NOTE

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 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, 2017

and

2016.

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, 2016,

which contains the audited financial statements and notes thereto, for the years ended

December 31, 2016

and

2015

included within the Company’s Form

-K/A filed with the SEC on

May 8, 2017.

The interim results for the

six

months ended

June 30, 2017

are

not

necessarily indicative of the results to be expected for the year ended

December 31, 2017

or for any future interim periods.

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, impairment of goodwill, valuation of stock options and warrants and assessment of deferred tax asset valuation allowance.

Reclassification

Certain prior period amounts have been reclassified to conform to current period presentation.

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, 2017

and

December 31, 2016,

the Company did

not

have any cash equivalents.

Marketable Securities

The Company accounts for marketable debt and equity securities, available for sale, in accordance with sub-topic

320

of the FASB Accounting Standards Codification (“Sub-topic

320

10”

Pursuant to Paragraph

320

investments in debt securities that are classified as available for sale and equity securities that have readily determinable fair values 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 except an available-for-sale security that is designated as being hedged in a fair value hedge, from which all or a portion of the unrealized holding gain and loss of shall be recognized in earnings during the period of the hedge, pursuant to paragraphs

815

through

815

During the

six

months ended

June 30, 2017

the Company purchased

$2,549,179

and sold

$720,000

in marketable securities. With a realized loss of

$92

and an unrealized loss of

$3,163.

As of

June 30, 2017,

the Company owns marketable securities with a total value of

$1,825,923.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The Company is 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

350–20

“

Goodwill

”, the Company is able to make a qualitative assessment of whether it is more likely than

not

that a 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 two–step impairment test for that reporting unit.

Atrinsic’s assets and liabilities acquired in the Merger had a minimal value therefore the Company recorded the fair value of shares given to predecessor stockholders as goodwill. Immediately subsequent to the merger the Company fully impaired the goodwill.

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 preferred stock, 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.

As of

June 30, 2017,

the goodwill was

$0.

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

) and the lowest priority to unobservable inputs (Level

The

three

levels are described below:

Level

Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that is accessible by the Company;

Level

Inputs – Quoted prices in markets that are

not

active or financial instruments for which all significant inputs are observable, either directly or indirectly;

Level

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, 2017.

	Carrying			Fair Value Measurement Using
	Value			Level 1		Level 2		Level 3			Total

Marketable securities		1,825,923			—		1,825,923		—			1,825,923
Derivative warrants liabilities	$	(504,326	)	$	—	$	—	$	(504,326	)	$	(504,326	)

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 assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level

) during the interim period ended

June 30, 2017:

	Fair Value Measurement Using Level 3 Inputs
	Total
Balance, December 31, 2016	$	516,870
Change in fair value of derivative warrants liabilities		(12,544	)
Balance, June 30, 2017	$	504,326

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:

	February 12, 2016			December 31, 2016			June 30 , 2017
Exercise price	$	1.25		$	1.25		$	1.25
Risk free interest rate		1.20	%		1.93	%		1.89	%
Dividend yield		0.00	%		0.00	%		0.00	%
Expected volatility		156	%		219	%		258.4	%
Contractual term (in years)		5.0			4.25			3.5

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

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’ contractual term.

Contractual term: The Company’s contractual term is based on the remaining contractual maturity of the warrants.

The use of a Monte Carlo or lattice model for these calculations would

not

have resulted in a material difference.

During the

six

months ended

June, 2017

and

2016,

the Company marked the derivative feature of the warrants to fair value and recorded a gain of

$12,544

and a loss of

$28,394,

respectively, relating to the change in fair value.

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

and

815

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 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

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 at each reporting date.

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, 2017		For the Six Months Ended June 30, 2016

Conversion Feature Shares

Common shares issuable under the conversion feature of preferred shares		872,766		11,018,766

Stock Options		2,613,299		2,592,229

Warrants		3,726,658		3,826,658

Total potentially outstanding dilutive common shares		7,212,723		17,437,653