hadour business. Based on our current forecast and budget, Management believes that our cash of approximately $101,000resources will be sufficient to fund our operations, anticipated capital expenditures and working capital deficitfor nearly two years from the date of approximately $71,000. Duringthis quarterly report. Absent generation of sufficient revenue from the period from July12execution of the Company’s business plan, we will need to June 30, 2014, weobtain debt or equity financing by the third quarter of 2018. Operating activities used approximately $790,000 of cash for operations, which included payments to legal$1,140,319 and accounting professionals, payments to consultants to develop our website, insurance, business licensing fees, stock-based compensation expenses and other administrative expenses. This accounted for the total decrease$381,341 in cash for the period. We anticipate only a modest amountyears ended December 31, 2016 and 2015, respectively. The use of affiliatecash in operating activities during the years ended December 31, 2016 and advertising revenue over the next 122015, was primarily used to 24 months, which will only have a negligible impact onfund our future capital requirements. As such, we need to raise additional capital to cover our budgeted operating and capital expenditures. Our operating budget for each of the current (i.e., year ending June 30, 2015) and ensuing (i.e., year ending June 30, 2016) fiscal years is $375,000, or $750,000 in the aggregate. The largest single line items in our budget are marketing ($115,000 to $150,000 per year) and development ($80,000 to $130,000 per year), which is essentially the cost of one to two full-time equivalent software engineers and/or programmers.net loss.
In order to enable us to continue to sustain our operations until we consummate aOur financing on August 15, 2014 eachactivities provided cash of our two principal stockholders loaned us $45,000, or $90,000 in the aggregate, which should provide us with sufficient working capital for an additional 90 days. We have recently begun to explore new financing opportunities.
Going Concern
We intend to finance operating activities through:
managing current cash on hand; and
seeking additional funds raised in the future.
Our financial statements$4,283,938 for the year ended June 30, 2014 indicate there is substantial doubt aboutDecember 31, 2016. On February 12, March 2, 2016, and April 15, 2016 we raised gross proceeds of $5,135,575 in the three closings of our abilitySeries B financing equity capital raising transaction, of which $1,850,000 was from our two principal institutional stockholders, Iroquois Capital and Hudson Bay Capital. With these proceeds, we converted $350,000 of stockholder debt to continue as a going concern asSeries B preferred stock. We paid $332,000 in closing costs, including $125,000 paid on accrued liabilities, and an additional $150,000 in legal expenses netted against the $2,000,000 invested on behalf of Iroquois Capital and Hudson Bay Capital per requirements of the Merger agreement.
Within the next two years, we are dependent onlikely to seek additional financing in two ways: (1) by approaching large pharmaceutical companies who may be interested in licensing the commercial rights to our ability to obtain short termlead drug candidate, PT00114, for a non-core indication or in a non-core geographic region (such as an indication other than anxiety, depression, or addictive behavior therapy, or a region of the world other than North America or Europe). If we are successful in striking a partnership with a large pharmaceutical company in this way, we may receive an up-front licensing fee that could be significant. (2) In the absence of a licensing opportunity with a large pharmaceutical partner, we may undertake an equity financing and ultimately to generate sufficient cash flow to meet our obligations on a timely basisin mid-2018, in order to attain profitability, as well as successfully obtain financing on favorable termsraise $10 million or more in working capital to fund our long term plans.first two phases of clinical trials. In this event, Management would aim to complete our IND application process prior to or coincident with this possible equity financing, because the IND submission would represent a developmental milestone that could increase the value of the Company’s equity in the view of future investors. We need
The anticipated impact on our cash position of either of these financing options would be to raise additionalprovide enough working capital to cover our budgeted operatingfund Phase I and capital expenditures. If our capital raising efforts are not successful, we might notPhase IIa clinical trials. The anticipated impact on the Company’s liquidity and operations is that the Company would be able to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilitiesoperating beyond 2018 that might be necessary should we not able to continue as a going concern.its current cash position provides for. Recent Developments On February 12, 2016, we merged Protagenic Acquisition Corp (a wholly-owned subsidiary of Atrinsic, Inc.) with and into Protagenic Therapeutics, Inc. with Protagenic Therapeutics, Inc. remaining as the surviving corporation and a wholly-owned subsidiary of Atrinisic, Inc. As a result of the merger, we acquired the business of Protagenic Therapeutics, Inc. and will continue its existing business operations. On June 17, 2016, we merged Protagenic Therapeutics, Inc. with and into Atrinsic, Inc. and changed our name to Protagenic Therapeutics, Inc. Simultaneously with the Merger, on February 12, 2016, we converted all of the issued and outstanding shares of the Company’s common stock, on a 1-for-1 basis, into shares of the Atrinsic’s Series B Preferred Stock, par value $0.000001 per share (“Series B Preferred Stock”). All of the issued and outstanding options to purchase shares of the Company’s common stock, and all of the issued and outstanding warrants to purchase shares of the Company’s common stock, converted, on a 1-for-1 basis, into options and new warrants, respectively, to purchase shares of Series B Preferred Stock. The new options will be administered under the Company’s 2006 Employee, Director and Consultant Stock Plan, which we assumed and adopted on February 12, 2016, in connection with the Merger. Concurrently with the closing of the Merger, we conducted the first closing of our 2016 Private Placement of Series B Preferred Stock. At the first closing, we sold 2,775,000 shares of Series B Preferred Stock at a purchase price of $1.25 per share, for which we received total gross consideration of $3,468,750. Of this amount, $350,000 consisted of conversion of outstanding stockholder debt held by Garo H. Armen, our chairmen and a member of our board of directors, and $150,000 of legal expenses incurred by Strategic Bio Partners LLC, stockholders of the Predecessor, in conjunction with and as allowed by the merger agreement. On March 2, 2016, we completed the second closing of the 2016 Private Placement, at which we issued an additional 913,200 shares of Series B Preferred Stock to accredited investors, for total gross proceeds of $1,141,500. On April 15, 2016, we completed the final closing of the 2016 Private Placement, at which we issued an additional 420,260 shares of Series B Preferred Stock to accredited investors, for total gross proceeds of $525,325. For all three closings, we raised total gross proceeds of $4,635,575 and total net proceeds of $4,261,797 (or total gross proceeds of $5,135,575 and total net proceeds of $4,783,438, including the conversion of the $350,000 in stockholder debt and $150,000 in legal expenses referred to above). We issued 4,108,460 shares of Series B Preferred Stock to investors in the 2016 Private Placement. The Placement Agent and its selected dealers were paid total cash commissions of $159,183 and the Placement Agent was paid an expense allowance of $15,000 and was issued (together with its selected dealers) Placement Agent Warrants to purchase 127,346 shares of Series B Preferred Stock at an exercise price of $1.25 per share. Following the final closing of the 2016 Private Placement, we registered with the Securities and Exchange Commission for resale the shares of common stock underlying the Series B Preferred Stock sold in the 2016 Private Placement and the Placement Agent Warrants. Plan of Operations Business Overview Since emerging from bankruptcy, we are a developmentThe Company is in its developmental stage, company in the process of developingwith encouraging but not conclusive evidence that its lead drug candidate, PT00014, may be effective as an online affiliate marketing and comparison shopping site targeting the Mommy Market. Our website,www.momspot.com, will aggregate thousands of consumer retail products from dozens of retailers and market these products to the Mommy Market. Our website will offer basic e-commerce functionality, including product search and browsing, product search filtering, and detailed product specifications. Users will also have the ability to share their thoughts and impressions about the products they choose either via email anti-anxiety and/or social networks of which they are a member, and will also be able to save specified products to their customizable “My Momspot”, which they can view or share at a later time. Users will also have the ability to cultivate a network of other Momspot users, or invite new individuals to become members of Momspot, which provides a forum for users to interact with each other and to provide personal product recommendations and reviews.
We are presently using CJ Affiliate by Conversant, formerly known as Commission Junction, to build our network and to source product data from various merchants and to manage our relationships and affiliate commissions generated from these merchants. We have already secured affiliate relationships with approximately 29 merchants. We are also a member of a second affiliate network, although we have not yet activated this data feed. Finally, we also plan to enhance and supplement our product database by working with an existing comparison shopping website.
We released the first live version of Momspot (v1.0) towww.momspot.comanti-depression drug. It is focused on March 1, 2014. We are not promoting the current live site, nor implementing any marketing effort as this release was used primarily for testing purposes, allowing us to gauge Momspot’s organic user acquisition capabilities in addition to allowing us to analyzeconfirming the efficacy of our site designthis drug candidate, along with performing the other preclinical steps needed to progress along the pathway to bring this drug candidate into human clinical trials and layout by measuring user interaction with various website elements and pages.
Despiteeventually, to the absence of any promotional activity, since its release more than 1,800 users visited our website, accruing more than 4,000 page views, clicking on 639 merchant products and conducting 12 sales transactions.global market to provide a new pharmaceutical for patients suffering from anxiety or treatment-resistant depression.
In May 2014,
Our anticipated timeline for reaching the significant milestones in our plan of operations and the costs associated with our plan are set forth in the table below: | | Estimated Cost | | 3Q 2017 | | | | | Begin in Vitro Pharmacology | | $ | 125,000 | | Begin Pharmacokinetics | | $ | 120,000 | | Complete preclinical efficacy studies | | $ | 112,000 | | | | | | | 4Q 2017 | | | | | Complete in Vitro Pharmacology | | $ | 68,000 | | Complete Pharmacokinetics | | $ | 120,000 | | Create custom tagged antibodies | | $ | 104,000 | | Complete antibody purification | | $ | 24,000 | | | | | | | 1Q 2018 | | | | | Completion of ELISA tests | | $ | 45,000 | | Complete Custom antibodies as an alternative to ELISA | | $ | 21,000 | | Complete toxicology studies in two species | | $ | 850,000 | | | | | | | 2Q 2018 | | | | | Complete Stability and Formulation | | $ | 85,000 | | Write our first IND application | | $ | 80,000 | | | | | | | 3Q 2018 | | | | | Submit our first IND application | | $ | 60,000 | | | | | | | 4Q 2018 | | | | | Begin dosing healthy volunteers in Phase I trial | | $ | 175,000 | |
If we released version 2.0 ofare able to successfully develop our drug, PT00114, and obtain FDA approval, we could then begin marketing and selling it in the Momspot website, which contains a newly redesigned homepageUnited States and other site functionality.Based on site testing and user feedback, we devised a number of homepage design changes that we anticipate will improve user engagement and bring more valuegenerate revenue. FDA approval to our user base. These changes include reducingbegin commercial sales is the height and size of the primary homepage image and to add tabbed navigation underneath the primary homepage image that allows for immediate product browsing and filtering. We also added new tabssingular gating item that will allow usersus to immediately view productsbegin generating sales revenue in the U.S., so it will have an enormous impact on our business plan and our financial condition. It is anticipated that we have curated based on child age and product importance, products that are most popular amongthe sale of our users, products that are on sale or have been discounted, as well as provide immediate accessdrug will allow the Company to the users’ My Momspot areagenerate enough sales revenue to support all of our operations and to our editorial and blog content.generate a profit. However, given the stage of development, even if FDA Approval is obtained, it is not anticipated prior to 2023. Simultaneously with the release of Version 2.0, we activated our marketing strategy to maximize the site publicity and public awareness of this new release. These strategies include:
1. Activating Momspot’s four main social networks on Facebook, Twitter, Pinterest and Google+ through frequent posts of products and content that all link to the Momspot website;
2. Paid Search, also referred to as Search Engine Marketing (SEM), via the major search engines Google and Bing;
3. Activating paid advertising via social media channels;
4. Hiring a public relations firm to help us get placed in popular magazines and other publications;
5. Sponsoring local and national events and trade shows, such as the Biggest Baby Shower in NYC, MommyCon, Brooklyn Baby Expo, etc.;
6. Sponsoring contests that are marketed to Momspot users for which prizes may include a paid baby shower or baby reveal party; and
7. Encouraging the Momspot user network to share products and make posts on their social networks, as well as to host Momspot-sponsored events.
We anticipate significant growth in users and increased revenues as a result of the release of Version 2.0. However, with this increase in site usage, we will require the support of additional resources to ensure consistent operational readiness of the website.
Development Milestones (upcoming developmental milestones) Upcoming development milestones include: | · | Devise development strategy for release 3.0.We are alsoinclude confirming efficacy of our lead drug candidate in the process of devising a development strategy for building out the components to be included in the next version of the website (release 3.0), which include the following four initiatives: |
1. Partnering with an existing comparison shopping companyanimal model in ordera clinical research organization (CRO), conducting toxicology testing in two animal species, and filing an Investigational New Drug (IND) application to leverage their merchant product database, product attribution and taxonomy.We are in advanced discussions with a number of comparison shopping engines, including PriceGrabber, Shopping.com, and Pronto.com, to use their existing product database to enhance and supplement our existing product database that is currently procured through our integration with CJ Affiliate by Conversant. This will require the development of a new back-end data solution that will integrate with the comparison shopping site we select, as well as a tool to administer an additional layer of intelligence that allows us to assign additional product attributes and display logic to products procured from this new source. This new data back-end would allow us to provide our users highly curated buying guides that recommend products users may need given their life circumstances, motherhood stage, and age of children.
2. Seamlessly integrating a blog and editorial area into the website.We plan to add a new blog section onto our website that will seamlessly integrate a Wordpress blog via a link from the Momspot website. The design of the blog will mimic the Momspot style guidelines, and will include email integration such that users who have opted in receive email notifications of new blog posts. This initiative includes the identification of potential content partners and bloggers with whom Momspot will work in order to procure content. This may take the form of either a syndication partnership, where we will wither pay specific bloggers or content sites in order to syndicate specific posts on the Momspot website or a freelance agreement with specific bloggers to write exclusive content for Momspot.
| · | Version 3.0 Development and Testing.Development of release 3.0 initiatives will be done by a different web development resource than the one that worked on version 1.0. As with version 1.0 and 2.0, there will be extensive development testing to ensure functionality has been built properly and data is being presented properly. Moreover, there will be user acceptance testing (UAT) performed by real users in order to determine the efficacy and usability of site features. Possible feature and functionality changes may occur as a result of this testing. |
Human Resourcesbegin human clinical trials.
Momspot has only one employee — Barry Eisenberg — who serves as its chief executive officer. Mr. Eisenberg is responsible for the day-to-day managementHuman Resources (current state of all aspects of Momspot, which includes identifyingemployees and hiring contractors, managing our financial matters, devising and implementing the marketing strategy, procuring and managing affiliate relationships, conducting market research and focus group testing, website testing, communicating with investors, and overseeing contractors work including design and development of the website.future plans towards employees
Third-party contractors are utilized to assumeThe Company has three part-time employees: David Hogg, PhD, a Research Technician, Garo H. Armen, PhD, the following critical roles:Executive Chairman, and Alexander K. Arrow, the Chief Financial Officer. The Company also has three paid consultants: Dalia Barsyte, PhD, Chief Technology Officer, David Lovejoy, PhD, Chief Scientific Officer, and Christina Fam Faragalla, Director of Project Management.
| 1. | Defining user experience and functional requirements |
| 2. | User interface and brand design |
| 3. | Front and back-end web development |
Eventually, we hope to hire full-time individuals to assume these critical roles.
| · | Human Resources. Our most urgent need at the moment is to hire a full-time technical resource that has full-stack website development experience and can both develop website code as well as manage other development resources. It is preferable that this person be located in New York City where we are currently located. Until this individual is hired, development and deployment of new website releases is at risk of being significantly delayed. At this time, we do not have the financial resources to hire this type of individual. |
| · | Ongoing Site Support and Maintenance.In addition to performing and managing larger development projects, we require a technical resource who can provide on-going technical support and site maintenance to ensure operational readiness at all times. As is common with websites, minor issues may arise that require someone with technical expertise to resolve. Having an individual with technical skills available to the company 24x7, with an expectation of quick turnaround, will be essential to ensure the uninterrupted operation of our website. In the near-term, if we cannot hire a full-time resource, this role will be outsourced to a third party service provider. |
Financing – Capital Needs Momspot was initially capitalized with $165,000 of which approximately $105,000 has been used by Momspot through June 30, 2014 for website design and development, website infrastructure and hosting services, management compensation and legal and accounting fees. Althoughwww.momspot.com went live in March 2014, to date we have had no meaningful revenues. Moreover, we anticipate only a modest amount of affiliate and advertising revenue over the next 12 to 24 months, whichThe Company anticipates that it will only have a negligible impact on our future capital requirements.
Our operating budget for each of the current (i.e., year ending June 30, 2015) and ensuing (i.e., year ending June 30, 2016) fiscal years is $375,000, or $750,000 in the aggregate. The largest single line items in our budget are marketing ($115,000 to $150,000 per year) and development ($80,000 to $130,000 per year), which is essentially the cost of one to two full-time equivalent software engineers and/or programmers.
In order to enable us to continue to sustain our operations until we consummate a financing, on August 15, 2014, each of our two principal stockholders loaned us $45,000, or $90,000 in the aggregate, which should provide us with sufficient working capital for an additional 90 days. Each loan evidenced by a secured promissory note bearing interest at the rate of 5.0% per annum. The entire original principal amount of the note and all accrued and unpaid interest thereon is due and payable on July 31, 2015. We have recently begun to explore additional financing options.
We need to raise additional capital in the next two years to cover our budgeted operating and capital expenditures. If the capital raising efforts are not successful, we might not be ablesupport its R&D activities as it prepares to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should we not be able to continue as a going concern.commence human clinical trials.
Data AnalyticsOver the next two years, we anticipate conducting the following research and development activities at the following estimated costs and expense:
Basic Science of TCAP-1 | | $ | 110,000 | | Efficacy Studies | | $ | 320,000 | | Toxicology Studies | | $ | 200,000 | | Stability and Formulation | | $ | 85,000 | | Custom antibodies as an alternative to ELISA | | $ | 37,000 | | Tagged antibodies | | $ | 104,000 | | Antibody purification | | $ | 24,000 | | Clinical consultants | | $ | 20,000 | | Medical Writing and IND application compilation | | $ | 79,000 | | Technical Infrastructure | | $ | 11,000 | | Total R&D not including personnel | | $ | 980,000 | |
As with all commercial websites, understanding users’ behaviors and interaction with the site is important to know in order to optimize the site layout and design to ensure maximum user engagement and conversion rates. Conversions include any ‘high-value’ actions made by users on the site – e.g. clicking the “Shop Now” button, sharing products via social networks, etc. We have created a detailed measurement plan to regularly track and collect site data and user interactions in order to make recommendations for site enhancements in order to optimize user interaction. We plan to leverage Google Analytics as the platform and tool by which we will collect and analyze this data.
This plan focuses on the analyzing the number of unique visitors per month, page views per visit, visit duration, bounce rate, and defined user conversions. Presently, we have defined the following as user conversions:
| · | Product share via social button |
We will implement a regular process by which we analyze the data collected through this data measurement plan, and then make recommendations for site tweaks/enhancements based on this analysis. We may conduct A/B testing as a result of these recommendations, or simply make the changes directly to a single instance of the production environment and then analyze the data of the modified site against the previous results.
Contractual Arrangements
We do not have any material contractual relationships.
Off Balance Sheet Arrangements We have no material off-balance sheet arrangements that are likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital resources, or capital expenditures. Significant Accounting Policies
Critical accounting policies and estimates We have identified significant accounting principles that affectOur discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, by considering accounting policies that involve the most complex or subjective decisions or assessments as well as considering newly adopted principals. They are:
Fresh Start Accounting.Effective July 12, 2013 (the “Effective Date”), we adopted fresh start accounting and reportingwhich have been prepared in accordance with FASB ASC 852. We are requiredaccounting principles generally accepted in the United States of America (“GAAP”). The notes to apply the provisions of fresh start reporting to ourconsolidated financial statements ascontained in this Annual Report describe our significant accounting policies used in the holderspreparation of our voting shares pre-bankruptcy received less than 50%the consolidated financial statements. The preparation of our voting shares post-bankruptcythese financial statements requires us to make estimates and assumptions that affect the reorganization value of our assets immediately before the date of confirmation was less than the post-petition liabilities and allowed claims. We determined that our fair value on the Effective Date was zero. Fresh start reporting generally requires resetting the historical net book valuereported amounts of assets and liabilities to fair value asand disclosure of the effective date by allocating the entity’s enterprise value as set forth in the Reorganization Plan to itscontingent assets and liabilities pursuant to accounting guidance related to business combinations. Theat the date of the financial statements asand the reported amounts of revenues and expenses during the Effective Date reportreporting periods. Actual results could differ from those estimates. We continually evaluate our results with no beginning retained earnings or accumulated deficit. Thus, any presentation aftercritical accounting policies and estimates.
We believe the Effective Date representscritical accounting policies listed below reflect significant judgments, estimates and assumptions used in the financial position and resultspreparation of operations of a new reporting entity and is not comparable to prior periods. The unaudited condensedour consolidated financial statements for periods ended prior to the Effective Date do not include the effect of any changes in capital structure or changes in the fair value of assets and liabilities as a result of fresh start accounting. In accordance with FASB ASC 852, our pre-emergence charges to earnings of $778,000, recorded as reorganization items result from certain costs and expenses relating to the Reorganization Plan becoming effective, including the cancellation of certain debt upon issuance of new equity.statements. Principles of Consolidation.consolidation The consolidated financial statements include the accounts of all majorityAtrinsic, Inc., and its wholly owned subsidiary, Protagenic Acquisition Corp, and Protagenic Therapeutics, Inc., which merged with and into Protagenic Acquisition Corp, on February 12, 2016, as well as Protagenic Therapeutics’ wholly-owned subsidiaries andCanadian subsidiary, PTI Canada. All significant intercompany balances and transactions have been eliminated. eliminated in consolidation. Foreign Currency Translation and Transactions.The ownershipassets and liabilities of more than 50%our foreign subsidiary PTI Canada are translated into U.S. dollars from the functional currency using the exchange rate in effect at the balance sheets date. Additionally, the accounts on the statements of operations are translated using exchange rates approximating average rates prevailing during the years. Equity accounts are translated at historical exchange rates. Translation adjustments that arise from translating its financial statements from the local currency to the U.S. dollar are accumulated and reflected as a separate component of stockholders’ equity (deficit). The current year effects of the voting stocktransaction adjustments are included on the statement of an entity createsoperations as a subsidiary. The financial statements of the parent and subsidiary are consolidated for reporting purposes.realized gain (loss) on foreign transaction exchange. Use of Estimates.Estimates. The preparation of financial statements in conformity with U.S. Generally Accepted AuditAccounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. Management continually evaluates its estimates and judgments including those related to allowancesaccruals, contingencies, valuation allowance for doubtful accounts, useful lives of property, plantdeferred tax assets, and equipment and intangible assets, fair valuevaluation of stock options granted, forfeiture rate of equity based compensation grants, probable losses associated with pre-acquisition contingencies, income taxes and other contingencies.warrants. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable in the circumstances. Actual results may differ from those estimates. Macroeconomic conditions may directly, or indirectly through our business partners and vendors, impact our financial performance and available resources. Such conditions may, in turn, impact the aforementioned estimates and assumptions. CashFair Value Measurements.Accounting Standards Codification ASC 820, “Fair Value Measurements and Cash Equivalents.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).
We consider
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 highly liquid instruments with a maturitysignificant inputs are observable, either directly or indirectly; Level 3 Inputs – Unobservable inputs for the asset or liability including significant assumptions of less than three months when purchasedthe Company and other market participants. 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 cash equivalents.separately accounted for in accordance with ASC 815-10-05-4 and 815-40-25. The carrying amountresult of cash equivalents approximates fair value because ofthis accounting treatment is that the short-term maturity of these instruments. Fair Value Measurement. The fair value of Momspot was determinedthe embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then the related fair value is reclassified to equity.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on valuation performed by management, which took into consideration, where applicable, cash received , market participant inputs, estimated cash flows based on entity specific criteria, purchase multiples paid in other comparable third-party transactions, market conditions, liquidity, operating results and other qualitative and quantitative factors.whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date. EarningsBasic and Diluted Net (Loss) Perper Common Share.Basic earnings(loss) per common share (“EPS”) is computed by dividing reported earningsthe net (loss) by the weighted averageweighted-average number of shares of common stock outstanding for theeach period. Diluted EPS includes(loss) per share is computed by dividing the effect, if any,net (loss) by the weighted-average number of the potential issuance of additional shares of common stock outstanding plus the dilutive effect of shares issuable through the common stock equivalents. Potentially dilutive securities consisting of options and warrants aggregating 7,183,869as a resultof December 31, 2016, including common shares issuable under the conversion feature of the exercise or conversion of dilutive securities, using the treasury stock method. Potential dilutive securities include outstanding stockpreferred shares, options and warrants.warrants issued in the Private Offering closing and merger transactions were not included in the calculation of weighted-average shares of common stock outstanding as they were determined to be anti-dilutive.
Recently Issued Accounting Pronouncements In June 2014,November 2015, the FASB issued ASU 2014-10, Development Stage EntitiesNo 2015-17, Income Taxes (Topic 915): Elimination of Certain Financial Reporting Requirements. ASU 2014-10 eliminates the distinction of a development stage entity and certain related disclosure requirements, including the elimination of inception-to-date information on the statements of operations, cash flows and stockholders’ equity.740). The amendments in ASU 2014-10 will2015-17 change the requirements for the classification of deferred taxes on the balance sheet. Currently, GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, the amendments in this ASU require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The pronouncement is effective prospectivelyfor fiscal years and interim periods within those fiscal years beginning after December 15, 2016. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting. On March 30, 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation" which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. For public business entities, the ASU is effective for annual reporting periods beginning after December 15, 2014, and2016, including interim periods within those annual periods, howeverreporting periods. Early adoption will be permitted in any interim or annual period for which financial statements have not yet been issued or have not been made available for issuance. If early adoption is permitted. We elected, to adopt this ASU effective with its Registration Statement on Form 10 filed with SEC on July 2, 2014. The adoption resultedall amendments in the removalASU that apply must be adopted in the same period. In addition, if early adoption is elected in an interim period, any adjustments should be reflected as of previously required developmental stage disclosures.the beginning of the annual period that includes that interim period. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements. In August 2014,February 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases. The main provisions of ASU 2014-15 on “Presentation of Financial Statements Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. Currently, there is no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this ASU provide that guidance. In doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendmentsNo. 2016-02 require management to assess an entity’s abilityrecognize lease assets and lease liabilities for all leases. ASU 2016-02 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to continue asthe classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The result of retaining a going concern by incorporatingdistinction between finance leases and expanding upon certain principlesoperating leases is that are currently in U.S. auditing standards. Specifically,under the amendments (1) provide a definition oflessee accounting model, the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubtleases in the statement of comprehensive income and the statement of cash flows is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued).largely unchanged from previous GAAP. The amendments in this ASU are effective for publicfiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements. In August 2016, the FASB issued ASU 2016-15,“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and nonpublic entitiesCash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently in the process of evaluating the impact of ASU 2016-15 on its condensed consolidated financial statements. In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory”, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance is effective for annual periods endingbeginning after December 15, 2016.2019, including interim periods within those fiscal years. Early adoption of the update is permitted. We areThe Company is currently evaluating the impact of the new standard. In November 2016, the FASB issued ASU 2014-152016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which requires application of the guidance for all periods presented. The Company is currently evaluating the impact of the new standard. Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on ourthe consolidated financial statements.statements filed with this annual report. In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”.The amendments in this Update affect the guidance in Update 2014-09, which is not yet effective. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. ItemItem 7A. Quantitative and Qualitative Disclosures About Market RiskRisk. We are a “smaller reporting company” as defined by Regulation S-K and as such, is not required to provide the information contained in this item pursuant to Regulation S-K.Not applicable.
Item8. Financial Statements and Supplementary Data. See pages F-1 through F-21 following the Exhibit Index of this Annual Report on Form 10-K. ItemItem 8. Financial Statements Our consolidated financial statements required by this item are set forth beginning on page F-1.
Item 9. Changes in and Disagreements withWith Accountants on Accounting and Financial Disclosure.
None. ItemItem 9A. Controls and ProceduresProcedures. Evaluations of Our 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 ofWe maintain our disclosure controls and procedures as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act, as of June 30, 2014. Based on this evaluation, our principal executive officer and principal financial officers have concluded that our disclosure controls and procedures are not effectivedesigned to ensureprovide reasonable assurance that material information required to be disclosed by us in theour periodic reports we file or submitfiled under the Securities Exchange Act including this Annual Report on Form 10-K,of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, our Executive Chairman and our Chief Financial Officer, to allow timely decisions regarding required disclosure. Our Executive Chairman and our Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the Exchange Act. Based on this evaluation, our Executive Chairman and our Chief Financial Officer concluded that, as of December 31, 2016, our disclosure controls are designedand procedures were not effective to ensure that information required to be disclosed by usthe Company in the reports that we filethe Company files or submitsubmits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to ourthe Company's management including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives
Management'sManagement’s Report on Internal Control over Financial Reporting
ManagementOur management is responsible for establishing and maintaining effectiveadequate internal control over financial reporting as defined in Rule 13a-15(f)required under the Exchange Act. Our internalapplicable United States securities regulatory requirements. Internal control over financial reporting is defined in Rule 13a–15(f) or 15d–15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s chief executive and chief financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance to managementregarding the reliability of financial reporting and the Board regarding the preparation and fair presentation of published financial statements for external purposes in accordance with United States generally accepted accounting principles (US GAAP), includingand includes those policies and procedures that: (i)
| ● | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. Based on this assessment, Management concluded that we did not maintain effective internal control over financial reporting as of June 30, 2014 and identified the following material weaknesses in our internal control over financial reporting:
| · | A system of internal controls (including policies and procedures) has neither been designed nor implemented; |
| · | A formal, internal accounting system has not been implemented; and |
| · | Segregation of duties in the handling of cash, cash receipts, and cash disbursements has not been formalized and, as a result, we have relied heavily on management review controls to lessen the issue of segregation of duties. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determinedAlso, projections of any evaluation of effectiveness to befuture periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013 in Internal Control Integrated Framework. Based on that evaluation under this framework, our management concluded that our internal control over financial reporting was not effective canbecause of the following significant deficiencies in our internal control over financial reporting: | ● | Due to our small number of employees and resources, we have limited segregation of duties, as a result of which there is insufficient independent review of duties performed; |
| ● | As a result of the limited number of accounting personnel, we rely on outside consultants for the preparation of our financial reports, including financial statements and management discussion and analysis, which could lead to overlooking items requiring disclosure. |
This annual report does not include an attestation report by our independent registered public accounting firm regarding internal control over financial reporting. As we are neither a large accelerated filer nor an accelerated filer, our management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only reasonable assurance with respect to financial statement preparation and presentation.management’s report in this annual report. An internal control material weakness is a significant deficiency, or aggregation of deficiencies, that does not reduce to a relatively low level the risk that material misstatements in financial statements will be prevented or detected on a timely basis by employees in the normal course of their work. An internal control significant deficiency, or aggregation of deficiencies, is one that could result in a misstatement of the financial statements that is more than consequential.
Changes in Internal ControlControls over Financial Reporting
There wereIn 2016, we hired a CFO in our finance department to enhance and strengthen our internal controls over financial reporting.
Other than the enhancement reported above, during the year ended December 31, 2016, there have been no changes in our internal controlscontrol over financial reporting that occurred during the last fiscal quarter covered by this Annual Report that hashave materially affected or isare reasonably likely to materially affect our internal controls over financial reporting. From time to time, we make changes to our internal control over financial reporting that are intended to enhance its effectiveness and which do not have a material effect on our overall internal control over financial reporting.
ItemItem 9B. Other InformationInformation. None. PART III
PARTIII Item10. Directors, Executive Officers and Corporate GovernanceGovernance. Executive Officers and Directors The following table containssets forth certain information with respect to our directors and executive officers as of October 1, 2014. To the bestand directors. Name | | Age | | Position(s) | Garo H. Armen | | 64 | | Executive Chairman of the Board of Directors | Alexander K. Arrow | | 46 | | Chief Financial Officer | Robert B. Stein | | 66 | | Director | Khalil Barrage | | 52 | | Director | Gregory H. Ekizian | | 53 | | Director | Josh Silverman | | 47 | | Director |
Garo H. Armen, PhD, Executive Chairman, is one of our knowledge, none ourfounders and joined us in September 2004. Garo H. Armen is Chairman and Chief Executive Officer of Agenus Inc., a biotechnology company he co-founded in 1994. From mid-2002 through 2004, he also served as Chairman of the Board of directors or executive officers have an arrangement or understanding with any other person pursuant toof the biopharmaceutical company Elan Corporation, plc, which he successfully restructured. Prior to Agenus Inc., Dr. Armen established Armen Partners, a money management firm specializing in biotechnology and pharmaceutical companies, and was selectedthe architect of the widely publicized creation of the Immunex Lederle oncology business in 1993. Earlier, he was a senior vice president of research at Dean Witter Reynolds, having begun his career on Wall Street as an analyst and investment banker at EF Hutton. In 2002, Dr. Armen founded the Children of Armenia Fund, a nonprofit organization dedicated to significantly rebuilding and revitalizing impoverished rural Armenian towns to provide immediate and sustainable benefits to children and youth. He received the Ellis Island Medal of Honor in 2004 for his humanitarian efforts, and received the Sabin Humanitarian Award from the Sabin Vaccine Institute in 2006 for his achievements in biotechnology and progressing medical research. Dr. Armen was also the Ernst & Young 2002 New York City Biotechnology Entrepreneur of the Year, and received a Wings of Hope Award in 2005 from The Melanoma Research Foundation for his ongoing commitment to the melanoma community. Dr. Armen received a PhD in physical chemistry from the Graduate Center, City University of New York, after which he worked as a research fellow at Brookhaven National Laboratories in Long Island, NY. Alexander K. Arrow, M.D., CFA –Chief Financial Officer. Dr. Arrow became our Chief Financial Officer in February 2016. Dr. Arrow is also the Chief Executive officer of Zelegent, Inc., a clinical-stage start-up medical device company preparing to launch a minimally invasive snoring alleviation tool. From January 2015 through December 2015, Dr. Arrow also served as a director and acting Chief Operating Officer of Neumedicines, Inc., a clinical-stage private biotechnology company developing protein therapeutics that address unmet clinical and societal needs in Oncology, Hematology and Immunology. Dr. Arrow serves as a director of Gel-e, Inc., a wound-care company with an FDA-cleared hemostatic patch product, BioLx, Inc., a start-up developing an advanced surgical mask, and Rindex Medical, Inc., a developmental-stage company, 30% owned by the Cleveland Clinic, which is developing a diagnostic technology for use in cardiovascular intensive care units. Previously, Dr. Arrow served on the board and was the Chairman of both the Audit Committee and Compensation Committee of Biolase, Inc. (NASDAQ: BIOL) from July 2010 through February 2014, and served as the President and Chief Operating Officer of Biolase, Inc. from June 2013 through December 2014. Biolase, Inc. is a medical device manufacturer and the leading provider of lasers to the global dentistry industry. From July 2012 to June 2013 Dr. Arrow was the Chief Medical and Strategic Officer of Circuit Therapeutics, Inc., a company seeking to realize commercial potential in the field of optogenetics. From December 2007 through June 2012, Dr. Arrow was the Chief Financial Officer of Arstasis, Inc., a cardiology device manufacturer. From 2002 to 2007, Dr. Arrow headed medical technology equity research at the global investment bank Lazard Capital markets, LLC. Dr. Arrow spent two years 1999-2001 as Chief Financial Officer of the Patent & License Exchange, later renamed PLX Systems, Inc., and three years as the publishing life sciences research analyst at Wedbush Morgan Securities. In 1996, Dr. Arrow was a surgical resident at the UCLA Medical Center. Dr. Arrow received his CFA in 1999. He was awarded an M.D. from Harvard Medical School in 1996 and a B.A. in Biophysics,magna cum laude, from Cornell University in 1992. Khalil Barrage, Director, joined us in July, 2007. Mr. Khalil Barrage has served as a Managing Director of The Invus Group, LLC since 2003, in charge of the Public Equities Group that he set up in September 2003. Invus manages over $3B of capital, with a primary focus is on private equity investments, biotechnology and health care. In addition, Invus manages a fund-of-funds liquid alternative investment and, most recently, the newly established public equities portfolio activity. Mr. Barrage is a value investor. He started his career in 1988 with The Olayan Group, a multibillion private group. He was in charge of the group’s US public equities portfolio, overseeing more than $2 billion of assets. Mr. Barrage holds a BA from American University of Beirut. Robert B. Stein, PhD. MD, Director, joined us effective the closing of the Merger in February, 2016. Dr. Robert B. Stein is Chief Scientific Officer of Agenus Inc. Dr. Robert B. Stein leads Agenus’ Research, Preclinical Development and Translational Medicine functions. He helps shape clinical development strategy for vaccines and adjuvants. Additionally, he’s leading integration of the 4-Antibody acquisition, which includes the company’s fully human antibody drug discovery and optimization technology platform, and portfolio of immune checkpoint antibody programs. Over his 30 years of experience in the biopharmaceutical industry he played a pivotal role in bringing to the market Sustiva®, Fablyn®, Viviant®, PanRetin®, TargRetin®, Promacta® and Eliquis®. Prior to joining Agenus, he held executive management positions at Ligand Pharmaceuticals, DuPont Merck, Incyte Pharmaceuticals, Roche Palo Alto and KineMed. Dr. Stein began his career at Merck, Sharp and Dohme. He holds an MD and a PhD in Physiology & Pharmacology from Duke University. Dr. Stein filed a personal voluntary bankruptcy petition under Chapter 7 in August of 2012 and the bankruptcy was discharged in May 2013. Gregory H. Ekizian, CFA, Director, joined us effective the closing of the Merger in February, 2016. Mr. Ekizian is presently a private investor. From 2012 to 2014 Mr. Ekizian was associated with Victory Capital Management, serving as the Chief Investment Officer and Lead Portfolio Manager for the Victory Dividend Growth Fund, a strategy which was managed for conservative growth and income across mutual fund and separate accounts. Prior to Victory, he was a private investor from 2009 through 2012. From 1997 through 2009 Mr. Ekizian was the co-leader of the Growth team at Goldman Sachs Asset Management where he served as a Chief Investment Officer and Senior Portfolio Manager. Over his tenure at GSAM, the Growth team grew assets from $2.2 billion to a peak of $29 billion across multiple Growth products. Prior to his service with GSAM, Mr. Ekizian was a principal member in the start-up of Liberty Investment Management in 1994, and as a Senior Portfolio Manager, remained with the firm through its acquisition by Goldman Sachs in 1997. Mr. Ekizian started his investment management career in 1990 at Eagle Asset Management as an analyst covering health care, media, staples and consumer discretionary industries. Mr. Ekizian received a Bachelor of Science in Finance from Lehigh University and MBA from the University of Chicago Graduate School of Business and is a CFA Charterholder. Joshua Silverman, Director, joined us effective the closing of the Merger in February 2016. Mr. Silverman is the Co–founder and Managing Member of Parkfield Funding LLC, and is a former Principal and Managing Partner of Iroquois Capital Management, LLC. Mr. Silverman served as Co–Chief Investment Officer of Iroquois from 2003 until July 2016. From 2000 to 2003, Mr. Silverman served as Co–Chief Investment Officer of Vertical Ventures, LLC, a merchant bank. He also serves as the Chairman of the Board of Neurotrope, Inc. (Nasdaq: NTRP). Prior to forming Iroquois, Mr. Silverman was a Director of Joele Frank, a boutique consulting firm specializing in mergers and acquisitions. Previously, Mr. Silverman served as Assistant Press Secretary to The President of The United States. Mr. Silverman received his B.A. from Lehigh University in 1992. In the past five years, Mr. Silverman has served as a director of MGT Capital Investments, Inc. and National Holdings Corporation, and in 2016, became a director of WPCS International, Inc. Consultants and Advisors Dalia Barsyte PhD, Chief Technology Advisor. Dr. Dalia Barsyte received her PhD in molecular and cellular biology from the University of Manchester, UK. She did the postdoctoral training at the University of Manchester and Ontario Cancer Institute, and currently is a scientist at the University of Toronto, Structural Genomics Consortium, where she has been employed since 2009. Dr. Barsyte is an inventor on one of the key Protagenic patents and author of over 50 scientific publications in oncology and neuroscience. Dr. Barsyte’s scientific interests include exploring chemical biology in therapeutic target validation through peptide or officer. small molecule chemical probe compounds as well as novel in vitro models of disease based on patient derived cell culture. David A. Lovejoy, PhD, Chief Scientific Advisor, is one of our founders and joined us in September 2004. He holds a PhD in Neuroendocrinology from the University of Victoria (Victoria, BC) and spent three years at the Clayton Foundation Laboratories for Peptide Biology at the Salk Institute (San Diego, CA) as a postdoctoral fellow. Dr. Lovejoy took his first academic appointment at the University of Manchester (Manchester, UK), one of the United Kingdom’s top-ranking research universities. He joined the University of Toronto (Toronto, Ontario) in 2000 and is currently Professor of Neuroendocrinology in the Department of Cell and Systems Biology at the University of Toronto. He is the author of more than 210 scientific publications including 3 books in the field and an Associate Editor for a scientific journal and is inventor or co-inventor on all of our intellectual property. Andrew Slee, Development Advisor. Andy Slee joined us in April 2016. During his 37-year pharmaceutical career, he has taken several drugs from inception through all their pre-clinical and early clinical testing. During the past five years he has worked for Preclinical CROs, immune-oncology companies and natural product companies focusing on anti-infectives, cancer, CNS, diabetes and inflammatory diseases. Spreading his influence beyond a single company, he created and ran his own Contract Research Organization (CRO), VivoSource Laboratories, which for ten years from 2003 to 2013 provided preclinical proof of concept catering to biopharmaceutical companies. For the 18 years before that, Mr. Slee shepherded multiple pharma targets in several therapeutic areas from inception onward at DuPont Pharmaceuticals. He is a graduate of Syracuse University and Leeds University Christina Faragalla, Director of Project Management, joined us in June 2016. Ms. Faragalla is responsible for managing communication and timelines in the Company’s development projects, as well as being the Company’s primary interface with its Contract Research Organizations (CROs). Prior to working with the Company, Ms. Faragalla served in roles both on the sponsor and CRO side. From 2010-2014 she worked with large Pharma clients overseeing late phase CNS programs at PAREXEL. From 2014-2016, she transitioned to exclusively serving emerging biotech clients in early development while at at Novella Clinical, a division of Quintiles CRO, running several first-in-man clinical trials. She is an expert in Global Clinical Operations, SOP Development and Harmonization, Translational medicine, POC to Early and Late phase drug development, IND to NDA to large registries and post marketing trials. She holds a MS Clinical Research Administration from George Washington University, and a BS in Biology from Rutgers College. Family Relationships There are no family relationships between anyor among the directors, executive officers or persons nominated or chosen by our stockholders or us to become directors or executive officers. Voting Agreement On February 12, 2016, the Company and certain of its stockholders (currently representing approximately 43% of the Company’s issued and outstanding common stock), including Messrs. Armen, Arrow and Ekizian and Strategic Bio Partners, LLC, entered into a voting agreement whereby these stockholders agreed to vote in favor of setting and maintaining the size of the Board at five directors (unless increased by the Board), the election of one director designated by Strategic Bio Partners, LLC and the election of four directors designated by Mr. Garo (so long as Mr. Garo is an officer or director of the Company). The term of the voting agreement runs until February 12, 2019 unless terminated earlier by a vote of at least 90% of the stockholders party to the agreement or the consummation of a firm commitment underwritten public offering of the Company’s common stock resulting in proceeds to the Company of at least $20 million. Involvement in Certain Legal Proceedings To our knowledge, during the past ten years, none of our directors, executive officers, promoters, control persons, or nominees has: been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); Except as set forth above with respect to Dr. Stein, had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officers. Our executive officers are appointed by and serveofficer, either at the pleasuretime of the bankruptcy filing or within two years prior to that time; been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity; been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. Code of Business Conduct and Ethics On February 24, 2017, we adopted a written Code of Business Conduct and Ethics, Guidelines on Significant Governance Issues, and Process for Security Holder Communications with Directors, each of which is attached as an exhibit hereto. Board Committees Our board of directors has established three standing committees: an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. Each of these committees will operate under a charter that has been approved by our board of directors. Name | | Age | | | Position | | | | | | | Edward Gildea | | | 63 | | | Chief Executive Officer and Director | Jonathan Schechter | | | 40 | | | Director | Barry Eisenberg | | | 36 | | | Chief Executive Officer of Momspot, LLC | David Horin | | | 46 | | | Chief Financial Officer |
Edward Gildea.Mr. Gildea was appointed as a director in February 2014Audit Committee. The Audit Committee will oversee and asmonitor our chief executive officer as of March 1, 2014. From January 2006 until June 2013, Mr. Gildea wasfinancial reporting process and internal control system, review and evaluate the CEO, President,audit performed by our registered independent public accountants and Chairmanreports to the Board any substantive issues found during the audit. The Audit Committee will be directly responsible for the appointment, compensation and oversight of the work of our registered independent public accountants. The Audit Committee will review and approve all transactions with affiliated parties. The Audit Committee shall be comprised on two or more independent directors who shall be appointed annually and subject to removal by the Board Of Directors of Converted Organics Inc., a publicly held company that manufactures organic fertilizer by recycling food waste. He is currently aat any time. Each member of the boardAudit Committee shall meet the independence requirements of directors of WPCS International Inc. (NASDAQ:WPCS) (wireless communicationsThe NASDAQ Stock Market, LLC, and Bitcoin exchange)SEC regulations, as well as any other applicable requirements. On March 25, 2016, our Board appointed Messrs. Ekizian (Committee Chairperson) and Worlds Inc. (QTCBB:WDDD) (Intellectual Property gaming software). Mr. Gildea is a practicing attorney. He received his undergraduate degree from The College of the Holy Cross and his law degree from Suffolk University. Mr. Gildea contributes expertise in areas of mergers & acquisitions, strategic planning, funding, business development and executive leadershipBarrage to the Board.
Jonathan Schechter. Mr. Schechter was appointed as a director in February 2014. He currently serves as DirectorAudit Committee, each of Investment Banking at Chardan Capital Markets, LLC, a middle-market full-service investment banking and brokerage firm. During his time at Chardan, Mr. Schechter has been lead investment banker in a wide variety of transactions including public stock offerings, private placements and mergers and acquisitions. Mr. Schechter joined Chardan Capital Markets, LLC in 1998. Beginning in 1999, Mr. Schechter worked as a corporate associate for Brian Cave LLP where he specialized in representing investors and investment banks in capital market transactions. Mr. Schechter also represented and advised numerous public companies in all aspects of corporate law. From 2005-2007 Mr. Schechter served as general counsel to a hedge fund. Mr. Schechter graduated from Duke University, cum laude, with an AB in political science and graduated from Fordham Law School with a JD and is licensed to practice inwhom meets the State of New York. Mr. Schechter contributes expertise in areas of corporate governance, mergers and acquisitions and investment banking to the Board.
Barry Eisenberg.Mr. Eisenberg is the founder of Momspot and has served as its chief executive officer since July 2012. From October 2008 through July 2012, Mr. Eisenberg was a vice president in the Acquisitions and Investment Management unit of Mubadala Development Company, a prestigious sovereign wealth fund and strategic investment firm of the Government of Abu Dhabi, with more than $50bn AUM.independence requirements. In this role, Mr. Eisenberg was responsible for the acquisition and investment management of private equity assets that deliver both financial returns and long-term social benefits to the Emirate of Abu Dhabi. Mr. Eisenberg was also the Head of the firm’s Portfolio Analytics group, responsible overseeing the development of the investment and portfolio performance analytics and reporting capabilities for the entire firm. From January 2004 through August 2007, Mr. Eisenberg was a product manager in the Equity Research group at Morgan Stanley, working as part of team responsible for developing an analytic platform to institutionalize a proprietary accounting and valuation framework across the firm’s businesses. Mr. Eisenberg received an M.B.A. in Finance and International Business from the Lawrence Zicklin School of Business at City University New York, and an Honors B.A. in Managerial Economics in 2008 and B.S. minor in Computer Science from Union College in Schenectady, NY.
David Horin. Mr. Horin was appointed our Chief Financial Officer in March 2014. Mr. Horin is the President and Founder of Chord Advisors, LLC, an advisory firm that provides targeted financial solutions to public companies, which he founded in 2012. From March 2008 to June 2012, Mr. Horin was the Chief Financial Officer of Direct Markets Holdings Corp. (f/k/a Rodman & Renshaw Capital Group, Inc.), a full-service investment bank dedicated to providing corporate finance, strategic advisory, sales and trading and related services to public and private companies across multiple sectors and regions. From March 2003 through March 2008, Mr. Horin was the Managing Director of Accounting Policy and Financial Reporting at Jefferies Group, Inc., (NYSE Symbol: JEF), a full-service global investment bank and institutional securities firm focused on growth and middle-market companies and their investors. Prior to his employment at Jefferies Group, Inc., from 2000 to 2003, Mr. Horin was a Senior Manager in KPMG’s Department of Professional Practice in New York, where he advised firm members and clients on technical accounting and risk management matters for a variety of public, international and early growth stage entities. Mr. Horin has a Bachelor of Science degree in Accounting from Baruch College at the City University of New York. Mr. Horin is also a certified public accountant.
None of the directors or executive officers are related by blood, marriage or adoption.
CORPORATE GOVERNANCE AND BOARD COMMITTEES
Director Independence
As a non-listed company, we are not subject to the rules regarding director independence. Nevertheless,addition, the Board has determined that Jonathan Schechter is independentalso designated Gregory Ekizian as an "audit committee financial expert," as that term is defined inby the listing standards of the NASDAQ. Generally a director is considered independent as long as he or she does not have a relationship with us or management that would interfere with the exercise of independent judgment in carrying out the director’s responsibilities.NSADAQ Listing Rules and SEC regulations.
In determiningCompensation Committee. The Compensation Committee will provide advice and make recommendations to the board in the areas of employee salaries, benefit programs and director independence,compensation. The Compensation Committee will also review the compensation of our President, Chief Executive Officer, and other officers and make recommendations in that regard to the board as a whole. The Compensation Committee shall be comprised on three or more directors who shall be appointed annually and subject to removal by the Board consideredat any time. The Compensation Committee must have at least two members, and must consist solely of independent directors. On March 25, 2016, our Board appointed Messrs. Barrage (Committee Chairperson) and Ekizian, and Dr. Stein to the compensation paidCompensation Committee, all of whom are independent.
Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee will nominate individuals to Mr. Schechterbe elected to the full board by our stockholders. The Nominating and Corporate Governance Committee will determine the slate of director nominees for the year ended June 30, 2014, disclosed in “Director Compensation” below, and determined that such compensation was for services renderedelection to the Board, to identify and therefore didrecommend candidates to fill vacancies occurring between annual stockholder meetings, to review the Company's policies and programs that relate to matters of corporate responsibility, including public issues of significance to the Company and its stockholders. The Compensation Committee shall be comprised on three or more directors who shall be appointed annually and subject to removal by the Board at any time. Each member of the Nominating and Corporate Governance Committee may or may not impact his abilitymeet the independence requirements of The NASDAQ Stock Market, LLC and SEC regulations. On March 25, 2016, our Board appointed Messrs. Silverman (Committee Chairperson), and Drs. Armen and Stein to continue to serve as independent directors. Board Committeesthe Nominating and Corporate Governance Committee.
Our Board has
Limitation of Directors Liability and Indemnification The Delaware General Corporation Law authorizes corporations to limit or eliminate, subject to certain conditions, the authority to appoint committees to perform certain management and administrative functions. As of the date of this Annual Report, given the limited numberpersonal liability of directors to corporations and their stockholders for monetary damages for breach of their fiduciary duties. Our certificate of incorporation limits the liability of our Board has not yet re-established any committees. However, we expect that our Board will appoint new directors into the future and once the Board has been expanded, we anticipate that the Board will again establish separate audit, compensation and nominating and corporate governance committees and may, from time to time, establish other committees it deems appropriate. Code of Ethicsfullest extent permitted by Delaware law.
We have adopteddirector and officer liability insurance to cover liabilities our directors and officers may incur in connection with their services to us, including matters arising under the Securities Act. Our certificate of incorporation and bylaws also provide that we will indemnify our directors and officers who, by reason of the fact that he or she is one of our officers or directors of our company, is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative related to their board role with the company. We have entered into indemnification agreements with each of our directors and executive officers. It is anticipated that future directors and officers will enter into an Indemnification Agreement with us in substantially similar form. The Indemnification Agreement provides, among other things, that we will indemnify and hold harmless each person subject to an Indemnification Agreement (each, an “Indemnified Party”) to the fullest extent permitted by applicable law from and against all losses, costs, liabilities, judgments, penalties, fines, expenses and other matters that may result or arise in connection with such Indemnified Party serving in his or her capacity as a Codedirector of Ethics (the “Codeours or serving at our direction as a director, officer, employee, fiduciary or agent of Ethics”), which appliesanother entity. The Indemnification Agreement further provides that, upon an Indemnified Party’s request, we will advance expenses to the Indemnified Party to the fullest extent permitted by applicable law. Pursuant to the Indemnification Agreement, an Indemnified Party is presumed to be entitled to indemnification and we have the burden of proving otherwise. The Indemnification Agreement also requires us to maintain in full force and effect directors’ liability insurance on the terms described in the Indemnification Agreement. If indemnification under the Indemnification Agreement is unavailable to an Indemnified Party for any reason, we, in lieu of indemnifying the Indemnified Party, will contribute to any amounts incurred by the Indemnified Party in connection with any claim relating to an indemnifiable event in such proportion as is deemed fair and reasonable in light of all of the circumstances to reflect the relative benefits received or relative fault of the parties in connection with such event. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, and employees. A copycontrolling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the CodeSecurities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment of Ethicsexpenses incurred or paid by a director, officer or controlling person in a successful defense of any action, suit or proceeding) is available on our web site underasserted by such director, officer or controlling person in connection with the heading “Investor Quick Facts.” We intendsecurities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to make available on our web site any future amendments or waivers to our Codethe court of Ethics within four business days after anyappropriate jurisdiction the question whether such amendments or waivers.indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
The table below sets forth the compensation earned byThere is no pending litigation or proceeding involving any of our current and former Chief Executive Officers for the fiscal years ended June 30, 2014 and 2013. They were the only executivedirectors, officers, whose compensation exceeded $100,000 during our last fiscal year ended June 30, 2014 (the “named executive officer”).
Name and Principal Position | | Year | | | Salary ($) | | | Bonus ($) | | | Stock Awards ($) | | | Option Awards ($)(3) | | | All other Compensation ($) | | | Total ($) | | | | | | | | | | | | | | | | | | | | | | | | Edward Gildea, Chief Executive Officer (1) | | | 2014 | | | $ | 14,000 | | | $ | - | | | $ | - | | | $ | 99,959 | | | $ | - | | | $ | 113,959 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sebastian Giordano,
| | | 2014 | | | $ | 80,000 | | | $ | - | | | $ | - | | | $ | 124,964 | | | $ | - | | | $ | 204,964 | | Chief Executive Officer (2) | | | 2013 | | | $ | 105,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | 6,777 | | | $ | 111,777 | |
_____________
| (1) | Mr. Gildea was appointed Chief Executive Officer effective March 1, 2014 |
| (2) | In June 2012, Mr. Giordano was appointed as our Chief Restructuring Officer in connection with our Chapter 11 Bankruptcy reorganization. Mr. Giordano was appointed as our Chief Executive Officer in July 2013 pursuant to the confirmation of our Chapter 11 Reorganization Plan. He resigned as chief executive officer effective as of March 1, 2014. |
| (3) | Reflects the value of stock options that was charged to income as reported in our financial statements and calculated using the provisions of FASB ASC 718 “Share-based Payments.” The assumptions underlying the valuation of equity awardsemployees or agents in which indemnification will be required or permitted. We are set forth in Note 4 of our financial statements, included elsewhere in this report. |
As of the date of this Report, we were not aware of any pledges of Common Stock whichthreatened litigation or proceeding that may at a subsequent date result in a change in control of the Company.
Employment Contracts
We are not a party to any employment agreements.claim for such indemnification.
Outstanding Equity Awards at Fiscal Year-EndItem11. Executive Compensation.
The following table sets forth information concerning outstanding equity awards held by theregarding each element of compensation that we paid or awarded to our named executive officer as of June 30, 2014.officers and for fiscal year ended December 31, 2016 and 2015. Name | | Year | | Number of Securities Underlying Unexercised Options (#) Exercisable | | | Option Exercise Price ($) | | | Option Expiration Date | | | | | | | | | | | | Edward Gildea | | 2014 | | | 50,000,000 | (3) | | | 0.002 | | | February 11, 2019 | Chief Executive | | | | | 50,000,000 | (4) | | | 0.002 | | | February 28, 2019 | Officer(1) | | | | | | | | | | | | | | | | | | | | | | | | | | Sebastian Giordano, | | 2014 | | | 125,000,000 | (5) | | | 0.002 | | | February 11, 2019 | Chief Executive | | | | | | | | | | | | | Officer(2) | | | | | | | | | | | | |
Summary Compensation Table | (1) | Mr. Gildea was appointed Chief Executive officer effective March 1, 2014. |
| (2) | In June 2012, Mr. Giordano was appointed as our Chief Restructuring Officer in connection with our Chapter 11 Bankruptcy reorganization. Mr. Giordano was appointed as our Chief Executive Officer in July 2013 pursuant to the confirmation of our Chapter 11 Reorganization Plan. He resigned as chief executive officer effective as of March 1, 2014. |
| (3) | Awarded on February 11, 2014. |
| (4) | Awarded on February 28, 2014. |
| (5) | Awarded on February 11, 2014. |
Name and Principal Position | | Year | | Salary | | | Bonus ($) | | | Stock Awards ($) | | | Option Awards ($) | | | Non-Equity Incentive Plan Compensation ($) | | | Deferred Compensation ($) | | | All Other Compensation ($) | | | Total Compensation ($) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Garo H. Armen, Chairman | | 2016 | | | N/A | | | | N/A | | | | N/A | | | $ | 580,000 | (1) | | | N/A | | | | N/A | | | | N/A | | | $ | 580,000 | | | | 2015 | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Robert Ziroyan, Chief Operating Officer and Interim President (4) | | 2016 | | $ | 16,861 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 2,869 | (2) | | $ | 19,730 | | | | 2015 | | $ | 76,812 | | | $ | 0 | | | $ | 0 | | | $ | 55,125 | (3) | | $ | 0 | | | $ | 0 | | | $ | 4,758 | (2) | | $ | 136,695 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Alexander K. Arrow, Chief Financial Officer | | 2016 | | $ | 106,552 | | | $ | 0 | | | $ | 0 | | | $ | 277,400 | (5) | | $ | 0 | | | $ | 0 | | | | N/A | | | $ | 383,952 | | | | 2015 | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
Compensation(1) We use the Black-Scholes option pricing model to value the options granted. On April 15, 2016, Dr. Armen was granted 580,000 options (exercise price of $1.25/option) which had vested by December 31, 2016 valued at US $1.16 each at December 31, 2016.
(2) Represents health benefits, Canada Pension Plan and employment insurance, cell phone and internet reimbursements. (3) We use the Black-Scholes option pricing model to value the options granted. On March 9, 2015 Mr. Ziroyan was granted 75,000 options (exercise price of $1.25/option) which had vested by December 31, 2015 valued at US $0.98 each at December 31, 2015. A week earlier, on March 1, 2015 Mr. Ziroyan was granted 50,000 options (exercise price of $1.25/option) which had vested by December 31, 2015 using a value of US $0.98 each at December 31, 2015. (4) Mr. Ziroyan ceased serving as an executive officer effective April 4, 2016. We compensated Mr. Ziroyan as an officer (President & COO) from January 1, 2016 through April 3, 2016, in the amount of $19,730. We then compensated him as an external consultant non-officer from April 4, 2016 through December 31, 2016, in the amount of $18,000. Mr. Ziroyan was not granted any options during 2016. (5) We use the Black-Scholes option pricing model to value the options granted. On February 12, 2016, Dr. Arrow was granted 100,000 options (exercise price of $1.25/option) which had 25,000 options vested by December 31, 2016 valued at US $1.15 each at December 31, 2016. Then, on April 15, 2016, Dr. Arrow was granted 140,000 options (exercise price of $1.25/option) which had 33,057 options vested by December 31, 2016 valued at US $1.16 each at December 31, 2016. ------------------------------------------ Employment Arrangements with Officers and Directors Dr. Alexander Arrow, our Chief Financial Officer, receives base compensation of $125,000 per year for his part-time work for us. In addition, Dr. Arrow received 100,000 options (on a post-Reverse Split basis) under the 2006 Plan as a sign-on bonus when he joined us and 140,000 options under the 2016 plan on April 15, 2016. These options have an exercise price of $1.25 per share, a ten-year term and vest over a three-year period in 35 monthly installments of 2,778 shares and a final installment of 2,770 shares and 3,889 shares and a final installment of 3,885 shares, respectively. The terms of Dr. Arrow’s option grant also include full vesting acceleration upon a change of control. Drs. Arrow and Armen are the only two executive officers of the Company. Consultancy Agreements Dalia Barsyte PhD, Chief Technology Officer. Our subsidiary, Protagenic Therapeutics Canada (2006) Inc., entered into a consulting agreement with Dr. Dalia Barsyte. Dr. Barsyte is responsible for overseeing i) design and development of ELISA assays for measuring TCAP, ii) evaluation of TCAP exposure biomarker assay, iii) development of pipeline peptides, iv) development of clinically compatible formulations for TCAP, as well as all of the bench research and development of formulation and extraction methods. Her consulting agreement is effective through December 2017. She is compensated at the rate of up to $3,000 (Canadian) per month, if she works at least 20 hours on behalf of the Company. As well, we have granted Dr. Barsyte 10,000 shares of our common stock and ten-year options to purchase 150,000 shares of our common stock. Options to purchase 100,000 shares of common stock, at an exercise price of $1.00 per share, have fully vested; the options to purchase the remaining 50,000 shares of common stock, at an exercise price of $1.25 per share, vested in March 2016. Robert B. Stein, PhD, MD. We entered into a consulting agreement with Dr. Stein effective January 2015. Dr. Stein is responsible for providing us with technical and advisory services related to our research and development efforts. The consulting agreement is effective through January 2020. On January 23, 2015, we granted Dr. Stein ten-year options to purchase 200,000 shares of our common stock, at an exercise price of $1.25 per share. The options vest in increments of 1.667% per month on the first day of each calendar month following January, 2015, such that the shares shall be fully vested on January 23, 2020, provided Dr. Stein remains a consultant to us. Christina Faragalla, Director of Project Management. We entered into a consulting agreement with Ms. Faragalla effective June 2016, via her consultancy entitled Lotus Clinical Consulting. She is compensated at the rate $100 per hour invoices, subject to a 12-month cap of $100,000. In addition, on October 26, 2016, we granted Ms. Faragalla ten-year options to purchase 25,000 shares of our common stock, at an exercise price of $1.25 per share. Outstanding Equity Awards at Fiscal Year End The following table provides compensation informationsummarizes the equity awards made to our named executive officers that were outstanding at December 31, 2016. Name | | No. of Securities Underlying Unexercised Options (#) Exercisable | | | No. of Securities Underlying Unexercised Options (#) Unexercisable | | | Option Exercise Price | | Option Expiration Date | | Garo H. Armen (1) | | | 118,057 | | | | 381,943 | | | $ | 1.25 | | April 15, 2026 | | Robert Ziroyan (2) | | | 100,000 | | | | — | | | $ | 1.00 | | March 30, 2021 | | Robert Ziroyan (2) | | | 50,000 | | | | — | | | $ | 1.00 | | March 1, 2024 | | Robert Ziroyan (2) | | | 75,000 | | | | — | | | $ | 1.25 | | March 9, 2025 | | Alexander K. Arrow (3) | | | 25,000 | | | | 75,000 | | | $ | 1.25 | | February 12, 2026 | | Alexander K. Arrow (3) | | | 33,057 | | | | 106,943 | | | $ | 1.25 | | April 15, 2026 | |
(1)Dr. Armen was granted a 500,000 share option grant on April 15, 2016 (2) Mr. Ziroyan ceased serving as an executive officer as of April 4, 2016. (3) Dr. Arrow was granted a 100,000 share option grant on February 12, 2016, and a 140,000 share option grant on April 15, 2016 For Drs. Armen and Arrow, following a qualified Change of Control, a resignation for the year ended June 30, 2014 for eachGood Reason, or an involuntary termination other than For Cause, 100% of the independent membersexecutives’ then-unvested options shall become immediately vested. Director Compensation During fiscal year 2016 we compensated directors who were not employees of the Board.Company. Name | | Fees Earned or Paid in Cash | | | Option Awards ($) | | | | | (a) | | ($) | | | (1) | | | Total ($) | | Jonathan Schechter(2) | | | - | | | | 49,986 | | | | 49,986 | |
Name | | Fees earned or paid in cash | | | Stock awards | | | Option awards (1) | | | Non-equity incentive plan compensation | | | Nonqualified deferred compensation earnings | | | All other compensation | | | Total | | Garo H. Armen | | | | | | | | | | $ | 580,000 | | | | | | | | | | | | | | | $ | 580,000 | | Khalil Barrage | | | | | | | | | | $ | 52,200 | | | | | | | | | | | | | | | $ | 52,200 | | Gregory Ekizian | | | | | | | | | | $ | 52,200 | | | | | | | | | | | | | | | $ | 52,200 | | Joshua Silverman | | | | | | | | | | $ | 52,200 | | | | | | | | | | | | | | | $ | 52,200 | | Robert Stein | | | | | | | | | | $ | 46,400 | | | | | | | | | | | | | | | $ | 46,400 | |
______________________ | (1) | Represents stockAll Directors’ option awards were granted under the 2006 Plan on April 15 of 2016, except for the options granted to purchase 50,000,000 shares of our common stock. Valuation is basedKhalil Barrage, which were granted under the 2006 Plan on ASC Topic 718. The assumptions underlying valuation of equity awards are set forth in note 11 to financial statements included elsewhere in this report. |
| (2) | At June 30, 2014, Mr. Schechter held a stock option to purchase 50,000,000 shares of our common stock at an exercise price of $ .002 per share.August 8, 2016. |
Going forward, on April 15 of each fiscal year, each non-employee directors will receive an option under the 2016 Plan to purchase 40,000 shares of common stock, as well as an option to purchase 5,000 shares for each committee which they chair. No additional options shall be granted for serving on a committee without being its chair. All options will be granted at fair market value, as defined in the 2016 Plan, on the date of grant, and will vest over a three-year period in equal monthly installments. Vesting will accelerate in certain circumstances, such as a change of control of the Company, and unvested options will terminate upon the cessation of an individual’s service to us as a director. Non-employee directors may be reimbursed for their reasonable expenses in attending Board and committee meetings. We entered into a consulting agreement with Robert B. Stein, PhD, MD, which is described above. ItemItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Equity CompensationPlans Equity CompensationPlan Information Plan category | | (a) No. ofsecurities to be issued upon exercise of outstanding options, warrants and rights | | | (b) Weighted-average exercise price of outstanding options, warrants and rights | | | (c) No. of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) | | Equity compensation plans approved by security holders | | | 6,453,887 | | | | $1.18 | | | | 2,148,300 | | | | | | | | | | | | | | | Equity compensation plans not approved by security holders | | | 0 | | | | 0 | | | | 0 | | | | | | | | | | | | | | | Total | | | 6,453,887 | | | | $1.18 | | | | 2,148,300 | |
In connection with the Merger, we adopted Protagenic’s 2006 Employee, Director and Consultant Stock Plan (the “2006 Plan”). On June 17, 2016, our stockholders adopted our 2016 Equity Compensation 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. 2006 Employee, Director and Consultant Stock Plan The following table presents information regardingdescription of the beneficial ownershippertinent terms of the 2006 Plan is a summary and is qualified in its entirety by the full text of the 2006 Plan. Administration. The administrator (the “Administrator”) of the 2006 Plan is the Board of Directors, except to the extent the Board of Directors delegates its authority to the Compensation committee (the “Committee”) of the Board, in which case the Committee shall be the Administrator. Subject to the provisions of the 2006 Plan, the Administrator is authorized to: | a. | Interpret the provisions of the 2006 Plan or of any option or stock grant and to make all rules and determinations which it deems necessary or advisable for the administration of the 2006 Plan; |
| b. | Determine which employees, directors and consultants shall be granted awards; |
| c. | Determine the number of Shares for which an award shall be granted; |
| d. | Specify the terms and conditions upon which an award may be granted; and |
| e. | Adopt any sub-plans applicable to residents of any specified jurisdiction as it deems necessary or appropriate in order to comply with or take advantage of any tax laws applicable to the us or to 2006 Plan participants or to otherwise facilitate the administration of the 2006 Plan, which sub-plans may include additional restrictions or conditions applicable to options or shares acquired upon exercise of options. |
provided, however, that all such interpretations, rules, determinations, terms and conditions shall be made and prescribed in the context of preserving the tax status under Section 422 of the Code of those options which are designated as ISOs. Subject to the foregoing, the interpretation and construction by the Administrator of any provisions of the 2006 Plan or of any award granted under it shall be final.
If permissible under applicable law, the Board of Directors or the Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any portion of its responsibilities and powers to any other person selected by it. Any such allocation or delegation may be revoked by the Board of Directors or the Committee at any time. Terms and Conditions of Options. Options granted under the 2006 Plan may be either “incentive stock options” that are intended to meet the requirements of Section 422 of the Code or “nonqualified stock options” that do not meet the requirements of Section 422 of the Code. The Administrator will determine the exercise price of options granted under the 2006 Plan. The exercise price of stock options may not be less than the fair market value per share of our common stock on the date of grant (or 110% of fair market value in the case of incentive stock options granted to a ten-percent stockholder). If on the date of grant the common stock is listed on a stock exchange or national market system, the fair market value will generally be the closing sale price on the date of grant. If the common stock is not traded on a stock exchange or national market system on the date of grant, the fair market value will generally be the mean between the bid and the asked price for the common stock at the close of trading in the over-the-counter market for the trading day on which common stock was traded immediately preceding the applicable date. If no such prices are available, the fair market value shall be determined in good faith by the Administrator. No option intended to qualify as an ISO may be exercisable for more than ten years from the date of September 30, 2014.grant (five years in the case of an incentive stock option granted to a ten-percent stockholder). Options granted under the 2006 Plan will be exercisable at such time or times as the Administrator prescribes at the time of grant. No employee may receive incentive stock options that first become exercisable in any calendar year in an amount exceeding $100,000. Generally, the exercise price of an option may be paid (a) in cash or by certified bank check, (b) at the discretion of the Administrator, through delivery of shares of our common stock held for at least six months having a fair market value equal to the purchase price, (c) at the discretion of the Administrator, by delivery of the grantee’s personal note, for full, partial or no recourse, bearing interest payable not less than annually at market rate on the date of exercise and at no less than 100% of the applicable Federal rate, as defined in Section 1274(d) of the Code, with or without the pledge of such shares as collateral, or (d) at the discretion of the Administrator, in accordance with a cashless exercise program established with a securities brokerage firm, and approved by the Administrator, or (e) at the discretion of the Administrator, by any combination of the above methods. No option may be transferred other than by will or by the laws of descent and distribution, and during a recipient’s lifetime an option may be exercised only by the recipient. The Administrator will determine the extent to which a holder of a stock option may exercise the option following termination of service with us. The Administrator will determine the extent to which a holder of a stock option may exercise the option following termination of service with us. Effect of Certain Corporate Transactions. If the Company is to be consolidated with or acquired by another entity in a merger, sale of all or substantially all of the Company’s assets other than a transaction to merely change the state of incorporation (a “Corporate Transaction”), the Administrator or the board of directors of any entity assuming the obligations of the Company hereunder (the “Successor Board”), shall, as to outstanding options, either (i) make appropriate provision for the continuation of such options by substituting on an equitable basis for the Shares then subject to such options either the consideration payable with respect to the outstanding shares of common stock in connection with the Corporate Transaction or securities of any successor or acquiring entity (provided, that, at the discretion of the Administrator, all unvested options shall be made fully or partially exercisable for purposes of this Subparagraph upon the closing of the Corporate Transaction); or (ii) upon written notice to the participants, provide that all options must be exercised (either to the extent then exercisable or, at the discretion of the Administrator, all options being made fully or partially exercisable), within a specified number of days of the date of such notice, at the end of which period the options shall terminate; or (iii) terminate all options in exchange for a cash payment equal to the excess of the fair market value of the shares of common stock subject to such options (either to the extent then exercisable or, at the discretion of the Administrator, all options being made fully or partially exercisable) over the exercise price thereof. Tax Withholding. As and when appropriate, we shall have the right to require each optionee purchasing shares of common stock and each grantee receiving an award of shares of common stock under the 2006 Plan to pay any federal, state or local taxes required by law to be withheld. 2016 Equity Compensation Plan The following description of the principal terms of the 2016 Plan is a summary and is qualified in its entirety by the full text of the 2016 Plan. Administration. The 2016 Plan is administered by the Compensation Committee of our Board of Directors, provided that the entire Board of Directors may act in lieu of the Compensation Committee on any matter, subject to certain requirements set forth in the 2016 Plan. The Compensation Committee may grant options to purchase shares of our common stock, stock appreciation rights, stock units, restricted shares of our common stock, performance shares, performance units, incentive bonus awards, other cash-based awards and other stock-based awards. The Compensation Committee also has broad authority to determine the terms and conditions of each option or other kind of award, and adopt, amend and rescind rules and regulations for the administration of the 2016 Plan. Subject to applicable law, the Compensation Committee may authorize one or more reporting persons (as defined in the 2016 Plan) or other officers to make awards (other than awards to reporting persons, or other officers whom the Compensation Committee has specifically authorized to make awards). No awards may be granted under the 2016 Plan on or after the ten-year anniversary of the adoption of the 2016 Plan by our Board of Directors, but awards granted prior to such tenth anniversary may extend beyond that date. Eligibility. Awards may be granted under the 2016 Plan to any person who is an employee, officer, director, consultant, advisor or other individual service provider of the Company or any subsidiary, or any person who is determined by the Compensation Committee to be a prospective employee, officer, director, consultant, advisor or other individual service provider of the Company or any subsidiary. Shares Subject to the 2016 Plan. The aggregate number of shares of common stock proposed to be available for issuance in connection with options and awards granted under the 2016 Plan is 3,000,000 shares. Incentive Stock Options may, but need not be, granted with respect to all of the shares available for issuance under the 2016 Plan;provided,however, that the maximum aggregate number of shares of common stock which may be issued in respect of Incentive Stock Options (after giving effect to any increases pursuant to the “evergreen” provisions of the 2016 Plan discussed below) shall not exceed 6,000,000 shares, subject to adjustment in the table representsevent of stock, splits and similar transactions. If any award granted under 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 owned by:as to which such option or award was forfeited, or which were withheld, will be available for future grants under the 2016 Plan. each person who is known to us to beIn addition, the beneficial owner2016 Plan contains an “evergreen” provision allowing for an annual increase in the number of more than 5%shares of our outstanding common stock; stock available for issuance under the 2016 Plan on January 1 of each year during the period beginning January 1, 2017, and ending on (and including) January 1, 2026. The annual increase in the number of our directors; each of our named executive officers; and
all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rulesshares shall be equal to (i) five point five percent (5.5%) of the Securities and Exchange Commission that deemtotal number of shares to be beneficially owned by any person who hasof common stock outstanding on December 31st of the preceding calendar year, or shares voting or investment power(ii) with respect to such shares. Sharesshares of common stock which may be issued under outstandingthe 2016 Plan other than in respect to Incentive Stock Options, the difference between (x) eighteen percent (18%) of the total number of shares of Series A Preferred Stock, warrants, convertible notescommon stock outstanding on December 31st of the preceding calendar year, and (y) the total number of shares of common stock reserved under the 2016 Plan on December 31st of such preceding calendar year (including shares subject to outstanding awards, issued pursuant to awards or available for future awards) if such amount is greater than the amount determined in (i) immediately above; provided, however, that our Board may act prior to the first day of any calendar year to provide that there shall be no increase such calendar year, or that the increase shall be a lesser number of shares of common stock than would otherwise occur. On January 1, 2017, 564,378 shares of common stock were added to the 2016 Plan pursuant to this evergreen provision.
Terms and Conditions of Options. Options granted under the 2016 Plan may be either “incentive stock options” that are intended to meet the requirements of Section 422 of the Code or “nonqualified stock options” that do not meet the requirements of Section 422 of the Code. The Compensation Committee will determine the exercise price of options currently exercisablegranted under the 2016 Plan. The exercise price of stock options may not be less than the fair market value, on the date of grant, per share of our common stock issuable upon exercise of the option (or 110% of fair market value in the case of incentive options granted to a ten-percent stockholder). If on the date of grant the common stock is listed on a stock exchange or exercisable within 60 daysnational market system, the fair market value shall generally be the closing sale price as of September 30, 2014such date, or if there were no trades recorded on such date, then the most recent date preceding such date on which trades were recorded. If on the date of grant the common stock is traded in an over-the-counter market, the fair market will generally be the average of the closing bid and asked prices for the shares of common stock as of such date, or, if there are deemed outstandingno closing bid and asked prices for the shares of common stock on such date, then the average of the bid and asked prices for the shares of common stock on the most recent date preceding such date on which such closing bid and asked prices are available. If the common stock is not listed on a national securities exchange or national market system or traded in an over-the-counter market, the fair market value shall be determined by the Compensation Committee in a manner consistent with Section 409A of the Code. Notwithstanding the foregoing, if on the date of grant the common stock is listed on a stock exchange or is quoted on a national market system, or is traded in an over-the-counter market, then solely for purposes of computingdetermining the percentage ownershipexercise price of any grant of a stock option or the base price of any grant of a stock appreciation right, the Compensation Committee may, in its discretion, base fair market value on the last sale before or the first sale after the grant, the closing price on the trading day before or the trading day of the person holdinggrant, the arithmetic mean of the high and low prices on the trading day before or the trading day of the grant, or any other reasonable method using actual transactions of the common stock as reported by the exchange or market on which the common stock is traded. In addition, the determination of fair market value also may be made using any other method permitted under Treasury Regulation section 1.409A-1(b)(5)(iv). No option may be exercisable for more than ten years from the date of grant (five years in the case of an incentive stock option granted to a ten-percent stockholder). Options granted under the 2016 Plan will be exercisable at such preferredtime or times as the Compensation Committee prescribes at the time of grant. No employee may receive incentive stock warrants, convertible notesoptions that first become exercisable in any calendar year in an amount exceeding $100,000. The Compensation Committee may, in its discretion, permit a holder of a nonqualified stock option to exercise the option before it has otherwise become exercisable, in which case the shares of our common stock issued to the recipient will continue to be subject to the vesting requirements that applied to the option before exercise. Generally, the option price may be paid in cash or optionsby bank check, or such other means as the Compensation Committee may accept. As set forth in an award agreement or otherwise determined by the Compensation Committee, in its sole discretion, at or after grant, payment in full or part of the exercise price of an option may be made (a) in the form of shares of common stock that have been held by the participant for such period as the Compensation Committee may deem appropriate for accounting purposes or otherwise, valued at the fair market value of such shares on the date of exercise; (ii) by surrendering to the Company shares of common stock otherwise receivable on exercise of the option; (iii) by a cashless exercise program implemented by the Compensation Committee in connection with the 2016 Plan; and/or (iv) by such other method as may be approved by the Compensation Committee and set forth in an award agreement. No option may be transferred other than by will or by the laws of descent and distribution, and during a recipient’s lifetime an option may be exercised only by the recipient or the recipient’s guardian or legal representative. However, the Compensation Committee may permit the transfer of a nonqualified stock option, share-settled stock appreciation right, restricted stock award, performance share or share-settled other stock-based award either (a) by instrument to the participant’s immediate family (as defined in the 2016 Plan), (b) by instrument to an inter vivos or testamentary trust (or other entity) in which the award is to be passed to the participant’s designated beneficiaries, or (c) by gift to charitable institutions. The Compensation Committee will determine the extent to which a holder of a stock option may exercise the option following termination of service. Stock Appreciation Rights. The Compensation Committee may grant stock appreciation rights independent of or in connection with an option. The Compensation Committee will determine the terms applicable to stock appreciation rights. The base price of a stock appreciation right will be determined by the Compensation Committee, but will not be less than 100% of the fair market value of a share of our common stock with respect to the date of grant of such stock appreciation right. The maximum term of any SAR granted under the 2016 Plan is ten years from the date of grant. Generally, each SAR stock appreciation right will entitle a participant upon exercise to an amount equal to: | ● | the excess of the fair market value of a share of common stock on the date of exercise of the stock appreciation right over the base price of such stock appreciation right, multiplied by |
| ● | the number of shares as to which such stock appreciation right is exercised. |
Payment may be made in shares of our common stock, in cash, or partly in common stock and partly in cash, all as determined by the Compensation Committee. Restricted Stock and Stock Units. The Compensation Committee may award restricted common stock and/or stock units under the 2016 Plan. Restricted stock awards consist of shares of stock that are transferred to a participant subject to restrictions that may result in forfeiture if specified conditions are not satisfied. Stock units confer the right to receive shares of our common stock, cash, or a combination of shares and cash, at a future date upon or following the attainment of certain conditions specified by the Compensation Committee. The Compensation Committee will determine the restrictions and conditions applicable to each award of restricted stock or stock units, which may include performance-based conditions. Dividends with respect to restricted stock may be paid to the holder of the shares as and when dividends are paid to stockholders or at the times of vesting or other payment of the restricted stock award. Stock unit awards may be granted with dividend equivalent rights, which may be accumulated and may be deemed outstandingreinvested in additional stock units, as determined by the Compensation Committee in its discretion. If any dividend equivalents are paid while a stock unit award is subject to restrictions, the dividend equivalents shall be subject to the same restrictions on transferability as the underlying stock units, unless otherwise set forth in an award agreement. Unless the Compensation Committee determines otherwise, holders of restricted stock will have the right to vote the shares. Performance Shares and Performance Units. The Compensation Committee may award performance shares and/or performance units under the 2016 Plan. Performance shares and performance units are awards which are earned during a specified performance period subject to the attainment of performance criteria, as established by the Compensation Committee. The Compensation Committee will determine the restrictions and conditions applicable to each award of performance shares and performance units. Incentive Bonus Awards. The Compensation Committee may award Incentive Bonus Awards under the 2016 Plan. Incentive Bonus Awards may be based upon the attainment of specified levels of Company or subsidiary performance as measured by pre-established, objective performance criteria determined at the discretion of the Compensation Committee. Incentive Bonus Awards will be paid in cash or common stock, as set forth in an award agreement. Other Stock-Based and Cash-Based Awards. The Compensation Committee may award other types of equity-based or cash-based awards under the 2016 Plan, including the grant or offer for computingsale of unrestricted shares of our common stock and payment in cash or otherwise of amounts based on the percentage ownershipvalue of shares of common stock. Section 162(m) Compliance. If stock or cash-based awards are intended to satisfy the conditions for deductibility under Section 162(m) of the Code as “performance-based compensation,” the performance criteria will be selected from among the following, which may be applied to our Company as a whole, any subsidiary or any division or operating unit thereof: (a) pre-tax income; (b) after-tax income; (c) net income; (d) operating income or profit; (e) cash flow, free cash flow, cash flow return on investment, net cash provided by operations, or cash flow in excess of cost of capital; (f) earnings per share; (g) return on equity; (h) return on sales or revenues; (i) return on invested capital or assets; (j) cash, funds or earnings available for distribution; (k) appreciation in the fair market value of the common stock; (l) operating expenses; (m) implementation or completion of critical projects or processes; (n) return on investment; (o) total return to stockholders; (p) dividends paid; (q) net earnings growth; (r) related return ratios; (s) increase in revenues; (t) the Company’s published ranking against its peer group of pharmaceutical companies based on total stockholder return; (u) net earnings; (v) changes (or the absence of changes) in the per share or aggregate market price of the common stock; (w) number of securities sold; (x) earnings before or after any one or more of the following items: interest, taxes, depreciation or amortization, as reflected in the Company’s financial reports for the applicable period; (y) total revenue growth; (z) economic value created; (aa) operating margin or profit margin; (bb) share price or total stockholder return; (cc) cost targets, reductions and savings, productivity and efficiencies; (dd) strategic business criteria, consisting of one or more objectives based on meeting objectively determinable criteria: specified market penetration, geographic business expansion, progress with research and development activities, investor satisfaction, employee satisfaction, human resources management, supervision of litigation, information technology, and goals relating to acquisitions, divestitures, joint ventures and similar transactions, and budget comparisons; (ee) objectively determinable personal or professional objectives, including any of the following performance goals: the implementation of policies and plans, the negotiation of transactions, the development of long term business goals, formation of joint ventures, research or development collaborations, and the completion of other corporate transactions, and (ff) any combination of, or a specified increase or improvement in, any of the foregoing. At the end of the performance period established in connection with any award, the Compensation Committee will determine the extent to which the performance goal or goals established for such award have been attained, and shall determine, on that basis, the number of performance shares or performance units included in such award that have been earned and as to which payment will be made. The Compensation Committee will certify in writing the extent to which it has determined that the performance goal or goals established by it for such award have been attained. With respect to awards intended to be performance-based compensation under Section 162(m) of the Code, no participant of the 2016 Plan may receive in any one fiscal year (a) options or stock appreciation rights relating to more than 1,000,000 shares of our common stock, and (b) stock units, restricted shares, performance shares, performance units or other stock-based awards that are denominated in shares of common stock relating to more than 1,000,000 shares of our common stock in the aggregate. The maximum dollar value payable to any participant for a fiscal year of the Company with respect to stock units, performance units or incentive bonus awards or other stock-based awards that may be settled in cash or other property (other than common stock) is $1,500,000. Effect of Certain Corporate Transactions. The Compensation Committee may, at the time of the grant of an award, provide for the effect of a change in control (as defined in the 2016 Plan) on any award, including (i) accelerating or extending the time periods for exercising, vesting in, or realizing gain from any award, (ii) eliminating or modifying the performance or other conditions of an award, (iii) providing for the cash settlement of an award for an equivalent cash value, as determined by the Compensation Committee, or (iv) such other modification or adjustment to an award as the Compensation Committee deems appropriate to maintain and protect the rights and interests of participants upon or following a change in control. The Compensation Committee may, in its discretion and without the need for the consent of any recipient of an award, also take one or more of the following actions contingent upon the occurrence of a change in control: (a) cause any or all outstanding options and stock appreciation rights to become immediately exercisable, in whole or in part; (b) cause any other person. Asawards to become non-forfeitable, in whole or in part; (c) cancel any option or stock appreciation right in exchange for a result,substitute option; (d) cancel any award of restricted stock, stock units, performance shares or performance units in exchange for a similar award of the percentage of outstanding sharescapital stock of any personsuccessor corporation; (e) redeem any restricted stock, stock unit, performance share or performance unit for cash and/or other substitute consideration with a value equal to the fair market value of an unrestricted share of our common stock on the date of the change in control; (f) cancel any option or stock appreciation right in exchange for cash and/or other substitute consideration based on the value of our common stock on the date of the change in control, and cancel any option or stock appreciation right without any payment if its exercise price exceeds the value of our common stock on the date of the change in control; (g) cancel any stock unit or performance unit held by a participant affected by the change in control in exchange for cash and/or other substitute consideration with a value equal to the fair market value per share of common stock on the date of the change in control, or (h) make such other modifications, adjustments or amendments to outstanding awards as shownthe Compensation Committee deems necessary or appropriate. Amendment, Termination. The 2016 Equity Compensation Plan will remain in this table doeseffect until March 2026, or, if earlier, when awards have been granted covering all available shares under the 2016 Plan or the 2016 Plan is otherwise terminated by the Board. The Board may amend the terms of awards in any manner not necessarily reflectinconsistent with the person’s actual ownership or voting power2016 Plan, provided that no amendment shall adversely affect the rights of a participant with respect to an outstanding award without the participant’s consent. In addition, our Board of Directors may at any time amend, suspend, or terminate the 2016 Plan, provided that (i) no such amendment, suspension or termination shall materially and adversely affect the rights of any participant under any outstanding award without the consent of such participant and (ii) to the extent necessary and desirable to comply with any applicable law, regulation, or stock exchange rule, the 2016 Plan requires us to obtain stockholder consent. Stockholder approval is required for any plan amendment that increases the number of shares of common stock actuallyavailable for issuance under the 2016 Plan or changes the persons or classes of persons eligible to receive awards. Tax Withholding.The Company has the power and right to deduct or withhold, or require a participant to remit to the Company, the minimum statutory amount to satisfy federal, state, and local taxes, domestic or foreign, required by law or regulations to be withheld. Recoupment Policy.Awards granted under the 2016 Plan will be subject to any provisions of applicable law providing for the recoupment or clawback of incentive compensation, such as provisions imposed pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act; the terms of any Company recoupment, clawback or similar policy in effect at the time of grant of the award; and any recoupment, clawback or similar provisions that may be included in the applicable award agreement. Federal Income Tax Consequences.The following is a brief summary of the U.S. federal income tax consequences applicable to awards granted under the 2016 Plan based on the federal income tax laws in effect on the date of this report. This summary is not intended to be exhaustive and does not address all matters relevant to a particular participant based on his or her specific circumstances. The summary expressly does not discuss the income tax laws of any state, municipality, or non-U.S. taxing jurisdiction, or the gift, estate, excise (including the rules applicable to deferred compensation under Code Section 409A), or other tax laws other than federal income tax law. The following is not intended or written to be used, and cannot be used, for the purposes of avoiding taxpayer penalties. Because individual circumstances may vary, the Company advises all participants to consult their own tax advisor concerning the tax implications of awards granted under the 2016 Plan. A recipient of a stock option or stock appreciation right will not have taxable income upon the grant of the stock option or stock appreciation right. For non-statutory stock options and stock appreciation rights, the participant will recognize ordinary income upon exercise in an amount equal to the difference between the fair market value of the shares and the exercise price on the date of exercise. Any gain or loss recognized upon any later disposition of the shares generally will be a capital gain or loss. The acquisition of shares upon exercise of an incentive stock option will not result in any taxable income to the participant, except, possibly, for purposes of the alternative minimum tax. The gain or loss recognized by the participant on a later sale or other disposition of such shares will either be long-term capital gain or loss or ordinary income, depending upon whether the participant holds the shares for the legally-required period (two years from the date of grant and one year from the date of exercise). If the shares are not held for the legally-required period, the participant will recognize ordinary income equal to the lesser of (i) the difference between the fair market value of the shares on the date of exercise and the exercise price, or (ii) the difference between the sales price and the exercise price, and the balance of the gain, if any, will be afforded capital gain treatment. For awards of stock grants, the participant will not have taxable income upon the receipt of the award (unless the participant elects to be taxed at the time of the stock is granted rather than when it becomes vested). The stock grants will generally be subject to tax upon vesting as ordinary income equal to the fair market value of the shares at the time of vesting less the amount paid for such shares (if any). A participant is not deemed to receive any taxable income at the time an award of restricted stock units is granted. When vested restricted stock units (and dividend equivalents, if any) are settled and distributed, the participant will recognize ordinary income equal to the amount of cash and/or the fair market value of shares received less the amount paid for such restricted stock units (if any). If the participant is an employee or former employee, the amount a participant recognizes as ordinary income in connection with any award is subject to withholding taxes (not applicable to incentive stock options) and the Company is allowed a tax deduction equal to the amount of ordinary income recognized by the participant. In addition, Code Section 162(m) contains special rules regarding the federal income tax deductibility of compensation paid to the Company’s chief executive officer and to certain of the Company’s other executive officers. The general rule is that annual compensation paid to any of these specified executives will be deductible only to the extent that it does not exceed $1,000,000. However, the Company can preserve the deductibility of certain compensation in excess of $1,000,000 if such compensation qualifies as “performance-based compensation” by complying with certain conditions imposed by the Code Section 162(m) rules (including the establishment of a maximum number of shares with respect to which awards may be granted to any one employee during one fiscal year). Option Grants and Stock Awards As of December 31, 2016, we had outstanding stock options to purchase 2,627,229 shares at an average exercise price of approximately $1.05 per share. Included in the total outstanding stock options were 117,784 stock options granted under the 2006 Plan in 2016 at an exercise price of $1.25 and 1,333,299 nonqualified stock options granted under the 2016 Plan in 2016 to our executive officers and others at an exercise price of $1.25 per share. All awards to be made under the 2016 Plan are discretionary, subject to the terms of the 2016 Plan. Therefore, the benefits and amounts that will be received or allocated under the 2016 Plan are generally not determinable at this time. The equity grant program for our non-employee directors is described under the Compensation of Directors section in this proxy statement. The following table summarizes these 2016 awards to our named executive officers, all executive officers and the non-executive officer employees and consultants. New Plan Benefits Table Name and Position | | Number of Units (options) | | Garo H. Armen, Executive Chairman | | | 500,000 | (1) | Alexander K. Arrow, Chief Financial Officer | | | 140,000 | (1) | Non-Executive Director Group | | | 325,000 | (2) | Non-Executive Officer Employee/Consultant Group | | | 243,300 | (3) |
_________________ | (1) | These options vest over three years in monthly installments. |
| (2) | 175,000 of these options vest over two years in equal monthly installments, and as of December 31, 2016, 58,333 have fully vested. |
| (3) | 10,000 of these options vest over one year in equal monthly installments, 100,000 of these options vest over three years in equal monthly installments, and 258,299 of these options vest over 4 years in equal monthly installments. |
Outstanding Equity Awards at Fiscal Year End The following table summarizes the equity awards made to our named executive officers that were outstanding at September 30, 2014. Unless otherwise indicated,December 31, 2016. Name | | No. of Securities Underlying Unexercised Options (#) Exercisable | | | No. of Securities Underlying Unexercised Options (#) Unexercisable | | | Option Exercise Price | | Option Expiration Date | Garo H. Armen (1) | | | 118,057 | | | | 381,943 | | | $ | 1.25 | | April 15, 2026 | Robert Ziroyan (2) | | | 100,000 | | | | — | | | $ | 1.00 | | March 30, 2021 | Robert Ziroyan (2) | | | 50,000 | | | | — | | | $ | 1.00 | | March 1, 2024 | Robert Ziroyan (2) | | | 75,000 | | | | — | | | $ | 1.25 | | March 9, 2025 | Alexander K. Arrow (3) | | | 25,000 | | | | 75,000 | | | $ | 1.25 | | February 12, 2026 | Alexander K. Arrow (3) | | | 33,057 | | | | 106,943 | | | $ | 1.25 | | April 15, 2026 |
(1) | Dr. Armen was granted a 500,000 share option grant on April 15, 2016 |
(2) | Mr. Ziroyan ceased serving as an executive officer as of April 4, 2016. |
(3) | Dr. Arrow was granted a 100,000 share option grant on February 12, 2016, and a 140,000 share option grant on April 15, 2016. |
Security Ownership of Certain Beneficial Owners and Management The following table summarizes the persons namedbeneficial owners of more than 5% of the Company’s voting securities and the securities of the Company beneficially owned by the Company’s directors and officers as of March 27, 2017. Name and address of Beneficial Owner | | Amount of Beneficial Ownership | | | Percent of Beneficial Ownership | | | | | | | | | | | Garo H. Armen(1) | | | 3,979,936 | (2) | | | 34 | | | | | | | | | | | Robert B. Stein(1) | | | 114,995 | (3) | | | 1 | | | | | | | | | | | Khalil Barrage(1) | | | 224,375 | (4) | | | 2 | | | | | | | | | | | Alexander K. Arrow(1) | | | 210,487 | (5) | | | 2 | | | | | | | | | | | Larry N. Feinberg 808 North St., Greenwich, CT 06831 | | | 800,000 | (6) | | | 8 | | | | | | | | | | | Gregory H. Ekizian(1) | | | 624,375 | (7) | | | 6 | | | | | | | | | | | David A. Lovejoy | | | 480,207 | (8) | | | 5 | | | | | | | | | | | Josh Silverman(1) | | | 24,375 | (9) | | | * | | | | | | | | | | | Strategic Bio Partners LLC (10) 777 Third Avenue 30th Floor New York, NY 10017 | | | 2,193,413 | (11) | | | 21 | | | | | | | | | | | All directors and executive officers as a group (6 persons) | | | 5,178,543 | (12) | | | | |
* Less than 1% (1) Executive officer and/or director. (2) Includes warrants to purchase 1,253,367 shares of common stock at an exercise price of approximately $1.00 per share. Includes 2,296,012 shares held in this table havethe name of Dr. Armen and 250,000 shares held in the name of the Garo H. Armen IRA, as to which Dr. Armen has sole voting and sole investment power with respectdispositive power. Also includes options to allpurchase 180,557 shares shown as beneficially owned, subjectof common stock at an exercise price of $1.25 per share. Does not include options to community property laws where applicable.purchase 319,443 shares that are not exercisable within 60 days of the date of this report. The information presented in this table is based on 400,000,000(3) Represents options to purchase 114,995 shares of our common stock outstanding on September 30, 2014. Unless otherwise indicated,at an exercise price of $1.25 per share. Does not include options to purchase 125,005 shares in the address of eachaggregate that are not exercisable within 60 days of the named executive officers and directors and 5% or more stockholders named below is c/o Atrinsic, Inc., 65 Atlantic Avenue, Boston, Massachusetts 02110.date of this report.
Name of Beneficial Owner | | Number of Shares Beneficially Owned | | | Percent of Class | | | | | | | | | Edward Gildea, Chief Executive Officer and Director | | | 100,000,000 | (1) | | | 20.00 | % | Jonathan Schechter, Director | | | 50,000,000 | (2) | | | 11.11 | % | All directors and executive officers as a group (3 persons) | | | 150,000,000 | (3) | | | 27.27 | % | 5% Stockholders: | | | | | | | | | Sebastian Giordano | | | 125,000,000 | (4) | | | 23.81 | % | Hudson Bay Capital Management LP. (5)(7) | | | 44,395,067 | (7) | | | 9.99 | % | Iroquois Capital Management LLC(6)(7) | | | 44,395,067 | (7) | | | 9.99 | % | 469 Holdings LLC(8) | | | 22,693,437 | | | | 5.67 | % | Brilliant Digital Entertainment Altent, Inc.(9) | | | 62,519,414 | | | | 15.63 | % | Google, Inc.(10) | | | 100,047,815 | | | | 25.01 | % | MediaNet Digital, Inc.(11) | | | 20,071,696 | | | | 5.02 | % |
____________________(4) Includes 50,000 shares of common stock and options to purchase 174,375 shares of common stock at an exercise price of $1.25 per share. Does not include options to purchase 20,625 shares in the aggregate that are not exercisable within 60 days of the date of this report.
| (1) | Consists of 100,000,000 shares of common stock issuable under currently outstanding options. |
| (2) | Consists of 50,000,000 shares of common stock issuable under currently outstanding options. |
| (3) | Consists of an aggregate of 150,000,000 shares of common stock issuable under currently outstanding options. |
| (4) | Consists of 125,000,000 shares of common stock issuable under currently outstanding options. Mr. Giordano resigned as chief executive officer effective March 1, 2014. |
| (5) | Hudson Bay Capital Management LP (the “Investment Manager”) serves as the investment manager to Hudson Bay Master Fund Ltd. (the “HB Fund”), in whose name the reported securities are held, and may be deemed to be the beneficial owner of all shares of common stock held by the HB Fund. The principal business address of the Investment Manager and the HB Fund is 777 Third Avenue, 30th Floor, New York, New York 10017. |
| (6) | Iroquois Capital Management LLC, a Delaware limited liability company (“Iroquois”) serves as the investment adviser that provides investment advisory services to Iroquois Master Fund Ltd. (the “Iroquois Fund”), in whose name the reported securities are held, may be deemed to be the beneficial owner of all shares of common stock held by the Iroquois Fund. The principal business address of Iroquois in 641 Lexington Avenue 26th Floor, New York, New York 10022. |
| (7) | Consists of shares of common stock issuable upon conversion of shares of Series A Convertible Preferred Stock held by such stockholder. Hudson Bay Capital Management L.P. owns 2,312,834,301 shares of the Series A Convertible Preferred Stock and Iroquois Capital Management LLC owns 2,287,165,699 shares of the Series A Convertible Preferred Stock. Excludes the number of shares of common stock issuable upon conversion of all the shares of Series A Preferred Stock held by the stockholder in excess of 44,395,067 because of the “Beneficial Ownership Cap” limitation applicable to all shares of Series A Preferred Stock pursuant to which the holder thereof does not have the right to convert shares of Series A Preferred Stock to the extent that such conversion would result in beneficial ownership by the holder thereof, or any of its affiliates and any other persons or entities whose beneficial ownership of common stock would be aggregated with the holder’s for purposes of Section 13(d) of the Exchange Act, of more than 9.99% of the total number of shares of common stock issued and outstanding immediately after giving effect to such conversion. |
| (8) | The address of 469 Holdings LLC is: c/o Belkin Burden Wenig & Goldman, Attn: S. Stewart Smith, Esq. 270 Madison Avenue, New York, NY 10016. |
| (9) | The address of Brilliant Digital Entertainment Altent, Inc. is: 12711 Ventura Blvd., Suite 210, Studio City, CA 91604. |
| (10) | The address of Google, Inc. is: PO Box 39000, San Francisco, CA 94139. |
| (11) | The address of MediaNet Digital, Inc. is: 1697 Broadway, 10th Floor, New York, NY 10019. |
(5) Includes 100,000 shares held in the name of Dr. Arrow and 18,260 shares held in the name of the Alexander K. Arrow IRA, as to which Dr. Arrow has sole voting and dispositive power. Also includes options to purchase 92,227 shares of common stock at an exercise price of $1.25 per share. Does not include options to purchase 147,773 shares of common stock in the aggregate that are not exercisable within 60 days of the date of this report. (6) Includes 200,000 shares of common stock held in the name of Mr. Feinberg and warrants to purchase 600,000 shares of common stock at an exercise price of $1.00 per share. (7) Includes 125,000 shares held in the name of the Gregory H. Ekizian Revocable Trust and 100,000 shares and 300,000 warrants held in the name of Pensco Trust Company f/b/o Gregory H. Ekizian, as to which Mr. Ekizian has sole voting and dispositive power. Also includes warrants to purchase 75,000 shares of common stock at an exercise price of $1.00 per share and options to purchase 24,375 shares of common stock at an exercise price of $1.25 per share. Does not include options to purchase 20,625 shares that are not exercisable within 60 days of the date of this report. (8) Includes 148,800 shares of common stock held in the name of Dr. Lovejoy and options to purchase 331,407 shares of common stock in the aggregate with an exercise price ranging from $1.00 to $1.25 per share. Does not include options to purchase 151,892 shares of common stock that are not exercisable within 60 days of the date of this report. (9) Includes options to purchase 24,375 shares of common stock at an exercise price of $1.25 per share. Does not include options to purchase 20,625 shares of common stock that are not exercisable within 60 days of the date of this report. (10) Hudson Bay Master Fund Ltd. (the "Managing Member") is the managing member of Strategic Bio Partners, LLC ("SBP"). Pursuant to SBP's Limited Liability Company Operating Agreement, the Managing Member has delegated to Hudson Bay Capital Management LP ("HBC") full and sole investment discretion and voting control of SBP's portfolio securities. Sander Gerber is the managing member of Hudson Bay Capital GP LLC, which is the general partner of HBC. Each of SBP, the Managing Member and Sander Gerber disclaims beneficial ownership over these securities. (11) SBP also holds shares of Series B Preferred Stock convertible into common stock and Predecessor Warrants to purchase common stock. However, the Series B Preferred and the Predecessor Warrants are subject to a "Beneficial Ownership Cap" limitation pursuant to which the holder thereof does not have the right to convert Series B Preferred Stock or exercise the Predecessor Warrants to the extent that such exercise would result in beneficial ownership by the holder thereof, or any of its affiliates and any other persons or entities whose beneficial ownership of common stock would be aggregated with the holder's for purposes of Section 13(d) of the Exchange Act, of more than 9.99% of the total number of shares of common stock issued and outstanding immediately after giving effect to such conversion or exercise. Disregarding the Beneficial Ownership Cap, SBP would own 2,193,413 shares of common stock, including the shares underlying Series B Preferred Stock and Predecessor Warrants. (12) Includes warrants to purchase 1,628,367 shares of common stock and options to purchase 610,904 shares of common stock. ItemItem 13. Certain Relationships and Related Transactions, and Director Independence. PoliciesCertain Relationships and Corporate GovernanceRelated Party Transactions
Other than compensation arrangements for our named executive officers and directors, we describe below each transaction or series of similar transactions, since January 1, 2015, to which we were a party or will be a party, in which: | ● | the amounts involved exceeded or will exceed $120,000; and |
| ● | any of our directors, executive officers or holders of more than 5% of our capital stock, or any member of the immediate family of the foregoing persons, had or will have a direct or indirect material interest. |
Compensation arrangements for our named executive officers and directors are described in Item 11, Executive Compensation. Our principal offices are located at 149 Fifth Avenue, Suite 500, New York, New York 10010, in a conference room of Agenus, Inc. We utilize our principal office for quarterly board meetings and our annual shareholder meeting at no cost. Our personnel and consultants all work remotely, the Company’s basic science laboratory work is conducted in the Lovejoy Lab at the University of Toronto, and its preclinical efficacy work is conducted at CROs. Hence the company does not have the need for a day-to-day physical office location other than a mailing address and conference room facility for meetings. For that reason, the Agenus conference room suits its purposes without imposing any inconveniences upon Agenus. . Dr. Armen, our Executive Chairman, is also the Chairman and Chief Executive Officer of Agenus Inc. Transactions with Predecessor Shareholders Split-Off At the closing of the Merger we had a 51% interest in MomSpot LLC, and the remaining 49% was held by B.E. Global LLC. Barry Eisenberg is the sole owner of B.E. Global LLC and is the Chief Executive Officer of MomSpot LLC. Immediately after the closing of the Merger, we split off our 51% membership interests in MomSpot LLC. The split-off was accomplished through the transfer of all of our membership interests of MomSpot LLC to B.E. Global LLC having nominal value of nominal considerations via a split off agreement. Secured Convertible Notes/Predecessor Warrants Between February 11, 2014 and December 9, 2015, Atrinsic issued secured convertible promissory notes (the “Secured Convertible Notes”) in the aggregate principal amount of $665,000 and $35,000 in interest to two of its stockholders, of which Secured Convertible Notes in the aggregate principal amount of $332,500 were issued to Iroquois Master Fund Ltd. (“IMF”). Josh Silverman, who became one of our directors upon the closing of the Merger, is an affiliate of IMF. The Secured Convertible Notes, as revised and amended, had a maturity date of August 31, 2016 and bore interest at the rate of 5.0% per annum, payable at maturity. The outstanding principal and accrued interest of each Secured Convertible Note was convertible, subject to a 4.99% beneficial ownership cap), into shares of Atrinsic’s common stock at an initial conversion price of $5.00 per share (subject to adjustment), at the option of the respective holders. IMF exchanged the Secured Convertible Notes that it held for 147,972 Predecessor Warrants, which Predecessor Warrants were issued to the Designee at the closing of the Merger, and the instruments by which the Secured Convertible Notes were secured were simultaneously terminated. Transactions Relating to Protagenic Garo H. Armen, our Chairman and principal stockholder, purchased shares of Series B Preferred Stock in the Private Offering in exchange for the cancellation of $350,000 of loans made by him, plus accrued and unpaid interest on these loans. During 2013 and 2012, Dr. Armen made loans to us in the amount of $310,000. The proceeds of the loans were used to fund research, development and general operating activity of Protagenic. The loans accrued interest at the rate of 10% per annum. In February 2013, in connection with a capital raise by Protagenic, the loans and accrued interest thereon, totaling $317,789, were converted into Protagenic warrants to purchase 953,367 shares of Protagenic common stock at an exercise price of $1.00 per share. Other than with respect to the payment of the purchase price for the securities by the conversion of debt, Dr. Armen participated in this capital raise on the same terms as all other investors. From April 15, 2015 through October 29, 2015, Dr. Armen made five loans to Protagenic. The proceeds of the loans were used to fund research, development and general operating activity of Protagenic. The loans accrued interest at the rate of 10% per annum. Principal and accrued interest on these loans, totaling approximately $350,000, were converted into shares of Series B Preferred Stock in the Private Offering at a price of $1.25 per share. On December 21, 2015, Alexander K. Arrow purchased 60,000 shares of common stock of Protagenic from Mark Berg at a per share purchase price equal to $0.50 for an aggregate purchase price of $30,000. In addition, Dr. Arrow purchased 58,260 shares of Series B Preferred Stock in the Private Offering, on the same terms as all other investors. Effective December 23, 2015, Dr. Armen entered into an additional loan agreement with Protagenic pursuant to which he agreed to loan Protagenic up to $150,000. The loans under this Agreement accrued interest at the rate of 10% per year. The principal and interest on these loans is convertible into common stock at a price of $1.25 per share. On December 23, 2015, Protagenic borrowed $37,628 of the $150,000 available Borrowings under the agreement. Effective June 17, 2016, the Board hasof Directors determined that it was in the best interest of the Company to convert the last remaining portion of debt owed to Dr. Armen into equity, per the terms of the loan agreements. The sum total of remaining debt and accumulated interest as of December 31, 2016 was $0. Merger Transaction On February 12, 2016, which we refer to as the Merger Closing Date, Atrinsic, Inc., Protagenic Therapeutics, Inc. and Protagenic Acquisition Corp., Atrinsic, Inc.’s wholly-owned subsidiary, entered into a merger agreement and completed the merger contemplated by the merger agreement. Pursuant to the merger agreement, on the Merger Closing Date, Protagenic Acquisition Corp. merged with and into Protagenic Therapeutics, Inc., with Protagenic Therapeutics, Inc. remaining as the surviving entity and wholly-owned subsidiary of Atrinsic, Inc. On June 17, 2016, we merged our wholly-owned subsidiary Protagenic Therapeutics, Inc. with and into the Company and we changed our name from Atrinsic, Inc. to Protagenic Therapeutics, Inc. While we believe that all of these agreements and arrangements are in the best interests of our Company, related parties of the Placement Agent may derive material benefits as the result of these transactions. In addition, related parties of the Placement Agent will have a continuing substantial interest in our Company and will derive substantial benefits from any success of our Company. Policies and Procedures for Related Party Transactions We have adopted a resolutionpolicy that our executive officers, directors, nominees for election as a director, beneficial owners of more than 5% of any class of our common stock, any members of the immediate family of any of the foregoing persons and any firms, corporations or other entities in which any of the future, any transactions betweenforegoing persons is employed or is a partner or principal or in a similar position or in which such person has a 5% or greater beneficial ownership interest, which we refer to collectively as related parties, are not permitted to enter into a transaction with us and another personwithout the prior consent of our board of directors acting through the audit committee or, entity who is deemedin certain circumstances, the chairman of the audit committee. Any request for us to be an “affiliate” orenter into a transaction with a related party, in which the amount involved exceeds $100,000 and such related party would have a direct or indirect interest must first be approvedpresented to our audit committee, or in certain circumstances the chairman of our audit committee, for review, consideration and approval. In approving or rejecting any such proposal, our audit committee, or the chairman of our audit committee, is to consider the material facts of the transaction, including, but not limited to, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances, the extent of the benefits to us, the availability of other sources of comparable products or services and the extent of the related party’s interest in the transaction. Director Independence We are not currently listed on any national securities exchange or in an inter-dealer quotation system that has a requirement that the Board of Directors be independent. However, in evaluating the independence of our members and the composition of the committees of our Board of Directors, our Board utilizes the definition of “independence” as that term is defined by applicable listing standards of the NASDAQ Stock Market and SEC rules, including the rules relating to the independence standards of an audit committee and the non-employee director definition of Rule 16b-3 promulgated under the Exchange Act. Our Board of Directors expects to continue to evaluate its independence standards and whether and to what extent the composition of the Board and its committees meets those standards. We ultimately intend to appoint such persons to our Board and committees of our Board as are expected to be required to meet the corporate governance requirements imposed by a national securities exchange. Therefore, we intend that a majority of our disinterested directors.directors will be independent directors of which at least one director will qualify as an “audit committee financial expert,” within the meaning of Item 407(d)(5) of Regulation S-K, as promulgated by the SEC. Transactions with Related PersonsWe believe that Messrs. Barrage, Ekizian, and Silverman are each an “independent” director as that term is defined by the NASDAQ Stock Market, Inc. Marketplace Rules and SEC Regulations. In addition, the Board also designated Gregory Ekizian as an "audit committee financial expert," as that term is defined by the NASDAQ Listing Rules and SEC regulations.
PursuantWith regard to Mr. Silverman’s independent status, the termsBoard considered the fact that he is an ex-CEO of a Membership Interest Purchase Agreement dated July, 2013, we acquired a 51% equity interest in Momspot in exchange for our commitment to contribute up to $165,000 of working capital to Momspot over a two-year period to fund its business development and operations. Simultaneous with the acquisition, we became a party to the Momspot, LLC Operating Agreement and the manager thereunder. B.E. Global LLC, an entity controlled by Barry Eisenberg, owns the remaining 49% of the equity interest in Momspot.
Pursuant to a Letter of Agreement dated August 1, 2013 with Chord Advisors, LLC (“Chord”) we engaged Chord to provide us with accounting policy and financial reporting and bookkeeping services. Further, as of July 1, 2014, David Horin, one of the principalsinstitutional funds (Iroquois Asset Management) that is a 50% owner of Chord, assumeda limited liability company which owns just under 10% of the roleCompany’s common stock. The Board noted that Mr. Silverman is no longer the CEO of Iroquois Asset Management, and as such, he does not represent a major single shareholder.
With regard to Mr. Ekizian’s independent status, the Board considered the fact that he is among the top five largest shareholders of the Company, but has no other business relationship with the Company. With regard to Mr. Barrage’s independent status, the Board considered the fact that he has no business relationship with the Company. Dr. Stein, a member of the Compensation Committee, is not considered “independent.” Our principal offices are located at 149 Fifth Avenue, Suite 500, New York, New York 10010, in a conference room of Agenus, Inc. We utilize our principal accounting officer. The Letteroffice for quarterly board meetings and our annual shareholder meeting on a month to month basis at a nominal value. Dr. Armen, our Executive Chairman, is also the Chairman and Chief Executive Officer of Agreement has a term of twelve months and provides for us to pay to Chord: (i) $500 per month for our basic accounting functionality and $500 per month for Momspot’s basic accounting functionality; (ii) a flat fee of $7,500 for services rendered in connection with the preparation of our Registration Statement on Form 10 filed July 2, 2014; and (iii) $6,000 per month upon the commencing September 1, 2014, the effective date of the Form 10 Registration Statement.Agenus Inc.
Item14. Principal AccountantAccounting Fees and ServicesServices. The aggregatefollowing table sets forth the fees for services provided and billed by Marcum LLP, and Schulman Lobel.The following is a summary of the fees billed by our principal accounting firm, Marcum, LLP,to the Company for professional services rendered for the fiscal years ended June 30, 2014December 31, 2016 and 2013 are as follows:2015.
| | Fiscal Year 2016 | | | Fiscal Year 2015 | | Audit fees | | $ | 88,500 | | | $ | 45,000 | | Audit-related fees | | $ | 15,458 | | | $ | - | | Tax Fees | | $ | - | | | $ | - | | All other fees | | $ | - | | | $ | - | | Total | | $ | 103,958 | | | $ | 45,000 | |
2014
TheAudit Fees:For the fiscal years ended December 31, 2016 and 2015, the aggregate audit fees incurred during fiscal 2014billed by our independent auditors were for Marcum, LLP,professional services rendered for audits and quarterly reviews of our principal accountant, were $51,000, coveringconsolidated financial statements, and assistance with reviews of registration statements and documents filed with the SEC.
Audit-Related Fees:Audit-related fees are for assurance and other activities not explicitly related to the audit of our annual financial statements andstatements.For the review of our financial statements for the nine months ended March 31, 2014. 2013
The aggregate fees incurred during fiscal 2013 for Marcum, LLP, our principal accountant, were $60,000, covering the audit of our annual financial statements and the review of our financial statements for fiscal year 2013 and 2012.
Thereended December 31, 2015, there were no audit-related fees billed by Marcum, LLP, our principal accountant during fiscal 2014.fees.
ThereTax Fees:For the fiscal years ended December 31, 2016 and 2015, there were no$0 and $6,926 in tax fees, billed by our principal accountants in fiscal 2014.respectively.
All Other Fees:For the fiscal years ended December 31, 2016 and 2015, there were $0 and $0, respectively No other fees, beyond those disclosed in this Item 14, were billed during fiscal 2014.
Audit Committee Pre-Approval Policies and ProceduresProcedures. The Audit Committee oversees and monitors our financial reporting process and internal control system, reviews and evaluates the audit performed by our registered independent public accountants and reports to the Board any substantive issues found during the audit. The Audit Committee is directly responsible for the appointment, compensation and oversight of the work of our registered independent public accountants. The Audit Committee convenes on a quarterly basis to approve each quarterly filing, and an annual basis to review the engagement of the Company’s external auditor. OurThe Audit Committee has considered whether the provision of Audit-Related Fees, Tax Fees, and all other fees as described above is compatible with maintaining Marcum LLP’s independence and has determined that such services for fiscal year 2015 and 2016 were compatible. All such services were approved the engagement with Marcum, LLP, our principal accountant, in advance. In additionby the Audit Committee approved tax services (as described above) provided by Marcum, LLP. These services were pre-approved by our Audit Committeepursuant to assureRule 2-01 of Regulation S-X under the Exchange Act to the extent that such services do not impair the auditor’s independence from us.rule was applicable.
PARTIV Item15. Exhibits, Financial Statement Schedules. (a) List of Documents filed as part of this Report (1) Consolidated Financial Statements The percentagefinancial statements and related notes, together with the report of hours expended on auditMarcum LLP appear at pages F-1 through F-21 following the Exhibit List as required by persons other than our principal accountant’s full time, permanent employees, did not exceed 50%.Part II, Item 8 “Financial Statements and Supplementary Data” of this Form 10-K. Item 15.(2) Financial Statements and Statement Schedules.
Schedules andare omitted because they are either not required, not applicable, or the information is otherwise included. (3) Exhibits The Company has filed with this report or incorporated by reference herein certain exhibits as specified below pursuant to Rule 12b-32 under the Exchange Act. See Exhibit Index following the signature page to this report for a complete list of documents filed with this report. Exhibit No. | (a) | 1. Financial Statements -See the Index to Consolidated Financial Statements below, beginning on page F-1.Description | | | 2.Financial Statement Schedules – See (c) below. | 2.1 | | 3Agreement and Plan of Merger and Reorganization, dated as of February 12, 2016, by and among Atrinsic, Inc. a Delaware corporation, Protagenic Acquisition Corp., a Delaware corporation and Protagenic Therapeutics, Inc., a Delaware corporation (Incorporated by reference to Exhibit 2.1 to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016).Exhibits– See (b) below. | | | | 2.2 | | Certificate of Merger as filed with the Delaware Secretary of State effective February 12, 2016 (Incorporated by reference to Exhibit 2.2 to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016). | | | | 2.3 | | Certificate of Ownership and Merger Merging Protagenic Therapeutics, Inc. with and into Atrinsic, Inc. (Incorporated by reference to Exhibit 2.1 to Company’s Current Report on Form 8-K, as filed with the SEC on June 20, 2016.) | | | | 2.4 | | Agreement of Merger of Atrinsic, Inc. and Protagenic Therapeutics, Inc. (Incorporated by reference to Exhibit 2.2 to Company’s Current Report on Form 8-K, as filed with the SEC on June 20, 2016.) | | | | 3.1 | | Amended and Restated Certificate of Incorporation of Atrinsic, Inc. (Incorporated by reference to Exhibit 3.1(A) to Company’s registration statement on Form 10, as filed with the SEC on July 2, 2014 (the “Form 10”)). | | | | 3.2 | | Certificate of Designations, Powers, Preferences and Other Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of Series B Convertible Preferred Stock of Atrinsic, Inc. (Incorporated by reference to Exhibit 3.1 to Company’s Current Report on Form 8-K, as filed with the SEC on February 4, 2016.) | | | | 3.3 | | Certificate of Elimination of Series A Convertible Preferred Stock of Atrinsic, Inc. (Incorporated by reference to Exhibit 3.1 to Company’s Current Report on Form 8-K, as filed with the SEC on April 5, 2016.) |
3.4 | | Certificate of Incorporation, Restated Certificate of Incorporation, Certificate of Amendment of Restated Certificate of Incorporation, Certificate for Renewal and Revival of Charter, Certificate for Renewal and Revival of Charter, and Certificate of Amendment of Restated Certificate of Incorporation, each of Protagenic Therapeutics, Inc., as filed with the Secretary of State of the State of Delaware on September 24, 2004, August 19, 2005, October 26, 2006, March 5, 2007, September 14, 2015 and October 2, 2015, respectively (Incorporated by reference to Exhibit 3.3 to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016). | | | | 3.5 | | Third Amended and Restated Certificate of Incorporation of Protagenic Therapeutics, Inc. (Incorporated by reference to Exhibit 3.1 to Company’s Current Report on Form 8-K, as filed with the SEC on June 20, 2016.) | | | | 3.6 | | Bylaws of Protagenic Therapeutics, Inc. (Incorporated by reference to Exhibit 3.1 to Company’s Current Report on Form 8-K, as filed with the SEC on July 15, 2016.) | | | | 4.1 | | Form of Warrant of Protagenic Therapeutics, Inc. (Incorporated by reference to Exhibit 4.1 to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | | | | 4.2 | | Form of Predecessor Warrant of Atrinsic, Inc. (Incorporated by reference to Exhibit 4.2 to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | | | | 4.3(i) | | Warrant of Protagenic Therapeutics, Inc. issued to Garo H. Armen on May 19, 2011. (Incorporated by reference to Exhibit 4.3(i) to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | | | | 4.3(ii) | | Warrant of Protagenic Therapeutics, Inc. issued to Garo H. Armen on February 18, 2013. (Incorporated by reference to Exhibit 4.3(ii) to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | | | | 4.4(i) | | Warrant of Protagenic Therapeutics, Inc. issued to Gregory H. Ekizian on July 7, 2011. (Incorporated by reference to Exhibit 4.4(i) to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | | | | 4.4(ii) | | Warrant of Protagenic Therapeutics, Inc. issued to PENSCO Trust Company, FBO Gregory H. Ekizian on February 18, 2013. (Incorporated by reference to Exhibit 4.4(ii) to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | | | | 4.5 | | Form of Placement Agent Warrant (Incorporated by reference to Exhibit 4.5 to Company’s Current Report on Form 8-K, as filed with the SEC on April 18, 2016). | | | | 10.1 | | Form of Securities Purchase Agreement, by and between Atrinsic, Inc. and the investors in the Private Offering. (Incorporated by reference to Exhibit 10.1 to Company’s Current Report on Form 8-K, as filed with the SEC on April 18, 2016.) | | | | 10.2 | (b) | ExhibitsForm of Registration Rights Agreement by and between Atrinsic, Inc. and the investors in the Private Offering. (Incorporated by reference to Exhibit 10.2 to Company’s Current Report on Form 8-K, as filed with the SEC on April 18, 2016.) | | | | 10.3 | | Placement Agency Agreement (Incorporated by reference to Exhibit 10.3 to Company’s Current Report on Form 8-K, as filed with the SEC on April 18, 2016). | | | | 10.4 | | Delaware Escrow Agreement, by and between Atrinsic Inc., Depositor and Delaware Trust Company. (Incorporated by reference to Exhibit 10.4 to Company’s Current Report on Form 8-K, as filed with the SEC on April 18, 2016.) |
10.5 | | Voting Agreement, effective February 12, 2016, among Atrinsic, Inc., the stockholders of Protagenic Therapeutics, Inc., and Strategic Bio Partners, LLC. (Incorporated by reference to Exhibit Numbers | | Description10.4 to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | 2.1 | | Second Amended Plan of Reorganization, dated March 7, 2013† | 2.210.6 | | Order Confirming Second Amended Plan of Reorganization, dated June 26, 2013†Indemnity Agreement, effective February 12, 2016, among Atrinsic, Inc., Strategic Bio Partners, LLC, and Iroquois Capital Management LLC and Hudson Bay Capital Management LP as guarantors. (Incorporated by reference to Exhibit 10.5 to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | 3.1(a) | | Amended and Restated Certificate of Incorporation filed on July 9, 2013† | 3.1(b)10.7 | | Certificate of Designations, Series A Convertible Preferred StockSplit-Off Agreement, effective February 12, 2016, among Atrinsic, Inc.,��B.E. Global LLC and MomSpot LLC. (Incorporated by reference to Exhibit 10.6 to Company’s Current Report on Form 8-K, as filed with the SEC on July 9, 2013† February 12, 2016.) | 3.1(c) | | Certificate of Correction of Certificate of Designations of Series A Convertible Preferred Stock filed on October 29, 2013† | 3.210.8 | | By-Laws(1)General Release Agreement, effective February 12, 2016, among Atrinsic, Inc., B.E. Global LLC and MomSpot LLC. (Incorporated by reference to Exhibit 10.7 to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | 10.1 | | Form of Option Agreement between the Company and each of Edward Gildea, Sebastian Giordano, and Jonathan Schechter† | 10.2**10.9 | | ConsultingSplit-Off Agreement, effective February 12, 2016, between Atrinsic, Inc. and Quintel Holdings, Inc. (Incorporated by reference to Exhibit 10.8 to Company’s Current Report on Form 8-K, as filed with the Company and Chord Advisors LLC† SEC on February 12, 2016.) | 10.3 | | Momspot Membership Interest Purchase Agreement entered into as of July 12, 2013† | 10.410.10 | | Momspot OperatingGeneral Release Agreement, entered intoeffective February 12, 2016, between Atrinsic, Inc. and Quintel Holdings, Inc. (Incorporated by reference to Exhibit 10.9 to Company’s Current Report on Form 8-K, as of Julyfiled with the SEC on February 12, 2013† 2016.) | 10.5 | | Momspot Contribution Agreement entered into as of July 12, 2013† | 10.610.11 | | Lock-upInvestor Note Exchange Agreement, effective February 12, 2016, among Atrinsic, Inc. and eachthe investors of Atrinsic, Inc. (Incorporated by reference to Exhibit 10.10 to Company’s Current Report on Form 8-K, as filed with the holders of the Series A SEC on February 12, 2016.) | | | | 10.12 | | Preferred Stock Exchange Agreement, effective February 12, 2016, among Atrinsic, Inc. and the investors of Atrinsic, Inc. (Incorporated by reference to Exhibit 10.11 to Company’s Current Report on Form 8-K, as of Julyfiled with the SEC on February 12, 2013†2016.) | 10.7 | | | 10.13 | | Employment Agreement, effective January 1, 2014, between Protagenic Therapeutics Canada (2006) Inc. and Dr. Robert Ziroyan. (Incorporated by reference to Exhibit 10.12 to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.)** | | | | 10.14 | | Consulting Agreement, as amended, between Protagenic Therapeutics Canada (2006) Inc. and Dr. Dalia Barsyte. (Incorporated by reference to Exhibit 10.13 to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | | | | 10.15 | | Consulting Agreement, effective January 23, 2015, between Protagenic Therapeutics, Inc. and Dr. Robert B. Stein. (Incorporated by reference to Exhibit 10.15 to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.)** | | | | 10.16 | | Consulting Agreement, effective June 3, 2016, between Protagenic Therapeutics, Inc. and Christina Fam Faragalla. (Lotus Clinical Consulting, LLC)** | | | | 10.17 | | Protagenic Therapeutics, Inc. 2006 Employee, Director and Consultant Stock Plan (Incorporated by reference to Exhibit 10.16 to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.)** | | | | 10.18 | | Form of Nonqualified Stock Option Award Agreement under the 2006 Employee, Director and Consultant Stock Plan. (Incorporated by reference to Exhibit 10.17 to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) ** |
10.19 | | Form of Indemnification Agreement†Agreement. (Incorporated by reference to Exhibit 10.7 to the Form 10.)** | 10.8 | | | 10.20(i) | | Technology License Agreement, effective July 21, 2005, between The University of Toronto Innovations Foundation and Protagenic Therapeutics, Inc. (Incorporated by reference to Exhibit 10.19(i) to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | | | | 10.20(ii) | | First Amendment to Technology License Agreement, effective February 18, 2015, between the Governing Council of the University of Toronto and Protagenic Therapeutics, Inc. (Incorporated by reference to Exhibit 10.19(ii) to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | | | | 10.21(i) | | Sponsored Research Agreement, effective April 1, 2014, between the Governing Council of the University of Toronto and Protagenic Therapeutics Canada (2006), Inc., Protagenic Therapeutics, Inc. (Incorporated by reference to Exhibit 10.20(i) to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | | | | 10.21(ii) | | Amendment to the Sponsored Research Agreement, effective April 1, 2015, between the Governing Council of the University of Toronto and Protagenic Therapeutics Canada (2006), Inc., Protagenic Therapeutics, Inc. (Incorporated by reference to Exhibit 10.20(ii) to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | | | Amended and Restated Promissory Note dated February 11, 2014 issued by the Company to Hudson Bay Master Fund Ltd.† | 10.910.22(i) | | Bridge Loan Agreement, effective April 15, 2015, between Protagenic Therapeutics, Inc. and Dr. Garo H. Armen. (Incorporated by reference to Exhibit 10.21(i) to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | | | | 10.22(ii) | | Bridge Loan Agreement, effective May 28, 2015, between Protagenic Therapeutics, Inc. and Dr. Garo H. Armen. (Incorporated by reference to Exhibit 10.21(ii) to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | | | | 10.22(iii) | | Bridge Loan Agreement, effective July 1, 2015, between Protagenic Therapeutics, Inc. and Dr. Garo H. Armen. (Incorporated by reference to Exhibit 10.21(iii) to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | | | | 10.22(iv) | | Bridge Loan Agreement, effective September 1, 2015, between Protagenic Therapeutics, Inc. and Dr. Garo H. Armen. (Incorporated by reference to Exhibit 10.21(iv) to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | | | | 10.22(v) | | Bridge Loan Agreement, effective October 29, 2015, between Protagenic Therapeutics, Inc. and Dr. Garo H. Armen. (Incorporated by reference to Exhibit 10.21(v) to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | | | | 10.22(vi) | | Bridge Loan Agreement, effective December 23, 2015, between Protagenic Therapeutics, Inc. and Dr. Garo H. Armen. (Incorporated by reference to Exhibit 10.21(vi) to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | | | | 10.23 | | Stock Purchase Agreement, effective December 21, 2015, between Mark Berg and Alexander Arrow. (Incorporated by reference to Exhibit 10.22 to Company’s Current Report on Form 8-K, as filed with the SEC on February 12, 2016.) | | | | 10.24 | | Protagenic Therapeutics, Inc. 2016 Equity Compensation Plan. (Incorporated by reference to Exhibit 10.1 to Company’s Current Report on Form 8-K, as filed with the SEC on June 20, 2016.)** | | | | 10.25 | | Form of Incentive Stock Option Agreement under the Protagenic Therapeutics, Inc. 2016 Equity Compensation Plan. (Incorporated by reference to Exhibit 10.2 to Company’s Current Report on Form 8-K, as filed with the SEC on June 20, 2016.) ** |
10.26 | | Form of Non-Qualified Stock Option Agreement under the Protagenic Therapeutics, Inc. 2016 Equity Compensation Plan. (Incorporated by reference to Exhibit 10.3 to Company’s Current Report on Form 8-K, as filed with the SEC on June 20, 2016.) ** | | | | 10.27 | | Letter dated June 17, 2016 from Schulman Lobel Zand Katzen Williams & Blackman LLP re change in Certifying accountant. (Incorporated by reference to Exhibit 10.4 to Company’s Current Report on Form 8-K, as filed with the SEC on June 20, 2016.) | | | | 14.1 | | AmendedCompany Code of Business Conduct and Restated Promissory Note datedEthics, adopted February 11, 2014 issued by the Company to Iroquois Master Fund Ltd.† 24, 2017. | 10.1014.2 | | Security Agreement datedCompany Guidelines on Significant Corporate Governance Issues, adopted February 11, 2014 by and among the Company, Iroquois Master Fund Ltd, and Hudson Bay Master Fund Ltd.† 24, 2017. | 10.1114.3 | | Promissory Note dated August 15, 2014 issued by the Company to Hudson Bay Master Fund Ltd. † Process for Security Holder Communications with Directors, adopted February 24, 2017. |
10.12 | | Promissory Note dated August 15, 2014 issued | 21.1 | | Subsidiaries of Atrinsic, Inc. (Incorporated by reference to Exhibit 21.1 to Company’s Current Report on Form 8-K, as filed with the CompanySEC on February 12, 2016.) | | | | 23.1 | | Consent of Marcum LLP | | | | 24.1 | | Power of Attorney (included on signature page). | | | | 31.2 | | Certification of Chief Financial Officer pursuant to Iroquois Master Fund Ltd. †Rule 13a-14(a) or Rule 15d-14(a). | | | | 32.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b). | | | | 99.1 | | Charter of the Science Committee of the Board of Directors of the Company. |
31.1101.INS | | Chief Executive Officer Certification as required under section 302 of the Sarbanes Oxley Act (*€) | 31.2 | | Chief Financial Officer Certification as required under section 302 of the Sarbanes Oxley Act (*€) | 32.1* | | Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes Oxley Act * | 101.INS | | XBRL Instance Document (2)(*€) | 101.CAL | | | 101.CAL | | XBRL Taxonomy Extension Schema Document (2)(*€) | 101.SCH | | | 101.SCH | | XBRL Taxonomy Extension Calculation Linkbase Document (2)(*€) | 101.LAB | | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document (2)(*€) | 101.PRE | | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document (2)(*€) | 101.DEF | | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document (2)(*€) |
† Filed as an Exhibit to our Registration Statement on Form 10, dated July 2, 2014 and as amended August 18, 2014, and incorporated hereunder by reference.
*
(*) | | - Furnished, not filed, in accordance with item 601(32)(ii) of Regulation S-K. ** This exhibit is a management contract or compensatory plan or arrangement.
*€ Filed herewith.
(1) Filed on June 10, 2005 as Exhibit 3.4 to the Registration Statement on Form 10-SB and incorporated herein by reference.
(2) Furnished with this report. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
| (c) | Financial Statement Schedules- No financial statement schedules are included because the information is either provided in the financial statements or is not required under the related instructions or is inapplicable and such schedules therefore have been omitted. |
SIGNATURESSIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. | ATRINSIC,PROTAGENIC THERAPEUTICS, INC.
| | | | Date: October 14, 2014April 17, 2017 | By: | /s/ EDWARD GILDEAGaro H. Armen | | | Name: | Edward GildeaGaro H. Armen | | | Title: | ChiefChairman (Principal Executive Officer and Duly Authorized Officer) |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Garo H. Armen as the undersigned’s true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for the undersigned and in the undersigned’s name, place, and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming that said attorney-in-fact and agent or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SignatureSignatures | | Title | | Date | | | | | | /s/ Garo H. Armen | | Director and Chairman of the Board | | April 17, 2017 | Garo H. Armen | | (Principal Executive Officer) | | | /s/ EDWARD GILDEA | | | | | /s/ Alexander K. Arrow | | Chief ExecutiveFinancial Officer and Director, | | April 17, 2017 | Alexander K. Arrow | | (Principal Financial Officer) | | | October 14, 2014 | | | | | Edward Gildea /s/ Robert B. Stein | | Director | | April 17, 2017 | Robert B. Stein | | | | | (Principal Executive Officer) | | | | | /s/ Khalil Barrage | | Director | | April 17, 2017 | Khalil Barrage | | | | | | | | | | /s/ Gregory H. Ekizian | | Director | | April 17, 2017 | Gregory H. Ekizian | | | | | | | | | | /s/ Joshua Silverman | | Director | | April 17, 2017 | Joshua Silverman | | | | |
PROTAGENIC THERAPEUTICS, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 | | | | | | Page | /s/ DAVID HORIN | | Chief Financial Officer | | October 14, 2014 | David Horin | | (Principal Financial Officer) | | | | | | | | /s/ JONATHAN SCHECHTER | | Director | | October 14, 2014 | Jonathan Schechter | | | | |
INDEX TO FINANCIAL STATEMENTS
Atrinsic, Inc.
Years Ended June 30, 2014 and 2013 (audited)
| Page | Report of Independent Registered Public Accounting Firm | F-2F-1 | Consolidated Financial Statements: | | Consolidated Balance Sheets - June 30, 2014 (Successor Company) and 2013 (Predecessor Company) | F-3 | | | Consolidated Statements of Operations for the periods from July 12, 2013 to June 30, 2014 (Successor Company), Eleven Days ended July 11, 2013 (Predecessor Company), and Year Ended June 30, 2013 (Predecessor Company)Comprehensive Loss | F-4 | | | Consolidated Statements of Stockholders’ Equity/Deficiency for the periods from July 12, 2013 to June 30, 2014 (Successor Company), Eleven Days ended July 11, 2013 (Predecessor Company), and the Years Ended June 30, 2013and 2012 (Predecessor Company)Equity (Deficit) | F-5 | | | Consolidated Statements of Cash Flows for the periods from July 12, 2013 to June 30, 2014 (Successor Company), Eleven Days ended July 11, 2013 (Predecessor Company), and the Years Ended June 30, 2013 | F-6 | | | Notes to Consolidated Financial Statements | F-7 |
REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Audit Committee of the Board of Directors and Shareholders of Atrinsic,Protagenic Therapeutics, Inc. We have audited the accompanying consolidated balance sheets of Atrinsic,Protagenic Therapeutics, Inc.(the (the “Company”) as of June 30, 2014 (Successor Company)December 31, 2016 and 2013 (Predecessor Company),2015, and the related consolidated statements of operations changes inand comprehensive loss, stockholders’ deficiencyequity (deficit) and cash flows for the periods from July 12, 2013 to June 30, 2014 (Successor Company), eleven days ended July 11, 2013 (Predecessor Company), and the year ended June 30, 2013 (Predecessor Company).years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financialconsolidatedfinancial position of Atrinsic,Protagenic Therapeutics, Inc., as of June 30, 2014 (Successor Company)December 31, 2016 and 2013 (Predecessor Company),2015 and the consolidated results of its operations and its cash flows for the periods from July 12, 2013 to June 30, 2014 (Successor Company), eleven daysyearsthen ended July 11, 2013 (Predecessor Company), and the year ended June 30, 2013 (Predecessor Company) in conformity with accounting principles generally accepted in the United States of America. The
/s/ Marcumllp New York, NY April 17, 2017 Protagenic Therapeutics, Inc., and Subsidiaries CONSOLIDATED BALANCE SHEETS | | December 31, | | | December 31, | | | | 2016 | | | 2015 | | | | | | | | | | | ASSETS | | | | | | | | | | | | | | | | | | CURRENT ASSETS | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 3,100,398 | | | $ | 3,343 | | Prepaid expenses | | | 60,417 | | | | - | | | | | | | | | | | TOTAL CURRENT ASSETS | | | 3,160,815 | | | | 3,343 | | | | | | | | | | | EQUIPMENT - NET | | | | | | | | | | | | | | | | | | | | | 1,097 | | | | 1,569 | | | | | | | | | | | OTHER ASSETS | | | - | | | | 6,230 | | | | | | | | | | | TOTAL ASSETS | | $ | 3,161,912 | | | $ | 11,142 | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | | | | | | | | | | | | | | | | | CURRENT LIABILITIES | | | | | | | | | | | | | | | | | | Bridge loan payable - stockholder and accrued interest | | $ | - | | | $ | 399,103 | | Accounts payable and accrued expenses | | | 167,987 | | | | 279,255 | | Derivative liability | | | 516,870 | | | | - | | | | | | | | | | | TOTAL CURRENT LIABILITIES | | | 684,857 | | | | 678,358 | | | | | | | | | | | COMMITMENTS AND CONTINGENCIES | | | | | | | | | | | | | | | | | | STOCKHOLDERS' EQUITY (DEFICIT) | | | | | | | | | Preferred stock, par value $0.000001: 20,000,000 shares authorized; 0 shares designated | | | - | | | | - | | Series B convertible preferred stock, $0.000001 par value, 18,000,000 shares authorized, 872,766 shares issued and outstanding at December 31, 2016, and 0 shares issued and outstanding at December 31, 2015 | | | 1 | | | | - | | Common stock, $.0001 par value, 100,000,000 shares authorized, 10,257,078 shares issued and outstanding at December 31, 2016 , 7,612,838 shares issued and 6,612,838 shares outstanding at December 31, 2015 | | | 1,026 | | | | 761 | | Additional paid-in-capital | | | 11,239,786 | | | | 5,886,971 | | Accumulated deficit | | | (8,582,123 | ) | | | (6,306,297 | ) | Treasury stock, at cost $.10 per share, 1,000,000 shares, for December 31, 2015 | | | - | | | | (100,000 | ) | Accumulated other comprehensive loss | | | (181,635 | ) | | | (148,651 | ) | | | | | | | | | | TOTAL STOCKHOLDERS' EQUITY (DEFICIT) | | | 2,477,055 | | | | (667,216 | ) | | | | | | | | | | TOTAL LIABILITIES ANDSTOCKHOLDERS'EQUITY (DEFICIT) | | $ | 3,161,912 | | | $ | 11,142 | |
See accompanying notes to the consolidated financial statements have been prepared assuming that Protagenic Therapeutics, Inc., and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPRHENSIVE LOSS | | For the year ended December 31, | | | | 2016 | | | 2015 | | OPERATIONS | | | | | | | | | REVENUE | | $ | - | | | $ | - | | OPERATING AND ADMINISTRATIVE EXPENSES | | | | | | | | | Research and development | | | 533,693 | | | | 456,274 | | General and administrative | | | 1,295,639 | | | | 568,764 | | Goodwill impairment | | | 404,169 | | | | - | | TOTAL OPERATING AND ADMINISTRATIVE EXPENSES | | | 2,233,501 | | | | 1,025,038 | | LOSS FROM OPERATIONS | | | (2,233,501 | ) | | | (1,025,038 | ) | OTHER (EXPENSE) INCOME | | | | | | | | | Interest income | | | 907 | | | | - | | Interest expense - stockholder | | | (7,162 | ) | | | (11,473 | ) | Realized loss on foreign exchange transactions | | | (6,625 | ) | | | 13,089 | | Change in fair value of derivative liability | | | (29,445 | ) | | | - | | TOTAL OTHER (EXPENSE) INCOME | | | (42,325 | ) | | | 1,616 | | NET LOSS | | $ | (2,275,826 | ) | | $ | (1,023,422 | ) | COMPREHENSIVE LOSS | | | | | | | | | NET LOSS | | $ | (2,275,826 | ) | | $ | (1,023,422 | ) | Other Comprehensive Loss - net of tax | | | | | | | | | Foreign exchange translation loss | | | (32,984 | ) | | | (1,070 | ) | TOTAL COMPREHENSIVE LOSS | | $ | (2,308,810 | ) | | $ | (1,024,492 | ) | Net loss per share - Basic and Diluted | | $ | (0.43 | ) | | $ | (0.15 | ) | Weighted average common shares - Basic and Diluted | | | 5,306,035 | | | | 6,613,338 | |
See accompanying notes to the Company will continue as a going concern. As more fully described in Note 1, on June 26, 2013, the Company emerged from Chapter 11 and on July 12, 2013 adopted fresh start accounting. The Company has continued to incur net losses through June 30, 2014 and have yet to establish profitable operations. These factors among others create a substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. /s/ Marcum LLP
MarcumllpProtagenic Therapeutics, Inc., and Subsidiaries
New York, NYCONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
October 14, 2014For the Year Ended December 31, 2016
ATRINSIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share data)
| Successor Company | | Predecessor Company | | | June 30, | | June 30, | | | 2014 | | 2013 | | ASSETS | | | | | | | Current assets | | | | | | | Cash | $ | 101 | | $ | 717 | | Prepaid insurance | | 144 | | | 237 | | Total current assets | | 245 | | | 954 | | | | | | | | | Property and equipment (net of accumulated depreciation of $0) | | 1 | | | - | | Total assets | $ | 246 | | $ | 954 | | | | | | | | | LIABILITIES AND SHAREHOLDERS' DEFICIT | | | | | | | Current liabilities | | | | | | | Accounts payable | $ | 138 | | $ | 15,566 | | Accrued interest expense - stockholders | | 3 | | | - | | Notes payable | | - | | | 2,614 | | Total current liabilities | | 141 | | | 18,180 | | Notes payable - due to stockholders | | 175 | | | - | | Total liabilities | | 316 | | | 18,180 | | | | | | | | | COMMITMENTS AND CONTINGENCIES | | - | | | - | | | | | | | | | Shareholders' deficit: | | | | | | | Series A convertible preferred stock, $0.000001 par value, 5,000,000,000 shares authorized,4,600,000,000 shares issued and outstanding at June 30, 2014; no shares issued or outstanding at June 30, 2013; ( Liquidation preference 20,700,000 as of June 30, 2014) | | 5 | | | - | | Common stock, $.000001 par value, 100,000,000,000 shares authorized, 400,000,000 shares issued and outstanding at June 30, 2014; par value $0.01, 100,000,000 authorized and outstanding at June 30, 2013. | | - | | | 1,000 | | Additional paid-in capital | | 1,053 | | | 182,281 | | Common stock, held in treasury, at cost, 0 and 681,509 shares at June 30, 2014 and June 30, 2013, respectively | | - | | | (4,981 | ) | Accumulated deficit | | (1,079 | ) | | (195,526 | ) | Shareholders' deficit attributed to Atrinsic, Inc. | | (21 | ) | | (17,226 | ) | | | | | | | | Non-controlling interest | | (49 | ) | | - | | Total shareholders' deficit | | (70 | ) | | (17,226 | ) | TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT | $ | 246 | | $ | 954 | |
| | Series B Convertible Preferred Stock | | | Common Stock | | | Additional Paid-in- | | | Accumulated | | | Treasury Stock | | | Other Comprehensive | | | Stockholders' (Deficit) | | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | (Deficit) | | | Shares | | | Amount | | | Loss | | | Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | BALANCE - December 31, 2014 | | | - | | | | - | | | | 7,612,838 | | | $ | 761 | | | $ | 5,409,103 | | | $ | (5,282,875 | ) | | | (1,000,000 | ) | | $ | (100,000 | ) | | $ | (147,581 | ) | | $ | (120,592 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation (loss) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,070 | ) | | | (1,070 | ) | Stock compensation - stock options | | | | | | | | | | | | | | | | | | | 477,868 | | | | | | | | | | | | | | | | | | | | 477,868 | | Net (loss) | | | | | | | | | | | | | | | | | | | | | | | (1,023,422 | ) | | | | | | | | | | | | | | | (1,023,422 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | BALANCE - January 1, 2016 | | | - | | | | - | | | | 7,612,838 | | | | 761 | | | | 5,886,971 | | | | (6,306,297 | ) | | | (1,000,000 | ) | | | (100,000 | ) | | | (148,651 | ) | | | (667,216 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Merger: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Atrinsic shares converted | | | 297,468 | | | | 1 | | | | 25,867 | | | | 3 | | | | 63,381 | | | | | | | | | | | | | | | | | | | | 63,385 | | Protagenic shares converted | | | 6,612,838 | | | | 6 | | | | (7,612,838 | ) | | | (761 | ) | | | (99,245 | ) | | | | | | | 1,000,000 | | | | 100,000 | | | | | | | | - | | Private offerings, net of expenses | | | 4,108,460 | | | | 4 | | | | | | | | | | | | 4,761,793 | | | | | | | | | | | | | | | | | | | | 4,761,797 | | Foreign currency translation (loss) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (32,984 | ) | | | (32,984 | ) | Stock compensation - stock options | | | | | | | | | | | | | | | | | | | 546,134 | | | | | | | | | | | | | | | | | | | | 546,134 | | Conversion of series B Preferred Stock | | | (10,146,000 | ) | | | (10 | ) | | | 10,146,000 | | | | 1,015 | | | | (1,005 | ) | | | | | | | | | | | | | | | | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of Bridge loan | | | | | | | | | | | 60,211 | | | | 6 | | | | 75,259 | | | | | | | | | | | | | | | | | | | | 75,265 | | Stock options converted to common | | | | | | | | | | | 25,000 | | | | 2 | | | | 6,498 | | | | | | | | | | | | | | | | | | | | 6,500 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | | | | | | | | | | | | | | | | | | | | | (2,275,826 | ) | | | | | | | | | | | | | | | (2,275,826 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | BALANCE - December 31, 2016 | | | 872,766 | | | $ | 1 | | | | 10,257,078 | | | $ | 1,026 | | | $ | 11,239,786 | | | $ | (8,582,123 | ) | | $ | - | | | $ | - | | | $ | (181,635 | ) | | $ | 2,477,055 | |
TheSee accompanying notes are an integral part of theseto the consolidated financial statements.
ATRINSIC, INC. AND SUBSIDIARIESProtagenic Therapeutics, Inc., and Subsidiaries
CONSOLIDATEDCONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)CASH FLOWS
| Successor Company | | | Predecessor Company | | | For the period from July 12, 2013 to
| | | For the period from July 1, 2013 to
| | For the year ended
| | | June 30, | | | July 11, | | June 30, | | | 2014 | | | 2013 | | 2013 | | Revenues | $ | - | | | | - | | $ | 85 | | | | | | | | | | | | | Operating expenses | | | | | | | | | | | General and administrative | $ | 975 | | | | - | | $ | 758 | | Total operating expenses | | 975 | | | | - | | | 758 | | Loss from operations | | (975 | ) | | | - | | | (673 | ) | | | | | | | | | | | | Other income (expenses) | | | | | | | | | | | Other income | | 59 | | | | - | | | - | | Interest expenses - stockholders | | (3 | ) | | | - | | | - | | Other expenses | | (5 | ) | | | - | | | (133 | ) | Net loss before reorganization items | | (924 | ) | | | - | | | (806 | ) | | | | | | | | | | | | Reorganization items | | | | | | | | | | | Gain on reorganization, net | | - | | | | 778 | | | - | | Legal and professional fees | | (204 | ) | | | - | | | (221 | ) | Total reorganization items | | (204 | ) | | | 778 | | | (221 | ) | Net (loss) income | | (1,128 | ) | | | 778 | | | (1,027 | ) | | | | | | | | | | | | Less: net loss attributable to non-controlling interest | | (49 | ) | | | - | | | - | | Net (loss) income attributable to Atrinsic | $ | (1,079 | ) | | $ | 778 | | $ | (1,027 | ) | | | | | | | | | | | | Net loss per share attributable to Atrinsic common stockholders | | | | | | | | | | | Basic | $ | (0.00 | ) | | $ | 0.01 | | $ | (0.01 | ) | Diluted | $ | (0.00 | ) | | $ | 0.01 | | $ | (0.01 | ) | | | | | | | | | | | | Weighted average shares outstanding: | | | | | | | | | | | Basic | | 400,000,000 | | | | 100,000,000 | | | 100,000,000 | | Diluted | | 400,000,000 | | | | 100,000,000 | | | 100,000,000 | |
| | For the year ended December 31, | | | | 2016 | | | 2015 | | | | | | | | | | | CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | Net Loss | | $ | (2,275,826 | ) | | $ | (1,023,422 | ) | Adjustments to reconcile net loss to net cash used inoperating activities | | | | | | | | | Depreciation expense | | | 534 | | | | 143 | | Goodwill impairment | | | 404,169 | | | | - | | Stock based compensation | | | 546,134 | | | | 478,629 | | Accretion to bridge loan | | | 7,162 | | | | 11,473 | | Legal fees satisfied through issuance of Series B preferred stock | | | 150,000 | | | | - | | Change in fair value of the derivative liability | | | 29,445 | | | | - | | Changes in operating assets and liabilities | | | | | | | | | Prepaid expenses | | | (60,417 | ) | | | - | | Other assets | | | 6,230 | | | | (2,916 | ) | Accounts payable and accrued expenses | | | 52,250 | | | | 154,752 | | | | | | | | | | | NET CASH USED IN OPERATING ACTIVITIES | | | (1,140,319 | ) | | | (381,341 | ) | | | | | | | | | | CASH FLOWS USED IN INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | Purchase of equipment | | | - | | | | (1,791 | ) | | | | | | | | | | NET CASH USED IN INVESTING ACTIVITIES | | | - | | | | (1,791 | ) | | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | Proceeds from exercise of stock options | | | 6,500 | | | | - | | Proceeds from bridge loan | | | 19,000 | | | | 387,630 | | Proceeds from issuance of Series B Preferred Stock | | | 4,283,437 | | | | - | | | | | | | | | | | NET CASH PROVIDED BY FINANCING ACTIVITIES | | | 4,283,938 | | | | 387,630 | | | | | | | | | | | Effect of exchange rate on cash and cash equivalents | | | (46,564 | ) | | | (23,888 | ) | | | | | | | | | | NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 3,097,055 | | | | (19,390 | ) | | | | | | | | | | CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | 3,343 | | | | 22,733 | | | | | | | | | | | CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 3,100,398 | | | $ | 3,343 | | | | | | | | | | | SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | | | | | | | Cash paid for interest expense | | $ | - | | | $ | - | | Cash paid for income taxes | | $ | - | | | $ | - | | | | | | | | | | | NONCASH TRANSACTIONS | | | | | | | | | Debt settled with issuance of Series B preferred stock | | $ | 425,265 | | | $ | - | | Reclassification of warrants to derivative liabilities from equity | | $ | 487,425 | | | $ | - | | Shares issued in connection with reverse business combination | | $ | 404,169 | | | $ | - | | Accrued liabilities paid through the issuances of Series B preferred stock | | $ | 150,000 | | | $ | - | | Series B Preferred stock converted to common stock | | $ | 10 | | | $ | - | |
TheSee accompanying notes are an integral partto the consolidated financial statements
ATRINSIC, INC. ANDPROTAGENIC THERAPEUTICS, INC & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(Dollars in thousands, except share data)
NOTESTO THE CONSOLIDATED FINANCIAL STATEMENTS | Convertible | | | | Additional | | | | Accumulated Other | | | | | | | | | Preferred Stock | | Common Stock | | Paid-In | | Accumulated | | Comprehensive | | Treasury Stock | | Noncontrolling | | Total | | | Shares | | Amount | | Shares | | Amount | | Capital | | Deficit | | Loss | | Shares | | Amount | | Interest | | Equity (Deficiency) | | Balance at June 30, 2012 (Predecessor Company) | | - | | $ | - | | | 100,000,000 | | $ | 1,000 | | $ | 182,250 | | $ | (194,513 | ) | $ | 14 | | | 681,509 | | $ | (4,981 | ) | $ | - | | $ | (16,230 | ) | Net loss | | - | | | - | | | - | | | - | | | - | | | (1,027 | ) | | - | | | - | | | - | | | - | | | (1,027 | ) | Foreign currency translation adjustment | | - | | | - | | | - | | | - | | | - | | | 14 | | | (14 | ) | | - | | | - | | | - | | | - | | Capital infusion | | - | | | - | | | - | | | - | | | 31 | | | - | | | - | | | - | | | - | | | - | | | 31 | | Balance at June 30, 2013 (Predecessor Company) | | - | | $ | - | | | 100,000,000 | | $ | 1,000 | | $ | 182,281 | | $ | (195,526 | ) | $ | - | | | 681,509 | | $ | (4,981 | ) | $ | - | | $ | 17,226 | | Cancellation of predecessor company common stock | | - | | | - | | | (100,000,000 | ) | | (1,000 | ) | | - | | | - | | | - | | | - | | | - | | | - | | | (1,000 | ) | Elimination of predecessor company capital in excess of par | | - | | | - | | | - | | | - | | | (182,281 | ) | | - | | | - | | | - | | | - | | | - | | | (182,281 | ) | Elimination of predecessor company accumulated deficit | | - | | | - | | | - | | | - | | | - | | | 195,526 | | | - | | | - | | | - | | | - | | | 195,526 | | Elimination of predecessor company treasury stock | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (681,509 | ) | | 4,981 | | | - | | | 4,981 | | Issuance of predecessor company convertible preferred stock | | 4,600,000,000 | | | 5 | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 5 | | Issuance of predecessor company common stock | | | | | | | | 400,000,000 | | | | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | Gain from reorganization | | - | | | - | | | - | | | - | | | - | | | 778 | | | - | | | - | | | - | | | - | | | 778 | | Elimination of predecessor company accumulated deficit | | - | | | - | | | - | | | - | | | 778 | | | (778 | ) | | - | | | - | | | - | | | - | | | - | | Balance at July 11, 2013 (Predecessor Company) | | 4,600,000,000 | | $ | 5 | | | 400,000,000 | | $ | - | | $ | 778 | | $ | - | | $ | - | | | - | | $ | - | | $ | - | | $ | 783 | | Net loss attributable to non-controlling interest | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (49 | ) | | (49 | ) | Net loss attributable to Atrinsic | | - | | | - | | | - | | | - | | | - | | | (1,079 | ) | | - | | | - | | | - | | | - | | | (1,079 | ) | Stock-based compensation | | - | | | - | | | - | | | - | | | 275 | | | - | | | - | | | - | | | - | | | - | | | 275 | | Balance at June 30, 2014 (Successor Company) | | 4,600,000,000 | | $ | 5 | | | 400,000,000 | | $ | - | | $ | 1,053 | | $ | (1,079 | ) | $ | - | | | - | | $ | - | | $ | (49 | ) | $ | (70 | ) |
December 31, 2016 NOTE 1 –ORGANIZATION AND NATURE OF BUSINESS Company Background Protagenic Therapeutics, Inc. (“we,” “our,” “Protagenic” or “the Company”), a Delaware corporation with one subsidiary named Protagenic Therapeutics Canada (2006) Inc., a corporation formed in 2006 under the laws of the Province of Ontario, Canada. The accompanying notes are an integral part of these consolidated statements. ATRINSIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30,
(DollarsCompany was most recently known as Atrinsic, Inc., a company that was once a reporting company under the Securities Act, but that, in thousands)
| Successor Company | | | Predecessor Company | | | For the periods from July 12, 2013 to | | | For the period from July 1, 2013 to | | Fiscal year ended | | | June 30, | | | July 11, | | June 30, | | | 2014 | | | 2013 | | 2013 | | Cash flows from operating activities | | | | | | | | | | | Net income (loss) | $ | (1,079 | ) | | $ | 778 | | $ | (1,027 | ) | | | | | | | | | | | | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | Net loss attributable to non-controlling interest in subsidiary | | (49 | ) | | | - | | | - | | Non-cash reorganization items | | - | | | | (778 | ) | | - | | Accrued interest on notes payable | | 3 | | | | - | | | - | | Stock-based compensation | | 275 | | | | - | | | - | | Changes in operating assets and liabilities of business, net of acquisitions: | | | | | | | | | | | Accounts receivable, net | | - | | | | - | | | 308 | | Prepaid insurance | | 93 | | | | - | | | 207 | | Other non-current assets | | - | | | | - | | | 487 | | Accounts payable, excluding reorganization items | | (33 | ) | | | - | | | (292 | ) | Other long-term liabilities | | - | | | | - | | | (7 | ) | Net cash used in operating activities | | (790 | ) | | | - | | | (324 | ) | | | | | | | | | | | | Cash flows from investing activities | | | | | | | | | | | Proceeds from sale of fixed assets | | - | | | | - | | | 15 | | Purchase of property and equipment | | (1 | ) | | | - | | | - | | Net cash (used in) provided by investing activities | | (1 | ) | | | - | | | 15 | | | | | | | | | | | | | Cash flows from financing activities | | | | | | | | | | | Proceeds from issuance of note payable | | 175 | | | | - | | | - | | Capital infusion | | - | | | | - | | | 31 | | Net cash provided by financing activities | | 175 | | | | - | | | 31 | | | | | | | | | | | | | Net decrease in cash | | (616 | ) | | | - | | | (278 | ) | Cash at beginning of period | | 717 | | | | 717 | | | 995 | | Cash at end of period | $ | 101 | | | $ | 717 | | $ | 717 | | | | | | | | | | | | | Supplemental reorganization items | | | | | | | | | | | Payment for reorganization items | $ | - | | | $ | - | | $ | 221 | | Income taxes paid | $ | - | | | | - | | | - | | Interest paid | $ | - | | | | - | | | - | |
The accompanying notes are an integral part of these consolidated statements.
ATRINSIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share2012 and per share data)
NOTE 1 – NATURE OF OPERATIONS
Prior to filing2013, reorganized under Chapter 11 on June 15, 2012,of the United States Bankruptcy Code and emerged from bankruptcy. On February 12, 2016, the Company acquired Protagenic Therapeutics, Inc. through a reverse merger. On June 17, 2016, Protagenic Therapeutics, Inc. (the then wholly-owned subsidiary of Atrinsic, Inc.) was a direct marketing company basedmerged with and into Atrinsic, Inc. Atrinsic, Inc. was the surviving corporation in the United States. this merger and changed its name from Atrinsic, Inc. to Protagenic Therapeutics, Inc.
The Company had two main service offerings: (i) transactional services; and (ii) Subscription services. Transactional services offered full service online marketing and distribution servicesoriginally incorporated as a Delaware corporation under the name Millbrook Acquisition Corp. in 1994. In 2007, Millbrook Acquisition Corp. changed its name to New Motion, Inc. In 2008, New Motion, Inc. merged with Traffix, Inc., pursuant to which were targeted and measurable online campaigns and programs for marketing partners, corporate advertisers, or their agencies, generating qualified customer leads, online responses and activities, or increased brand recognition. Subscription services offeredTraffix, Inc. became a portfoliowholly-owned subsidiary of subscription based content applications directNew Motion, Inc. In 2009, New Motion, Inc. changed its name to users working with wireless carriers and other distributors. Atrinsic, Inc. On June 15, 2012, the Company filed Chapter 11 in the United States Bankruptcy Court in Southern District of New York (Case No. 12-12553). As of that date, the Company terminated all remaining employees and ceased its normal business operations. Prior to March 30, 2012, the Company was a reporting company under the Exchange Act, and filed periodic reports with the Securities and Exchange Commission (“SEC”). On March 30, 2012, the Company filed a Form 15 with the SEC, terminating its obligation to file periodic reports under Sections 13 and 15(d) of the Exchange Act. Prior to the filing of our Plan of Reorganization under Chapter 11 of the United States Bankruptcy Code on June 15, 2012 (the “Plan of Reorganization”), the Company was a marketer of direct-to-consumer subscription products and an Internet search marketing agency. The Company sold entertainment and lifestyle subscription products directly to consumers, which the Company marketed through the Internet. The Company also sold Internet marketing services to our corporate and advertising clients. The Company emerged from Chapter 11 on June 26, 2013, at which time the Plan of Reorganization was conditionally confirmed by the United States Bankruptcy Court, Southern District of New York. The confirmation was subject to the consummation of the Company’s acquisition of a 51% controlling interest in MomspotMomSpot LLC (“Momspot”MomSpot”), which was subsequently completed on July 12, 2013 (“Emergence Date”). Momspot’sMomSpot’s goal iswas to be the premier specialty retail affiliate marketing company targeting women between the ages of 24 and 45 who are either mothers or expecting their first child. The Emergence Date was the date the Company adopted fresh start accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 852. The adoption of fresh-start accounting resulted in the Company becoming a new entity for financial reporting purposes. Accordingly,At that time, our principal activities were conducted through MomSpot. On February 12, 2016, the Company acquired Protagenic Therapeutics, Inc. (referred to herein as “Prior Protagenic”) through a reverse merger, pursuant to which all the issued and outstanding shares of Protagenic common stock converted on a 1-for-1 basis into shares of the Company’s Series B Preferred Stock, par value $0.000001 per share. Concurrently with the reverse merger, the Company conducted the first closing of a private offering of our Series B Preferred Stock. Since the fourth quarter of the 2015 fiscal year, MomSpot’s development plans have been suspended pending receipt of incremental funding. On February 12, 2016, the Company sold its 51% interest of MomSpot to the remaining 49% interest holder through a split off agreement. Additionally, on February 12, 2016, the Company sold its equity interests in 29 wholly-owned subsidiaries. Protagenic Therapeutics Canada (2006) Inc. (“PTI Canada”) was incorporated in 2006 in the Province of Ontario, Canada. PTI Canada was a wholly-owned subsidiary of Prior Protagenic, and following the Special Meeting, as defined in Note 7 below, it became a wholly-owned subsidiary of the Company. PTI Canada provides operational support and assistance for the implementation of corporate and operational activities conducted in Canada. Reverse Business Combination (Merger) On February 12, 2016 (“Closing Date”), Protagenic Acquisition Corp., a wholly-owned subsidiary of the Company (which at the time was named Atrinsic, Inc.), merged (the “Merger”) with and into Prior Protagenic. Prior Protagenic was the surviving corporation of the Merger. As a result of the Merger, the Company acquired the business of prior Protagenic and will continue 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. On the Closing Date, all of the issued and outstanding (6,612,838) shares of Prior Protagenic common stock converted, on a 1 for 1 basis, into shares of the Company’s Series B Convertible Preferred Stock, par value $0.000001 per share (“Series B Preferred Stock”). Also on the Closing Date, all of the issued and outstanding options to purchase shares of Prior Protagenic common stock, and all of the issued and outstanding warrants to purchase shares of Prior Protagenic common stock, converted, on a 1 for 1 basis, into options (the “New Options”) and warrants (the “New Warrants”) respectively, to purchase shares of Series B Preferred Stock. New Options to purchase 1,807,744 shares of Series B Preferred Stock, having an average exercise price of approximately $0.87 per share, were issued to Prior Protagenic optionees. New Warrants to purchase 3,403,367 shares of Series B Preferred Stock at an average exercise price of approximately $1.03 per share were issued to holders of Prior Protagenic warrants. The common stockholders of Atrinsic, Inc. before the Merger (“Predecessor”) retained 25,867 shares of common stock, par value $0.0001 per share (the “Common Stock”). Upon the effectiveness of the Merger, the holders of the Predecessor’s Series A Preferred Stock exchanged all of the issued and outstanding Series A Preferred Stock for an aggregate of 297,468 shares of Series B Preferred Stock. In addition, the holders of options to purchase Predecessor common stock were issued options (“Predecessor Options”) to purchase 17,784 shares of Series B Preferred Stock at $1.25 per share. Warrants (“Predecessor Warrants”) to purchase 295,945 shares of Series B Preferred Stock at $1.25 per share were issued to Strategic Bio Partners, LLC, the designee (the “Designee”) of the holders of the Predecessor’s debt in consideration of the cancellation of such debt amounting to $665,000 in principal and $35,000 in interest. The Merger is being accounted for as a “Reverse Business Combination,” and Prior Protagenic is deemed to be the accounting acquirer in the merger. Consequently, the assets and liabilities and the historical operations that will be reflected in the financial statements on or prior to July 12, 2013 are not comparable with the Merger will be those of Prior Protagenic, and the consolidated financial statements for periods after July 12, 2013. NOTE 2 – LIQUIDITY AND FINANCIAL CONDITIONcompletion of the Merger will include the assets and liabilities of Prior Protagenic, historical operations of Prior Protagenic and combined operations of Prior Protagenic, Predecessor and the Company from the Closing Date of the Merger. Further, as a result of the issuance of the shares of Series B Preferred Stock pursuant to the Merger, a change in control of the Company occurred as of the date of consummation of the Merger.
The Merger will be treated as a recapitalization of the Company intends to finance its activities through:for financial accounting purposes. The historical financial statements of Predecessor before the Merger will be replaced with the historical financial statements of Prior Protagenic before the Merger in all future filings with the Securities and Exchange Commission (the “SEC”). | · | managing current cash on hand, |
| · | seeking additional funds raised in the future, |
At the closing of the Merger, Predecessor had a 51% interest in MomSpot, and the remaining 49% was held by B.E. Global LLC. Barry Eisenberg is the sole owner of B.E. Global LLC and is the Chief Executive Officer of MomSpot LLC. Immediately after the closing of the Merger, the Company split off its 51% membership interests in MomSpot. The split-off was accomplished through the transfer of all of its membership interests of MomSpot, having nominal value, to B.E. Global LLC via a split off agreement for nominal consideration. The Company’s financial statements forImmediately after the year ended June 30, 2014 indicate there is substantial doubt about its ability to continue as a going concern asclosing of the Merger, the Company is dependentalso split off all of its equity interest in 29 wholly-owned subsidiaries of Predecessor. The split-off was accomplished through the sale of all equity interests in these wholly-owned subsidiaries to Quintel Holdings, Inc. for nominal considerations via a split off agreement. These entities had nominal value.
Private Offering Concurrently and a condition of the closing of the Merger, the Company conducted the first closing of an offering (the “Private Offering”) of our Series B Preferred Stock. At the first closing, we sold 2,775,000 shares of Series B Preferred Stock at a purchase price of $1.25 per share, for which we received total gross consideration of $3,468,750. Of this amount, $350,000 consisted of the conversion of outstanding stockholder debt held by Garo H. Armen, our chairman and a member of our board of directors, and $150,000 of legal expenses incurred by Strategic Bio Partners, LLC, on behalf of the stockholders of Predecessor, in conjunction with and as permitted under the terms of the Merger. On March 2, 2016, we completed the second closing of the Private Offering, at which we sold an additional 913,200 shares of Series B Preferred Stock, for total gross proceeds of $1,141,500. On April 15, 2016 we completed the final closing of the Private Offering, at which we issued an additional 420,260 shares of Series B Preferred Stock to accredited investors, for total gross proceeds of $525,325. The Company paid commissions, legal and miscellaneous fees aggregating $373,778 associated with these closings. We also issued Placement Agent Warrants to purchase 127,346 shares of Series B Preferred Stock valued at $146,641 using a Black-Scholes model at an exercise price of $1.25 per share to the Placement Agent and its abilityselected dealers. The Company determined the fair value of the binomial lattice model and the Black-Scholes valuation model to retain short term financingbe materially the same. For all three closings, the Company issued 4,108,460 shares of Series B Preferred Stock and ultimatelyraised total gross proceeds of $4,635,575 and total net proceeds of $4,261,797 (or total gross proceeds of $5,135,575 and total net proceeds of $4,761,797 , including the conversion of the $350,000 in principal of stockholder debt, and $150,000 of legal expenses incurred by the Predecessor’s stockholders. Debt Exchange Simultaneous with the Merger and the Private Offering, holders of $665,000 of Predecessor debt accompanied with $35,000 in accrued interest exchanged such debt for Predecessor Warrants to generate sufficient cash flow to meet its obligations onpurchase 295,945 shares of Series B Preferred Stock at $1.25 per share. The Predecessor Warrants were valued at $340,784 (see Note 6). Reverse Stock Split On June 17, 2016, the Company held a timely basis in order to attain profitability, as well as successfully obtain financing on favorable terms to fundSpecial Meeting of Stockholders (the “Special Meeting”). At the Special Meeting, the Company’s long term plans. The Company continually projects anticipated cash requirements, which may include business combinations, capital expenditures,stockholders approved a third amendment and working capital requirements. In accordance withrestatement (the “Third Amendment and Restatement”) to the PlanCompany’s Amended and Restated Certificate of Reorganization, mostIncorporation, effective July 27, 2016 (the “Effective Time”), to effect a one-for-15,463.7183 reverse split of the Company’s accounts payablecommon stock (the “Reverse Stock Split”). Pursuant to the Reverse Stock Split, at the Effective Time, each 15,463.7183 shares of common stock owned by a stockholder were combined into one new share of common stock, with any fractional shares that would otherwise be issuable as a result of the Reverse Stock Split being rounded up to the nearest whole share. The Third Amendment and Restatement also effected (i) a reduction in the Company’s authorized shares of common stock from 100 billion shares to 100 million shares, (ii) an increase in the par value of the Company’s common stock from $0.000001 per share to $0.0001 per share and (iii) a reduction in the Company’s authorized shares of preferred stock from 5 billion shares to 20 million shares. As a result of the Reverse Split, 400,000,000 shares of common stock were split into 25,867 shares of common stock. Additionally, as a result of the Reverse Split and in accordance with our certificate of designations for our Series B Preferred Stock, our Series B Preferred Stock immediately and automatically converted into our common stock on a 1-for-1 basis other than any Series B Preferred Stock (i) to the extent (but only to the extent) a Series B Preferred Stock holder would beneficially own greater than 9.99% of our common stock (the “Springing Blocker”) and (ii) such holder has notified the Company in writing that it wants the Springing Blocker to apply to such holder. On July 27, 2016, 10,146,000 of the Company’s 11,018,766 outstanding shares of Series B Preferred Stock were eligible to immediately convert into 10,146,000 shares of the Company’s common stock with 872,766 shares of Series B Preferred Stock remaining as a result of one holder exercising the Springing Blocker. As of December 31, 2016, 10,146,000 shares of the Series B Preferred Stock were converted into Equity, which10,146,000 shares of common stock on the records of the Company. Any Series B Preferred Stock not converted as a result of this provision would automatically convert into common stock as soon as such conversion would not violate the Springing Blocker. Our Series B Preferred Stock will cease to be designated as a separate series of our preferred stock when all of such shares have converted into shares of our common stock. All share and per share amounts for the common stock have been retroactively restated to give effect to the reverse split. NOTE 2 - LIQUIDITY As shown in the accompanying consolidated financial statements, the Company incurred a net loss of $2,275,826 and $1,023,442 for the years ended December 31, 2016 and 2015, respectively. The Company has incurred losses since inception resulting in an accumulated deficit of $8,582,123 as of December 31, 2016. The net loss presented for the twelve months is attributed to goodwill impairment, an increase in professional fees as related to the Merger, and an increase in stock compensation expense. The net loss present for the prior period was attributed to stock compensation expense and research and development expenses. The Company anticipates further losses in the development of its business. The Company had a favorable impact on liquidity. As of June 30, 2014, the Company had cash of approximately $101, and anet working capital deficit of approximately $71 including note payable to stockholders due July 2015. During$2,475,958 at December 31, 2016 as a result of the period from July 12, 2013 through June 30, 2014, the Company used approximately $790 ofMerger and simultaneous financings. Based on its current forecast and budget, Management believes that its cash for operations. The Company’s existing liquidity is notresources will be sufficient to fund its operations anticipated capital expenditures, working capital and otherat least until the third quarter of 2018. Absent generation of sufficient revenue from the execution of the Company’s business plan, it will need to obtain debt or equity financing requirements forby the foreseeable future.third quarter of 2018. NOTE 3 -SUMMARY OF SIGNFICANT ACCOUNTING POLICIES Basis of presentation The Company needs to raise additional capital to cover its budgeted operating and capital expenditures. If the capital raising efforts are not successful, the Company might not be able to continue as a going concern. TheCompany’s consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should the Company be not able to continue as a going concern. These factors among others create a substantial doubt about the Company’s ability to continue as a going concern. NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The ownership of more than 50% of the voting stock of an entity creates a subsidiary. The financial statements of the parent and subsidiary are consolidated for reporting purposes.
The consolidated financial statements include the accounts of all majority and wholly-owned (“Momspot”) subsidiaries and significant intercompany balances and transactions have been eliminated.
ATRINSIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollarsprepared in thousands, except share data)
Use of Estimates
The preparation of financial statements in conformityaccordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”).
Principles of consolidation The consolidated financial statements include the accounts of Atrinsic, Inc., and its wholly owned subsidiary, Protagenic Acquisition Corp, and Protagenic Therapeutics, Inc., which merged with and into Protagenic Acquisition Corp, on February 12, 2016, as well as Protagenic Therapeutics’ wholly-owned Canadian subsidiary, PTI Canada. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. Use of estimates The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities revenue and expenses as well as the disclosure of contingent assets and liabilities. Management continually evaluates its estimatesliabilities at the date of the consolidated financial statements and judgments including those related to fair valuethe reported amounts of stock options grantedrevenue and income taxes. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable inexpense during the circumstances.reporting period. Actual results maycould differ from those estimates. Macroeconomic conditions may directly, or indirectly throughSignificant estimates underlying the Company’s business partnersconsolidated financial statements include the allocation of the fair value of acquired assets and vendors, impactliabilities associated with the Company’sMerger, assessment of goodwill and income tax provisions and allowances, impairment of goodwill, valuation of stock options and warrants and assessment of deferred tax valuation allowance. The Company also relies on estimates for the valuation of stock-based compensation expense and financial performance and available resources. Such conditions may, in turn, impact the aforementioned estimates and assumptions.instruments. CashConcentrations of Credit Risk
The Company maintains its cash accounts at financial institutions which are insured by the Federal Deposit Insurance Corporation ("FDIC"). At times, the Company may have deposits in excess of federally insured limits. For the purposes of reporting cash flows, theCash and Cash Equivalents
The Company considers all cash accounts which are not subject to withdrawal restrictions or penalties, and highly liquid investments with an original maturitiesmaturity of 90 daysthree months or less when purchased to be cash.cash equivalents. As of December 31, 2016 and 2015, the Company did not have any cash equivalents. Property and Equipment
PropertyEquipment is stated at cost less accumulated depreciation. Cost includes expenditures for computer equipment. Maintenance and equipment consistrepairs are charged to expense as incurred. When assets are sold, retired, or otherwise disposed of, computer hardware, softwarethe cost and office equipment asaccumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations. The cost of June 30, 2014. Depreciation of property and equipment is calculateddepreciated using the straight-line method over the estimated useful lives of the respective assets. The estimated useful lives range from three to fifteenrelated assets which is 3 years. Depreciation expense was not material for the years ended December 31, 2016 and 2015.
Stock-Based CompensationGoodwill
Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The Company records stock based compensationis required to perform impairment reviews annually and more frequently in certain circumstances. The Company performs the annual assessment on December 31. In accordance with ASC 718. In estimating the grant date fair value of stock option awards and performance based restricted stock,350–20 “Goodwill”, the Company uses the Black Scholes option pricing model and other binomial pricing models where appropriate. The key assumptions for these modelsis able to derive fair value include expected term, ratemake a qualitative assessment of risk free returns and volatility. Information about the Company’s specific award plans can be found in Note 5. Income Taxes
The Company accounts for income taxes pursuant to ASC 740. Under ASC 740, deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management,whether it is more likely than not that some portion or alla reporting unit’s fair value is less than its carrying amount before applying the two–step goodwill impairment test. If the Company concludes that it is more likely than not that the fair value of a reporting unit is not less than its carrying amount it is not required to perform the deferred tax assets will not be realized. Deferred taxtwo–step impairment test for that reporting unit.
Atrinsic’s assets and liabilities are adjusted foracquired in the effectsMerger had a minimal value therefore the Company recorded the fair value of changesshares given to predecessor stockholders as goodwill. Immediately subsequent to the merger the Company fully impaired the goodwill, in tax laws and rates onas the date of enactment. predecessor business had limited operations. The allocation of the consideration transferred is as follows: Shares issued in connection with Merger: | | | | | Atrinsic 25,867 shares Common stock | | $ | 32,334 | | Atrinsic Series A preferred stock as converted to Series B preferredstock, 297,468 shares | | | 371,835 | | Total value of shares issued to Atrinsic on Merger | | | 404,169 | | Fair value of net assets identified | | | - | | | | | | | Goodwill | | | 404,169 | | Net value of consideration | | $ | - | |
Goodwill impairment for the year ended December 31, 2016 was $404,169. Fair Value Measurements Accounting Standards Codification 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 adoptedand other market participants. The carrying amount of the Company’s financial assets and liabilities, such as cash, accounts payable and accrued expenses approximate their fair value because of the short maturity of those instruments. Transactions involving related parties cannot be presumed to be carried out on an accounting standard which clarifiesarm's-length basis, as the accounting for uncertaintyrequisite 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 income taxes recognizedarm's-length transactions unless such representations can be substantiated. The assets or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. The following table provides a summary of financial instruments that are measured at fair value as of December 31, 2016. | | Carrying | | | Fair Value Measurement Using | | | | Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | | | | | | | | | Derivative warrants liabilities | | $ | 516,870 | | | $ | — | | | $ | — | | | $ | 516,870 | | | $ | 516,870 | |
The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial statements. This standard provides guidance on recognizing, measuring, presentingassets and disclosing in the financial statements uncertain tax positions that a company has taken or expects to takeliabilities measured at fair value on a tax return.recurring basis using significant unobservable inputs (Level 3) during the year ended December 31, 2016: | | Fair Value Measurement Using Level 3 Inputs | | | | Total | | Balance, December 31, 2015 | | $ | — | | Issuance of derivative warrants liabilities | | | 487,425 | | Change in fair value of derivative warrants liabilities | | | 29,445 | | Balance, December 31, 2016 | | $ | 516,870 | |
Fair Value Measurement
The fair value of Momspot, which wasthe derivative feature of the 127,346 and 295,945 warrants to the placement agent of the private offering and to Strategic Bio Partners for debt cancellation, respectively on the issuance dates and at the balance sheet date were calculated using a Black-Scholes option model valued with the following average assumptions: | | February 12, 2016 | | | December 31, 2016 | | Exercise price | | $ | 1.25 | | | $ | 1.25 | | Risk free interest rate | | | 1.20 | % | | | 1.93 | % | Dividend yield | | | 0.00 | % | | | 0.00 | % | Expected volatility | | | 156 | % | | | 219 | % | Contractual term (in years) | | | 5.0 | | | | 4.25 | |
Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar expected term on the date of the grant. Dividend yield: The Company uses a 0% expected dividend yield as the Company has not material, was determinedpaid 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 valuation performed by Management, which took into consideration, where applicable, cash received , market participant inputs, estimated cash flowsthe 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 entity specific criteria, purchase multiples paid in other comparable third-party transactions, market conditions, liquidity, operating results and other qualitative and quantitative factors.the remaining contractual maturity of the warrants. EarningsDuring the year ended December 31, 2016, the Company marked the derivative feature of the warrants to fair value and recorded a loss of $29,445 relating to the change in fair value.
During the year ended December 31, 2016, there was a full impairment of Goodwill which arose at the time of the reverse business combination in the amount of $404,169, a level 3 measurement. Derivative Liability The Company evaluates its options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-10-05-4 and 815-40-25. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then the related fair value is reclassified to equity. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date. Stock-Based Compensation The Company accounts for stock based compensation costs under the provisions of ASC 718, “Compensation—Stock Compensation”, which requires the measurement and recognition of compensation expense related to the fair value of stock based compensation awards that are ultimately expected to vest. Stock based compensation expense recognized includes the compensation cost for all stock based payments granted to employees, officers, and directors, based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC. 718 is also applied to awards modified, repurchased, or canceled during the periods reported. Stock-Based Compensation for Non-Employees The Company accounts for warrants and options issued to non-employees under ASC 505-50,Equity – Equity Based Payments to Non-Employees, using the Black-Scholes option-pricing model. The value of such non-employee awards unvested are re-measured over the vesting terms and at each reporting date. Basic and Diluted Net (Loss) per Common Share Basic earnings(loss) per common share (“EPS”) is computed by dividing reported earningsthe net (loss) by the weighted average number of shares of common stock outstanding for theeach period. Diluted EPS includes(loss) per share is computed by dividing the effect, if any,net (loss) by the weighted average number of the potential issuance of additional shares of common stock as a resultoutstanding plus the dilutive effect of shares issuable through the common stock equivalents. | | Potentially Outstanding Dilutive Common Shares | | | | | | | | | | | | | For the Year Ended December 31, 2016 | | | For the Year Ended December 31, 2015 | | | | | | | | | | | Conversion Feature Shares | | | | | | | | | | | | | | | | | | Common shares issuable under the conversion feature of preferred shares | | | 872,766 | | | | - | | | | | | | | | | | Stock Option | | | 2,484,445 | | | | 1,707,744 | | | | | | | | | | | Warrant | | | 3,826,658 | | | | 3,403,367 | | | | | | | | | | | Total potentially outstanding dilutive common shares | | | 7,183,869 | | | | 5,051,111 | |
Foreign Currency Translation
The Company follows Section 830-10-45 of the exercise or conversionFASB Accounting Standards Codification (“Section 830-10-45”) for foreign currency translation to translate the financial statements of dilutive securities,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 treasury stock method.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.
Potential dilutive securities forThe 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 Company include outstanding stock optionssubsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and warrants.
Securitiesother 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 could potentially dilutesubsidiary’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 per share inassociated with the future that were notre-measurement of these financial statements from the local currency to the functional currency would be included in the computationconsolidated statements of diluted loss per share at June 30, 2014income and June 30, 2013, because such securities are anti-dilutive, are as follows:
ATRINSIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollarscomprehensive income (loss). If the Company disposes of foreign subsidiaries, then any cumulative translation gains or losses would be recorded into the consolidated statements of income and comprehensive income (loss). If the Company determines that there has been a change in thousands, except share data)
| As of June 30, | | | 2014 | | 2013 | | Convertible preferred shares | | 4,600,000,000 | | | 4,600,000,000 | | Options to purchase common stock | | 275,000,000 | | | - | | Total | | 4,875,000,000 | | | 4,600,000,000 | |
Preferred Stockthe functional currency of a subsidiary to the U.S. Dollar, any translation gains or losses arising after the date of change would be included within the statement of income and comprehensive income (loss).
The Company applies the accounting standards for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within the controlBased on an assessment of the holder or subjectfactors discussed above, the management of the Company determined the relevant subsidiary’s local currency to redemption uponbe the occurrencefunctional currency for its foreign subsidiary.
Research and Development Costs
Research and development costs are charged to operations as incurred. During the period from July 12, 2013 to June 30, 2014, the total research and development expenses were approximately $42 for web design, infrastructure, graphic and content development.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash. The Company reduces credit risk by placing its cash with major financial institutions. At times, such amounts may exceed federally insured limits.
Recent Accounting Pronouncements In JuneMay 2014, the FASBFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements.2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-10 eliminates the distinction of a development stage entity and certain related disclosure requirements, including the elimination of inception-to-date information2014-09 will require that companies recognize revenue based on the statementsvalue of operations,transferred goods or services as they occur in the contract. ASU 2014-09 also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and stockholders’ equity. The amendmentschanges in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-10 will be2014-09 is effective prospectively for reporting periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2014, and2016, including interim reporting periods within those annual periods, however early adoption is permitted. The Company electedthat reporting period. Entities will be able to adopt this ASU effective with its Registration Statement on Form 10 filed with SEC on July 2, 2014.transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The adoption resulted inof ASU 2014-09 is not expected to have any impact on the removal of previously required developmental stageCompany’s financial statement presentation or disclosures. In August 2014, the FASB Accounting Standards Update (“ASU”) issued ASU No. 2014-15, on “Presentation“Presentation of Financial Statements GoingStatements-Going Concern (Subtopic 205-40) -: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. Currently, there is noConcern.” ASU 2014-15 provides guidance in U.S. GAAP abouton management’s responsibility to evaluate whether there is substantial doubt about an entity’sorganization’s ability to continue as a going concern orand to provide related footnote disclosures. The amendments in this ASU provideFor each reporting period, management will be required to evaluate whether there are conditions or events that guidance. In doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’sraise substantial doubt about a company’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period ofwithin one year afterfrom the date that the financial statements are issued.The amendments in ASU 2014-15 are effective for annual reporting periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company has elected to adopt the methodologies prescribed by ASU 2014-15. The adoption of ASU 2014-15 had no material effect on its financial position or results of operations. In November 2015, the FASB issued (or availableASU No 2015-17, Income Taxes (Topic 740). The amendments in ASU 2015-17 change the requirements for the classification of deferred taxes on the balance sheet. Currently, GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, the amendments in this ASU require that deferred tax liabilities and assets be issued).classified as noncurrent in a classified statement of financial position. The pronouncement is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company does not believe the adoption of this standard will have a material effect on the Company’s consolidated financial position and results of operations. In February 2016, the FASB issued ASU No. 2016-02, Leases. The main provisions of ASU No. 2016-02 require management to recognize lease assets and lease liabilities for all leases. ASU 2016-02 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model, the effect of leases in the statement of comprehensive income and the statement of cash flows is largely unchanged from previous GAAP. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements. On March 30, 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation" which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. For public business entities, the ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. Early adoption will be permitted in any interim or annual period for which financial statements have not yet been issued or have not been made available for issuance. If early adoption is elected, all amendments in the ASU that apply must be adopted in the same period. In addition, if early adoption is elected in an interim period, any adjustments should be reflected as of the beginning of the annual period that includes that interim period. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements. In August 2016, the FASB issued ASU 2016-15,“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements. In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory”, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance is effective for annual periods endingbeginning after December 15, 2016.2019, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluatingassessing the impact of this ASU 2014-15 on the Company’s consolidated financial statements. NOTE 4 - FRESH START ACCOUNTINGIn November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which requires application of the guidance for all periods presented. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.
On July 12, 2013,In December 2016, the Company adopted fresh start accountingFASB issued ASU 2016-20, “Technical Corrections and reportingImprovements to Topic 606, Revenue from Contracts with Customers”. The amendments in accordance with Topic ASC 852.this Update affect the guidance in Update 2014-09, which is not yet effective. The Company was required to applyeffective date and transition requirements for the provisions of fresh start reporting to its financial statements,amendments are the same as the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the emerging entityeffective date and the reorganization value of the Predecessor Company’s assets immediately before the date of confirmation was less than the post-petition liabilities and allowed claims.
ATRINSIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
Fresh start reporting generally requires resetting the historical net book value of assets and liabilities to fair value astransition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by allocating the entity’s enterprise value as set forth in the Reorganization Plan to its assetsone year.
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and liabilities pursuant to accounting guidance related to business combinations. The financial statements asaccrued expenses consist of the Effective Date report the resultsfollowing at: | | December 31, 2016 | | | December 31, 2015 | | | | | | | | | | | Legal | | $ | 1,190 | | | $ | 186,936 | | Payroll and related | | | - | | | | 47,388 | | Patent expense | | | 37,142 | | | | 29,239 | | Research and development | | | 116,255 | | | | 8,128 | | Other | | | 13,400 | | | | 7,564 | | | | | | | | | | | | | $ | 167,987 | | | $ | 279,255 | |
NOTE 5 – BRIDGE LOAN PAYABLE – STOCKHOLDER In accordance with ASC Topic 852, the Predecessor Company’s pre-emergence charges to earnings of $778, recorded as reorganization items result from certain costs and expenses relating to the Reorganization Plan becoming effective, including the cancellation of certain debt upon issuance of new equity.
Methodology, Analysis and Assumptions
The Company determined that the fair value ofDuring January 1, 2015 through February 12, 2016, the Company (“Reorganization Value”) onhad entered into a series of bridge loan arrangements for total borrowings received and interest accrued of $425,265 ($399,103 at December 31, 2015) with a major Stockholder and Chairman. The proceeds were used to fund research, development and the Effective date to be minimal.
The Company’s valuation was based upon a discounted cash flow methodology, which included a calculationgeneral operating activity of the present value of expected un-levered after-tax free cash flows reflected in the Company’s long-term financial projections, including the calculation of the present value of the terminal value of cash flows, and supporting analysis that included a comparison of selected financial data of the Company with similar data of other publicly held companies comparable to ours in terms of end markets, operational characteristics, growth prospects and geographical footprint. The Company also considered precedent transaction analysis but ultimately determined there was insufficient data for a meaningful analysis.
| July 12, 2013 | | | Predecessor Company | | Reorganization Adjustments | | Successor Company | | ASSETS | | | | | | | | | | Current assets | | | | | | | | | | Cash and cash equivalents | $ | 717 | | $ | - | | $ | 717 | | Prepaid expenses and other current assets | | 237 | | | | | | 237 | | Total current assets | | 954 | | | - | | | 954 | | TOTAL ASSETS | $ | 954 | | $ | - | | $ | 954 | | | | | | | | | | | | LIABILITIES AND EQUITY | | | | | | | | | | Current liabilities | | | | | | | | | | Accounts payable and accrued expenses | $ | 15,566 | | $ | (15,395 | )2) | $ | 171 | | Note payable | | 2,614 | | | (2,614 | )3) | | - | | Total current liabilities | | 18,180 | | | (18,009 | ) | | 171 | | TOTAL LIABILITIES | | 18,180 | | | (18,009 | ) | | 171 | | | | | | | | | | | | COMMITMENTS AND CONTINGENCIES | | - | | | - | | | - | | | | | | | | | | | | STOCKHOLDERS' EQUITY/ DEFICIENCY | | | | | | | | | | Convertible preferred stock - par value $.000001, 5,000,000,000 shares authorized, 4,600,000,000 shares issued and outstanding at July 11, 2013; no shares authorized, issued or outstanding at June 30, 2013 | | - | | | 5 | 3) | | 5 | | Common stock - par value $.000001, 100,000,000,000 shares authorized, 400,000,000 shares issued and outstanding at July 11, 2013; par value $.01, 100,000,000 authorized and outstanding at June 30, 2013. | | 1,000 | | | (1,000 | )1) | | - | | Additional paid-in capital | | 182,281 | | | (182,281 | )4) | | - | | | | | | | 778 | 5) | | 778 | | Common stock, held in treasury, at cost, 0 and 681,509 shares at July 11, 2013 and June 30, 2013, respectively. | | (4,981 | ) | | 4,981 | 4) | | - | | Accumulated income (deficit) | | (195,526 | ) | | 195,526 | 1) | | - | | | | | | | | | | | TOTAL SHAREHOLDERS EQUITY/ DEFICIENCY | | (17,226 | ) | | 18,009 | | | 783 | | TOTAL LIABILITIES AND SHAREHOLDERS EQUITY/ DEFICIENCY | $ | 954 | | $ | - | | $ | 954 | |
1) To reduce the total par value of stock held by the pre-petition stockholders to $100, in accordance with the new post-bankruptcy capital structure
2) To record conversion of pre-petition Accounts Payable to 300,000,000, $0.000001 par value common shares, in accordance with the new post-bankruptcy capital structure
3) To record conversion of note payable to 4,600,000,000, $0.000001 par value shares of convertible preferred stock, in accordance with the new post-bankruptcy petition capital structure
4) To eliminate Treasury Stock. APIC and Accumulated Deficit as of July 11, 2013
5) Elimination of Predecessor Company accumulated deficit July 1, 2013 to July 11, 2013
ATRINSIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
NOTE 5 - STOCKHOLDERS’ EQUITY
On July 12, 2013, the Company established a new capital structure, in accordance with the Plan of Reorganization.
Accordingly, 100,000,000,000 shares of $0.000001 par value common stock were authorized. The Company exchanged the 100,000,000 outstanding shares held by the pre-bankruptcy petition stockholders for 100,000,000 $0.000001 par value shares in the reorganized Company. The Company also issued 300,000,000has guaranteed the payment of all principal and interest in the authorized shares to the unsecured creditors of the Company subsequent to the filing bankruptcy. The 400,000,000 aggregate shares issued were outstanding at the time of filing bankruptcy. The 400,000,000 aggregate shares issued were outstanding at June 30, 2014.
In addition, the Company authorized 5,000,000,000 shares of $0.000001 par value preferred stock. The Company applies the accounting standards for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, preferred shares are classified as stockholders’ equity. 4,600,000,000 shares of Series A Preferred Stock were issued to the Company’s secured creditors in exchange for the Convertible Notes that were previously issued to them in May 2011. The 4,600,000,000 shares issued were outstanding as of June 30, 2014. Each share of Convertible Preferred stock is convertible into one share of common stock.
As of June 30, 2014, 4,600,000,000 shares of the Series A Preferred Stock were issued and outstanding, and are held of record by two holders. The holders of the Series A Preferred Stock each have the right at any time, at the holder’s option, to convert any or all of his shares of Series A Preferred Stock into such number of fully paid and non-assessable shares of common stock to the extent that such conversion would not result in beneficial ownership by the holder of more than 9.99% of the total number of shares of common stock issued and outstanding immediately after giving effect to such conversion (the “Beneficial Ownership Cap”). Subject to the Beneficial Ownership Cap, the holders of the Series A Preferred Stock are entitled to vote on an as-converted basis together with the holdersform of the Company’s common stock at a purchase price of $1.25 per share. The loan bears interest at a rate of 10% per annum. The Company recorded interest expense of $7,162 and $11,473 for the years ended December 31, 2016 and 2015, respectively. On February 12, 2016, the Company settled $350,000 of principal and interest by issuing shares of Series B Preferred Stock in the Private Offering at a price of $1.25 per share as part of its private offering. On June 17, 2016, the Company settled the remaining $75,265 in principal and accrued interest by issuing shares of Common Stock at a price of $1.25 per share.
NOTE 6 - DERIVATIVE LIABILITIES Upon closing of the private placement transactions on February 12, 2016, the Company issued 127,346 and 295,945 warrants, to the placement agent of the private offering and to Strategic Bio Partners for debt cancellation, respectively, to purchase the Company’s Series B Preferred Stock with an exercise price of $1.25 and a five-year term. The warrants have a cashless exercise feature that requires the Company to classify the warrants as a class onderivative liability. NOTE 7 - STOCKHOLDERS’ EQUITY (DEFICIT) Stock-Based Compensation
In connection with the Merger, all matters submitted to a vote of stockholders. Holders of the issued and outstanding options to purchase shares of Prior Protagenic common stock converted, on a 1-for-1 basis, into options (the “New Options”), to purchase shares of our Series AB Preferred Stock. The New Options will be administered under Prior Protagenic’s 2006 Employee, Director and Consultant Stock do not have cumulative voting rights. On an as-converted basis,Plan (the “2006 Plan”), which the holders are entitledCompany assumed and adopted. The Plan is authorized to any dividends that may be declared onissue up to 2,000,000 stock options. In accordance with the Plan, the Company can grant to certain employees, directors or consultants options to purchase shares of the Company’s common stock bywhich vest automatically or ranging from a one-year period to a five-year period. The shares are exercisable over a period of ten years from the boarddate of directors without regardgrant. The Plan provides that qualified options be granted at an exercise price equal to the Beneficial Ownership Cap. Uponfair market value at the Company’s dissolution, liquidationdate of grant. There were 2,484,445 options outstanding as of December 31, 2016. The fair value of each stock option granted was estimated using the Black-Scholes assumptions and or winding up, after payment or provision for all liabilities and any preferential liquidation rights of any shares of a more senior classfactors as follows: Exercise price | | | $.26 | - | $1.25 | | Expected dividend yield | | | 0% | | | | Risk free interest rate | | | 1.01% | - | 2.43% | | Expected life in years | | | 5 | | | | Expected volatility | | | 85% | - | 213% | |
The following is an analysis of the preferred stock thatoption grant activity under the Plan: | | Number | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life | | Stock Options | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding January 1, 2016 | | | 1,707,744 | | | $ | 0.84 | | | | 6.45 | | Granted | | | 1,193,300 | | | $ | 1.25 | | | | 10.35 | | Expired | | | (506,599 | ) | | $ | 0.26 | | | | | | Converted | | | (25,000 | ) | | $ | 0.26 | | | | | | Outstanding December 31, 2016 | | | 2,369,445 | | | $ | 1.18 | | | | 9.82 | |
As of December 31, 2016 the Company may issue in the future, the holdershad 2,484,445 shares issuable under options outstanding at a weighted average exercise price of the Series A Preferred Stock shall have priority with respect to the distribution$1.04 and an intrinsic value of the Company’s net assets over the holders of its common stock. All outstanding shares of the Series A Preferred Stock are fully paid and non-assessable. From July 12, 2013 through July 12, 2014, each Holder of the Series A Preferred Stock is prohibited from selling or otherwise transferring more than 2.5% of the Company’s outstanding common stock, calculated on a fully diluted basis, per 90-day period.
Stock Options$$697,820.
On February 11, 2014,12, 2016, the Company issued 100,000 options withunder the 2006 Plan to its Chief Financial Officer as a term of five (5) years andsign-on bonus. These options have an exercise price of $0.002$1.25 per share, a ten-year term and vest over a three-year period in 35 monthly installments of 0.18 shares and a final installment of 2,778 shares. The terms of the option grant also include full vesting acceleration upon a change of control as defines. The Company recognized compensation expense related to the individuals belowthis issuance of $25,696 for the number of shares of common stock: ATRINSIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)year ended December 31, 2016.
The Company granted to Sebastian Giordano, for services as Chief Restructuring Officer and Acting Chief Executive Officer, an option to purchase 125,000,000 shares
On February 28, 2014, the Company granted to Edward Gildea, for services toApril 15, 2016, our Compensation Committee of our Board determined that each board member will be rendered as Acting Chief Executive Officer,compensated an option to purchase 50,000,000 sharesgrant of 40,000 options per year, plus 5,000 options for serving as the Company’s Common Stock withChair of a term of five (5) yearscommittee. Options shall have 10-year expiration dates, 24-month vesting cycles, and an exercisea strike price of $0.002. All of$1.25 per share, or more in future time periods to match the shares covered by these options shall immediately vest on the grant date.
The grant date fair value of stock options granted at June 30, 2014 was approximately $275. The fairmarket value of the Company’s common stockstock. The aggregate amount granted was based upon175,000 options.
On April 15, 2016, the publicly quotedBoard granted 1,009,300 options to employees and consultants. These options shall have 10-year expiration dates, 12 to 48 month vesting cycles, and a strike price of $1.25 per share. Having an aggregate fair market value of $1,261,625 on December 31, 2016. During the dateyear, 17,785 options were granted to former Atrinsic executives. These options have 3-year expiration dates, and a strike price of grant. $1.25 per share. Having an aggregate fair market value of $22,231 on December 31, 2016. The expected term for stocktotal number of options granted with service conditions representsand vested during the average period the stockyear ended December 31, 2016 and 2015 was 1,308,300 and 1,272,982, respectively. The exercise price for these options are expected to remain outstanding and is based on the expected term calculated using the approach prescribed by the Securities and Exchange Commission's Staff Accounting Bulletin No. 110 for “plain vanilla” options. was $1.25 per share. The Company obtainedrecognized compensation expense related to options issued of $546,134 and $477,868 during the risk free interest rate from publicly available data published byyears ended December 31, 2016 and 2015, respectively, which is included in general and administrative expenses. On June 17, 2016, the Federal Reserve. The volatility rate was computed basedstockholders of the Company approved the adoption of the 2016 equity compensation plan at the Special Meeting. No further options will be granted under the 2006 equity compensation plan, which we assumed in connection with the Merger. On July 31, 2016 25,000 options were exercised into common stock of the Company for $6,500. On October 26, 2016, the Board granted 25,000 options to an employee. These options shall have 10-year expiration dates, a 48 month vesting cycle with a one-year cliff, and a strike price of $1.25 per share. Warrants: In connection with the Merger, all of the issued and outstanding warrants to purchase shares of Prior Protagenic common stock, converted, on a comparison1 for 1 basis, into new warrants (the “New Warrants”) to purchase shares of average volatility rates of similar companies. The fair value of the options was determined using the Black-Scholes modelour Series B Preferred Stock. Simultaneous with the following assumptions: risk freeMerger and the Private Offering, New Warrants to purchase 3,403,367 shares of Series B Preferred Stock at an average exercise price of approximately $1.05 per share were issued to holders of Prior Protagenic warrants; additionally, holders of $665,000 of our debt and $35,000 of accrued interest rate - 0.69%exchanged such debt for five-year warrants to 0.71%, volatility - 84.40%, expected term - 2.5 years, expected dividends- N/A.purchase 295,945 shares of Series B Preferred Stock at $1.25 per share. Placement Agent Warrants to purchase 127,346 shares of Series B Preferred Stock at an exercise price of $1.25 per share were issued in connection with the Private offering. These warrants to purchase 423,291 shares of Series B Preferred Stock have been recorded as derivative liabilities. See Note 6. A summary of warrant issuances are as follows: | | Number | | | Weighted Average Exercise Price | | | Weighted Average Remaining Life | | Warrants | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding January 1, 2016 | | | 3,403,367 | | | $ | 1.03 | | | | 5.80 | | Granted | | | 423,291 | | | $ | 1.25 | | | | 4.12 | | OutstandingDecember 31, 2016 | | | 3,826,658 | | | $ | 1.05 | | | | 5.61 | |
As of June 30, 2014December 31, 2016 the Company had 3,826,658 shares issuable under warrants outstanding at a weighted average exercise price of all stock options outstanding was $0.002, the remaining contractual life was 4.6 years$1.07 and there was noan intrinsic value.value of $763,342. NOTE 6 - NOTES PAYABLE DUE TO STOCKHOLDERS
On February 11, 2014, the Company issued notes payable with two principal stockholders, each such note in the principal amount of $87.5 with the interest thereon at the rate of 5% per annum. The principal amount and all accrued interest of this Note are due on July 31, 2015 (the “Maturity Date”). Any amounts that remain unpaid until due shall thereafter bear interest at the rate of twelve percent (12%) per annum. Interest as aforesaid shall be calculated on the basis of actual number of days elapsed over a year of 360 days. At June 30, 2014 interest expense amounted to approximately $3. Accrued interest as of June 30, 2014 was approximately $3. The notes are secured by all the assets of the Company.
NOTE 7 - BUSINESS COMBINATIONS 8 –The Momspot AcquisitionINCOME TAXES
Pursuant to the terms of a Membership Interest Purchase Agreement, dated July, 2013, the Company acquired a 51% equity interest in Momspot LLC, (“Momspot”) in exchange for the Company’s commitment to contribute up to $165 of working capital to Momspot over a two-year period to fund its business development and operations. Simultaneous with the acquisition the Company became a party to the Momspot Operating Agreement and the manager thereunder. Momspot meets the definition of a “business” in accordance with ASC Topic 805.
MomSpot is a start-up company. Momspot’s goal is to be the premier specialty retail affiliate marketing company targeting women between the ages of 24 and 45 who are either mothers or expecting their first child (“Moms”).
The results for Momspot for the twelve month period ended June 30, 2014components of (loss) income before income taxes are consolidated in the consolidated financial statements within this document. The fair value of the purchase consideration was allocated to fair value of the net tangible assets acquired, with the resulting excess allocated to separately identifiable intangibles, and the remainder recorded as goodwill, if any.
The purchase price was allocated as follows:
Purchase Consideration: | | | | | Fair value of Momspot (1) | | $ | - | | | | | | | Tangible assets acquired | | | - | |
ATRINSIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
| (1) | Fair value, which was not material, was based upon the fair value of the cash consideration paid by the Company for the acquisition of Momspot ($0 consideration received) and a discounted cash flow analysis, including the calculation of the present value of the terminal value of cash flows, and supporting analysis that included a comparison of selected financial data of the Company with similar data of other publicly held companies comparable to ours in terms of end markets, operational characteristics, growth prospects and geographical footprint. |
| | 2016 | | | 2015 | | Domestic | | | (2,182,114 | ) | | | (747,693 | ) | Foreign | | | (93,712 | ) | | | (275,729 | ) | (Loss) income before income taxes | | | (2,275,826 | ) | | | (1,023,422 | ) |
The following table presentsCompany had no income tax expense due to operating losses incurred for the unaudited pro-forma financial results, as if the acquisition of Momspot had been completed as of July 1, 2013years ended December 31, 2016 and 2012:2015. | For the year ended June 30, | | | 2014 | | 2013 | | Revenues | $ | - | | $ | - | | Net loss | | (1,079 | ) | | (1,027 | ) | Loss per share - basic and diluted | $ | (0.00 | ) | $ | (0.01 | ) |
For the years ended December 31, 2016 and 2015, a reconciliation of the Company’s effective tax rate to the statutory U.S. Federal rate is as follows: | | 2016 | | | 2015 | | Income taxes at Federal statutory rate | | | (34.0 | %) | | | (34.0 | %) | State income taxes, net of Federal income tax effect | | | (16.0 | %) | | | (13.0 | %) | Perm difference | | | (7.0 | %) | | | 0.0 | % | Foreign tax rate differential | | | (0.2 | %) | | | 2.4 | % | Change in valuation allowance | | | 50.4 | % | | | 43.5 | % | Other | | | 6.8 | % | | | 1.1 | % | Income tax provision | | | 0.0 | % | | | 0.0 | % |
The unaudited pro-forma resultstax effects of operationstemporary differences that give rise to the Company’s deferred tax assets and liabilities are as follows: | | 2016 | | | 2015 | | U.S. net operating loss carryforwards | | | 1,733,000 | | | | 563,000 | | Stock compensation | | | (29,000 | ) | | | 206,000 | | Canadian Provincial income tax losses | | | 116,000 | | | | 402,000 | | Canadian Provincial scientific investment tax credits | | | 56,000 | | | | 201,000 | | | | | 1,876,000 | | | | 1,372,000 | | Valuation allowance | | | (1,876,000 | ) | | | (1,372,000 | ) | Net deferred tax assets | | | - | | | | - | |
As of December 31, 2016 and 2015, the Company had federal net operating loss carryforwards (“NOL”) of approximately $4,035,000 and $1,310,000, respectively. The losses expire beginning in 2024. The Company has not intendedperformed a detailed analysis to present actual results thatdetermine whether an ownership change under IRC Section 382 has occurred. The effect of an ownership change would have been attainedbe the imposition of annual limitation on the use of NOL carryforwards attributable to periods before the change Any limitation may result in expiration of a portion of the NOL before utilization. As of December 31, 2016 and 2015, the Company had the acquisition been completed asstate and local net operating loss carryforwards of July 1, 2012 or 2013 orapproximately $4,027,000 and $1,303,000, respectively, to project potential operating results as of anyreduce future date or for any future periods.state tax liabilities also through 2035. NOTE 8 – INCOME TAXESAs of December 31, 2016 and 2015, the Company had Canadian NOL of approximately $1,174,000 and $1,256,000, respectively. The Canadian losses expire in stages beginning in 2026. As of December 31, 2016 and 2015, the Company also has unclaimed Canadian federal scientific research and development investment tax credits, which are available to reduce future federal taxes payable of approximately $56,000 and $201,000, respectively.
During both 2014 and 2013, the Company incurred a net loss and therefore had no tax liability. The Company does not have any material uncertain income tax positions. As a result of significant losses and uncertainty of future profit, the net deferred tax asset has been fully reserved. As of June 30, 2014,The net change in the valuation allowance decreased by $604during the years ended December 31, 2016 and 2015 was an increase of $242,000 and $445,000, respectively.
Foreign earnings are assumed to be permanently reinvested. U.S. Federal income taxes have not been provided on undistributed earnings of our foreign subsidiary. The Company recognizes interest and penalties related to decreased federaluncertain tax positions in selling, general and state NOL carry forwards. The cumulative net operating loss carryforward is approximately $47.7 million and $47.7 million at June 30, 2014 and 2013, respectively, and will start expiring in the year ended 2029.administrative expenses. The Company has not performedidentified any uncertain tax positions requiring a detailed analysis to determine whether an ownership change under Section 382reserve as of the IRC has occurred. The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss (“NOL”) carryforwards attributable to periods before the change. Any limitation may result in expiration of a portion of the NOL before utilization.December 31, 2016 and 2015. The Company is required to file U.S. federal and state income tax effectsreturns. These returns are subject to audit by tax authorities beginning with the year ended December 31, 2013. NOTE 9 - COLLABORATIVE AGREEMENTS The Company and the University of temporary differences and tax loss carry forwards that give rise to significant portions of deferred tax assets at June 30, 2014 and 2013 are comprisedToronto, a stockholder of the following:Company (the “University”) entered into an agreement effective December 14, 2004 (the “Research Agreement”) for the performance of a research project titled “Evidence for existence of TCAP receptors in neurons” (the “Project”). The Research Agreement expired on March 31, 2013. The Company and the University entered into an agreement effective April 1, 2014 (the “New Research Agreement”) for the performance of a research project titled “Teneurin C-terminal Associated Peptide (“TCAP”) mediated stress attenuation in vertebrates: Establishing the role of organismal and intracellular energy and glucose regulation and metabolism" (the “New Project”). The New Project is to perform research related to work done by a professor at the University and stockholder of the Company (the “Professor”) 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, the Professor entered into an agreement with the University in order to commercialize certain technologies. The New Research Agreement expired on March 30, 2016. In February 2017, the New Research Agreement was extended to December 31, 2016 which allows for further development of the technologies and use of their applications. Upon expiration of the agreement, payments to the University and research support from the University will suspend until an agreement can be made. | As of June 30, | | | 2014 | | 2013 | | Deferred tax asset | | | | | | | Net operating loss carryovers | $ | 21,698 | | $ | 22,427 | | Stock based compensation | | 125 | | | - | | Total deferred tax assets | | 21,823 | | | 22,427 | | Valuation Allowance | | (21,823 | ) | | (22,427 | ) | Deferred tax asset, net of allowance | $ | - | | $ | - | |
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 10 year period which ends on April 1, 2022. As of December 31, 2016, the Professor has been granted 483,299 stock options, of which 297,190 are fully vested, at an exercise price of $1.00 exercisable over 10 or 13 year periods which end either on March 30, 2021, December 1, 2022, April 15, 2026 or on March 1, 2027. The sponsorship research and development expenses pertaining to the Research Agreements were $65,252 and $10,584 for the year ended December 31, 2016 and 2015, respectively. NOTE 10 - 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 years ended December 31, 2016 and 2015 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 the Professor, 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 the Professor and other inventors, but the Company’s exclusive, worldwide rights to such patent applications are included in the License Agreement and its amendment with the University. The Company maintains exclusive licensing agreements and it currently controls the six intellectual patent properties. NOTE 11 - COMMITMENTS AND CONTINGENCIES Consulting Agreement The Company had an employment agreement with its Officer/Related Party which expired on December 31, 2015. The employment agreement indicated a salary of $6,489 per month plus a bonus, other healthcare benefits and was granted stock options during the year ended December 31, 2015, the Officer/Related Party has been granted 75,000 stock options, valued at $64,223 using the Black-Scholes calculation of which $53,519 was expensed in 2015. As the agreement above expired, the Company issued a consulting agreement in its place that extended the majority of the terms of the employment agreement on a month-to-month basis. As a consultant, he is responsible for financial reporting, data compilation, and document retrieval services, reporting to the Chief Financial Officer, and to endeavor to secure non-dilutive grant funding for the Company. Prior to January 1, 2016, the Consultant had been granted 250,000 stock options, which are fully vested, at exercise prices of $0.26, $1.00, and $1.25 exercisable over 10 year periods which ends either August 1, 2016 or March 9, 2025. The consultant will be paid $2,000 per month for the remainder of the year ended December 31, 2016 and is eligible for bonus payments both contingent and not contingent on obtaining non-dilutive grant financing for the Company. Either party may terminate the agreement (a) immediately at any time upon written notice to the other party in the event of a breach of the agreement by the other party which cannot be cured (i.e. breach of the confidentiality obligations) and or (b) at any time without cause upon not less than fifteen (15) days’ prior written notice to the other party. Upon expiration or termination, neither the Company nor Consultant will have any further obligations under the consulting agreement. The Company has accrued $41,595 to the Consultant for research and development projects during the year ended December 31, 2016 and paid $0 during the year ended December 31, 2016. Consulting Agreement PTI Canada entered into a consulting agreement with a stockholder of the Company (the “Consultant”) which expired on December 31, 2015, pursuant to which the Consultant is responsible for overseeing i) design and development of enzyme-linked immunosorbent assay “(ELISA”), assays for measuring TCAP, ii) evaluation of TCAP exposure biomarker assay, iii) development of pipeline peptides, and iv) development of clinically compatible formulations for TCAP, as well as all of the bench research and development of formulation and extraction methods. The agreement has been extended through December 31, 2016 and updated accordingly. Prior to January 1, 2016, the Consultant had been granted 150,000 stock options which are fully vested at exercise prices of $1.00 and $1.25 exercisable over 10 year periods which ends either on March 30, 2021 or on March 1, 2025. The Consultant is paid approximately CA$3,000 per month. Either party may terminate the agreement (a) immediately at any time upon written notice to the other party in the event of a breach of the agreement by the other party which cannot be cured (i.e. breach of the confidentiality obligations) and or (b) at any time without cause upon not less than fifteen (15) days’ prior written notice to the other party. Upon expiration or termination, neither the Company nor Consultant will have any further obligations under the consulting agreement. The Company has accrued $22,656 to pay the Consultant for research and development projects during the year ended December 31, 2016 and paid $10,861 during the year ended December 31, 2016. 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 12 - SUBSEQUENT EVENTS The Company has evaluated the period after the balance sheet date up through the date that the condensed consolidated financial statements were filed, and determined that other than noted above, there were subsequent events or transactions that required recognition or disclosure in the condensed consolidated financial statements. The expected tax expense (benefit) based on the U.S. federal statutory rate is reconciled with actual tax expense (benefit) as follows:F-21
| As of June 30, | | | 2014 | | 2013 | | Statutory federal income tax rate | | -34.0 | % | | -34.0 | % | State taxes, net of federal tax benefit | | -11.5 | % | | -11.5 | % | Valuation Allowance | | 45.5 | % | | 45.5 | % | Income tax provision (benefit) | | 0.0 | % | | 0.0 | % |
ATRINSIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
The income tax provision consists of the following:
| As of June 30, | | 2014 | | 2013 | | Federal | | | | | | | Current | $ | - | | $ | - | | Deferred | | 451 | | | (350 | ) | State | | | | | | | Current | | - | | | - | | Deferred | | 153 | | | (118 | ) | Change in valuation allowance | | (604 | ) | | 468 | | Income tax provision (benefit) | $ | - | | $ | - | |
NOTE 9 - SUBSEQUENT EVENTS
In August, 2014, the Company raised gross proceeds, in a debt financing transaction, of $90 from its two principal stockholders, Iroquois and Hudson, and issued secured promissory notes in the principal amount of $45 to each of them. The notes have a maturity date of July 31, 2015 and bear interest at the rate of 5.0% per annum, payable at maturity. The notes are secured by all the assets of the Company.
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