ProtoKinetix, Inc. 10-K

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is currently quoted on OTCQB tier of the OTC Markets under the symbol “PKTX”. The table below sets forth the high and low bid prices of the Company’s common stock during the periods indicated as reported on OTC Markets Inc. (www.otcmarkets.com). The quotations are inter-dealer prices without retail markups, markdowns or commissions, and may not necessarily represent actual transactions. 2019 Low High First Quarter $ 0.050 $ 0.088 Second Quarter 0.058 0.319 Third Quarter 0.080 0.289 Fourth Quarter 0.081 0.143 2018 Low High First Quarter $ 0.040 $ 0.070 Second Quarter 0.030 0.120 Third Quarter 0.059 0.130 Fourth Quarter 0.050 0.130 Holders As of February 18, 2020, there were approximately 89 shareholders of record of the Company’s common stock. This does not include an indeterminate number of persons who hold our Common Stock in brokerage accounts and otherwise in “street name.” Dividends We have never paid cash dividends and have no plans to do so in the foreseeable future. Our future dividend policy will be determined by our board of directors and will depend upon a number of factors, including our financial condition and performance, our cash needs and expansion plans, income tax consequences, and the restrictions that applicable laws, our current preferred stock instruments, and our future credit arrangements may then impose. Adoption of the 2015 Stock Option and Stock Bonus Plan On July 1, 2015, the Board of Directors of the Company adopted the 2015 Stock Option and Stock Bonus Plan (the “2015 Plan”). All awards granted under the 2015 Plan will continue forward under the 2015 Plan until expired or exercised pursuant to the terms of each individual award agreement, however, no new awards shall be granted under the 2015 Plan. As of both December 31, 2019 and February 18, 2020, no options and 2,000,000 shares of fully vested common stock remained as granted under the 2015 Plan. 19 Adoption and Amendment of the 2017 Stock Option and Stock Bonus Plan On December 30, 2016, the Board of Directors of the Company the (“Board”) adopted the 2017 Stock Option and Stock Bonus Plan (the "“2017 Plan”). The Board adopted the 2017 Plan as it anticipates utilizing equity compensation as part of its ongoing standard corporate operations and in connection with its contemplated activities going forward. On November 9, 2018, the Board amended the 2017 Stock Option and Stock Bonus Plan to increase the aggregate number of shares that may be issued under the 2017 Plan from 30,000,000 to 50,000,000 shares subject to adjustment as provided therein to continue to incentivize contractors and future employees (if any) of the Company (the amended 2017 Plan is hereinafter referred to as the “Amended 2017 Plan”). On July 15, 2019, the Board again amended the Amended 2017 Plan to increase the aggregate number of shares that may be issued under the 2017 Plan from 50,000,000 to 89,700,000 shares. The Amended 2017 Plan also provides for the ability of the Board to extend the exercise period of an option and provides for flexibility in the event of a change in control of the Company or consolidation or merger. The Amended 2017 Plan is administered by the Board, or a committee appointed by the Board. In addition to determining who will be granted options or bonuses, the committee has the authority and discretion to determine when options and bonuses will be granted and the number of options and bonuses to be granted. The committee also may determine a vesting and/or forfeiture schedule for bonuses and/or options granted, the time or times when each option becomes exercisable, the duration of the exercise period for options and the form or forms of the agreements, certificates or other instruments evidencing grants made under the Amended 2017 Plan. The committee may determine the purchase price of the shares of common stock covered by each option and determine the fair market value per share. The committee also may impose additional conditions or restrictions not inconsistent with the provisions of the Amended 2017 Plan. The committee may adopt, amend and rescind such rules and regulations as in its opinion may be advisable for the administration of the Amended 2017 Plan. 20 The committee also has the power to interpret the Amended 2017 Plan, and the provisions in the instruments evidencing grants made under it, and is empowered to make all other determinations deemed necessary or advisable for the administration of it. Participants in the Amended 2017 Plan may be selected by the committee from employees, officers, consultants and advisors (including board members) of ProtoKinetix. The committee may take into account the duties of persons selected, their present and potential contributions to the success of ProtoKinetix and such other considerations as the committee deems relevant to the purposes of the Amended 2017 Plan. In the event of a change, such as a stock split, is made in the Company’s capitalization which results in an exchange or other adjustment of each share of common stock for or into a greater or lesser number of shares, appropriate adjustments will be made to unvested bonuses and in the exercise price and in the number of shares subject to each outstanding option. The committee also may make provisions for adjusting the number of bonuses or underlying outstanding options in the event the Company effects one or more reorganizations, recapitalizations, rights offerings, or other increases or reductions of shares of its outstanding common stock. Options and bonuses may provide that in the event of the dissolution or liquidation of ProtoKinetix, a corporate separation or division or the merger or consolidation of ProtoKinetix, the holder may exercise the option on such terms as it may have been exercised immediately prior to such dissolution, corporate separation or division or merger or consolidation; or in the alternative, the committee may provide that each option granted under the 2017 Plan shall terminate as of a date fixed by the committee. The exercise price of any option granted under the Amended 2017 Plan must be no less than 100% of the “fair market value” of ProtoKinetix’s common stock on the date of grant. Any incentive stock option granted under the Amended 2017 Plan to a person owning more than 10% of the total combined voting power of the common stock must be at a price of no less than 110% of the fair market value per share on the date of grant. The exercise price of an option may be paid in cash, in shares of ProtoKinetix common stock or other property having a fair market value equal to the exercise price of the option, or in a combination of cash, shares, other securities and property. The committee determines whether or not property other than cash or common stock may be used to purchase the shares underlying an option and shall determine the value of the property received. As of both December 31, 2019 and February 18, 2020, 89,450,000 options remain as granted under the Amended 2017 Plan. As of both December 31, 2019 and February 18, 2020, 2,000,000 options remain as granted not pursuant to any stock option plan. 21 Securities Authorized for Issuance Under Equity Compensation Plans The following table sets forth securities authorized for issuance under equity compensation plans, including but not limited to the the Amended 2017 Plan and individual compensation arrangements as of December 31, 2019: Plan category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (a) (b) (c) Equity compensation plans approved by security holders — — — Equity compensation plans not approved by security holders 92,450,000 $ 0.15 250,000 Total 92,450,000 $ 0.15 250,000 During the year ended December 31, 2019, warrants to purchase 6,000,000 shares of common stock of the Company were outstanding (see Note 8 of the notes to the financial statements). As of the year ended December 31, 2019, there were warrants and options outstanding representing a total of 8,500,000 and 91,450,000 shares of common stock respectively to be issued upon exercise, of which: (i) options to purchase no shares of common stock were outstanding under the 2015 Plan; (ii) options to purchase 89,450,000 shares of common stock were outstanding under the Amended 2017 Plan; and (iii) warrants outstanding to purchase 8,500,000 shares of common stock not pursuant to any plan and options outstanding to purchase 2,000,000 of common stock not pursuant to any plan. To management’s knowledge, there are no outstanding options, warrants or other rights to acquire the common stock of the Company that were issued pursuant to the Company’s 2003, 2004 or 2005 Stock Incentive Plans (the “Old Plans”) for the year ended December 31, 2019. To management’s knowledge, the Old Plans have expired and terminated. Recent Sales of Unregistered Securities and Use of Proceeds On January 22, 2019, the Company issued 250,000 shares of common stock at a price of $0.06 per share for gross proceeds of $15,000 to an accredited investor and on February 4, 2019 Clarence E. Smith, CEO of the Company, was issued 500,000 shares of common stock at a price of $0.06 per share for gross proceeds of $30,000 pursuant to a private placement. No solicitation was used in this offering. For both sales of securities, the Company relied on the exemption from registration available under Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated under the Securities Act with respect to transactions by an issuer not involving any public offering. No commissions were paid in connection with this issuance of securities. A Form D was filed on January 14, 2019. 22 Between April 1, 2019 and May 9, 2019, the Company sold 10,000,000 shares of common stock for gross proceeds of $500,000 to accredited investors (one of which was the Company’s President & CEO, Clarence E. Smith) in a private placement. No solicitation was used in the offering. The Company relied on the exemption from registration available under Section 4(a)(2) of the 1933 Act and Rule 506(b) of Regulation D promulgated under the 1933 Act with respect to transactions by an issuer not involving any public offering. No commissions were paid in connection with these issuances of securities. A Form D was filed on April 8, 2019. Between June 14, 2019 and June 18, 2019, the Company sold 2,266,667 shares of common stock for gross proceeds of $272,000 to accredited investors in a private placement. No solicitation was used in the offering. The Company relied on the exemption from registration available under Section 4(a)(2) of the 1933 Act and Rule 506(b) of Regulation D promulgated under the 1933 Act with respect to transactions by an issuer not involving any public offering. No commissions were paid in connection with these issuances of securities. A Form D was filed on July 2, 2019. On July 15, 2019, the Board of Directors of the Company canceled a total of 16,000,000 options previously granted to its CEO, a director, and a consultant and granted a total of 16,000,000 new options under the Amended 2017 Plan at an exercise price of $0.26 per share as follows: Clarence Smith, President, CEO & Director (options to purchase 5,000,000 shares); Edward McDonough, Director (options to purchase 1,000,000 shares); and Grant Young, a consultant (options to purchase 10,000,000 shares). Twenty-five percent of the shares vest on October 13, 2019 and 25% vest every three months thereafter. The options expire on July 14, 2024. Prior to a change in control of the Company, the vesting schedule of the option shall immediately accelerate so that the option is fully vested and available for exercise. Also on July 15, 2019, in connection with the continued service of certain directors, officers and consultants, the Board granted options pursuant to the Amended 2017 Plan to acquire shares of common stock of the Company at an exercise price of $0.26 per share as follows: Mr. Smith (an option to purchase 5,000,000 shares); Mr. McDonough (an option to purchase 2,000,000 shares); Michael Guzzetta, CFO (an option to purchase 4,000,000 shares); and Mr. Young (options to purchase 5,000,000 shares). Twenty-five percent of the shares vest on October 13, 2019 and 25% vest every three months thereafter. The options expire on July 14, 2024. Prior to a change in control of the Company, the vesting schedule of the option shall immediately accelerate so that the option is fully vested and available for exercise. The Company also issued an option under the Amended 2017 Plan to a consultant to acquire 500,000 shares at an exercise price of $0.26 per share. The option is identical to the others issued by the Board except that 250,000 shares vest on October 13, 2019 and 250,000 vest three months thereafter. For these grants of options, no solicitation was used and the Company relied on the exemption from registration available under Section 4(a)(2) of the Securities Act of 1933, as amended (the “1933 Act”) and/or Rule 506(b) of Regulation D promulgated under the 1933 Act with respect to transactions by an issuer not involving any public offering. No commissions were paid in connection with these issuances of securities. On September 24, 2019, the Company’s CFO exercised an option to purchase 250,000 shares of common stock of the Company at $0.07 per share through a cashless exercise. The CFO received 97,826 shares and the Company received 152,174 as consideration for the exercise. The Company relied on the exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “1933 Act”) and/or Rule 506(b) of Regulation D promulgated under the 1933 Act with respect to transactions not involving a public offering. No commissions were paid in connection with the issuance of these securities. On November 18, 2019, in connection with the continued service of certain directors, officers and consultants, the Board granted options pursuant to the Amended 2017 Plan to acquire shares of common stock of the Company at an exercise price of $0.11 per share as follows: Mr. Smith (an option to purchase 5,000,000 shares); Mr. McDonough (an option to purchase 1,000,000 shares); Michael Guzzetta, CFO (an option to purchase 4,000,000 shares); and Mr. Young (options to purchase 5,000,000 shares). Twenty-five percent of the shares vest on February 18, 2020 and 25% vest every three months thereafter. The options expire on November 17, 2024. For these grants of options, no solicitation was used and the Company relied on the exemption from registration available under Section 4(a)(2) of the Securities Act of 1933, as amended (the “1933 Act”) and/or Rule 506(b) of Regulation D promulgated under the 1933 Act with respect to transactions by an issuer not involving any public offering. No commissions were paid in connection with these issuances of securities. Between October 16, 2019 and December 19, 2019, the Company sold 2,500,000 Units (each Unit comprised of one common share and one warrant to purchase one common share at $0.12) for gross proceeds of $300,000 to accredited investors (one of which was the Company’s President & CEO, Clarence E. Smith) in a private placement. The warrants were immediately vested and expire three years from the date of issuance. No solicitation was used in the offering. The Company relied on the exemption from registration available under Section 4(a)(2) of the 1933 Act and Rule 506(b) of Regulation D promulgated under the 1933 Act with respect to transactions by an issuer not involving any public offering. No commissions were paid in connection with these issuances of securities. A Form D was filed on October 31, 2019, an amended Form D was filed on each of November 4, 2019, December 17, 2019, and December 30, 2019. 23 ITEM 6. SELECTED FINANCIAL DATA As a smaller reporting company, we are not required to provide the information required by this item. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information regarding the results of operations for the years ended December 31, 2019 and 2018, and our financial condition, liquidity and capital resources as of December 31, 2019 and 2018. The financial statements and the notes thereto contain detailed information that should be referred to in conjunction with this discussion. The following discussion and analysis should be read in conjunction with and our historical financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K, as well as the Risk Factors and the Cautionary Note Regarding Forward-Looking Statements included above. Results of Operations For the Years Ended 2019 2018 Operating Expenses Amortization $ 3,000 $ 3,000 General and Administrative 280,438 78,074 Interest Expense — 306 Professional Fees 149,619 149,123 Research and Development 369,520 337,067 Share-Based Compensation 3,395,319 648,773 Total operating expenses 4,197,897 1,216,343 Loss from Operations (4,197,897 ) (1,216,343 ) Other Income Gain on Settlement of Short-Term Loans — — Total other income — — Net Loss $ (4,197,897 ) $ (1,216,343 ) Revenues We had no revenues for the years ended December 31, 2019 and 2018. 24 Gross profit and expenses The Company’s net loss was $4,197,897 for the year ending December 31, 2019 compared to $1,216,343 for the year ending December 31, 2018. These expenses were primarily incurred for professional fees, share-based compensation related to the operations of the Company’s business, research and development and other general and administrative expenses. Significant changes from the prior year include: · Professional fees remained flat year over year going to $149,619 from $149,123 as legal, accounting and auditing activity all remained relatively unchanged over prior year totals. · Share-based compensation increased sharply by $2,746,546 from $648,773 to $3,395,319 primarily as a result of the sharp increase of stock price at grant date of certain options and a change in accounting based on new FASB guidance for valuation of share based payments to non-employees. Additionally, we granted a higher number of stock options in 2019. · Research and development increased by $32,453 from $337,067 to $369,520 primarily as a result of management’s current year investment in further testing and development of the AAGP ® molecule and expanded study lines. · General and administrative expenses increased by $202,364 from $78,074 to $280,438 due to the engagement of two investor relations firms and the engagement of a marketing firm to build a new website and expand public awareness of the Company through new social media applications. Our expenses in 2019 were $4,197,897 which included $149,619 in professional fees. We operate the Company by hiring outside consultants to assist us with management, strategic planning, organization and daily operations. This resulted in $3,395,319 in share-based compensation recognized based on the fair value of equity instruments granted as compensation. These professional consulting services related to marketing and accounting, capitalization and merger opportunities as well as research development services. The Company also incurred total research and development expenses of $369,520 and general and administrative costs of $280,438 during the year ended December 31, 2019. Liquidity and Capital Resources As at December 31, 2019 2018 Cash $ 377,349 $ 136,029 Working Capital $ 352,879 $ 58,194 At December 31, 2019, we had $377,349 in cash and $378,399 in total current assets. As of December 31, 2018, we had a working capital equity position of $58,194. Although as of the date of this Annual Report we believe we have sufficient capital to meet cash flow projections and carry forward our business objectives in the short-term, the Company needs additional working capital to continue its medical research or to be successful in any future business activities and continue to pay its liabilities. There can be no assurance that in the future we will be able to raise capital from outside sources in sufficient amounts to fund our business. The failure to secure adequate outside funding would have an adverse effect on our plan of operation and results therefrom and a corresponding negative impact on stockholder liquidity. 25 Sources and Uses of Cash for the Years ended December 31, 2019 and 2018 Net Cash Used in Operating Activities During the year ended December 31, 2019, net cash used in operating activities increased $397,165 from $453,493 to $850,658 for the years ended December 31, 2018 and 2019, respectively. This increase was predominantly due to the increased spending on marketing and investor relations. Additionally, new research and development contributed to the year-over- year increase of cash used in operations. Net Cash Used in Investing Activities During the year ended December 31, 2019, net cash used in investing activities decreased by $10,436 primarily due to lower costs of patent maintenance and patent application spending. Net cash from investing activities for the year ended December 31, 2018 was $35,458. Net cash used for investing activities for the year ended December 31, 2019 was $25,022. Net Cash Provided by Financing Activities During the year ended December 31, 2019, net cash provided by financing activities increased by $794,962 from $322,038 to $1,117,000 for the years ended December 31, 2018 and 2019, respectively. This increase was predominantly due to an increase in private placements completed. Going Concern The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”), which contemplate continuation of the Company as a going concern. The history of losses and the potential inability for the Company to make a profit from selling a good or service has raised substantial doubt about our ability to continue as a going concern. In spite of the fact that the current cash obligations of the Company are relatively minimal, given the cash position of the Company, we have very little cash to operate. We intend to fund the Company and attempt to meet corporate obligations by selling common stock. However, the Company’s common stock is at a low price and trading is not consistent. Off-Balance Sheet Arrangements None. Contractual Obligations As a smaller reporting company, we are not required to provide the information required by paragraph (a)(5) of this Item. Critical Accounting Policies The preparation of financial statements in conformity with U.S. GAAP requires management to make a variety of estimates and assumptions that affect (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and (ii) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements. Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increase, these judgments become even more subjective and complex. Although we believe that our estimates and assumptions are reasonable, actual results may differ significantly from these estimates. Changes in estimates and assumptions based upon actual results may have a material impact on our results of operation and/or financial condition. Our significant accounting policies are disclosed in Note 2 to the Financial Statements included in this Form 10-K. While all of the significant accounting policies are important to the Company’s financial statements, the following accounting policies and the estimates derived there from have been identified as being critical. 26 Share-Based Compensation The Company has granted warrants and options to purchase shares of the Company’s common stock to various parties for consulting services. The fair values of the warrants and options issued have been estimated using the Black-Scholes Option Pricing Model. The Company accounts for stock compensation with persons classified as employees for accounting purposes in accordance with ASC 718 “Compensation – Stock Compensation”, which recognizes awards at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. Cliff Vesting is used and awards vest on the last day of the vesting period. The fair value of stock options is determined using the Black-Scholes Option Pricing Model. The fair value of common shares issued for services is determined based on the Company’s stock price on the date of issuance. The Company accounts for stock compensation arrangements with persons classified as non-employees for accounting purposes in accordance with ASC 505-50 “Stock-Based Transactions with Nonemployees”, which requires that such equity instruments are recorded at their fair value on the measurement date. The measurement of share-based compensation is subject to periodic adjustment as the underlying instruments vest. The fair value of stock options is estimated using the Black-Scholes Option Pricing Model and the compensation charges are amortized over the vesting period. Intangible Assets – Patent and Patent Application Costs The Company owns intangible assets consisting of certain patents and patent applications. Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which they relate. All other expenditures are recognized in profit or loss as incurred. As at December 31, 2019, the Company does not hold any intangible assets with indefinite lives. Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization method and amortization period of an intangible asset with a finite life is reviewed at least annually. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates. Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives of the Company’s patents, whereas no amortization has been recognized on the patent application costs as at December 31, 2019. Sales and Marketing The Company is currently not selling or marketing any products. Inflation Although management expects that our operations will be influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the year ending December 31, 2018. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide the information required by this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item begins on page F-1 of this Annual Report on Form 10-K and is incorporated into this part by reference. 27 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.