| Summary of Significant Accounting Policies | NOTE 3 - SUMMARY OF SIGNFICANT ACCOUNTING
POLICIES Basis of presentation The Company’s
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). The consolidated
financial statements include the accounts of Protagenic Therapeutics, Inc., and its wholly-owned Canadian subsidiary, PTI Canada.
All significant intercompany balances and transactions have been eliminated in consolidation. Principles of consolidation The consolidated
financial statements include the accounts of Protagenic Therapeutics, Inc., and its wholly owned Canadian subsidiary, PTI Canada.
All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. Use of estimates The preparation
of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from
those estimates. Significant estimates underlying the consolidated financial statements include 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. While the
Company’s marketable securities are cash equivalents it is the Company’s policy to present them separately on the Balance
Sheet. As of December 31, 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 three years. Depreciation expense was not material for the
years ended December 31, 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 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 year
ended December 31, 2018 the Company purchased $2,744,338 and sold $3,790,000 in marketable securities with a realized gain of $4,047
and an unrealized gain of $6,250. As of December 31, 2018 and 2017, the Company owns marketable securities with a total value of
$250,388 and $1,285,753, respectively. Below is a summary
of each type of marketable security held by the Company at December 31, 2018:
Type of Marketable Secutiry Estimated Market Value
U.S. Treasury Bills $ 149,954
U.S. Treasury Notes $ 100,434
Total at December 31, 2018 $ 250,388 As of December 31,
2018, the marketable securities have maturity dates ranging from January 2, 2019 to January 31, 2019. While these marketable securities
are cash equivalent it is the Company’s policy to present them separately on the Balance Sheet. 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 December
31, 2018.
Carrying Fair Value Measurement Using
Value Level 1 Level 2 Level 3 Total
Marketable securities 250,388 250,388 — — 250,388
Derivative warrants liabilities $ (676,079 ) $ — $ — $ (676,079 ) $ (676,079 ) 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 year ended December 31,
2018 and 2017:
Fair Value Measurement Using Level 3
Inputs Total
Balance, December 31, 2016 $ 516,870
Change in fair value of derivative warrants liabilities (91,032 )
Balance, December 31, 2017 425,838
Change in fair value of derivative warrants liabilities 250,241
Balance, December 31, 2018 $ 676,079 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 December 31, 2018
Exercise price 1.25 1.25
Risk free interest rate 1.98 % 2.46 %
Dividend yield 0.00 % 0.00 %
Expected volatility 144 % 152 %
Contractual term 3.15 Years 2.15 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 years
ended December 30, 2018 and 2017, the Company marked the derivative feature of the warrants to fair value and recorded a gain of
$250,241 and a loss of $91,032 relating to the change in fair value, respectively. Derivative Liability The Company evaluates
its options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify
as derivatives to be separately accounted for in accordance with ASC 815-10-05-4 and 815-40-25. The result of this accounting treatment
is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or
a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated
statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument
is marked to fair value at the date of conversion, exercise or cancellation and then the related fair value is reclassified to
equity. The classification
of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at
the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification
are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities
will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative
instrument is expected within 12 months of the balance sheet date. 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 AUS 2018-07, 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. The effect of dilution on net loss
becomes anti-dilutive and therefore is not reflected on the income statement.
Potentially Outstanding Dilutive Common Shares
For the Year Ended December 31, 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 consolidated statements of income and comprehensive income (loss). If the Company disposes of
foreign subsidiaries, then any cumulative translation gains or losses would be recorded into the consolidated statements of income
and comprehensive income (loss). If the Company determines that there has been a change in the functional currency of a subsidiary
to the U.S. Dollar, any translation gains or losses arising after the date of change would be included within the statement of
income and comprehensive income (loss). Based on an assessment
of the factors discussed above, the management of the Company determined 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 release’s 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 adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related
disclosures. 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 adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related
disclosures. 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 Date In June 2018, the
FASB issued ASU 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting”, which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and
services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the
grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07
also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or
(2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606.
ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years,
with early adoption permitted, but no earlier than our adoption of ASC 606. The Company chose to early adopt ASU 2018-07 in July
2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and
related disclosures. |
