UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2014

 

OR

 

o     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________ to _______________

 

Commission file number 000-30728

 

PROTEO, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

NEVADA	88-0292249
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)	(I.R.S. EMPLOYER IDENTIFICATION NO.)
2102 BUSINESS CENTER DRIVE, IRVINE, CALIFORNIA	92612
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)	(ZIP CODE)

 

(949) 253-4155

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes   x     No   o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   x     No   o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "an accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   o     No   x

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

CLASS		NUMBER OF SHARES OUTSTANDING
Common Stock, $0.001 par value		23,879,350 shares of common stock at May 6, 2014

 

 

 

PROTEO, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

 

TABLE OF CONTENTS

 

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three- month Periods Ended March 31, 2014 and 2013, and for the Period From November 22, 2000 (Inception) Through March 31, 2014 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Three-month Periods Ended March 31, 2014 and 2013, and for the Period From November 22, 2000 (Inception) Through March 31, 2014 (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	14
Item 4.	Controls and Procedures	14
PART II.	OTHER INFORMATION	15
Item 1.	Legal Proceedings	15
Item 1A.	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3.	Defaults Upon Senior Securities	15
Item 4.	Mine Safety Disclosures	15
Item 5.	Other Information	15
Item 6.	Exhibits	15
SIGNATURES		16

  

 

 

PROTEO, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		March 31,				December 31,
		2014				2013
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	360,769			$	456,310
Research supplies			392,923				391,526
Prepaid expenses and other current assets			19,987				22,073
			773,679				869,909
PROPERTY AND EQUIPMENT, NET			19,446				20,501
		$	793,125			$	890,410
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities		$	67,055			$	151,359
Deposit liability			137,950				–
			205,005				151,359
LONG TERM LIABILITIES
Accrued licensing fees			783,978				784,776
			783,978				784,776
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Non-voting preferred stock, par value $0.001 per share; 10,000,000 shares authorized; 723,590 shares issued and outstanding			724				724
Common stock, par value $0.001 per share; 300,000,000 shares authorized; 23,879,350 shares issued and outstanding			23,880				23,880
Additional paid-in capital			8,988,125				8,988,125
Accumulated other comprehensive income			248,736				250,514
Deficit accumulated during development stage			(9,457,323	)			(9,308,968	)
Total Stockholders' Deficit			(195,858	)			(45,725	)
Total Liabilities and Stockholders' Deficit		$	793,125			$	890,410

 

 

 

SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

PROTEO, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2014 AND 2013

AND FOR THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH MARCH 31, 2014 (UNAUDITED)

 

										NOVEMBER 22, 2000
		THREE MONTHS ENDED								(INCEPTION) THROUGH
		MARCH 31,								MARCH 31,
		2014				2013				2014
CONSOLIDATED STATEMENTS OF OPERATIONS
REVENUES		$	–			$	–			$	–
EXPENSES
General and administrative			44,873				53,492				5,642,246
Research and development			108,094				53,136				4,348,615
			152,967				106,628				9,990,861
INTEREST AND OTHER INCOME (EXPENSE), NET			4,612				33,671				470,629
NET LOSS			(148,355	)			(72,957	)			(9,520,232	)
LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST			–				–				63,004
NET LOSS ATTRIBUTABLE TO PROTEO, INC.			(148,355	)			(72,957	)			(9,457,228	)
PREFERRED STOCK DIVIDEND			–				–				(95	)
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS		$	(148,355	)		$	(72,957	)		$	(9,457,323	)
BASIC AND DILUTED LOSS ATTRIBUTABLE TO PROTEO, INC. COMMON SHAREHOLDERS		$	(0.01	)		$	(0.00	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING			23,879,350				23,879,350
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
NET LOSS ATTRIBUTABLE TO PROTEO, INC.		$	(148,355	)		$	(72,957	)		$	(9,457,228	)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS			(1,778	)			(42,903	)			248,736
COMPREHENSIVE LOSS		$	(150,133	)		$	(115,860	)		$	(9,208,492	)

 

 

 

SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

 

 

PROTEO, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2014 AND 2013

AND FOR THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH MARCH 31, 2014 (UNAUDITED)

 

										NOVEMBER 22, 2000
		THREE MONTHS ENDED								(INCEPTION) THROUGH
		MARCH 31,								MARCH 31,
		2014				2013				2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss attributable to Proteo, Inc.		$	(148,355	)		$	(72,957	)		$	(9,457,228	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			2,766				8,003				549,247
Allowance for bad debts			–				–				60,408
Loss on disposal of equipment			–				11,503				16,086
Foreign currency transaction (gains) losses			(1,291	)			(43,346	)			169,511
Changes in operating assets and liabilities:
Research supplies			(1,789	)			(103	)			(423,298	)
Prepaid expenses and other current assets			2,056				22,316				(120,495	)
Accounts payable and accrued liabilities			(83,673	)			(25,827	)			36,022
Deferred fees			–				–				11,944
Deposit liability			137,055								137,055
Accrued licensing fees			–				–				621,213
NET CASH USED IN OPERATING ACTIVITIES			(93,231	)			(100,411	)			(8,399,535	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment			–				34,663				34,663
Acquisition of property and equipment			(1,735	)			–				(638,921	)
Cash of reorganized entity			–				–				27,638
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES			(1,735	)			34,663				(578,355	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock			–				–				1,792,610
Proceeds from issuance of preferred stock			–				–				420,520
Proceeds from subscribed common stock and issuance of preferred stock to related party			–				–				6,790,975
NET CASH PROVIDED BY FINANCING ACTIVITIES			–				–				9,004,105
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			(575	)			(10,371	)			334,554
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(95,541	)			(76,119	)			360,769
CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD			456,310				375,722				–
CASH AND CASH EQUIVALENTS--END OF PERIOD		$	360,769			$	299,603			$	360,769

 

 

 

SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

 

 

PROTEO, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014 (UNAUDITED)

 

1.   NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

BASIS OF PRESENTATION

 

The accompanying condensed consolidated balance sheet as of December 31, 2013, which has been derived from audited financial statements, and the accompanying interim condensed consolidated financial statements as of March 31, 2014, for the three-month periods ended March 31, 2014 and 2013, and for the period from November 22, 2000 (Inception) through March 31, 2014 have been prepared by management pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. These interim condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments and accruals) necessary to present fairly the financial condition, results of operations and cash flows of Proteo, Inc. and its wholly owned subsidiary (hereinafter collectively referred to as the “Company” or “Proteo”) as of and for the periods presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Operating results for the three-month period ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014, or for any other interim period during such year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC, although the Company believes that the disclosures made are adequate to make the information not misleading. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC on February 26, 2014.

 

NATURE OF BUSINESS

 

The Company is a clinical stage drug development company focusing on the development of anti-inflammatory treatments for rare diseases with significant unmet needs. The Company's management deems its lead drug candidate Tiprelestat (also known as Elafin) for intravenous use to be one of the most prospective treatments of acute postoperative inflammatory complications, in particular after esophagus carcinoma surgery. Elafin appears to be also a promising compound for the treatment of pulmonary arterial hypertension. The clinical development is currently focused in Europe with the intention to receive the primary approval in Europe.

 

The products that the Company is developing are considered drugs or biologics, and hence are governed by the Federal Food, Drug and Cosmetics Act (in the United States) and the regulations of State and various foreign government agencies. The Company's proposed pharmaceutical products to be used by humans are subject to certain clearance procedures administered by the above regulatory agencies.

 

Since its inception, the Company has primarily been engaged in the research and development of its proprietary product Elafin. Once the research and development phase is complete, the Company intends to seek the various governmental regulatory approvals for the marketing of Elafin. Management believes that none of its planned products will produce sufficient revenues in the near future. As a result, the Company intends to generate revenue by out-licensing and marketing activities. There are no assurances, however, that the Company will be able to develop such products, or if produced, that they will be accepted in the marketplace.

 

From time to time, the Company enters into collaborative arrangements for the research and development (R&D), manufacture and/or commercialization of products and product candidates.  These collaborations may provide for non-refundable, upfront license fees, R&D and commercial performance milestone payments, cost sharing, royalty payments and/or profit sharing. The Company's collaboration agreements with third parties are generally performed on a “best efforts” basis with no guarantee of either technological or commercial success.

 

Proteo, Inc.'s common stock is currently quoted on the OTC QB under the symbol "PTEO".

 

DEVELOPMENT STAGE CONSIDERATIONS

 

The Company has been in the development stage since it began operations on November 22, 2000 and has not generated any significant revenues from operation. There is no assurance of any future revenues. At March 31, 2014, the Company had cash of approximately $361,000. The Company will require substantial additional funding for continuing research and development, obtaining regulatory approval, and for the commercialization of its products.

 

 

PROTEO, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014 (UNAUDITED)

 

DEVELOPMENT STAGE CONSIDERATIONS (continued)

 

Management has taken action to address these matters, which include:

 

	•	Retention of experienced management personnel with particular skills in the development of such products;
	•	Attainment of technology to develop biotech products; and
	•	Raising additional funds through the sale of debt and/or equity securities.

 

The Company's products, to the extent they may be deemed drugs or biologics, are governed by the United States Federal Food, Drug and Cosmetics Act and the regulations of state and various foreign government agencies. The Company's proposed pharmaceutical products to be used with humans are subject to certain clearance procedures administered by the above regulatory agencies. There can be no assurance that the Company will receive the regulatory approvals required to market its proposed products elsewhere or that the regulatory authorities will review the product within the average period of time.

 

Management plans to generate revenues from product sales, but there are no purchase commitments for any of the proposed products. Additionally, the Company may generate revenues from out-licensing activities. There can be no assurance that further out-licensing may be achieved or whether such will generate significant profit. In the absence of significant sales and profits, the Company may seek to raise additional funds to meet its working capital requirements through the additional placement of debt and/or equity securities. There is no assurance that the Company will be able to obtain sufficient additional funds when needed, or that such funds, if available, will be obtainable on terms satisfactory to the Company.

 

Based on current cash on hand and estimates of future operating expenditures and incomes, management believes that the Company has sufficient cash to cover its operations for the next 12 to 15 months. There is no assurance that actual operating expenses will match management's estimates. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

CONCENTRATIONS

 

The Company maintains substantially all of its cash in bank accounts at a German private commercial bank. The Company's bank accounts at this financial institution are presently protected by the voluntary "Deposit Protection Fund of The German Private Commercial Banks". The Company has not experienced any losses in these accounts.

 

The Company's operations, including research and development activities and most of its assets are located in Germany. The Company's operations are subject to various political, economic, and other risks and uncertainties inherent in Germany and the European Union.

 

OTHER RISKS AND UNCERTAINTIES

 

The Company's line of future pharmaceutical products being developed by its German subsidiary are considered drugs or biologics, and as such, are governed by the Federal Food, Drug and Cosmetics Act (in the United States) and by the regulations of State agencies and various foreign government agencies. There can be no assurances that the Company will obtain the regulatory approvals required to market its products. The pharmaceutical products under development will be subject to more stringent regulatory requirements because they are recombinant products for humans. The Company has no experience in obtaining regulatory clearance on these types of products. Therefore, the Company will be subject to the risks of delays in obtaining or failing to obtain regulatory clearance and other uncertainties, including financial, operational, technological, regulatory and other risks associated with an emerging business, including the potential risk of business failure.

 

The Company is exposed to risks related to fluctuations in foreign currency exchange rates. Management does not utilize derivative instruments to hedge against such exposure.

 

 

PROTEO, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014 (UNAUDITED)

 

PRINCIPLES OF CONSOLIDATION

 

The condensed consolidated financial statements have been prepared in accordance with GAAP and include the accounts of Proteo, Inc. and Proteo Biotech AG, its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. Furthermore, the Company classifies noncontrolling interests (previously referred to as "minority interest") as part of consolidated net earnings and includes the accumulated amount of noncontrolling interests as part of stockholders' equity. Earnings per share reflects amounts attributable only to the Company, excluding noncontrolling interests. Increases and decreases in the Company's controlling financial interests in consolidated subsidiaries will be reported in equity similar to treasury stock transactions. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interests are remeasured with the gain or loss reported in net earnings. The Company has a substantive contractual arrangement that specifies the attribution of net earnings and loss not to exceed the noncontrolling interest.

 

RESEARCH SUPPLIES

 

The Company capitalizes the cost of supplies used in its research and development activities.  Such costs are expensed as used to research and development expenses in the accompanying condensed consolidated statements of operations.

 

FAIR VALUE MEASUREMENTS

 

The Fair Value Measurements and Disclosures Topic of the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC” or “Codification”) requires disclosure of fair value information about financial instruments when it is practicable to estimate that value. Management believes that the carrying amounts of the Company's financial instruments, consisting primarily of cash, accounts payable and accrued expenses, approximate their fair value at March 31, 2014 due to their short-term nature. The Company does not have any assets or liabilities that are measured at fair value on a recurring basis and, during the three-month periods ended March 31, 2014 and 2013 and for the period from November 22, 2000 (Inception) through March 31, 2014, did not have any assets or liabilities that were measured at fair value on a non-recurring basis.

 

SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS

 

In the opinion of management, neither the FASB, the AICPA, nor the SEC have issued any additional accounting pronouncements since the Company filed its December 31, 2013 Form 10-K that are expected to have material impact on the Company's future consolidated financial statements.

 

2.   STOCK SUBSCRIPTIONS RECEIVABLE AND OTHER EQUITY TRANSACTIONS

 

There were no issuances of common or preferred stock during the three-month periods ended March 31, 2014 and 2013. No stock options were granted from inception to date.

 

 

 

PROTEO, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014 (UNAUDITED)

 

3.   LOSS PER COMMON SHARE

 

Basic loss per common share is computed based on the weighted average number of shares outstanding for the period. Diluted loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average shares outstanding assuming all dilutive potential common shares were issued. There were no dilutive potential common shares outstanding at March 31, 2014 and 2013. Additionally, there were no adjustments to net loss to determine net loss available to common shareholders. As such, basic and diluted loss per common share equals net loss, as reported, divided by the weighted average common shares outstanding for the respective periods. 

 

4.   FOREIGN CURRENCY TRANSLATION

 

Assets and liabilities of the Company's German operations are translated from Euros (the functional currency) into U.S. dollars (the reporting currency) at period-end exchange rates; equity transactions are translated at historical rates; and income and expenses are translated at weighted average exchange rates for the period. Net foreign currency exchange gains or losses resulting from such translations are excluded from the results of operations but are included in other comprehensive income and accumulated in a separate component of stockholders' equity. Accumulated other comprehensive income approximated $249,000 at March 31, 2014 and $251,000 at December 31, 2013.

 

5.   FOREIGN CURRENCY TRANSACTIONS

 

The Company records payables related to a certain licensing agreement (Note 8) in accordance with the Foreign Currency Matters Topic of the Codification. Quarterly commitments under such agreement are denominated in Euros. For each reporting period, the Company translates the quarterly amount to U.S. dollars at the exchange rate effective on that date. If the exchange rate changes between when the liability is incurred and the time payment is made, a foreign exchange gain or loss results.

 

Additionally, the Company computes a foreign exchange gain or loss at each balance sheet date on all recorded transactions denominated in foreign currencies that have not been settled. The difference between the exchange rate that could have been used to settle the transaction on the date it occurred and the exchange rate at the balance sheet date is the gain or loss that is currently recognized. The Company recorded foreign currency transaction gains of approximately $1,000 and $43,000 for the three-month periods ended March 31, 2014 and 2013, respectively, which are included in interest and other income (expense), net in the accompanying condensed consolidated statements of operations and comprehensive loss.

 

6.   SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

 

The Company considers itself to operate in one segment and has not generated any significant operating revenues since its inception. All of the Company's property and equipment is located in Germany.

 

 

 

PROTEO, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014 (UNAUDITED)

 

7.   LONG-TERM LIABILITIES

 

On December 30, 2000, the Company entered into a thirty-year license agreement, beginning January 1, 2001 (the "License Agreement"), with Dr. Oliver Wiedow, MD, the owner and inventor of several patents, patent rights and technologies related to Elafin. Pursuant to the License Agreement, the Company agreed to pay Dr. Wiedow an annual license fee of 110,000 Euros for a period of six years. The License Agreement was amended in 2004 and again in December 2008 to waive non-payment defaults and to defer the due dates of each payment. In July 2011, and again in December 2012, Dr. Wiedow agreed in writing to waive the non-payment defaults and agreed to defer the due dates of the payments for the outstanding balance of 570,000 Euro. As a result, installments payable by the Company in the amount of 330,000 Euros are due on April 15, 2015, and installments of 120,000 Euros are due on December 31, 2015 and 2016. While the total amount owed does not currently bear interest, the Amendment provides that any late payment shall be subject to interest at an annual rate equal to the German Base Interest Rate plus six percent. In the event that the Company's financial condition improves, the parties can agree to increase and/or accelerate the payments. Dr. Wiedow, who is a director of the Company, beneficially owned approximately 27% of the Company's outstanding common stock as of March 31, 2014.

 

At March 31, 2014, the Company has accrued approximately $784,000 of licensing fees payable to Dr. Wiedow which are included in long-term liabilities. This is a decrease over the respective accrual of approximately $785,000 at December 31, 2013, which was solely due to changes in foreign currency exchange rates.

 

8.   INCOME TAXES

 

The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management evaluates the need to establish a valuation allowance for deferred tax assets based upon the amount of existing temporary differences, the period in which they are expected to be recovered and expected levels of taxable income. A valuation allowance to reduce deferred tax assets is established when it is “more likely than not” that some or all of the deferred tax assets will not be realized. Management has determined that a full valuation allowance against the Company’s net deferred tax assets is appropriate.

 

There is no material income tax expense recorded for the periods ended March 31, 2014 and 2013, due to the Company's net losses and related changes to the valuation allowance for deferred tax assets.

 

As of March 31, 2014, the Company has a deferred tax asset and an equal amount of valuation allowance of approximately $2,539,000, relating primarily to federal and foreign net operating loss carryforwards of approximately $591,000 and $1,673,000, respectively, and temporary differences related to the recognition of accrued licensing fees of approximately $275,000.

 

Based on management’s evaluation of uncertainty in income taxes, the Company concluded that there were no significant uncertain tax positions requiring recognition in its financial statements or related disclosures. Accordingly, no adjustments to recorded tax liabilities or accumulated deficit were required.  As of March 31, 2014, there were no increases or decreases to liability for income taxes associated with uncertain tax positions. 

 

9.  DEPOSIT LIABILITY

 

In the first quarter 2014, the Company signed a Letter of Intent (“LOI”) to enter into negotiations about the funding of further clinical development and potential revenue sharing. Concurrent with signing the LOI, the Company received 100,000 Euros ($138,000) as a deposit. The definitive contract is currently under preparation. As such, a deposit liability of $138,000 is included in current liabilities at March 31, 2014 in the accompanying condensed consolidated balance sheets.

 

 

 

 

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

CAUTIONARY STATEMENTS:

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company intends that such forward-looking statements be subject to the safe harbors created by such statutes. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. Accordingly, to the extent that this Quarterly Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that the Company's actual financial condition, operating results and business performance may differ materially from that projected or estimated by management in forward-looking statements.

 

Such differences may be caused by a variety of factors, including but not limited to adverse economic conditions, intense competition, including intensification of price competition and entry of new competitors and products, adverse federal, state and local government regulation, inadequate capital, unexpected costs and operating deficits, increases in general and administrative costs and other specific risks that may be alluded to in this Quarterly Report or in other reports issued by the Company. In addition, the business and operations of the Company are subject to substantial risks that increase the uncertainty inherent in the forward-looking statements. The inclusion of forward-looking statements in this Quarterly Report should not be regarded as a representation by management or any other person that the objectives or plans of the Company will be achieved.

 

Since inception, the Company has generated a relatively minor amount of non-operating revenue from its licensing activities and does not expect to report any significant operating revenue until the successful development and marketing of its planned pharmaceutical and other biotech products. Additionally, after the launch of the Company's products, there can be no assurance that the Company will generate positive cash flow and there can be no assurances as to the level of revenues, if any, the Company may actually achieve from its planned principal operations.

 

OVERVIEW

 

Proteo is a clinical stage drug development company focusing on the development of anti-inflammatory treatments for rare diseases with significant unmet needs. The Company's management deems its lead drug candidate Elafin for intravenous use to be one of the most prospective treatments of acute postoperative inflammatory complications, in particular after esophagus carcinoma surgery. Elafin also appears to be a promising compound for the treatment of pulmonary arterial hypertension.

 

The Company's success will depend on its ability to prove that Elafin is well tolerated by humans and its efficacy in the indicated diseases in order to demonstrate a favorable risk/benefit balance. There can be no assurance that the Company will be able to develop feasible production procedures in accordance with Good Manufacturing Practices ("GMP") standards, or that Elafin will receive any governmental approval for its use in further clinical trials or its use as a drug in any of the intended applications.

 

Proteo has obtained Orphan drug designations within the European Union for the use of Elafin for the treatment of pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension as well as for the treatment of esophagus carcinoma. The latter indication, especially the postoperative inflammation, the main reason for postoperative morbidity, will be targeted by Elafin treatment. Within the United States, Proteo has obtained Orphan drug designations for the use of Elafin for the treatment of pulmonary arterial hypertension as well as for the prevention of inflammatory complications of transthoracic esophagectomy.

 

For the development of its lead product Elafin, Proteo has established a network of globally renowned research institutes, physicians and hospitals in Europe and the US. The development of Elafin has been widely supported by public grants. Worldwide leading funding bodies, such as the American National Institutes of Health (NIH) and the British Medical Research Council (MRC), support preclinical and clinical studies on Elafin with high volume grants.

 

Proteo currently focuses on the clinical development of Elafin for prophylactic treatment of acute postoperative inflammatory complications in the surgical therapy of esophagus carcinoma. Clinical trials for further indications and preclinical research into new fields of application are conducted in cooperation with third parties.

 

 

The tolerability of Elafin in healthy male subjects was demonstrated in a Phase I clinical single dose escalating study. A placebo-controlled Phase II clinical trial on the effect of Elafin on the postoperative inflammatory reactions and postoperative clinical course was conducted in patients undergoing transthoracic esophagectomy for esophagus carcinoma. The trial showed that Elafin had a positive effect on the period of recovery: 63 percent of the Elafin-treated patients required only one day of postoperative intensive care, while all patients in the placebo group needed several days of postoperative intensive medical care. A further Phase II study, EMPIRE (Elafin Myocardial Protection from Ischaemia Reperfusion Injury), an investigator initiated trial, investigates the efficacy and safety of Elafin in coronary bypass surgery. In November 2013, the recruitment period for the EMPIRE study was closed after a total of 87 participants had been recruited. No safety concerns were raised by the Data Monitoring Committee at the two planned interim safety analyses of the study. The study results are expected in 2014.

 

In February 2014, Proteo has received Protocol Assistance (scientific advice for orphan medicines) from the Committee for Medicinal Products for Human Use (CHMP) at the European Medicines Agency (EMA) with respect to the strategy for further clinical development and marketing authorization of Elafin for the prophylactic treatment of postoperative complications after resection of esophageal cancer.

 

RESULTS OF OPERATIONS

 

OPERATING EXPENSES

 

The Company's operating expenses for the three-month period ended March 31, 2014 approximated $153,000, an increase of approximately $46,000 over the respective period of the prior year. General and administrative expenses (mostly professional and legal fees) for the three-month periods ended March 31, 2014 decreased $9,000, which was due to lower professional fees related to SEC filings, as well as lower depreciation and lease expenses driven by Management’s decision to terminate the month-to-month lease at its pilot research plant during the first quarter of 2013. Research and development expenses increased $55,000 over the same periods. The increase in research and development expenses was primarily driven by an increase in research related wages in 2014 due to increased compensation to existing employees.

 

INTEREST AND OTHER INCOME (EXPENSE)

 

Net interest and other income for the three-month period ended March 31, 2014 approximated $5,000, compared to $34,000 for the respective period in 2013, a net decrease of approximately $29,000.  The decrease is driven primarily by foreign currency transaction gains during the first quarter of 2013, due to a strengthening of the U.S. Dollar compared to the Euro, compared to a relatively flat U.S. Dollar during the similar period in 2014.

 

INCOME TAXES

 

The Company has a deferred tax asset of approximately $2,539,000 at March 31, 2014 relating primarily to tax net operating loss carryforwards, as discussed below, and temporary differences related to the recognition of accrued licensing fees.  Full valuation allowances have been established against these deferred tax assets as it is likely that the Company will not be able to utilize them.

 

As of March 31, 2014, the Company had tax net operating loss carryforwards ("NOLs") of approximately $1,737,000 and $6,690,000 available to offset future taxable Federal and foreign income, respectively. The Federal NOL expires in varying years through 2025. The foreign net operating loss relates to Germany and does not have an expiration date. In the event the Company were to experience a greater than 50% change in ownership, as defined in Section 382 of the Internal Revenue Code, the utilization of the Company's Federal tax NOLs could be restricted.

 

FOREIGN CURRENCY TRANSLATION ADJUSTMENTS

 

The Company experienced net losses of approximately $2,000 and $43,000 in foreign currency translation adjustments during the three-month periods ended March 31, 2014 and 2013, respectively. The changes are primarily due to a fluctuating U.S. Dollar (our reporting currency) compared to the Euro (our functional currency) during the periods.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Proteo is a holding company that owns 100% of Proteo Biotech AG, its operating subsidiary in Germany (the “Subsidiary”). To date the Subsidiary has not had any earnings, and it does not expect to have any earnings for several years pending the approval of its first product candidate. In this regard, there were no undistributed earnings of the Subsidiary to repatriate to the U.S. parent (i.e. the Company).

 

In December 2012, Dr. Wiedow agreed in writing to waive any non-payment defaults under the License Agreement and to defer all current payments to April 2015. See Note 8 to the consolidated financial statements included elsewhere for the payment terms under the License Agreement.

 

In the first quarter 2014, the Company signed a Letter of Intent (LOI) to enter into negotiations about the funding of further clinical development. Concurrent with signing the LOI, the Company received 100,000 Euros ($138,000) as a deposit. The definitive contract is currently under preparation.

 

The Company has cash approximating $361,000 as of March 31, 2014 to support current and future operations. This is a decrease of $95,000 over the December 31, 2013 cash balance of approximately $456,000. Such cash is held by the Subsidiary in Germany in Euros. The Company does not intend to repatriate any amount of this cash to the United States as it will be used to fund the Subsidiary’s continued operations. Management believes that the Company will not generate any significant revenues in the next few years. Given the Company's current cash on hand, management believes the Company has sufficient cash on hand to cover its operations for the next 12 to 15 months. As for periods beyond the next 15 months, we expect to continue to direct the majority of our research and development expenses towards the development of Elafin, although it is extremely difficult for us to reasonably estimate all future research and development costs associated with Elafin due to the number of unknowns and uncertainties associated with preclinical and clinical trial development.

 

These unknown variables and uncertainties include, but are not limited to:

 

	•	the uncertainty of future clinical trial results;
	•	the uncertainty of the ultimate number of patients to be treated in any current or future clinical trial;
	•	the uncertainty of the applicable regulatory bodies allowing our studies to move forward;
	•	the uncertainty of the rate at which patients are enrolled into any current or future study. Any delays in clinical trials could significantly increase the cost of the study and would extend the estimated completion dates;
	•	the uncertainty of terms related to potential future partnering or licensing arrangements;
	•	the uncertainty of protocol changes and modifications in the design of our clinical trial studies, which may increase or decrease our future costs; and
	•	the uncertainty of our ability to raise additional capital to support our future research and development efforts.

 

As a result of the foregoing, the Company's success will largely depend on its ability to generate revenues from outside licensing activities and secure additional funding through the sale of its Common/Preferred Stock and/or debt securities. There can be no assurance, however, that the Company will be able to generate revenues from outside licensing activities and/or to consummate debt or equity financing in a timely manner, or on a basis favorable to the Company, if at all.

 

PROPERTY AND EQUIPMENT

 

The Company’s capitalized property and equipment decreased from $21,000 at December 31, 2013 to $19,000 at March 31, 2014, primarily due to depreciation.

 

RESEARCH SUPPLIES

 

The Company’s capitalized research supplies increased $1,000 between December 31, 2013 and March 31, 2014. The increase was due primarily to the acquisition of additional materials during the three-month period. 

 

 

OFF BALANCE SHEET ARRANGEMENTS

 

The Company does not currently have any off balance sheet arrangements.

 

CAPITAL EXPENDITURES

 

None significant.

 

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

A smaller reporting company ("SRC") is not required to provide any information in response to Item 305 of Regulation S-K.

 

ITEM 4.   CONTROLS AND PROCEDURES

 

a) Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including to Birge Bargmann our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

As required by Rule 13a-15 under the Exchange Act, our management, including Birge Bargmann our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2014. Based on that evaluation, Ms. Bargmann concluded that as of March 31, 2014, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were effective.

 

b) Changes in Internal Control Over Financial Reporting

 

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has concluded there were no significant changes in our internal controls over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

 

 

 

PART II - OTHER INFORMATION

 

ITEM 1.    LEGAL PROCEEDINGS.

 

                  None.

 

ITEM 1A. RISK FACTORS

 

                  Not required for SRCs.

 

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

                  None.

 

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES.

 

                  None.

 

ITEM 4.    MINE SAFETY DISCLOSURES

 

                  Not applicable.

 

ITEM 5.    OTHER INFORMATION.

 

                  None.

 

ITEM 6.    EXHIBITS.

 

Exhibits:

 

	31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101.INS	XBRL Instance Document
	101.SCH	XBRL Schema Document
	101.CAL	XBRL Calculation Linkbase Document
	101.DEF	XBRL Definition Linkbase Document
	101.LAB	XBRL Label Linkbase Document
	101.PRE	XBRL Presentation Linkbase Document

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	PROTEO, INC.
Dated: May 13, 2014	By:	/s/ Birge Bargmann
		Birge Bargmann
		Principal Executive Officer and Chief Financial Officer (signed both as an Officer duly authorized to sign on behalf of the Registrant and Principal Financial Officer and Chief Accounting Officer)