NOTE

STOCKHOLDERS’

EQUITY

Stock-Based Compensation

In connection with the consummation of the Merger completed on

February 12, 2016,

we adopted the pre-merger Protagenic Therapeutics, Inc.'s

2006

Employee, Director and Consultant Stock Plan (the

“2006

Plan”). On

June 17, 2016,

our stockholders adopted our

2016

Equity Compensation Plan (the

“2016

Plan”) and, as a result, we terminated the

2006

Plan. We will

not

grant any further awards under the

2006

Plan. All outstanding grants under the

2006

Plan will continue in effect in accordance with the terms of the particular grant and the

2006

Plan.

Pursuant to the

2016

Plan, the Company’s Compensation Committee

may

grant awards to any employee, officer, director, consultant, advisor or other individual service provider of the Company or any subsidiary.

January 1, 2017,

pursuant to an annual “evergreen” provision contained in the

2016

Plan, the number of shares reserved for future grants was increased by

564,378

shares. As a result of this increase, as of

January 1, 2017,

the aggregate number of shares of common stock available for issuance under the

2016

Plan is

2,712,678.

Options issued under the

2016

Plan are exercisable for up to

years from the date of issuance.

As of

December 31, 2016,

there were

2,484,445

options outstanding under the

2006

Plan and

2016

Plan. The fair value of each stock option granted was estimated using the Black-Scholes assumptions and or factors 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%

As of

June 30, 2017,

there were

2,613,299

options outstanding under the

2006

Plan and

2016

Plan. The fair value of each stock option granted was estimated using the Black-Scholes assumptions and or factors as follows:

Exercise price	$	1.00	-	$1.25
Expected dividend yield			0%
Risk free interest rate		1.89%	-	2.31%
Expected life in years		4.60	-	9.59
Expected volatility		204%	-	258%

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

2006

and

2016

Plans:

				Weighted Average		Weighted Average
				Exercise		Remaining
	Number			Price		Life
Stock Options

Outstanding January 1, 2017		2,484,445		$	1.18		9.82
Granted		150,000			1.25		4.11
Expired		(21,146	)		1.00
Outstanding June 30, 2017		2,613,299		$	1.18		7.92

As of

June 30, 2017

and

December 31, 2016,

the options outstanding had an intrinsic value of

$193,687

and

$171,537,

respectively.

The total number of options granted during the

six

months ended

June, 2017

and

2016

under the

2006

plan was

and

100,000

, respectively. The exercise price for these options was

$1.25

per share.

The total number of options granted during the

six

months ended

June, 2017

and

2016

under the

2016

plan was

150,000

and

1,201,084

, respectively. The exercise price for these options was

$1.25

per share.

The Company recognized compensation expense related to options issued of

$500,877

and

$176,892

during the

six

months ended

June 30, 2017

and

2016,

respectively, which is included in general and administrative expenses.

As of

June 30, 2017,

the unamortized stock option expense was

$1,033,921.

Warrants:

In connection with the Merger, all of the issued and outstanding warrants to purchase shares of Prior Protagenic common stock, converted, on a

-for-

basis, into new warrants (the “

New Warrants

”) to purchase shares of our Series B Preferred Stock.

Simultaneous with the Merger and the Private Offering, New Warrants to purchase

3,403,367

shares of common 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 exchanged such debt for

five

-year warrants to purchase

295,945

shares of common Stock at

$1.25

per share. Placement Agent Warrants to purchase

127,346

shares of common 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 common stock have been recorded as derivative liabilities.

A summary of warrant issuances are as follows:

			Weighted Average		Weighted Average
			Exercise		Remaining
	Number		Price		Life
Warrants

Outstanding January 1, 2017		3,826,658	$	1.02		5.72
Expired		100,000		1.25
Outstanding June 30, 2017		3,726,658	$	1.05		5.26

As of

June 30, 2017

the Company had

3,726,658

shares issuable under warrants outstanding at a weighted average exercise price of

$1.05

and an intrinsic value of

$763,342.