PROTEO, INC. AND SUBSIDIARY
SEE ACCOMPANYING NOTES TO THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
PROTEO, INC. AND SUBSIDIARY
SEE ACCOMPANYING NOTES TO THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
PROTEO, INC. AND SUBSIDIARY
SEE ACCOMPANYING NOTES TO THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017 (UNAUDITED)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
BASIS OF PRESENTATION
The accompanying condensed consolidated
balance sheet as of December 31, 2016, which has been derived from audited financial statements, and the accompanying interim condensed
consolidated financial statements as of March 31, 2017 and for the three-month periods ended March 31, 2017 and 2016, 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") 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, 2017 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2017, 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, 2016 filed with the SEC on April 14, 2017.
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 esophageal cancer 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,
to the extent they are considered drugs or biologics, 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. 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".
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 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 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.
The Company's line of future pharmaceutical
products being developed by its German subsidiary, to the extent they may be considered drugs or biologics, 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.
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 (“PBAG”),
its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
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 condensed consolidated
statements of operations.
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 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.
The Company may receive grants from the
German government which are used to fund research and development activities (see Note 7). Grant funds to be received for the reimbursement
of qualified research and development expenses are offset against such expenses in the accompanying condensed consolidated statements
of operations and comprehensive loss when the related expenses are incurred.
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, 2017 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, 2017 and 2016, did not have any assets or liabilities that were measured at fair value on a non-recurring
basis.
REVENUE RECOGNITION
As more fully described in Note 5,
amounts received under the Development Agreement (as defined below) are initially deferred and recognized as revenue over
the projected performance period under the Development Agreement in relation to development expenses incurred.
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
In the opinion of management, neither
the FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants (“AICPA”), nor the
SEC have issued any additional accounting pronouncements since the Company filed its December 31, 2016 Form 10-K that
are expected to have a material impact on the Company's future consolidated financial statements.
2. 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 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, 2017 and 2016. As such, basic and diluted loss per common share equals net loss,
as reported, divided by the weighted average number of common shares outstanding for the respective periods.
3. 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'
deficit. Accumulated other comprehensive loss approximated $14,000 and $24,000 at March 31, 2017 and December 31, 2016, respectively.
4. FOREIGN CURRENCY TRANSACTIONS
The Company records payables related
to a certain licensing agreement (see Note 6) 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 losses of approximately $20,000 and $51,000 for the three-month periods ended March 31, 2017 and 2016, respectively,
which are included in interest and other expense, net in the accompanying condensed consolidated statements of operations and comprehensive
loss.
5. DEFERRED REVENUES
On May 16, 2014, the Company entered
into a funding and revenue sharing agreement (the “Development Agreement”) with an unrelated third party
(disclosed in the Company’s Current Report on 8-K filied with the SEC on May 22, 2014). 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 March 31, 2017, the Company received approximately 1,538,000 Euros 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 third 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 estimated total development expenses was due to additional clinical indicators that
will be explored by the Company.
For the three-month periods ended March
31, 2017 and 2016, the Company recognized approximately $38,000 and $35,000, respectively, of development income under the Development
Agreement, which is included in revenues in the accompanying condensed consolidated statements of operations. Deferred revenues
approximated $138,000 and $174,000 at March 31, 2017 and December 31, 2016, respectively.
6. LONG-TERM LIABILITIES
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 Euro 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, June 2014, and again in April 2017, 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
Euro is due on June 30, 2020. While the total amount owed does not currently bear interest, any late
payment is 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, 2017.
At March 31, 2017, the Company has accrued
approximately $609,000 of licensing fees payable to Dr. Wiedow, which are included in long-term liabilities. This is an increase
over the respective accrual of approximately $600,000 at December 31, 2016, which was solely due to changes in foreign currency
exchange rates.
OTHER LIABILITIES
Other liabilities at March 31, 2017 and
December 31, 2016 consist of employee compensation that was incurred in 2015 and 2016, but for which payment was agreed to be deferred
until 2018.
7. 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. At March 31, 2017, 64,000 Euro ($68,000) of eligible expense from 2017 and 2016 was submitted for reimbursement, but
payment was not received at March 31, 2017. Research and development expenses for the three-month period ended March 31, 2017 have
been reduced by approximately $50,000, and a grant funds receivable of $68,000 is included on the accompanying condensed consolidated
balance sheet as of March 31, 2017.
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 three month periods ended March 31, 2017 and 2016, due to the Company's net losses and related
changes to the full valuation allowance for deferred tax assets.
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, 2017, there were no increases or decreases to liability for income taxes associated with
uncertain tax positions.
9. STOCK PURCHASE AGREEMENT
AND OTHER CAPITAL EQUITY TRANSACTIONS
On September 9, 2016, the
Company entered into a Preferred Stock Purchase Agreement (the “Agreement”) with a third-party
(“Investor”). 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 at the price of 1.00 Euro per share, for an aggregate purchase price of
1,000,000 Euro and the Investor agreed to purchase such shares no later than March 31, 2017. Further details are described in the
Company's Current Report on Form 8-K filed with the SEC on September 13, 2016.
During 2016, the Company received 15,000
Euro ($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. In March 2017, the Company received
an additional 5,000 Euro from the Investor; however, the full purchase was not received by March 31, 2017.
No shares of preferred stock were issued during the three
month periods ended March 31, 2017 and 2016.
Subsequent to March 31, 2017, the Company received an additional
5,000 Euro from the Investor. The Company is currently negotiating with the Investor to complete the transaction.