PROTEO, INC. AND SUBSIDIARY
PROTEO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION/NATURE OF BUSINESS
Proteo, Inc. and Proteo Marketing, Inc. ("PMI"),
a Nevada corporation, which began operations in November 2000, entered into a reorganization and stock exchange agreement in December
2000 with Proteo Biotech AG ("PBAG"), a German corporation, incorporated in Kiel, Germany. Pursuant to the terms of the
agreement, all of the shareholders of PBAG exchanged their common stock for 2,500,000 shares of PMI common stock. As a result,
PBAG became a wholly owned subsidiary of PMI. Proteo Inc.'s common stock is quoted on the OTCQB under the symbol "PTEO."
Effective December 31, 2004, PMI merged into Proteo, Inc. PBAG and Proteo, Inc. are hereinafter collectively referred to as the
"Company."
The Company intends to develop, promote and
market pharmaceuticals and other biotech products. The Company is focused on the development of pharmaceuticals based on the human
protein Elafin. Elafin is a human protein that naturally occurs in human skin, lungs, and mammary glands. The Company believes
Elafin may be useful in the treatment of post-surgery damage to tissue, complications resulting from organ transplantation, pulmonary
hypertension, as well as other diseases.
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 will seek to obtain the various governmental regulatory approvals for the
marketing of Elafin. The Company has not generated any significant revenues from product
sales. The Company believes that none of its planned products will produce sufficient revenues in the near future. There are
no assurances that the Company will be able to obtain regulatory approvals for marketing of Elafin, or if approved,
that Elafin will be accepted in the marketplace.
CONCENTRATIONS
The Company maintains substantially all of
its cash in bank accounts at a private German 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. As such, the Company's bank is a member
of this deposit protection fund. The Company has not experienced any losses in these bank accounts.
The Company's 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 will require
substantial additional funding for continuing research and development, obtaining regulatory approval, and for the
commercialization of its products. Management plans to generate revenues from product sales, but there are no products
currently approved and 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 will be required
to 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. If we are unable to receive
additional financing when needed, we may choose to delay or reduce other spending including Elafin research and development
spending. Based on our current plan, we believe that our current resources will be sufficient to satisfy our anticipated
working capital requirements through April 2018.
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
and Drug and Cosmetics Act and by the regulations of state agencies and various foreign government agencies. There can be no assurance
that the Company will obtain the regulatory approvals required to market its products. The pharmaceutical products under development
in Germany will be subject to more stringent regulatory requirements because they are recombinant proteins for use in humans. The
Company has no experience in obtaining regulatory approvals for 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.
As substantially all of the Company's operations
are in Germany, they are exposed to risks related to fluctuations in foreign currency exchange rates. The Company does not utilize
derivative instruments to hedge against such exposure.
PROTEO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include
the accounts of Proteo, Inc. and PBAG, its wholly owned subsidiary. All significant intercompany accounts and transactions have
been eliminated in consolidation.
GRANTS
At times the Company has received grants from
the German government which are used to fund research and development activities and the acquisition of equipment. Grant receipts
for the reimbursement of research and development expenses are offset against such expenses in the accompanying consolidated statements
of operations and comprehensive loss when the related expenses are incurred. Grants related to the acquisition of tangible property,
if any, will be recorded as a reduction of such property's historical cost.
USE OF ESTIMATES
The Company prepares its consolidated financial
statements in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported
amounts of revenues (if any) and expenses during the reporting period. Significant estimates made by management include, among
others, realizability of long-lived assets, revenue recognition estimates for the Development Agreement, and estimates for deferred
tax asset valuation allowances. Actual results could materially differ from such estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Fair Value Measurements and Disclosures
Topic of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”
or the “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 and cash equivalents, receivables, and accounts payable and accrued liabilities approximate their fair value at December
31, 2016 and 2015 due to their short-term nature. The Company did not have any assets or liabilities that are measured at fair
value on a recurring or non-recurring basis during the years ended December 31, 2016 and 2015.
FOREIGN CURRENCY
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. Expense and grant receipts are translated at weighted average exchange rates for the period. Net exchange gains or losses
resulting from such translation are excluded from the consolidated statements of operations and are included in comprehensive loss
and accumulated in a separate component of stockholders' deficit. Accumulated income (losses) approximated ($24,000) and $1,000
at December 31, 2016 and 2015, respectively.
The Company records quarterly payables
related to a certain licensing agreement (Note 7) which 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. The
Company made no payments under this licensing agreement during the years ended December 31, 2016 and 2015.
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 unrealized gain or loss that is currently recognized. The Company recorded unrealized
foreign currency transaction gains of approximately $51,000 and $129,000 for the years ended December 31, 2016 and 2015, respectively,
which are included in interest and other income, net in the accompanying consolidated statements of operations and comprehensive
loss.
PROTEO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary
cash investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents consist primarily
of deposits with banks.
RESEARCH AND DEVELOPMENT ACTIVITIES
The Company capitalizes the cost of supplies
used in its research and development activities if such supplies are deemed to have alternative future uses, usually in other research
and development projects. Such costs are expensed as used to research and development expenses in the accompanying consolidated
statements of operations. All other research and development costs are expensed as incurred,
The costs of materials that are acquired for
a particular research and development project and that have no alternative future uses (in other research and development projects
or otherwise) and therefore no separate economic values are expensed as research and development costs at the time the costs are
incurred.
Nonrefundable advance payments for goods or
services that have the characteristics that will be used or rendered for future research and development activities are deferred
and capitalized as prepaid expenses. Such amounts are expensed to research and development as the related goods and services are
received.
The Company may receive grants from the German
government which are used to fund research and development activities (see Note 6). Grant funds to be received for the reimbursement
of qualified research and development expenses are offset against such expenses in the accompanying consolidated statements
of operations and comprehensive loss when the related expenses are incurred.
LONG-LIVED ASSETS
Property and equipment are recorded at cost
and depreciated using the straight-line method over their expected useful lives, which range from 3 to 14 years. Leasehold improvements
are amortized over the expected useful life of the improvement or the remaining lease term, whichever is shorter. Expenditures
for normal maintenance and repairs are charged to income, and significant improvements are capitalized. The cost and related accumulated
depreciation or amortization of assets are removed from the accounts upon retirement or other disposition; any resulting gain or
loss is reflected in the consolidated statements of operations and comprehensive loss.
GAAP requires that certain long-lived
assets be reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.
If the cost basis of a long-lived asset is greater than the projected future undiscounted net cash flows from such asset, an impairment
loss is recognized. Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair
value. Assets to be disposed are reported at the lower of the carrying amount or fair value less costs to sell. Management believes
that no indicators of impairment existed for property and equipment as of or during the years ended December 31, 2016 and 2015.
REVENUE RECOGNITION
As more fully described in Note 5, amounts
received under the Development Agreement are initially deferred and recognized as revenue over the projected performance period
under the Development Agreement in direct relation to development expenses incurred.
PROTEO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
INCOME TAXES
The Company accounts for income taxes using
the liability method in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized for future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. A valuation allowance is provided for significant deferred tax assets when it is more likely than
not that such assets will not be recovered.
The Company also follows the provisions of
ASC 740-10 relating to accounting for uncertain tax positions. Under ASC 740-10, the Company must recognize the tax benefit from
an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a
position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
The Company has not recognized any liabilities for uncertain tax positions as a result of ASC 740-10. The Company expects any resolution
of unrecognized tax benefits, if created, would occur while the full valuation allowance of deferred tax assets is maintained;
therefore, the Company does not expect to have any unrecognized tax benefits that, if recognized, would affect the effective tax
rate.
The Company will recognize interest and penalties
related to any unrecognized tax benefits within the income tax expense line in the accompanying consolidated statements of operations.
As of December 31, 2016 and 2015, management believes the Company has no unrecognized tax benefits.
The Company’s income tax returns remain
open for examination by taxing authorities for a statutory defined period of time. The Company is currently not under examination
by any taxing authorities.
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 available 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 December 31, 2016 or 2015.
SUBSEQUENT EVENTS
Management has evaluated subsequent events
through the date the accompanying financial statements were filed with the SEC for transactions and other events which may require
adjustment of and/or disclosure in such financial statements.
COMPREHENSIVE LOSS
Total comprehensive loss represents the net
change in stockholders' deficit during a period from sources other than transactions with stockholders and as such, includes net
earnings or loss. For the Company, other comprehensive loss represents the foreign currency translation adjustments, which are
recorded as components of stockholders' deficit.
PROTEO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company considers itself to operate in
one segment and has had no operating revenues from inception. See Note 2 for information on long-lived assets located in Germany.
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued Accounting Standards
Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic 606),
which will supersede existing revenue
recognition guidance under current GAAP. The new standard is a comprehensive new revenue recognition model that requires a company
to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it
expects to receive in exchange for those goods or services. In doing so, among other things, companies will generally need to
use more judgment and make more estimates than under the current guidance. The accounting standard will be effective for the Company
in the year beginning January 1, 2018. The standard may be adopted using a full retrospective or a modified retrospective (cumulative
effect) method. Early adoption is not permitted. The Company is currently evaluating ASU 2014-09 and has not yet selected a transition
method nor has it determined the effect of the standard on the Company’s consolidated financial statements and related disclosures.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern,
that will require management of an entity to assess, for each annual and interim period,
if there is substantial doubt about the entity’s ability to continue as a going concern within one year of the financial
statement issuance date. The definition of substantial doubt within ASU 2014-15 incorporates a likelihood threshold of “probably”
similar to the use of that term under current GAAP for loss contingencies. Certain disclosures will be required if conditions give
rise to substantial doubt. ASU 2014-15 is effective for the Company in the year ending December 31, 2016. The adoption of ASU 2014-15
had no material impact on the Company’s consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which will require, among other things, lessees to recognize for all leases (with the exception of short-term
leases) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, and a right-of-use
asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease
term. ASU 2016-02 is effective for the Company for the year beginning January 1, 2019. The Company is currently evaluating the
impact of this standard on its consolidated financial statements and related disclosures.
During 2016, the FASB issued 3 new ASUs impacting
Topic 606. ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting
Revenue Gross versus Net)
, provides guidance on the application of principal versus agent considerations under Topic 606. ASU
2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
, adds further
guidance on identifying performance obligations and improves the operability and understandability of the licensing implementation
guidance within Topic 606. ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients
, provides additional guidance on Topic 606. These ASUs will be effective at the same time as ASU 2014-09. The Company
is currently evaluating the impact of these standards on its consolidated financial statements and related disclosures.
PROTEO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
2. PROPERTY AND EQUIPMENT
Property and equipment, all of which is located in Kiel, Germany,
consist of the following:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Technical and laboratory equipment
|
|
$
|
193,653
|
|
|
$
|
200,769
|
|
Leasehold improvements
|
|
|
3,911
|
|
|
|
4,055
|
|
Office equipment
|
|
|
9,842
|
|
|
|
10,205
|
|
|
|
|
207,406
|
|
|
|
215,029
|
|
Less accumulated depreciation and amortization
|
|
|
(201,246
|
)
|
|
|
(205,995
|
)
|
Total
|
|
$
|
6,160
|
|
|
$
|
9,034
|
|
Depreciation and amortization expense included
in general and administrative expense in the consolidated statements of operations approximated $3,000 and $5,000 for the years
ended December 31, 2016 and 2015, respectively.
3. STOCKHOLDERS' DEFICIT
COMMON STOCK
The Company is authorized to issue 300,000,000
shares of $0.001 par value common stock. The holders of the Company's common stock are entitled to one vote for each share held
of record on all matters to be voted on by those stockholders. No common stock was issued during the years ended December 31, 2016
and 2015.
PREFERRED STOCK
The Company is authorized to issue 10,000,000
shares of preferred stock, $0.001 par value per share. Except as described below, the Board of Directors has not designated any
liquidation value, dividend rates or other rights or preferences with respect to any shares of preferred stock.
The Board of Directors has designated 750,000
preferred shares as non-voting Series A Preferred Stock. Holders of Series A Preferred Stock are entitled to receive preferential
dividends, if and when declared, at the per share rate of twice the per share amount of any cash or non-cash dividend distributed
to holders of the Company's common stock.
On September 7, 2016, the Company filed a Certificate
of Designation with the Secretary of State of the State of Nevada to designate 1,000,000 shares of its authorized preferred stock
as Series B-1 Preferred Stock ("Series B-1 Stock"). On September 9, 2016, the Company entered into a Preferred Stock
Purchase Agreement (the “Agreement”) with CFI Innovation GmbH Berlin Unternehmensberatung und Beteiligungen ("Investor"),
a German corporation. Pursuant to the Agreement, the Company agreed to issue and sell to the Investor 1,000,000 shares of the Company’s
Series B-1 Preferred Stock (the “Purchase Shares”) at the price of EUR 1.00 per share (the “Purchase Price”),
for an aggregate purchase price of EUR 1,000,000. An initial closing of 100,000 of the Purchase Shares was to occur on October
31, 2016 or on such earlier date as the Investor and the Company may agree (the “Initial Closing Date”). The Investor
agreed to deliver EUR 100,000, which is the Purchase Price with respect to such Purchase Shares, on or before the Initial Closing
Date. However, as of the Initial Closing Date, the Company only received 15,000 EUR from the Investor and the Initial Closing Date
has been delayed until the Investor provides the remaining amount due for the purchase of the 100,000 Purchase Shares to be purchased
at the Initial Closing Date. After the Initial Closing Date, subsequent closings of the remaining Purchase Shares will occur on
the fifth (5th) business day after such date or dates that Investor delivers all or a portion of the Purchase Price with respect
to such Purchase Shares; provided, however, that Investor shall deliver the Purchase Price for all remaining Purchase Shares on
or before March 31, 2017. In partial consideration for the Investor agreeing to purchase the Purchase Shares from the Company,
the Company agreed to rebate four percent (4%) of the Purchase price paid to the Company prior to March 31, 2017 on each of June
30, 2017, June 30, 2018, and June 30 2019 (the “Rebate Dates”).
PROTEO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
The rights, preferences, and privileges of
the Series B-1 Preferred Stock are as follows:
|
•
|
Holders
of shares of Series B-1 Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors preferential
dividends at the per share rate of 1.5 times the per share amount of each and any cash and non-cash dividend distributed to the
holders of the Registrants common stock.
|
|
•
|
Except
as otherwise required by law, the Series B-1 Preferred Stock shall have no voting rights and not be entitled to vote as a separate
class on an matter to be voted on by stockholders of the Company.
|
|
•
|
Upon
any liquidation, voluntary or otherwise, dissolution or winding up of the Registrant, holders of Series B-1 Preferred Stock will
be entitled to receive per share distributions equal to 1.5 times the rate of per share distributions to be made to the holders
of the Registrant’s common stock.
|
|
•
|
In
the event the Registrant enters into any consolidation, merger, combination or other transaction in which the shares of common
stock of the Registrant are exchanged into other stock or securities, cash and/or any other property, then in any such case each
share of Series B-1 Preferred Stock shall automatically be simultaneously exchanged for or converted into the same stock or securities,
cash and/or other property at a rate per share equal to 1.5 times the rate per share that the common stock is being exchanged
or converted.
|
During 2016, the Company received 15,000 Euros
($16,000) from the Investor, as a refundable deposit for the Initial Closing Date. Such amount is included in accounts payable
and accrued liabilities in the accompanying consolidated balance sheet at December 31, 2016.
No shares of preferred stock were issued during the years ended
December 31, 2016 and 2015.
Subsequent to December 31, 2016, the Company received an additional
5,000 Euros from the Investor, however, the full purchase was not received by March 31, 2017. The Company is currently negotiating
with the Investor to complete the transaction prior to June 30, 2017.
4. INCOME TAXES
There is no material income tax expense or
benefit recorded for the years ended December 31, 2016 or 2015 due to the Company's net losses and related deferred tax asset full
valuation allowance.
Income tax expense (benefit) for the years
ended December 31, 2016 and 2015 differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent
to the pretax loss for the following reasons:
|
|
2016
|
|
|
2015
|
|
Income tax benefit at U.S. federal statutory rates
|
|
$
|
(11,000
|
)
|
|
$
|
(106,000
|
)
|
Change in valuation allowance
|
|
|
11,000
|
|
|
|
106,000
|
|
|
|
$
|
–
|
|
|
$
|
–
|
|
The Company has a deferred tax asset and an
equal amount of valuation allowance of approximately $2,209,000 and $2,631,000 at December 31, 2016 and 2015, respectively, relating
primarily to tax net operating loss carryforwards, as discussed below, and temporary differences related to the recognition of
accrued licensing fees.
As of December 31, 2016, the Company had tax
net operating loss carryforwards ("NOLs") of approximately $2,100,000 and $5,337,000 available to offset future taxable
Federal and foreign income, respectively. The Federal NOL begins to expire in 2025 over varying years. The foreign net operating
loss relates to Germany and does not have an expiration date.
PROTEO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
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.
5. DEVELOPMENT AGREEMENT
On May 16, 2014, the Company entered into a
funding and revenue sharing agreement (the “Development Agreement”) with an unrelated third party. The third party will fund operational expenses of the Company as well
as the development costs related to the clinical development program aimed at receiving regulatory approval for the use of Elafin
for the intravenous treatment of patients undergoing esophageal cancer surgery in the European Union. Total payments by the third
party to the Company shall not exceed 3.5 million Euros. Through December 31, 2016, the Company received approximately 1.5 million
Euros (including $37,000 accrued as a receivable at December 31, 2016) of the 3.5 million Euro maximum. Revenue participation right
payments will be made to the party when and if Elafin is commercialized within the European Union for the intravenous treatment
of patients undergoing esophageal cancer surgery.
The Development Agreement will terminate after
the earlier of 15 years or 10 complete and consecutive years after the first regulatory approval of Elafin for this indication.
Under no circumstances are the payments refundable, even if the drug is never commercialized. As no revenue sharing payments will
be made unless Elafin is commercialized, the payments received are being accounted for as payments for the Company to use reasonable
efforts to complete development, obtain regulatory approvals, and to commercialize Elafin (i.e. the performance period). Therefore,
amounts received from the party will be deferred and recognized as revenue over the projected performance period under the Development
Agreement in relation to expenses incurred.
From inception of the Development Agreement
through September 30, 2015, management estimated total Elafin related development expenses at 3.5 million Euro. As revenues to
be received also totaled 3.5 million Euros, revenue was recognized at 100% of the related expenses incurred. Beginning October
1, 2015, management increased their estimate of remaining development expenses by 3.5 million Euro and began recognizing revenues
at 43% of related expenses. The increase in expenses was due to additional clinical indicators that will be explored by the Company.
For the years ended December 31, 2016 and 2015,
the Company recognized approximately $243,000 and $826,000, respectively, of development income under the Development Agreement,
which is included in revenues in the accompanying consolidated statements of operations. Deferred revenues approximated $174,000
and $212,000 at December 31, 2016 and 2015, respectively. Subsequent to year-end, the Company received 35,000 Euros under the Development
Agreement.
6. GRANTS
In June 2016, the German State of Schleswig-Holstein
granted PBAG approximately 874,000 Euros (the “Grant”) for further research and development of the Company's pharmaceutical
product Elafin. The Grant covers 50% of eligible research and development costs incurred from December 1, 2015 through November
30, 2018. Grant funds approximating 154,000 Euros ($170,000) were received during the twelve-month period ended December 31, 2016.
An additional 45,000 Euros ($47,000) of eligible expense was submitted for reimbursement, but payment was not received at December
31, 2016. As such, research and development expenses for the year ended December 31, 2016 have been reduced by approximately $220,000,
and a grant funds receivable of $47,000 is included on the accompanying consolidated balance sheet as of December 31,
2016.
PROTEO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
7. COMMITMENTS AND CONTINGENCIES
ACCRUED LICENSING FEES
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 December 2008 to waive non-payment defaults and to defer the due dates of each payment. In July 2011, in February 2012, February
2013, and again in June 2014, 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, the outstanding balance of 570,000 Euros is due on April
30, 2018. 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 December 31, 2016.
At December 31, 2016, the Company has accrued
approximately $600,000 of licensing fees payable to Dr. Wiedow, which are included in long-term liabilities. This is a decrease
over the respective accrual of approximately $622,000 at December 31, 2015, which was solely due to changes in foreign currency
exchange rates.
Pursuant to the License Agreement, as amended,
Dr. Wiedow may terminate the License Agreement in the event of a breach which is not cured within 90 days following written notice
of such breach. In addition, Dr. Wiedow may terminate the License Agreement immediately in the event of the Company’s bankruptcy,
insolvency, assignment for the benefit of creditors, insolvency, liquidation, assignment of all or substantially all of its assets,
failure to continue to develop Elafin. After any termination, to the extent permitted by applicable law, the Company will return
all documents, information and data received by Dr. Wiedow and will immediately cease to develop, manufacture or sell Elafin.
ARTES BIOTECHNOLOGY LICENSE AGREEMENT
On November 15, 2004, the Company entered into
an exclusive worldwide license and collaboration agreement with ARTES Biotechnology GmbH ("ARTES"). This agreement enables
the Company to economically produce Elafin on a large scale by using the sublicensed yeast HANSENULA POLYMORPHA as a high performance
expression system. Rhein Biotech GmbH ("Rhein") has licensed the yeast to ARTES, who in-turn sublicensed it to the Company.
The agreement has a term of fifteen years with an annual license fee equal to the greater of 10,000 Euros or 2.5% royalties on
the future sales of Elafin. Should the license agreement between Rhein and ARTES terminate, Rhein will assume the sublicense agreement
with the Company under similar terms.
RHEIN MINAPHARM AGREEMENT
In August 2007, the Company's subsidiary entered
into an agreement with Rhein Minapharm ("Minapharm") for clinical development, production and marketing of Elafin. The
Company has granted Minapharm the nonexclusive right to market Elafin in Egypt and certain Middle Eastern and African countries.
The Company may receive milestone-payments upon Minapharm's attainment of certain clinical milestones as well as royalties on any
future net product sales. No payments under this agreement were received in 2016 or 2015. The Minapharm agreement terminates 15
years after the first commercial sales of licensed products.
LEASES
The Company has entered into short-term leases
for office and laboratory facilities in Germany. The Company also leases office space in Irvine, California on a month-to-month
basis. Total rental expense (including additional expenses) for all facilities for the years ended December 31, 2016 and 2015 approximated
$29,000 and $27,000, respectively.