SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2009
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)
253-4616
(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
o
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 September 30,
2009
|
AND
SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
TABLE OF
CONTENTS
|
|
Page
|
|
|
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements:
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2009 (unaudited) and
December 31, 2008
|
3
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Operations and Comprehensive Loss for
the Three-month and Nine-month Periods Ended September 30, 2009 and 2008,
and for the Period From November 22, 2000 (Inception) Through September
30, 2009
|
4
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows for the Nine-month Periods
Ended September 30, 2009 and 2008, and for the Period From November 22,
2000 (Inception) Through September 30, 2009
|
5
|
|
|
|
|
Notes
to Condensed Consolidated Financial
Statements (Unaudited)
|
6
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
17
|
|
|
|
Item
4T.
|
Controls
and Procedures
|
17
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
18
|
|
|
|
Item
1.
|
Legal
Proceedings
|
18
|
|
|
|
Item
1A.
|
Risk
Factors
|
18
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
18
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
18
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
18
|
|
|
|
Item
5.
|
Other
Information
|
18
|
|
|
|
Item
6.
|
Exhibits
|
18
|
|
|
|
SIGNATURES
|
19
|
PROTEO,
INC. AND SUBSIDIARY
|
(A
DEVELOPMENT STAGE COMPANY)
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,024,226
|
|
|
$
|
1,237,450
|
|
Research
supplies
|
|
|
123,330
|
|
|
|
114,650
|
|
Prepaid
expenses and other current assets
|
|
|
339,070
|
|
|
|
191,599
|
|
|
|
|
1,486,626
|
|
|
|
1,543,699
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
249,828
|
|
|
|
265,245
|
|
|
|
$
|
1,736,454
|
|
|
$
|
1,808,944
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
119,993
|
|
|
$
|
138,225
|
|
Accrued
licensing fees
|
|
|
42,144
|
|
|
|
42,291
|
|
|
|
|
162,137
|
|
|
|
180,516
|
|
|
|
|
|
|
|
|
|
|
LONG
TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
|
119,348
|
|
|
|
115,300
|
|
Accrued
licensing fees
|
|
|
833,376
|
|
|
|
803,529
|
|
|
|
|
952,724
|
|
|
|
918,829
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Non-voting
preferred stock, par value $0.001 per share; 10,000,000
|
|
|
|
|
|
|
|
|
shares
authorized; 630,000 and 600,000 shares issued and outstanding as of
September 30, 2009 and
|
|
|
|
|
|
|
|
|
December
31, 2008, respectively (Liquidation preference - Note 2)
|
|
|
630
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
8,567,634
|
|
|
|
8,567,634
|
|
Note
receivable for sale of preferred stock
|
|
|
(1,771,359
|
)
|
|
|
(2,245,389
|
)
|
Accumulated
other comprehensive income
|
|
|
348,844
|
|
|
|
279,280
|
|
Deficit
accumulated during development stage
|
|
|
(6,548,036
|
)
|
|
|
(5,916,406
|
)
|
Total
Proteo, Inc. Stockholders' Equity
|
|
|
621,593
|
|
|
|
709,599
|
|
Noncontrolling
Interest
|
|
|
-
|
|
|
|
-
|
|
Total
Stockholders' Equity
|
|
|
621,593
|
|
|
|
709,599
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
1,736,454
|
|
|
$
|
1,808,944
|
|
SEE
ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
PROTEO,
INC. AND SUBSIDIARY
|
(A
DEVELOPMENT STAGE COMPANY)
|
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
|
FOR
THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND
2008
|
AND
FOR THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH SEPTEMBER 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOVEMBER
22,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE
MONTHS ENDED
|
|
|
NINE
MONTHS ENDED
|
|
|
|
|
|
|
SEPTEMBER
30,
|
|
|
SEPTEMBER
30,
|
|
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
121,502
|
|
|
|
100,363
|
|
|
|
357,044
|
|
|
|
315,420
|
|
|
|
4,343,370
|
|
Research
and development
|
|
|
123,188
|
|
|
|
124,844
|
|
|
|
347,734
|
|
|
|
371,494
|
|
|
|
2,500,363
|
|
|
|
|
244,690
|
|
|
|
225,207
|
|
|
|
704,778
|
|
|
|
686,914
|
|
|
|
6,843,733
|
|
INTEREST
AND OTHER INCOME (EXPENSE), NET
|
|
|
(19,362
|
)
|
|
|
113,767
|
|
|
|
73,178
|
|
|
|
64,446
|
|
|
|
232,723
|
|
NET
LOSS
|
|
|
(264,052
|
)
|
|
|
(111,440
|
)
|
|
|
(631,600
|
)
|
|
|
(622,468
|
)
|
|
|
(6,611,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LESS:
NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63,004
|
|
NET
LOSS ATTRIBUTABLE TO PROTEO, INC.
|
|
|
(264,052
|
)
|
|
|
(111,440
|
)
|
|
|
(631,600
|
)
|
|
|
(622,468
|
)
|
|
|
(6,548,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK DIVIDEND
|
|
|
-
|
|
|
|
-
|
|
|
|
(30
|
)
|
|
|
-
|
|
|
|
(30
|
)
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(264,052
|
)
|
|
$
|
(111,440
|
)
|
|
$
|
(631,630
|
)
|
|
$
|
(622,468
|
)
|
|
$
|
(6,548,036
|
)
|
BASIC
AND DILUTED LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
|
|
23,879,000
|
|
|
|
23,879,000
|
|
|
|
23,879,000
|
|
|
|
23,879,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO PROTEO, INC.
|
|
$
|
(264,052
|
)
|
|
$
|
(111,440
|
)
|
|
$
|
(631,600
|
)
|
|
$
|
(622,468
|
)
|
|
$
|
(6,548,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOREIGN
CURRENCY TRANSLATION ADJUSTMENTS
|
|
|
40,459
|
|
|
|
(170,132
|
)
|
|
|
69,564
|
|
|
|
(26,657
|
)
|
|
|
348,844
|
|
COMPREHENSIVE
LOSS
|
|
$
|
(223,593
|
)
|
|
$
|
(281,572
|
)
|
|
$
|
(562,036
|
)
|
|
$
|
(649,125
|
)
|
|
$
|
(6,199,162
|
)
|
SEE
ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
PROTEO,
INC. AND SUBSIDIARY
|
(A
DEVELOPMENT STAGE COMPANY)
|
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
FOR
THE SIX-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
|
AND
FOR THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH SEPTEMBER 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOVEMBER
22,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NINE
MONTHS ENDED
|
|
|
|
|
|
|
SEPTEMBER
30,
|
|
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
2009
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(631,600
|
)
|
|
$
|
(622,468
|
)
|
|
$
|
(6,548,006
|
)
|
Adjustments
to reconcile net loss to net cash used in
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
42,375
|
|
|
|
45,950
|
|
|
|
377,053
|
|
Loss
on disposal of equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
4,518
|
|
Unrealized
foreign currency transaction (gains) losses
|
|
|
29,700
|
|
|
|
(18,453
|
)
|
|
|
213,102
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
supplies
|
|
|
(4,360
|
)
|
|
|
(647
|
)
|
|
|
(135,052
|
)
|
Prepaid
expenses and other current assets
|
|
|
(135,747
|
)
|
|
|
45,538
|
|
|
|
(325,966
|
)
|
Accounts
payable and accrued liabilities
|
|
|
3,622
|
|
|
|
(71,375
|
)
|
|
|
95,617
|
|
Deferred
revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
120,341
|
|
Accrued
licensing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
660,713
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(696,010
|
)
|
|
|
(621,455
|
)
|
|
|
(5,537,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(19,210
|
)
|
|
|
(4,884
|
)
|
|
|
(632,516
|
)
|
Cash
of reorganized entity
|
|
|
-
|
|
|
|
-
|
|
|
|
27,638
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(19,210
|
)
|
|
|
(4,884
|
)
|
|
|
(604,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
1,792,610
|
|
Proceeds
from subscribed common stock and issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
of
preferred stock to related party
|
|
|
474,030
|
|
|
|
1,271,992
|
|
|
|
5,019,616
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
474,030
|
|
|
|
1,271,992
|
|
|
|
6,812,226
|
|
EFFECT
OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
AND
CASH EQUIVALENTS
|
|
|
27,966
|
|
|
|
26,540
|
|
|
|
354,558
|
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(213,224
|
)
|
|
|
672,193
|
|
|
|
1,024,226
|
|
CASH
AND CASH EQUIVALENTS--BEGINNING OF PERIOD
|
|
|
1,237,450
|
|
|
|
802,745
|
|
|
|
-
|
|
CASH
AND CASH EQUIVALENTS--END OF PERIOD
|
|
$
|
1,024,226
|
|
|
$
|
1,474,938
|
|
|
$
|
1,024,226
|
|
SEE
ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
PROTEO,
INC. AND SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 (UNAUDITED)
1.
NATURE OF BUSINESS AND BASIS OF PRESENTATION
BASIS OF
PRESENTATION
The
accompanying condensed consolidated balance sheet as of December 31, 2008, which
has been derived from audited financial statements, and the accompanying interim
condensed consolidated financial statements as of September 30, 2009, for the
three-months and nine-months ended September 30, 2009 and 2008 and for the
period from November 22, 2000 (Inception) through September 30, 2009 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-months and nine-months ended September 30, 2009 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2009 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. 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, 2008 filed with the SEC on March 30,
2009.
NATURE OF
BUSINESS
The
Company intends to develop, manufacture, promote and market pharmaceuticals and
other biotech products. The Company is focused on the development of
pharmaceuticals based on the human protein Elafin which naturally occurs in
human skin, lungs and mammary glands. The Company believes Elafin may be useful
in the treatment of cardiac infarction, serious injuries caused by accidents,
post surgery damage to tissue, complications resulting from organ
transplantations and pulmonary arterial hypertension.
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 manufacture and 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 plans to identify and
develop other potential products. 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.
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.
Proteo,
Inc.'s common stock is currently quoted on the OTC Bulletin Board of the
Financial Industry Regulatory Authority under the symbol "PTEO".
DEVELOPMENT
STAGE AND GOING CONCERN 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 operations.
Management plans to generate revenues from product sales, but there is no
commitment by any persons for purchase of any of the proposed products and there
is no assurance of any future revenue. The Company will require substantial
additional funding for continuing research and development, obtaining regulatory
approvals and for the commercialization of its product. There can be 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.
PROTEO,
INC. AND SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 (UNAUDITED)
DEVELOPMENT
STAGE AND GOING CONCERN 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.
|
In the
absence of significant sales and profits, the Company may seek to raise funds to
meet its future working capital requirements through the additional sales 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.
These
circumstances, among others, raise concerns about the Company's ability to
continue as a going concern. 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.
Proteo,
Inc.'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
Proteo,
Inc.'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 in Germany
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, its
wholly owned subsidiary. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Effective
January 1, 2009, the Company adopted new guidance to the Consolidation Topic of
the Financial Accounting Standard Board’s (“FASB”) new Accounting Standards
Codification (“ASC” or “Codification”). This guidance improves the
relevance, comparability and transparency of the financial information that a
company provides in its consolidated financial statements by establishing
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. This standard requires
the Company to classify noncontrolling interests (previously referred to as
"minority interest") as part of consolidated net earnings and to include the
accumulated amount of noncontrolling interests as part of stockholders'
equity.
PROTEO,
INC. AND SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 (UNAUDITED)
PRINCIPLES
OF CONSOLIDATION (continued)
The net
loss amounts the Company has previously reported are now presented as "Net loss
attributable to Proteo, Inc" and, as required by the Codification, earnings per
share continues to reflect amounts attributable only to the Company. Similarly,
in the presentation of stockholders' equity, the Company distinguishes between
equity amounts attributable to the Company's stockholders and amounts
attributable to the noncontrolling interest - previously classified as minority
interest outside of stockholders' equity. In addition to these financial
reporting changes, this guidance provides for significant changes in accounting
related to noncontrolling interests; specifically, 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. Except for presentation, the implementation of
this guidance did not have a material effect on the Company's condensed
consolidated financial statements because a substantive contractual arrangement
specifies the attribution of net earnings and loss not to exceed the
noncontrolling interest.
FAIR
VALUE OF FINANCIAL INSTRUMENTS AND CERTAIN OTHER ASSETS/LIABILITIES
The Fair
Value Measurements and Disclosures Topic of the ASC 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
September
30, 2009 and
December 31, 2008 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 and nine-month periods ended
September 30, 2009 and 2008 and for the period from November 22, 2000
(Inception) through September 30, 2009, did not have any assets or liabilities
that were measured at fair value on a non-recurring basis.
SIGNIFICANT
RECENT ACCOUNTING PRONOUNCEMENTS
Effective
September 30, 2009, the Company adopted the FASB’s new Accounting Standard
Codification as the single source of authoritative accounting guidance under the
Generally Accepted Accounting Principles Topic. The ASC does not
create new accounting and reporting guidance, rather it reorganizes GAAP
pronouncements into approximately 90 topics within a consistent
structure. All guidance in the ASC carries an equal level of
authority. Relevant portions of authoritative content, issued by the
SEC, for SEC registrants, have been included in the ASC. After the
effective date of the Codification, all nongrandfathered, non-SEC accounting
literature not included in the ASC is superseded and deemed
nonauthoritative. Adoption of the Codification also changed how the
Company references GAAP in its condensed consolidated financial
statements.
Effective
June 30, 2009, the Company adopted new guidance to the Subsequent Events Topic
of the FASB ASC. The Subsequent Events Topic establishes general
standards of accounting for and disclosure of events that occur after the
statement of financial condition date but before financial statements are issued
or are available to be issued. Companies are required to disclose the
date through which subsequent events were evaluated as well as the date the
financial statements were issued or available to be issued. Adoption
of this guidance did not have any impact on the Company's condensed consolidated
financial statements. The Company evaluated subsequent events through
the filing date of our quarterly 10-Q with the Securities and Exchange
Commission on November
4
,
2009.
In April
2009, the FASB issued additional guidance under the Fair Value Measurements and
Disclosures Topic of the ASC. This update relates to determining fair
values when there is no active market or where the price inputs being used
represent distressed sales. This update provides additional guidance
for estimating fair value when the volume and level of activity for the asset or
liability have significantly decreased. Also included is guidance on
identifying circumstances that indicate a transaction is not
orderly. The adoption of this guidance had no impact on the Company’s
condensed consolidated financial statements.
In April
2009, the FASB issued additional guidance under the Financial Instruments Topic
of the ASC. This update requires disclosures about the fair value of
financial instruments for interim reporting periods as well as in annual
financial statements. This update also requires interim financial
reporting disclosures in summarized financial information at interim reporting
periods. This update is applicable to public companies
only. The adoption of this guidance had no impact on the Company’s
condensed consolidated financial statements.
PROTEO,
INC. AND SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 (UNAUDITED)
SIGNIFICANT
RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In April
2009, the FASB issued additional guidance under the Investments – Debt and
Equity Securities Topic of the ASC. For debt securities, this
guidance replaces the management assertion that it has the intent and ability to
hold an impaired debt security until recovery with the requirement that
management assert if it either has the intent to sell the debt security or if it
is more likely than not the entity will be required to sell the debt security
before recovery of its amortized cost basis. If management intends to
sell the debt security or it is more likely than not the entity will be required
to sell the debt security before recovery of its amortized cost basis, an other
than temporary impairment (“OTTI”) shall be recognized in earnings equal to the
entire difference between the debt security's amortized cost basis and its fair
value at the reporting date. After the recognition of an OTTI, the
debt security is accounted for as if it had been purchased on the measurement
date of the OTTI, with an amortized cost basis equal to the previous amortized
cost basis less the OTTI recognized in earnings. The update also
changes the presentation in the financial statements of non credit related
impairment amounts for instruments within its scope. When the entity
asserts it does not have the intent to sell the security and it is more likely
than not it will not have to sell the security before recovery of its cost
basis, only the credit related impairment losses are to be recognized in
earnings and non credit losses are to be recognized in other comprehensive
income (“OCI”). Additionally, this update provides for enhanced
presentation and disclosure of OTTIs of debt and equity securities in the
financial statements. The adoption of this guidance had no impact on
the Company’s condensed consolidated financial statements.
Effective
January 1, 2009, the Company adopted additional guidance to the Intangibles –
Goodwill and Other Topic of the FASB ASC. This update amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible
asset. The intent of this update is to improve the consistency
between the useful life of a recognized intangible asset and the period of
expected cash flows used to measure the fair value of the asset under accounting
for business combinations, and other U.S. GAAP. The adoption of this
guidance did not have any impact on the Company's condensed consolidated
financial statements.
Effective
January 1, 2009, the Company adopted new guidance to the Business Combinations
Topic of the FASB ASC. This guidance establishes principles and
requirements for how the acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree, recognizes and measures the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. The adoption of this guidance
had no impact on the Company's condensed consolidated financial
statements. The Company will apply this guidance prospectively to any
business combination on or after January 1, 2009 as required.
Effective
January 1, 2009, the Company adopted additional guidance under the Fair Value
Measurement and Disclosures Topic of the FASB ASC, which delays the effective
date of the adoption of new guidance under the Fair Value Measurements and
Disclosures Topic to January 1, 2009 for certain nonfinancial assets and
nonfinancial liabilities. Examples of applicable nonfinancial assets
and nonfinancial liabilities to which this update applies include, but are not
limited to:
·
|
Nonfinancial
assets and nonfinancial liabilities initially measured at fair value in a
business combination that are not subsequently remeasured at fair
value;
|
·
|
Reporting
units measured at fair value in the goodwill impairment test as described
in the Intangibles – Goodwill and Other Topic of the FASB ASC and
nonfinancial assets and nonfinancial liabilities measured at fair value in
the goodwill impairment test, if applicable;
and
|
·
|
Nonfinancial
long-lived assets measured at fair value for impairment assessment under
the Property, Plant and Equipment Topic of the FASB
ASC.
|
The
adoption of this update had no impact on the Company's condensed consolidated
financial statements.
Except as
described above, in the opinion of management, neither the FASB, its Emerging
Issues Task Force, the AICPA, nor the SEC have issued any additional accounting
pronouncements since the Company filed its December 31, 2008, Form 10-K that are
expected to have material impact on the Company's future consolidated financial
statements.
PROTEO,
INC. AND SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 (UNAUDITED)
FUTURE
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In June
2009, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No.
166,
Accounting for Transfers
of Financial Assets
. SFAS No. 166 is a revision to SFAS No.
140,
Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities
. SFAS No. 166 will require more information about
transfers of financial assets, including securitization transactions, and where
companies have continuing exposure to the risks related to transferred financial
assets. It eliminates the concept of a "qualifying special-purpose
entity", changes the requirements for derecognizing financial assets, and
requires additional disclosures. SFAS No. 166 will be effective
January 1, 2010 and early adoption is not permitted. The Company is
currently evaluating the impact of this statement on the consolidated financial
statements.
In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No.
46(R). SFAS No. 167 is a revision to the accounting for the
consolidation of variable interest entities, and changes how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be
consolidated. The determination is based on, among other things, an
entity's purpose and design and a company's ability to direct the activities of
the entity that most significantly affect the entity's economic
performance. SFAS No. 167 provides for enhanced disclosure
requirements and will be effective on January 1, 2010. Early adoption
is not permitted. The Company is currently evaluating the impact of
this statement on the consolidated financial statements.
2.
STOCK SUBSCRIPTIONS RECEIVABLE AND OTHER EQUITY TRANSACTIONS
The
Company is authorized to issue 10,000,000 shares of preferred stock, $0.001 par
value. 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. As more fully described in the Company’s Form 8-K filed with
the SEC on June 11, 2008, 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. If no dividend is distributed to common
stockholders, the holders of Series A Preferred Stock are entitled to an annual
stock dividend payable at the rate of one share of Series A Preferred Stock for
each twenty shares of Series A Preferred Stock owned by each holder of Series A
Preferred Stock. The annual stock dividend shall be paid on June 30 of each year
commencing in 2009 and no stock dividends will be paid after December 31, 2011.
Effective June 30, 2009, the Company declared a stock dividend of 30,000 shares
of Series A Preferred Stock payable to its Series A Preferred Stock holders
pursuant to the Stock Purchase Agreement.
On June
9, 2008, the Company entered into a Preferred Stock Purchase Agreement ("Stock
Purchase Agreement") with FIDEsprit (the “Investor”), a common stockholder and
related party. Pursuant to the Stock Purchase Agreement, the Company sold and
issued to the Investor 600,000 shares of Series A Preferred Stock at a price of
$6.00 per share, for an aggregate price of $3,600,000 ("Purchase Price"). In
payment of the Purchase Price, the Investor delivered to the Company a
promissory note in the amount of $3,600,000 (the “Note”), and
matured on March 31, 2009. The Note is guaranteed by a principal of the
Investor (the “Guaranty”). During the nine-month periods ended September 30,
2009 and 2008, the Company received payments approximating $474,000 and
$1,272,000, respectively, in connection with the Stock Purchase Agreement. The
unpaid principal balance of the Series A Preferred Stock note receivable as of
September 30, 2009 approximated $1,771,000. Of this amount approximately $42,000
was received in October 2009. The Series A Preferred Stock note receivable is
reported as a reduction of stockholders' equity at September 30, 2009.
On July
6, 2009, the Company and Investor entered into a Forbearance Agreement and
General Release (the “Forbearance Agreement”) to renegotiate the terms of the
Note. Pursuant to the Forbearance Agreement, the Investor
acknowledged and agreed that, as of July 6, 2009, it was obligated to the
Company under the Note for the aggregate sum of $1,940,208 (the “Indebtedness”),
which represents the unpaid principal amount as of such date plus a late charge
equal to three percent (3%) of the unpaid principal amount (approximately
$65,000). In exchange for the Company’s agreement to forbear from
exercising its rights under the Note and Guaranty, the Investor has agreed to
pay the Indebtedness by making monthly payments in the amount of $140,000
commencing on the first business day of September 2009 and continuing on the
first business day of each succeeding month thereafter until the Indebtedness is
paid in full. As of September 30, 2009, the first installment of
$140,000 had not been fully paid, and therefore the Investor was technically in
default of the Forbearance Agreement. The Company received approximately
$107,000 for the quarter ended September 2009 and the remaining amount due
approximating $33,000 in October 2009 relating to amounts due under the
Forbearance Agreement in September 2009. The Company has not chosen to enforce
the remedies under the Forbearance Agreement or the Stock Purchase Agreement as
of the filing of this Form 10-Q.
PROTEO,
INC. AND SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 (UNAUDITED)
2.
STOCK SUBSCRIPTIONS RECEIVABLE AND OTHER EQUITY TRANSACTIONS
(continued)
The other
information required by Item 701 of Regulation S-K relating to the transactions
described in the preceding paragraphs were included in the Company's Forms 8-K
filed with the SEC on June 11, 2008 and July 8, 2009.
There
were no issuances of common stock during the nine-month period ended September
30, 2009, nor have any stock options been granted from inception to
date.
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 September 30, 2009
or 2008. 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 comprehensive income approximated $349,000 at
September 30, 2009 and $279,000 at December 31, 2008.
5.
FOREIGN CURRENCY TRANSACTIONS
The
Company records payables related to a certain licensing agreement (Note 7) 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. The Company has made no payments under this licensing
agreement during the nine-month periods ended September 30, 2009 and 2008, and,
therefore, has not realized any significant foreign currency exchanges gains or
losses during these periods.
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 an unrealized foreign currency transaction loss of
approximately $30,000 and an unrealized foreign currency transaction gain of
$18,000 for the nine-month periods ended September 30, 2009 and 2008,
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
SEPTEMBER
30, 2009 (UNAUDITED)
7.
DR. WIEDOW LICENSE AGREEMENT
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. No
payments were made through fiscal year 2003. In 2004, the License Agreement was
amended to require the Company to make annual payments of 30,000 Euros, to be
paid on July 15 of each year, beginning in 2004. Such annual payment could be
increased to 110,000 Euros by June 1 of each year based on an assessment of the
Company's financial ability to make such payments. In December 2007 the Company
paid Dr. Wiedow 30,000 Euros. The License Agreement was again amended by an
Amendment Agreement to the License Agreement (the "Amendment") dated December
23, 2008. Pursuant to the Amendment, the Company and Dr. Wiedow have agreed that
the Company would pay the outstanding balance of 630,000 Euros to Dr. Wiedow as
follows: for fiscal years 2008 to 2012, the Company shall pay Dr. Wiedow 30,000
Euros per year, and for fiscal years 2013 to 2016, the Company shall pay Dr.
Wiedow 120,000 Euros per year. The foregoing payments shall be made on or before
December 31 of each fiscal year. In December 2008 the Company paid Dr. Wiedow
30,000 Euros. 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 (1.6% as of January 1, 2009)
plus six percent. In the event that the Company's financial condition improves,
the parties can agree to increase and/or accelerate the payments.
The
Amendment also modified the royalty payment such that from the date of the
Amendment the Company will not only pay Dr. Wiedow a three percent royalty on
gross revenues from the Company's sale of products based on the licensed
technology but also three percent of the license fees (including upfront and
milestone payments and running royalties) received by the Company or its
subsidiary from their sublicensing of the licensed technology.
At
September 30, 2009 and December 31, 2008, the Company has accrued approximately
$876,000 and $846,000, respectively, of licensing fees payable to Dr. Wiedow, of
which approximately $42,000 is included in current liabilities as of both
periods and $834,000 and $804,000, respectively, is included in long-term
liabilities. The difference in amounts at September 30, 2009 compared to
December 31, 2008 is attributable to the unrealized foreign currency transaction
gain described in Note 5.
Dr.
Wiedow, who is a director of the Company, beneficially owned approximately 45%
of the Company's outstanding common stock as of September 30, 2009.
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 September 30, 2009
or 2008, due to the Company's net losses and related changes to the valuation
allowance for deferred tax assets.
As of
September 30, 2009, the Company has a deferred tax asset and an equal amount of
valuation allowance of approximately $1,839,000, relating primarily to federal
and foreign net operating loss carryforwards of approximately $387,000 and
$1,155,000, respectively, as discussed below, and timing differences related to
the recognition of accrued licensing fees of approximately
$297,000.
PROTEO,
INC. AND SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 (UNAUDITED)
The
Company has federal and foreign net operating loss carry forwards in the amount
of $1,138,000 and $4,621,000, respectively at September 30, 2009, which is
expected to begin expiring in 2025 for federal purpose and has indefinite life
for foreign purpose.
Utilization
of the net operating losses (“NOL”) carry forwards may be subject to a
substantial annual limitation due to ownership change limitations that may have
occurred or that could occur in the future, as required by Section 382 of the
Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state
and foreign provisions. These ownership changes may limit the amount of NOL
carryforwards that can be utilized annually to offset future taxable income and
tax, respectively. In general, an “ownership change” as defined by Section 382
of the Code results from a transaction or series of transactions over a
three-year period resulting in an ownership change of more than 50 percentage
points of the market value of a company by certain stockholders or public
groups. Due to the existence of the valuation allowance, future
changes in the Company’s unrecognized tax benefits will not impact its effective
tax rate. Any carry forwards that may expire prior to utilization as a
result of such limitations will be removed, if applicable, from deferred tax
assets with a corresponding reduction of the valuation allowance.
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
September 30, 2009, there were no increases or decreases to liability for income
taxes associated with uncertain tax positions.
9.
MANUFACTURING AGREEMENT
During
the three months ended September 30, 2009, the Company entered into a contract
for a third party to produce certain research supplies. The total contract price
is 275,900 Euros, half of which was due upon signing and the other half due upon
completion of production. The initial payment of approximately
$201,000 has been included in prepaid expenses and other current assets in the
accompanying condensed consolidated balance sheet at September 30,
2009.
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
The
Company specializes in the research, development and marketing of drugs for
inflammatory diseases with Elafin as its first project. Management deems Elafin
to be one of the most prospective substances in the treatment of serious tissue
and muscle damage. Independently conducted animal experiments have indicated
that Elafin may have benefits in the treatment of tissue and muscle damage
caused by insufficient oxygen supply and therefore may be useful in the
treatment of heart attacks, serious injuries and in the course of organ
transplants. Other applications have yet to be determined.
The
Company intends to implement Elafin as a drug in the treatment of inflammatory
diseases, and plans to seek governmental approval in Europe first. Currently,
management estimates that it will take approximately four years to achieve its
first governmental approval for the use of Elafin as a drug for the first
indication.
The
Company's success will depend on its ability to prove that Elafin is well
tolerated by humans and its efficacy in the indicated treatment. 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 as a drug in any
of the intended applications.
After
developing a production procedure for Elafin, Proteo has initiated clinical
trials to achieve governmental approval for the use of Elafin as a drug in
Europe. For this purpose, Proteo has contracted Eurogentec, an experienced
Contract Manufacturing Organization (“CMO”) located in Belgium to produce Elafin
in accordance with GMP standards as required for clinical trials.
In August
2007, the Company's subsidiary entered into an agreement with Minapharm for
clinical development, production and marketing of Elafin. The Company has
granted Minapharm the right to exclusively market Elafin in Egypt and certain
Middle Eastern and African countries. Proteo received an upfront payment in 2007
and has deferred additional amounts received, and will receive
milestone-payments and royalties on net product sales. In addition, Minapharm
will take over the funding of clinical research activities for the designated
region. In December 2008 the responsible authority in Cairo granted approval for
a Phase II clinical trial to study the efficacy of Elafin on kidney transplant
patients. The commencement of the trial is scheduled for year- end.
In
January 2008, the Company entered into an agreement with Stanford
University in California, to cooperate in preclinical studies related to Elafin
treatment of pulmonary arterial hypertension. Proteo provides support for animal
experiments that are currently conducted by Marlene Rabinovitch, Research
Director of the Vera Moulton Wall Center for Pulmonary Vascular Disease at
Stanford University who is a renowned expert in the field, and her group at the
university.
In August
2008, the Company's subsidiary received the approval for a Phase II clinical
trial with Elafin by the German Federal Institute for Drugs and Medical Devices
(BfArM). In this randomized, placebo-controlled Phase II trial the effect of
Elafin on inflammatory parameters will be investigated in patients undergoing
esophagectomy for esophagus carcinoma. The trial will be performed at the
Department of General and Thoracic Surgery, University Medical Center
Schleswig-Holstein, Campus Kiel. Patient recruitment started in November 2008
and is ongoing. The excellent tolerability of Elafin in human subjects was
demonstrated in a Phase I clinical single dose escalating study. Approximately
40% of the patients have been treated so far.
In
September 2009, the Company’s subsidiary has signed a Memorandum of
Understanding with the University of Edinburgh. Within the framework of
collaboration, it is intended to investigate the effect of Elafin on the damage
and inflammation of cardiac muscle after coronary bypass operations in a Phase
II clinical trial at the University of Edinburgh.
The Company's
goal is to obtain the first governmental regulatory approval for the first
indication of the initial product in 2012. It should be noted that the
first indication, if successfully developed, would have a market potential
substantially smaller than the overall market of Elafin for more widespread
applications such as for the treatment of cardiac infarction.
RESULTS
OF OPERATIONS
OPERATING
EXPENSES
The
Company's operating expenses for the nine-month period ended September 30, 2009
were approximately $705,000, an increase of approximately $18,000 over the same
period of the prior year. The Company's operating expenses for the three-month
period ended September 30, 2009 were approximately $245,000, an increase of
approximately $19,000 over the same period of the prior year. This increase is
due primarily to an increase in general and administrative expenses during the
current year quarter of approximately $21,000 and a decrease in research and
development expenses of approximately $2,000. The increase in general and
administrative expenses is primarily due to an increase in professional fees
related to public financial reporting in the current year.
INTEREST
AND OTHER EXPENSE
Net
interest and other income (expenses) for the nine-month and three-month periods
ended September 30, 2009 were approximately $73,000, and ($19,000),
respectively, an increase/(decrease) of approximately $9,000 and $(133,000) over
the same periods of the prior year. The changes are due primarily to fluctuating
foreign currency exchange rates resulting in unrealized foreign currency
transaction losses, as described in Note 5 to the Company's condensed
consolidated financial statements included elsewhere herein.
INCOME
TAXES
There is
no material income tax expense recorded for the periods ended September 30, 2009
or 2008, due to the Company's net losses.
As of
September 30, 2009, the Company has a deferred tax asset and an equal amount of
valuation allowance of approximately $1,839,000, relating primarily to federal
and foreign net operating loss carryforwards of approximately $387,000 and
$1,155,000, respectively, as discussed below, and timing differences related to
the recognition of accrued licensing fees of approximately
$297,000.
The
Company has federal and foreign net operating loss carry forwards in the amount
of $1,138,000 and $4,621,000, respectively at September 30, 2009. 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 tax NOLs could be severely restricted.
FOREIGN
CURRENCY TRANSLATION ADJUSTMENTS
We
experienced a net gain of approximately $70,000 and $40,000 in foreign currency
translation adjustments during the nine-month and three-month periods ended
September 30, 2009, respectively. This represents an increase of approximately
$96,000 over the nine-month period in 2008 and an increase of $211,000 over the
three-month period in 2008. 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
Since our
inception we have raised a total of (i) approximately $4,983,000 from the sale
of 20,065,428 shares of our common stock, of which 6,585,487 shares, 300,000
shares and 1,500,000 shares have been sold at $0.40 per share, $0.84 per share
and $0.60 per share, respectively, under stock subscription agreements in the
amount of approximately $2,035,000, $252,000 and $900,000, respectively, and
(ii) $1,829,000 from the sale of 600,000 shares of the Company's non-voting
Series A Preferred Stock. The balance of the purchase price for the Series A
Preferred Stock is evidenced by a promissory note which, as of September 30,
2009, had a principal balance of $1,833,000. See Note 2 to the condensed
consolidated financial statements included elsewhere herein for the payment
terms under the promissory note.
The
Company has cash approximating $1,024,000 as of September 30, 2009 to support
current and future operations. This is a decrease of $213,000 over the December
31, 2008 cash balance of approximately $1,237,000.
Management
believes that the Company will not generate any significant revenues in the next
few years, nor will it have sufficient cash to fund future operations. As a
result, the Company's success will largely depend on its ability to secure
additional funding through the sale of its common stock, preferred stock and/or
debt securities. There can be no assurance, however, that the Company will be
able to consummate a debt or equity financing in a timely manner, or on terms
favorable to the Company, if at all.
GOING
CONCERN
The
Company's independent registered public accounting firm stated in their
Auditors’ Report included in the Company’s Form 10-K for the year ended December
31, 2008 dated March 30, 2009, that the Company will require a significant
amount of additional capital to advance the Company's products to the point
where they may become commercially viable and has incurred significant losses
since inception. These conditions, among others, raise substantial doubt about
the Company's ability to continue as a going concern. Therefore, the Company
will be required to seek additional funds to finance its long-term operations.
The successful outcome of future activities cannot be determined at this time
and there is no assurance that if achieved, the Company will have sufficient
funds to execute its intended business plan or generate positive operating
results.
OFF
BALANCE SHEET ARRANGEMENTS
The
Company does not currently have any off balance sheet arrangements.
CAPITAL
EXPENDITURES
None
significant.
A smaller
reporting company ("SRC") is not required to provide any information in response
to Item 305 of Regulation S-K.
ITEM
4T. 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 September 30, 2009. Based on that evaluation, Ms. Bargmann
concluded that as of September 30, 2009, 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.
ITEM
1.
|
LEGAL
PROCEEDINGS.
|
None.
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.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
|
None.
ITEM
5.
|
OTHER
INFORMATION.
|
None.
Exhibits:
|
|
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.
|
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.
|
|
|
|
|
|
|
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)
|
|
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