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, t

he 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 awards 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.

s 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%

s of

September 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
	Number			Exercise Price		Remaining Life
Stock Options

Outstanding January 1, 2017		2,484,445		$	1.18		9.82
Granted		150,000			1.25		3.86
Expired		(21,146	)		1.00
Outstanding September 30, 2017		2,613,299		$	1.18		7.66
Exercisable September 30, 2017		1,853,892		$	1.16		7.12

As of

September 30, 2017

and

December 31, 2016,

the options outstanding had an intrinsic value of

$181,537

and

$171,537,

respectively.

The total number of options granted during the

nine

months ended

September, 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

nine

months ended

September, 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

$153,830

and

$273,674

for the

three

month periods ended

September 30, 2017

and

2016,

respectively and

$654,707

and

$450,566

for the

nine

month periods ended

September 30, 2017

and

2016,

respectively, which is included in general and administrative expenses.

As of

September 30, 2017,

the unamortized stock option expense was

$880,075.

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
	Number		Exercise Price		Remaining Life
Warrants

Outstanding January 1, 2017		3,826,658	$	1.02		5.72
Outstanding September 30, 2017		3,826,658	$	1.05		4.94
Exercisable September 30, 2017		3,826,658	$	1.05

As of

September 30, 2017

the Company had

3,826,658

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

$1.05

and an intrinsic value of

$763,342.

During the

nine

months ended

September 30, 2017

the Company extended warrants to purchase an aggregate of

100,000

common shares of the Company from

January 2, 2017

January 2, 2020.

All other warrant terms remain the same. The Company recognized compensation expense related to the extended warrants of

$99,782

during the

nine

months ended

September 30, 2017,

which is included in general and administrative expenses. Compensation expense related to the extended warrants

was calculated as the fair value of the extended warrants minus the fair value of the warrants just prior to the extension.