| Summary of Significant Accounting Policies | NOTE 3 - SUMMARY OF SIGNFICANT ACCOUNTING
POLICIES Basis of presentation The accompanying
unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities
and Exchange Commission (“SEC”) for interim financial information. In the opinion of the Company’s management,
the accompanying condensed consolidated financial statements reflect all adjustments, consisting of normal, recurring adjustments,
considered necessary for a fair presentation of the results for the interim periods ended June 30, 2018 and 2017. As this is an
interim period financial statement, certain adjustments are not necessary as with a financial period of a full year. Although management
believes that the disclosures in these unaudited condensed consolidated financial statements are adequate to make the information
presented not misleading, certain information and footnote disclosures normally included in financial statements that have been
prepared in accordance U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. The condensed consolidated
financial statements include the accounts of Protagenic Therapeutics, Inc., and its wholly-owned Canadian subsidiary, PTI Canada.
All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying
unaudited condensed consolidated financial statements should be read in conjunction with the Company’s financial statements
for the year ended December 31, 2017, which contains the audited financial statements and notes thereto, for the years ended December
31, 2017 and 2016 included within the Company’s Form 10-K/A filed with the SEC on April 5, 2018. The interim results for
the six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the year ended December 31,
2018 or for any future interim periods. Principles of consolidation The unaudited condensed
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 unaudited condensed consolidated financial statements. Use of estimates The preparation of
unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
unaudited condensed consolidated financial statements and the reported amounts of revenue and expense during the reporting period.
Actual results could differ from those estimates. Significant estimates underlying the unaudited condensed consolidated financial
statements include the allocation of the fair value of acquired assets and liabilities associated with the Merger, income tax provisions,
valuation of stock options and warrants and assessment of deferred tax asset valuation allowance. Concentrations of Credit Risk The Company maintains
its cash accounts at financial institutions which are insured by the Federal Deposit Insurance Corporation. At times, the Company
may have deposits in excess of federally insured limits. Cash and Cash Equivalents The Company considers
all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. As of June
30, 2018, and December 31, 2017, the Company did not have any cash equivalents. Equipment Equipment is stated
at cost less accumulated depreciation. Cost includes expenditures for computer equipment. Maintenance and repairs are charged to
expense as incurred. When assets are sold, retired, or otherwise disposed of, the cost and accumulated depreciation are removed
from the accounts and any resulting gain or loss is reflected in operations. The cost of equipment is depreciated using the straight-line
method over the estimated useful lives of the related assets which is threeyears. Depreciation expense was not material for
the six months ended June 30, 2018 and 2017. Marketable Securities The Company accounts
for marketable debt securities, the only type of securities it owns, in accordance with sub-topic 320-10 of the FASB Accounting
Standards Codification (“Sub-topic 320-10”). Pursuant to Paragraph
320-10-35-1, investments in debt securities that are classified as available for sale shall be measured subsequently at fair value
in the unaudited condensed consolidated balance sheets at each balance sheet date. Unrealized holding gains and losses for available-for-sale
securities (including those classified as current assets) shall be excluded from earnings and reported in other comprehensive income
until realized. During the six months
ended June 30, 2018 the Company purchased $1,777,355 and sold $2,220,000 in marketable securities with a realized gain of $1,568
and an unrealized gain of $4,893. As of June 30, 2018 and December 31, 2017, the Company owns marketable securities with a total
value of $849,569 and 1,285,753, respectively. As of June 30, 2018,
the marketable securities have maturity dates ranging from July 26, 2018 to August 23, 2018. Fair Value Measurements ASC 820, “Fair
Value Measurements and Disclosure,” defines fair value as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs.
ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value
into three broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level
1) and the lowest priority to unobservable inputs (Level 3). The three levels are described below: Level 1
Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that is accessible by the Company; Level 2
Inputs – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable,
either directly or indirectly; Level 3
Inputs – Unobservable inputs for the asset or liability including significant assumptions of the Company and other market
participants. The carrying amount
of the Company’s financial assets and liabilities, such as cash, accounts payable and accrued expenses approximate their
fair value because of the short maturity of those instruments. Transactions involving
related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive,
free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the
related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless
such representations can be substantiated. The assets or liability’s
fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair
value measurement. The following table provides a summary of financial instruments that are measured at fair value as of June 30,
2018.
Carrying Fair Value Measurement Using
Value Level 1 Level 2 Level 3 Total
Marketable securities 849,569 — 849,569 — 849,569
Derivative warrants liabilities $ (407,616 ) $ — $ — $ (407,616 ) $ (407,616 ) The following table provides a summary
of financial instruments that are measured at fair value as of December 31, 2017.
Carrying Fair Value Measurement Using
Value Level 1 Level 2 Level 3 Total
Marketable securities 1,285,753 — 1,285,753 — 1,285,753
Derivative warrants liabilities $ (425,838 ) $ — $ — $ (425,838 ) $ (425,838 ) The table below provides
a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured
at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2018:
Fair Value Measurement Using Level 3
Inputs Total
Balance, December 31, 2017 $ 425,838
Change in fair value of derivative warrants liabilities (18,222 )
Balance, June 30, 2018 $ 407,616 The fair value of
the 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 assumptions:
December 31, 2017 June 30, 2018
Exercise price 1.25 1.25
Risk free interest rate 1.98 % 2.63 %
Dividend yield 0.00 % 0.00 %
Expected volatility 144 % 145 %
Contractual term 3.15 Years 2.65 Years Risk-free interest
rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar expected term on the date of measurement. Dividend yield: The
Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends
in the near future. Volatility: The Company
calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s peer group stock
price for a period consistent with the warrants’ expected term. Expected term: The
Company’s expected term is based on the remaining contractual maturity of the warrants. During the six months
ended June 30, 2018 and 2017, the Company marked the derivative feature of the warrants to fair value and recorded a gain of $18,222
and a gain of $12,544 relating to the change in fair value, respectively. Derivative Liability The Company evaluates
its options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify
as derivatives to be separately accounted for in accordance with ASC 815-10-05-4 and 815-40-25. The result of this accounting treatment
is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or
a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the unaudited
condensed consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative
instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then the related fair
value is reclassified to equity. The classification
of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at
the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification
are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities
will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative
instrument is expected within 12 months of the balance sheet date. Stock-Based Compensation The Company accounts
for stock based compensation costs under the provisions of ASC 718, “Compensation—Stock Compensation”, which
requires the measurement and recognition of compensation expense related to the fair value of stock based compensation awards that
are ultimately expected to vest. Stock based compensation expense recognized includes the compensation cost for all stock based
payments granted to employees, officers, and directors based on the grant date fair value estimated in accordance with the provisions
of ASC 718. ASC. 718 is also applied to awards modified, repurchased, or canceled during the periods reported. If any award granted
under the 2016 Plan payable in shares of common stock is forfeited, cancelled, or returned for failure to satisfy vesting requirements,
otherwise terminates without payment being made, or if shares of common stock are withheld to cover withholding taxes on options
or other awards, the number of shares of common stock as to which such option or award was forfeited, or which were withheld, will
be available for future grants under the 2016 Plan. The company recognizes the impact of forfeitures when they occur. Stock-Based Compensation for Non-Employees The Company accounts
for warrants and options issued to non-employees under ASC 505-50, Equity – Equity Based Payments to Non-Employees, Basic and Diluted Net (Loss) per
Common Share Basic (loss) per
common share is computed by dividing the net (loss) by the weighted average number of shares of common stock outstanding for each
period. Diluted (loss) per share is computed by dividing the net (loss) by the weighted average number of shares of common stock
outstanding plus the dilutive effect of shares issuable through the common stock equivalents.
Potentially Outstanding Dilutive Common Shares
For the Six Months Ended June 30, 2018 For the Year Ended December 31, 2017
Conversion Feature Shares
Common shares issuable under the conversion feature of preferred shares 872,766 872,766
Stock Option 3,846,299 3,566,299
Warrant 3,826,658 3,826,658
Total potentially outstanding dilutive common shares 8,545,723 8,265,723 Research and Development Research and development
expenses are charged to operations as incurred. Foreign Currency Translation The Company follows
Section 830-10-45 of the FASB Accounting Standards Codification (“Section 830-10-45”) for foreign currency translation
to translate the financial statements of the foreign subsidiary from the functional currency, generally the local currency, into
U.S. Dollars. Section 830-10-45 sets out the guidance relating to how a reporting entity determines the functional currency of
a foreign entity (including of a foreign entity in a highly inflationary economy), re-measures the books of record (if necessary),
and characterizes transaction gains and losses. Pursuant to Section 830-10-45, the assets, liabilities, and operations of a foreign
entity shall be measured using the functional currency of that entity. An entity’s functional currency is the currency of
the primary economic environment in which the entity operates; normally, that is the currency of the environment, or local currency,
in which an entity primarily generates and expends cash. The functional currency
of each foreign subsidiary is determined based on management’s judgment and involves consideration of all relevant economic
facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions,
including billings, financing, payroll and other expenditures, would be considered the functional currency, but any dependency
upon the parent and the nature of the subsidiary’s operations must also be considered. If a subsidiary’s functional
currency is deemed to be the local currency, then any gain or loss associated with the translation of that subsidiary’s financial
statements is included in accumulated other comprehensive income. However, if the functional currency is deemed to be the U.S.
Dollar, then any gain or loss associated with the re-measurement of these financial statements from the local currency to the functional
currency would be included in the unaudited condensed consolidated statements of income and comprehensive income (loss). If the
Company disposes of foreign subsidiaries, then any cumulative translation gains or losses would be recorded into the unaudited
condensed consolidated statements of income and comprehensive income (loss). If the Company determines that there has been a change
in the functional currency of a subsidiary to the U.S. Dollar, any translation gains or losses arising after the date of change
would be included within the statement of income and comprehensive income (loss). Based on an assessment
of the factors discussed above, the management of the Company determined the relevant subsidiary’s local currency to be the
functional currency for its foreign subsidiary. Recent Accounting Pronouncements 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 U.S. 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 unaudited condensed 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” 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
beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the update is permitted.
The Company is currently assessing the impact of this ASU on the Company’s unaudited condensed consolidated financial statements. 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. 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
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