Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended June 30, 2017

 

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	90-0019065
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)	(I.R.S. EMPLOYER IDENTIFICATION NO.)
2102 BUSINESS CENTER DRIVE, IRVINE, CALIFORNIA	92612
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)	(ZIP CODE)

 

(949) 253-4155

(Registrant's telephone number, including area code)

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth 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)
Emerging growth company  o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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 August 1, 2017

 

 

 

 

 

 

 

 

PROTEO, INC.

AND SUBSIDIARY

 

TABLE OF CONTENTS

 

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements:	3
	Condensed Consolidated Balance Sheets as of June 30, 2017 (Unaudited) and December 31, 2016	3
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three-month and Six-month Periods Ended June 30, 2017 and 2016 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Six-month Periods Ended June 30, 2017 and 2016 (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	15
Item 4.	Controls and Procedures	15
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	16
Item 1A.	Risk Factors	16
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3.	Defaults Upon Senior Securities	16
Item 4.	Mine Safety Disclosures	16
Item 5.	Other Information	16
Item 6.	Exhibits	16
SIGNATURES		17

 

 

 

 

 

 

PART I . FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PROTEO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

ASSETS
		June 30,				December 31,
		2017				2016
		(Unaudited)
CURRENT ASSETS
Cash and cash equivalents		$	153,696			$	141,668
Research supplies			108,922				100,313
Grant funds receivable			16,804				47,405
Receivables for Development Agreement			28,558				36,821
Prepaid expenses and other current assets			16,772				17,079
Total Current Assets			324,752				343,286
PROPERTY AND EQUIPMENT, NET			5,853				6,160
Total Assets		$	330,605			$	349,446
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities		$	173,300			$	178,773
Deferred revenues			161,730				173,875
Total Current Liabilities			335,030				352,648
LONG TERM LIABILITIES
Accrued licensing fees			651,128				599,663
Other liabilities			134,386				111,967
Total Long Term Liabilities			785,514				711,630
Total Liabilities			1,120,544				1,064,278
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Non-voting preferred stock, par value $0.001 per share; 10,000,000 shares authorized; 723,590 shares issued and outstanding			724				724
Common stock, par value $0.001 per share; 300,000,000 shares authorized; 23,879,350 shares issued and outstanding			23,880				23,880
Additional paid-in capital			8,988,125				8,988,125
Accumulated other comprehensive income (loss)			35,680				(24,093	)
Accumulated deficit			(9,838,348	)			(9,703,468	)
Total Stockholders' Deficit			(789,939	)			(714,832	)
Total Liabilities and Stockholders' Deficit		$	330,605			$	349,446

 

SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

PROTEO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2017 AND 2016

(UNAUDITED)

 

 

 

		THREE MONTHS ENDED								SIX MONTHS ENDED
		JUNE 30,								JUNE 30,
		2017				2016				2017				2016
REVENUES		$	57,653			$	44,929			$	96,035			$	80,249
EXPENSES
General and administrative			68,946				55,211				100,249				84,495
Research and development			12,675				(33,726	)			20,160				18,563
Total Expenses			81,621				21,485				120,409				103,058
INCOME (LOSS) FROM OPERATIONS			(23,968	)			23,444				(24,374	)			(22,809	)
INTEREST AND OTHER INCOME (EXPENSE), NET			(89,269	)			39,116				(110,506	)			(12,697	)
NET INCOME (LOSS)		$	(113,237	)		$	62,560			$	(134,880	)		$	(35,506	)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS			49,348				(14,406	)			59,773				11,571
COMPREHENSIVE INCOME (LOSS)		$	(63,889	)		$	48,154			$	(75,107	)		$	(23,935	)
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE		$	(0.00	)		$	0.00			$	(0.01	)		$	(0.00	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING			23,879,350				23,879,350				23,879,350				23,879,350

 

SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

PROTEO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2017 AND 2016

(UNAUDITED)

 

 

		SIX MONTHS ENDED
		JUNE 30,
		2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(134,880	)		$	(35,506	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			793				1,356
Foreign currency transaction loss			113,825				21,976
Changes in operating assets and liabilities:
Research supplies			–				2,437
Grant funds receivable			32,861				(82,516	)
Receivables for Development Agreement			10,828				72,521
Prepaid expenses and other current assets			1,680				522
Accounts payable and accrued liabilities			(14,546	)			(57,693	)
Deferred revenue			(25,656	)			42,542
Other liabilities			12,142				–
NET CASH USED IN OPERATING ACTIVITIES			(2,953	)			(34,361	)
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			14,981				4,643
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			12,028				(29,718	)
CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD			141,668				237,288
CASH AND CASH EQUIVALENTS--END OF PERIOD		$	153,696			$	207,570

 

 

 

 

SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

PROTEO, INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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 June 30, 2017 and for the three-month and six-month periods ended June 30, 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 and six-month periods ended June 30, 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 fully 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.

 

LIQUIDITY

 

Management expects existing cash as of June 30, 2017 to be sufficient to fund the Company’s operations for at least twelve months from the issuance date of these interim financial statements.

 

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.

 

OTHER RISKS AND UNCERTAINTIES

 

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 June 30, 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 and six-month periods ended June 30, 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.   INCOME (LOSS) PER COMMON SHARE

 

Basic income (loss) per common share is computed based on the weighted average number of shares outstanding for the period. Diluted income (loss) per common share is computed by dividing net income (loss) by the weighted average shares outstanding assuming all dilutive potential common shares were issued. There were no dilutive potential common shares outstanding at June 30, 2017 and 2016. As such, basic and diluted income (loss) per common share equals net income (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 Euro (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 income (loss) approximated $36,000 and ($24,000) at June 30, 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 Euro. For each reporting period, the Company translates the quarterly amount to U.S. dollars at the exchange rate effective on that date. If the exchange rate changes between when the liability is incurred and the time payment is made, a foreign exchange gain or loss results.

 

Additionally, the Company computes a foreign exchange gain or loss at each balance sheet date on all recorded transactions denominated in foreign currencies that have not been settled. The difference between the exchange rate that could have been used to settle the transaction on the date it occurred and the exchange rate at the balance sheet date is the gain or loss that is currently recognized. The Company recorded foreign currency transaction gains (losses) of approximately ($94,000) and $29,000 for the three-month periods ended June 30, 2017 and 2016, respectively, and ($114,000) and ($22,000) for the six-month periods ended June 30, 2017 and 2016, respectively, which are included in interest and other income (expense), net in the accompanying condensed consolidated statements of operations and comprehensive income (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 filed 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 Euro. Through June 30, 2017, the Company received approximately 1,578,000 Euro of the 3.5 million Euro maximum. An additional 25,000 Euro was accrued for at June 30, 2017 and received in July 2017. 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 Euro, 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 are being explored by the Company.

 

For the three-month and six-month periods ended June 30, 2017 and 2016, the Company recognized approximately $58,000 and $45,000 and $96,000 and $80,000, respectively, of development income under the Development Agreement, which is included in revenues in the accompanying condensed consolidated statements of operations. Deferred revenues approximated $162,000 and $174,000 at June 30, 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, 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 June 30, 2017.

 

At June 30, 2017, the Company has accrued approximately $651,000 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 June 30, 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 Euro (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 June 30, 2017, 15,000 Euro ($17,000) of eligible expense from 2017 was submitted for reimbursement, but payment was not received at June 30, 2017, which resulted in a $17,000 grant fund receivable on the accompanying condensed consolidated balance sheet at June 30, 2017. Research and development expenses for the three-month and six-month periods ended June 30, 2017 and 2016, have been reduced by approximately $52,000 and $82,000, respectively, and $102,000 and $82,000, respectively.

 

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 six-month periods ended June 30, 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 June 30, 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. During the six month period ended June 30, 2017, the Company received an additional 15,000 Euro ($17,000) from the Investor, which was also recorded in accounts payable and accrued liabilities; however, the full purchase price was not received by June 30, 2017. The Company is currently negotiating with the Investor to complete the transaction, but at this time the Company believes that it is unlikely that the transaction will close in the future.

 

No shares of preferred stock were issued during the six month periods ended June 30, 2017 and 2016.

 

 

 

 

 

 

 

 

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.

 

The Company currently generates revenue under a development agreement. Additionally, after the launch of the Company's products, there can be no assurance that the Company will generate positive cash flow and there can be no assurances as to the level of revenues, if any, the Company may actually achieve from its planned principal operations.

 

OVERVIEW

 

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

 

The Company's success will depend on its ability to prove that Elafin is well tolerated by humans and its efficacy in the indicated diseases in order to demonstrate a favorable benefit/risk balance. There can be no assurance that the Company will receive government approval for the use of Elafin in further clinical trials or its use as a drug in any of the intended applications.

 

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

 

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

 

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

 

 

 

 

The tolerability of Elafin in healthy male subjects was demonstrated in a Phase I clinical single dose escalating study. A placebo-controlled Phase II clinical trial on the effect of Elafin on the postoperative inflammatory reactions and postoperative clinical course was conducted in patients undergoing transthoracic esophagectomy for esophageal cancer. A further Phase II study, EMPIRE (Elafin Myocardial Protection from Ischemia Reperfusion Injury), an investigator initiated trial at Edinburgh University, was conducted to investigate the safety and efficacy of Elafin in coronary bypass surgery. The result from the EMPIRE trial which indicates that Elafin has cardioprotective properties by reducing the cardiac troponin I release has been published in 2015 (Alam et al., Heart 2015). Further details are described 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.

  

In January 2015, our subsidiary signed a contract with a contract research organization (“CRO”) for conducting a pivotal clinical trial with Elafin for the prophylactic treatment of acute postoperative complications after resection of esophageal cancer (“POSTCOM TRIAL”). In addition, our subsidiary commissioned the GMP manufacturing of the study drug. In December 2015, the EMA pediatric committee (“PDCO”) agreed that no investigations in pediatric populations will be performed, as children are almost not affected by this kind of cancer. We plan to conduct the POSTCOM TRIAL at up to 10 sites in the European Union and it is expected to enroll 80 patients. There are no updates at this time.

 

In February 2016, the results of a biodistribution study with radiolabeled Elafin were published (Kaschwich et al., Drug Metab Pharmacokinet 2016). The researchers found high accumulation in the kidney and concluded that this could be of great importance in the future as within the treatment of reperfusion injury of the kidney.

 

In June 2016, we announced that our subsidiary has been awarded a BFEI grant (the “Grant”) from the German State of Schleswig-Holstein. The Grant has a volume of up to Euro 874,000 and will be used for the R&D program to develop a new formulation of Proteo's lead compound Elafin. If effective, a new Elafin formulation would allow Proteo to extend the development pipeline to treat chronic diseases, such as pulmonary arterial hypertension (PAH).

 

On September 9, 2016, we 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 Euro 1.00 per share, for an aggregate purchase price of Euro 1,000,000. The sale was to occur no later than March 30, 2017. However, the Investor failed to deliver the purchase price. We are currently negotiating with the Investor to complete the transaction, but at this time we believe it is unlikely that the transaction will close in the future. See Note 9 to the accompanying condensed consolidated financial statements for additional information.

 

In September 2016 we signed an agreement with a third party within the framework of our collaboration with Marlene Rabinovitch at Stanford University for an animal toxicity program for the use of Elafin in the treatment of pulmonary arterial hypertension (“PAH”), following the Pre-Investigational New Drug Application (“PIND”) Meeting with the US Food and Drug Administration (“FDA”) for discussing the development strategies for Elafin to be used for the treatment of PAH, occurred in November 2015.

 

In April 2017, we received the final report of the respiratory safety pharmacology study in rats. The study was conducted by a third party laboratory in the US. It was conducted in accordance with the FDA “Good Laboratory Practice for Nonclinical Laboratory Studies” (GLP). The objective of this study was to evaluate the acute respiratory effects of Elafin when administered subcutaneously to rats. Single subcutaneous administrations of Elafin to rats resulted in no test article-related changes in the measured respiratory parameters (respiratory frequency, tidal volume, or minute volume) and were well tolerated.

 

RESULTS OF OPERATIONS

 

REVENUES

 

Revenue reported represents income recognized under the Development Agreement, as described above and in Note 5 to the accompanying condensed consolidated financial statements. Approximately $58,000 and $45,000 was recognized as development income during the three-month periods ended June 30, 2017 and 2016, respectively. Approximately $96,000 and $80,000 was recognized as development income during the six-month periods ended June 30, 2017 and 2016, respectively. The increases are consistent with the increases to operating expenses, as discussed below.

 

 

 

 

OPERATING EXPENSES

 

The Company's operating expenses for the three-month and six-month periods ended June 30, 2017 were approximately $82,000 and $120,000, respectively, an increase of approximately $60,000 and $17,000, respectively, over the same periods of the prior year. General and administrative expenses (mostly accounting and professional fees) for the three-month and six-month periods ended June 30, 2017 increased $14,000 and $16,000 respectively due to patent costs incurred in 2017. As Elafin has not received regulatory approval, all patent costs are expensed as incurred. Research and development expenses increased $46,000 and $2,000 over the same three-month and six-month periods, respectively. The increase in research and development expenses for the three-month periods was primarily due to $83,000 of Grant funds recorded in 2016, which were netted against research and development expenses. These were recorded in connection of the signing of the Grant agreement during the second quarter of 2016, but they reimbursed the Company for certain expense going back to the beginning of 2016. Grant reimbursements offsetting research and development expenses approximated $52,000 and $83,000 for the three-month periods ended June 30, 2017 and 2016, respectively, and $102,000 and $83,000 for the six-month periods ended June 30, 2017 and 2016, respectively. Research and development expenses, excluding Grant reimbursements, increased $16,000 and $21,000 for the three-month and six-month periods ended June 30, 2017, respectively, over the same periods in 2016. These increases are primarily due to the hire of one new research employee in February 2017.

 

INTEREST AND OTHER INCOME (EXPENSE)

 

Interest and other income (expense), net for the three-month and six-month periods ended June 30, 2017, respectively, decreased by approximately $128,000 and $98,000 over the same periods in 2016. The decrease was driven primarily by foreign currency transaction losses during 2017 due to a strengthening of the Euro compared to the U.S. Dollar. Foreign currency transaction gains and losses were primarily due to unrealized gains and losses on accrued licensing fees related to the Licensing Agreement, which is denominated in Euro.

   

INCOME TAXES

 

There is no material income tax expense recorded for the six-month periods ended June 30, 2017 and 2016, due to the Company's net losses. The Company had a deferred tax asset of $2,333,000 at June 30, 2017 relating primarily to tax net operating loss carryforwards, as discussed below, and temporary differences related to the recognition of accrued licensing fees. Full valuation allowances have been established against these deferred tax assets as it is likely that the Company will not be able to utilize them.

 

The Federal NOL expires in varying years through 2025. The foreign net operating loss relates to Germany and does not have an expiration date. In the event the Company were to experience a greater than 50% change in ownership, as defined in Section 382 of the Internal Revenue Code, the utilization of the Company's Federal NOLs could be restricted.

 

FOREIGN CURRENCY TRANSLATION ADJUSTMENTS

 

The Company experienced other comprehensive gains (losses) related to foreign currency translation adjustments of approximately $49,000 and ($14,000) during the three-month periods ended June 30, 2017 and 2016, respectively and $60,000 and $12,000 during the six-month periods ended June 30, 2017 and 2016, respectively. The changes are primarily due to a fluctuating U.S. Dollar (our reporting currency) compared to the Euro (our functional currency) during the periods.

 

LIQUIDITY AND CAPITAL RESOURCES

 

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

 

The Company received approximately 75,000 Euro and 175,000 Euro under the Development Agreement during the six-month periods ended June 30, 2017 and 2016, respectively. The Company expects to receive approximately 1.9 million Euros in future periods under this agreement.

 

In June 2016, the German State of Schleswig-Holstein granted PBAG approximately 874,000 Euro (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 124,000 Euro were received during the six-month period ended June 30, 2017. PBAG submitted for the reimbursement of additional eligible expenses approximating 15,000 Euro. The Company expects to receive approximately 596,000 Euro in future periods under this Grant.

 

 

 

 

In September 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. See Note 9 to the accompanying consolidated financial statements for additional information.

 

In April 2017, Dr. Wiedow agreed in writing to waive any non-payment defaults under the License Agreement and to defer all current payments to June 2020. See Note 6 to the accompanying consolidated financial statements for the payment terms under the License Agreement.

 

The Company has cash approximating $154,000 as of June 30, 2017 to support current and future operations. This is an increase of $12,000 over the December 31, 2016 cash balance of approximately $142,000. Such cash is held by the Subsidiary in Germany in Euro. The Company does not intend to repatriate any amount of this cash to the United States as it will be used to fund the Subsidiary’s continued operations. Management believes that the Company will generate sufficient revenues under the Development Agreement to fund its development activities over the next 2 years. Given the Company's current cash on hand, anticipated collections under the Development Agreement and collections under the grant of the German State of Schleswig-Holstein, management believes the Company has sufficient cash on hand to cover its operations for the next 2 years. As for periods beyond the next 2 years, we expect to continue to direct the majority of our research and development expenses towards the development of Elafin. It is extremely difficult for us to reasonably estimate all future research and development costs associated with Elafin due to the number of unknowns and uncertainties associated with preclinical and clinical trial development.

   

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

 

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

 

As a result of the foregoing, the Company's success will largely depend on its ability to generate revenues from out-licensing activities, secure additional funding through the sale of its Common/Preferred Stock and/or the sale of debt securities. There can be no assurance, however, that the Company will be able to generate revenues from out-licensing activities and/or to consummate debt or equity financing in a timely manner, or on a basis favorable to the Company, if at all. If we are unable to secure additional financing when needed, we may choose to delay or reduce other spending including Elafin research and development spending. 

 

RESEARCH SUPPLIES

 

The Company’s capitalized research supplies, which are all held by PBAG in Germany, increased from $100,000 at December 31, 2016 to $109,000 at June 30, 2017, primarily due to a strengthening Euro relative to the U.S. Dollar.

 

GRANT FUNDS RECEIVABLE

 

Grant funds receivable decreased from $47,000 at December 31, 2016 to $17,000 at June 30, 2017. The Company received approximately $132,000 during 2017 and submitted an additional $17,000 for reimbursement.

 

RECEIVABLES FROM DEVELOPMENT AGREEMENT

 

Receivables related to the Development Agreement approximating $37,000 at December 31, 2016 were collected during the three-month period ended March 31, 2017. An additional receivable of $29,000 was recorded at June 30, 2017, and such amount was collected during July, 2017.

 

 

 

 

DEFERRED REVENUES

 

Deferred revenues related to the Development Agreement had a translated balance of approximately $162,000 at June 30, 2017, a $12,000 decrease from the balance at December 31, 2016. The decrease was driven by the recognition of revenues during the period, net of additional deferrals approximating $71,000.

 

ACCRUED LICENSING FEES

 

Accrued licensing fees increased from $600,000 at December 31, 2016 to $651,000 at June 30, 2017, due to a strengthening of the Euro compared to US Dollar. The Licensing Agreement is denominated in Euro, and the accrued licensing fee was 570,000 Euro at both June 30, 2017 and December 31, 2016.

 

OTHER LIABILITIES

 

Other liabilities at 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. Other liabilities increased by $22,000 to $134,000 at June 30, 2017 due to certain 2017 employee compensation that was also deferred to 2018.

  

OFF BALANCE SHEET ARRANGEMENTS

 

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

 

CAPITAL EXPENDITURES

 

None significant.

 

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

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

  

ITEM 4.   CONTROLS AND PROCEDURES

 

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 June 30, 2017. Based on that evaluation, Ms. Bargmann concluded that as of June 30, 2017, 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.

 

Changes in Internal Control Over Financial Reporting

 

Our management, with the participation of Birge Bargmann, our 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 have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

PART II - OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS.

 

None.

 

ITEM 1A. RISK FACTORS.

 

Not required for SRCs.

 

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

 

None.

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4.  MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5.  OTHER INFORMATION.

 

None.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ITEM 6.  EXHIBITS.

 

Exhibits:

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SIGNATURES

 

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

 

	PROTEO, INC.
Dated: August 9, 2017	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)