Protagenic Therapeutics(PTIX) - 2023 Q4 - Annual Report

Part I Item 1. Business Protagenic Therapeutics develops PT00114 for neuropsychiatric disorders, with Phase I/IIa trials underway, relying on licensed technology - The company's lead compound, PT00114, is a synthetic TCAP targeting stress-related neuropsychiatric and mood disorders[17] - A Phase I human trial for PT00114 began on September 26, 2023, with the first cohort's safety milestone passed on February 13, 2024, and full single-dose results expected in Q2 2024[18] - The company holds an exclusive worldwide license from the University of Toronto for PT00114 technology, with 2.5% royalties on net sales and 10% of up-front sub-license fees[60] - Protagenic relies on third-party contract manufacturers for PT00114 synthesis, with sufficient supply for GLP toxicology studies and Phase 1 human clinical trials[57] - As of December 31, 2023, the company holds issued and pending patents in the US, Canada, and Europe to protect its TCAP-related technology[76][82][83] Item 1A. Risk Factors The company faces significant financial, clinical, and third-party reliance risks, with substantial doubt about its going concern ability and material internal control weaknesses - The company's significant operating losses, with an accumulated deficit of $30.8 million as of December 31, 2023, and negative cash flow raise substantial doubt about its ability to continue as a going concern, with current cash sufficient only until Q3 2024[92][238] - The company reported net losses of $5.0 million in 2023 and $3.6 million in 2022, with continued losses expected and profitability uncertain without successful drug development and regulatory approval[93] - The company is highly dependent on its exclusive license agreement with the University of Toronto for PT00114, where failure to meet obligations could result in the license becoming non-exclusive and materially harm the business[154] - The company relies on third parties for non-clinical studies, clinical trials, and manufacturing, where any performance failure could delay or prevent regulatory approval and commercialization[133][139] - Management identified material weaknesses in internal controls over financial reporting, including a lack of segregation of duties and ineffective risk assessment, potentially leading to inaccurate financial reporting[206][212] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments - Not applicable[216] Item 1C. Cybersecurity The company maintains an ISO 27002-based cybersecurity risk management program, overseen by the audit committee, with no material threats - The company's cybersecurity risk management program is guided by ISO 27002 standards and utilizes external resources for assessment[217] - The Audit Committee of the Board of Directors oversees cybersecurity risk management[218] Item 2. Properties The company does not own real property and leases its principal executive office in New York, NY - The Company leases its principal executive office at 149 Fifth Avenue, Suite 500, New York, New York 10010, and does not own any real property[219] Item 3. Legal Proceedings As of December 31, 2023, the company is not involved in any legal proceedings with a material adverse effect - There are no pending legal proceedings expected to have a material adverse effect on the company[220] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[221] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under 'PTIX', underwent a 1-for-4 reverse split in March 2023, and has never paid cash dividends - The company's common stock is traded on the Nasdaq Capital Market under the symbol "PTIX"[223] - A 1-for-4 reverse stock split was completed on March 22, 2023, with all share and per-share data adjusted accordingly[227] - The company has never paid cash dividends and does not intend to in the foreseeable future[226] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The company's loss from operations increased in 2023 due to higher R&D expenses, facing critical liquidity with cash sufficient only until Q3 2024, necessitating additional financing Results of Operations (2023 vs. 2022) | Metric | 2023 (USD) | 2022 (USD) | Change (USD) | Reason for Change | | :--- | :--- | :--- | :--- | :--- | | Loss from Operations | $4,526,974 | $3,557,788 | +$969,186 | Increased R&D expenses | | Research & Development | $3,319,867 | $1,589,239 | +$1,730,628 | Additional costs for continued R&D efforts | | General & Administrative | $1,207,107 | $1,968,549 | -$761,442 | Lower stock compensation expense | | Net Loss | $5,000,497 | $3,555,505 | +$1,444,992 | Higher operating loss and realized loss on securities | - The company's cash resources are projected to fund operations only until the end of Q3 2024, necessitating additional capital to continue operations[238][439] - Net cash used in operating activities increased to $3.7 million in 2023 from $2.0 million in 2022, primarily due to the higher net loss[235] - Key clinical milestones for 2024 include public results from Phase I single and multiple dose studies in Q2, and initiation of the Phase IIa study in Q3[249] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None reported[248] Item 9A. Controls and Procedures Management concluded internal controls over financial reporting were ineffective as of December 31, 2023, due to material weaknesses like lack of segregation of duties - Management concluded that internal controls over financial reporting were not effective as of December 31, 2023[250][253] - Material weaknesses identified include a lack of necessary segregation of duties and limited multiple reviews in the financial reporting process[254][261] - To remediate weaknesses, the company engaged an independent third party to enhance segregation of duties and plans additional controls[256] Item 9B. Other Information The company received a Nasdaq deficiency notice in November 2023 for minimum bid price, but regained compliance by March 2024 - The company received a Nasdaq deficiency notice on November 21, 2023, for its stock price falling below the $1.00 minimum bid requirement[259] - The company regained compliance with the Nasdaq minimum bid price rule, and the matter was closed on March 19, 2024[262] Part III Item 10. Directors, Executive Officers and Corporate Governance The company's leadership includes Executive Chairman Garo H. Armen and CFO Alexander K. Arrow, with a Board of Directors comprising five committees and independent members - The executive team is led by Garo H. Armen, PhD, as Executive Chairman, and Alexander K. Arrow, M.D., CFA, as Chief Financial Officer[266] - The Board has five standing committees: Audit, Compensation, Nominating and Corporate Governance, Science, and Clinical and Regulatory[287] - Messrs. Corvese, Wright, and Barrage are independent directors, with Mr. Corvese designated as the 'audit committee financial expert'[281][288] Item 11. Executive Compensation For fiscal year 2023, CFO Alexander K. Arrow received a salary of $150,000, while Executive Chairman Garo H. Armen received no salary, with other key personnel compensated via stock options Summary Compensation Table (2023) | Name and Principal Position | Year | Salary ($) | Total Compensation ($) | | :--- | :--- | :--- | :--- | | Garo H. Armen, Chairman | 2023 | 0 | 0 | | Alexander K. Arrow, CFO | 2023 | 150,000 | 150,000 | - The company has consulting agreements with key personnel, including the COO, CMO, and scientific advisors, compensating them with stock options[304][305][307] - Non-employee directors receive annual grants of stock options, typically 10,000 shares per year, plus additional options for committee chairmanship[310] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of April 1, 2024, directors and executive officers beneficially own approximately 35% of common stock, with Executive Chairman Garo H. Armen holding 21%, and the company maintains an equity compensation plan - As of April 1, 2024, all directors and executive officers as a group beneficially own approximately 35% of the company's common stock[210][376] - Executive Chairman Garo H. Armen is the largest beneficial owner, holding approximately 21% of the common stock[376] Equity Compensation Plan Information (as of Dec 31, 2023) | Plan category | No. of securities to be issued upon exercise | Weighted-average exercise price ($) | No. of securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 2,300,032 | $12.34 | 1,279,181 | Item 13. Certain Relationships and Related Transactions, and Director Independence The company has related party transactions, including office space from Agenus, Inc. (where Dr. Armen is Chairman), insider participation in convertible notes, and stock options to Dr. Armen's son, subject to audit committee approval for transactions over $100,000 - The company uses conference room space at Agenus, Inc., where Protagenic's Chairman, Dr. Armen, also serves as Chairman and CEO, provided at no cost[386] - Insiders Garo H. Armen and Khalil Barrage each invested $200,000 in the 2019-2020 Convertible Note Offering, converted to stock as of December 31, 2023[387] - The company has a policy for reviewing and approving related party transactions over $100,000, managed by the audit committee[389] Item 14. Principal Accountant Fees and Services The company's independent auditor is Malone Bailey LLP, with total audit fees of $100,000 in 2023, an increase from $85,000 in 2022, all pre-approved by the Audit Committee Accountant Fees (2023 vs. 2022) | Fee Type | Fiscal Year 2023 ($) | Fiscal Year 2022 ($) | | :--- | :--- | :--- | | Audit fees | $100,000 | $85,000 | | Audit-related fees | $0 | $0 | | Tax Fees | $0 | $0 | | All other fees | $0 | $0 | | Total | $100,000 | $85,000 | Part IV Item 15. Exhibits, Financial Statement Schedules This section lists all documents filed as part of the Form 10-K report, including corporate governance, material contracts, and compensation plans, with financial statement schedules omitted - This section provides a comprehensive list of all exhibits filed with or incorporated by reference into the annual report, including charter documents, material contracts, and compensation plans[408] Financial Statements Report of Independent Registered Public Accounting Firm The auditor issued an unqualified opinion but included a 'Going Concern' paragraph due to recurring losses and negative cash flows, raising substantial doubt about the company's ability to continue - The auditor's report contains a "Going Concern" paragraph, citing recurring losses and negative cash flows that raise substantial doubt about the company's ability to continue operations[420] Consolidated Financial Statements The consolidated financial statements for 2023 show a net loss of $5.0 million, increased from 2022, with total assets decreasing to $4.3 million and net cash used in operating activities at $3.7 million Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2023 ($ thousands) | Dec 31, 2022 ($ thousands) | | :--- | :--- | :--- | | Cash | $1,288 | $215 | | Marketable securities | $2,768 | $7,764 | | Total Assets | $4,323 | $8,037 | | Total Current Liabilities | $655 | $1,120 | | Total Liabilities | $655 | $1,120 | | Total Stockholders' Equity | $3,668 | $6,918 | Consolidated Statement of Operations Data (in thousands) | Account | Year Ended Dec 31, 2023 ($ thousands) | Year Ended Dec 31, 2022 ($ thousands) | | :--- | :--- | :--- | | Research and development | $3,320 | $1,589 | | General and administrative | $1,207 | $1,969 | | Loss from Operations | ($4,527) | ($3,558) | | Net Loss | ($5,000) | ($3,556) | | Net loss per share | ($1.15) | ($0.82) | Consolidated Cash Flow Data (in thousands) | Account | Year Ended Dec 31, 2023 ($ thousands) | Year Ended Dec 31, 2022 ($ thousands) | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($3,704) | ($1,994) | | Net Cash Provided by Investing Activities | $4,775 | $1,597 | Notes to Consolidated Financial Statements The notes reiterate the going concern doubt, with resources sufficient only until Q3 2024, detail convertible note conversions, stock-based compensation, and significant federal net operating loss carryforwards fully offset by a valuation allowance - Note 2 (Liquidity and Going Concern) states current resources are insufficient to fund operations beyond Q3 2024, reinforcing the going concern risk[439] - On November 6, 2023, all outstanding convertible notes, totaling $430,000 in principal plus accrued interest, were converted into 104,173 shares of common stock[470][473] - Stock-based compensation expense for 2023 was $666,828, with $676,415 of unamortized expense remaining as of December 31, 2023, to be recognized over 3.55 years[480][481] - As of December 31, 2023, the company had federal Net Operating Loss (NOL) carryforwards of approximately $15.2 million, fully offset by a valuation allowance due to uncertain future profits[498] - Subsequent to year-end, in January and March 2024, the company granted a total of 737,750 stock options to employees and consultants[504][505]