Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
þ
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨
No
þ
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
þ
No
¨
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate 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
þ
No
o
Indicate by check mark
if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
þ
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
þ
The aggregate market value of the registrant’s
voting equity held by non-affiliates of the registrant, computed by reference to the closing sales price for the registrant’s
common stock on June 29, 2012, as reported on the OTCQB, was approximately $3,229,000. (1)
Number of shares of Common Stock outstanding
as of March 20, 2013: 23,879,350
1) Excludes 12,744,000
shares of common stock held by directors and officers, and any stockholder whose ownership exceeds five percent of the shares outstanding
as of June 29, 2012
This Annual Report includes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Since we are a "penny stock"
company (see Item 5 of Part II of this Annual Report), the safe harbor for forward-looking statements provided by the Private
Securities Litigation Reform Act of 1995 does not apply to us. We note, however, that such forward-looking statements involve assumptions,
known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the
"Company" (as that term is defined below) to be materially different from any future results, performance,
or achievements expressed or implied by such forward-looking statements contained in this Form 10-K. Such potential risks and uncertainties
include, without limitation, Food and Drug Administration ("FDA") and other regulatory approval of our products, patent
protection on our proprietary technology, product liability exposure, uncertainty of market acceptance, competition, technological
change, and other risk factors detailed herein and in our other filings with the Securities and Exchange Commission (the "SEC").
Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning
our Company and our business made elsewhere in this annual report as well as other public reports filed with the SEC. The
forward-looking statements are made as of the date of this Form 10-K, and we assume no obligation to update the forward-looking
statements or to update the reasons actual results could differ from those projected in such forward-looking statements.
Such statements are based on management's beliefs
and assumptions, and on information currently available to management. Forward-looking statements include the information concerning
possible or assumed future results of operations of the Company set forth under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Forward-looking statements also include statements in which words such as
"may," "should, " "expect," "anticipate," "intend," "plan," "believe,"
"estimate," "consider," “hopes,” “project,” “will,” their opposites and
similar expressions are used.
Forward-looking statements are not guarantees
of future performance. They should not be regarded as a representation by us or any other person that the objectives or plans
will be achieved. The Company's future results and shareholder values may differ materially from those expressed in these forward-looking
statements. Readers are cautioned not to put undue reliance on any forward-looking statements.
PART I
ITEM 1 - BUSINESS
COMPANY OVERVIEW- HISTORY
Proteo, Inc. is a Nevada corporation formed
on December 18, 1992. Proteo, Inc. has one wholly owned subsidiary, Proteo Biotech AG ("PBAG"), a German corporation
(Proteo, Inc. and PBAG are hereinafter collectively referred to as "we", "our", the "Company" and
"Proteo"). The Company's common stock is currently quoted on the OTCQB under the symbol "PTEO". Effective December
31, 2004, the Company's other wholly owned subsidiary, Proteo Marketing, Inc. ("PMI") was merged into the Company.
PMI was incorporated in the State of Nevada
and began operations on November 22, 2000. In December 2000, PMI entered into a reorganization and stock exchange agreement with
PBAG, and as a result, PBAG became a wholly owned subsidiary of PMI.
During 2001, PMI entered into a Shell Acquisition
Agreement (the "Acquisition Agreement") with Trivantage Group, Inc. ("Trivantage"), a public "shell"
company, in a transaction accounted for as a public shell reverse merger. In accordance with the Acquisition Agreement, PMI first
acquired 176,660,280 shares (1,313,922 post-reverse split shares, as described below) of Trivantage's common stock representing
90% of the issued and outstanding common stock of Trivantage, in exchange for a cash payment of $500,000 to the sole shareholder
of Trivantage. Secondly, Trivantage completed a one for one-hundred-fifty reverse stock split. Finally, effective April 25, 2002,
the shareholders of PMI exchanged their shares of PMI for an aggregate of 20,286,512 shares of Trivantage to effect a public shell
reverse merger between PMI and Trivantage. Subsequently, Trivantage changed its name to Proteo, Inc.
DESCRIPTION OF BUSINESS
Proteo is a clinical stage drug development
company and intends to develop, promote and market pharmaceuticals and other biotech products. The Company's focus is on the development
of anti-inflammatory treatments for rare diseases with significant unmet needs.
The Company is engaged in the development of
pharmaceuticals based on the body's own tools and weapons to fight inflammatory diseases. Specifically, we are focusing our research
on the development of drugs based on the human protein Elafin. We strongly believe that Elafin will be useful in the treatment
of post-surgery damage to tissue, complications resulting from organ transplantation, pulmonary hypertension, serious injuries
caused by accidents, cardiac infarction, as well as other diseases.
Several countries have passed laws or made
provisions in order to make the development of drugs for rare diseases financially attractive to the pharmaceutical industry. Pharmaceutical
companies developing new medicaments for the treatment of rare diseases (orphan drugs) receive assistance for their approval and
marketing. Orphan drugs are pharmaceuticals for the treatment of rare diseases, which do not affect more than 200,000 people in
the United States (“US”) and about 250,000 people in the European Union according to the respective legislations. The
advantage of developing orphan drugs is seen in the fact that companies can apply for an orphan drug designation in the US
or European Union. This is associated with reduced fees to regulatory agencies and guarantees 7-year or 10-year marketing exclusivity
in the US and European Union, respectively, on drug sales for the first company to obtain marketing approval of a particular drug
in the respective regions.
In contrast to drug development for widespread
diseases, orphan drug development costs can be significantly lower, typically 75% lower. Compared with other drugs, fewer requirements
have to be met for the clinical trials, particularly those relating to the number of patients. The marketing expenses of orphan
drugs are significantly lower, as treatment is generally conducted by a limited number of specialized doctors. The Company believes
that it is favorable to target orphan drug indications in the field of post-surgery damage to tissue, organ transplantation, and
pulmonary arterial hypertension.
Proteo has obtained Orphan
drug designations for the use of Elafin in treatment of pulmonary arterial hypertension and chronic thromboembolic
pulmonary hypertension as well as for the treatment of esophagus carcinoma. In the latter indication especially the
postoperative inflammation, the main reason for postoperative morbidity, will be targeted by Elafin treatment. If Proteo is
the first to obtain marketing approval to sell Elafin for these uses, it will secure marketing exclusivity in the applicable
jurisdiction for a period of time as discussed above.
Proteo’s pharmaceutical Elafin is a copy
of a naturally occurring human anti-inflammatory substance. It is a natural antagonist of tissue destroying enzymes (proteases
such as elastase and proteinase 3) that participate in the inflammatory mechanism of many diseases. Elafin’s ability to block
the proteases that cause these undesirable effects makes it a promising drug for the treatment of various inflammatory diseases
and posttraumatic inflammatory complications. The beneficial anti-inflammatory effects of Elafin have been demonstrated by numerous
preclinical studies in animal models of human diseases.
For the development of its lead product Elafin
Proteo has established a network of globally renowned research institutes, physicians and hospitals in Europe and the US. The development
of Elafin has been widely supported by public grants. Worldwide leading funding bodies, such as the American National Institutes
of Health (NIH) and the British Medical Research Council (MRC), support preclinical and clinical studies on Elafin with high volume
grants.
Proteo currently focuses on the clinical development
of Elafin for treatment of postoperative inflammatory complications in the surgical therapy of esophagus carcinoma. Clinical trials
for further indications and preclinical research into new fields of application are conducted in cooperation with Universities
and our licensing partner Minapharm.
Our strategy and goal is to develop into a
profitable company by developing drug candidates for orphan diseases with high medical needs. The company intends to generate revenue
by out-licensing and marketing activities. To date, the Company has not had profitable operations. Furthermore, we do not anticipate
that we will have profitable operations in the near future.
The products and technologies we intend to
develop will require significant commitments of personnel and financial resources. However, we do not believe that any of our planned
products will produce sufficient revenues in the next several years to support us financially. To achieve profitable operations,
the Company, independently or in collaboration with others, must successfully identify, develop, manufacture, obtain regulatory
approval for and market proprietary products.
CLINICAL DEVELOPMENT
After developing a production procedure for
Elafin, the Company has initiated clinical trials to achieve governmental approval for the use of Elafin as a drug in Europe. For
this purpose, the Company has contracted an experienced Contract Manufacturing Organization in Europe to produce Elafin in accordance
with GMP standards as required for clinical trials. The excellent tolerability of Elafin in human subjects was demonstrated in
a Phase I clinical single dose escalating study. The drug candidate is currently being investigated in clinical trials for three
diseases:
Treatment of Esophagus Cancer
Esophagus cancer mainly occurs in individuals
over the age of 50. In Europe and the US, 80,700 patients contract this disease annually. Complete surgical removal of the tumor
offers the best chance of a cure. This surgical procedure, which can last up to 6 hours, is one of the most invasive surgical interventions
and is associated with delayed recovery of the patients. The postoperative inflammatory reaction seriously affects the lungs, resulting
in the need for artificial ventilation and prolonged stays in intensive care units. Surgery for esophagus carcinoma is associated
with frequent and severe postoperative complications. Pulmonary complications are most frequent, occurring in 30% – 40% of
patients and these may progress to respiratory failure. Once established, respiratory failure is often resistant to current therapies
and the mortality rate is about 40%, with most patients dying within the first 2 – 3 weeks. The most frequent causes of death
are multiple organ failure, sepsis and hypoxemia. These complications are a major source of postoperative morbidity and mortality
in patients undergoing surgery for esophagus carcinoma. The alleviation of these postoperative inflammatory complications would
considerably improve the outcome of treatment for this disease.
A double-blind, randomized, 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 esophagectomy for esophagus carcinoma. We announced the favorable influence of Elafin treatment
on the postoperative recovery in February 2011. The trial showed that intravenously administered Elafin has a very clear positive
effect on the period of recovery: 63 percent of the Elafin treated patients required only one day of intensive care. All patients
in the placebo group needed several days of postoperative intensive medical care. In January 2010 Orphan Drug Designation was awarded
to the Company by the European Commission for the use of Elafin in the treatment of esophagus carcinoma.
Treatment of Coronary Bypass Patients
Coronary artery bypass surgery is a surgical
procedure performed to relieve angina pectoris and reduce the risk of death from coronary artery disease. It is the most frequently
performed operation in cardiovascular surgery In Europe and the US about 1 bypass operation is performed on 1,200 inhabitants per
year or about 673,000 annually. Coronary artery bypass surgery is associated with a substantial risk of myocardial infarction,
pulmonary and renal failure as well as stroke. No specific treatment exists which suppresses myocardial reperfusion injury and
systemic inflammation occurring after coronary artery bypass surgery. Inflammation of cardiac muscle and the resulting muscle injury
after a bypass operation remain a frequent and unresolved problem. In the view of cardiovascular surgeons there is an urgent need
for therapeutics that can be administered to prevent those postoperative inflammatory complication affecting heart, lungs and kidneys
to improve the overall benefit of bypass surgery for the patients and to reduce the risk of deleterious outcomes.
In September 2009, the Company signed a Memorandum
of Understanding with the University of Edinburgh. Within the framework of collaboration, the recruitment and treatment of patients
into the EMPIRE (Elafin Myocardial Protection from Ischaemia Reperfusion Injury) Study, which is investigating the efficacy of
Elafin in preventing cardiac complications of coronary bypass surgery, was started in the third quarter of 2011. EMPIRE is a placebo-controlled,
double-blinded, monocentric Phase-II study with 80 patients. In June 2012, we announced that the planned interim safety analysis
of the EMPIRE study has already been conducted. No safety concerns were raised by the Data Monitoring Committee and the continuation
of the trial was recommended. The recruitment has been better than expected; currently, approximately 80 percent of the patients
have been treated. The study is being performed under the supervision of the cardiologist Dr. Peter Henriksen at NHS Lothian’s
Edinburgh Heart Centre in association with The University of Edinburgh, one of the leading European universities in the area of
cardiovascular research. The study is funded by the Medical Research Council (MRC) and Chest Heart & Stroke Scotland (CHSS)
with funding in excess of 500,000 GBP.
Treatment of Kidney Transplantation
Kidney transplantation is the
only long-term treatment option for end stage renal disease and is recognized to be one of the most successful organ
transplants. Within the European Union and the US, approximately 31,800 kidney transplantations are performed per year. In
spite of improvements in surgical techniques, postoperative patient care, immune suppression and HLA-matching, the failure of
organ grafts due to immune rejection and premature degeneration still represents one of the major obstacles in
transplantation medicine. Chronic allograft nephropathy (CAN) is the most common cause of renal graft failure, which results
in degeneration of the kidney parenchymal and vascular tissue and leads to a progressive decline in allograft function.
Ischemia-reperfusion injury following kidney transplantation has been identified as a significant cause of CAN. Graft
ischemia occurs during organ removal, flushing, transportation and transplantation and leads to limited tissue damage. On
revascularization or reperfusion, leukocytes infiltrate the tissue and initiate an inflammatory response, which results in a
considerable exacerbation of the ischemic cellular degeneration. This damage to transplanted organs is a major factor
influencing the appearance of subsequent T-cell-mediated acute rejection episodes, both early after transplantation and
during later chronic rejection. Consequently, suppressing ischemia reperfusion injury is a potentially effective approach to
increasing organ viability after surgery and improving the long-term survival of organ grafts.
In August 2007, we entered into a license agreement
with Minapharm Pharmaceuticals SAE ("Minapharm"), a well established Egyptian pharmaceutical company based in Cairo,
for clinical development, production and marketing of Elafin. We have granted Minapharm the right to exclusively market Elafin
in Egypt and certain Middle Eastern and African countries. Minapharm has initiated a Phase II clinical trial on the use of Elafin in kidney transplantation patients. This trial is concerned with
the prevention of acute organ rejection and will be conducted at the University
of Cairo. The start and conduct of the trial may be influenced by the actual political situation in Egypt. Actually, the consequences
cannot be overseen by management.
PRECLINICAL RESEARCH
Pulmonary Arterial Hypertension and Lung
Diseases
Pulmonary arterial hypertension (PAH) is
a life-threatening disease in which the pressure in a patient's pulmonary arteries becomes dangerously high. If untreated,
patients have a 40% chance of surviving five years. While the advent of new therapies has likely improved the five year
survival rate to approximately 60%, there remains no specific cure for the disease. Despite the treatment progress during the
last two decades there is still an unmet medical need for additional treatments. Proteo’s Elafin blocks the activity of
enzymes that are involved in pulmonary arterial hypertension. We believe that this makes Elafin a highly promising compound
for the treatment of the disease with a new mode of action. In preclinical studies, the treatment with Elafin attenuated
fully developed PAH in an animal model with a pronounced and significant improvement of the vascular pathology, parameters of
pulmonary hemodynamics, and right ventricular function. In humans, the obliteration of distal pulmonary arteries leads to a
severe increase in pulmonary artery pressure and subsequently to right ventricular dysfunction. Reversal of this obliteration
is a key goal in the treatment of PAH.
Since 2008, the Company has been cooperating
with scientists at Stanford University in California with respect to the preclinical development in the field of pulmonary arterial
hypertension and ventilator-induced injury. The group presented preclinical data on the Company’s drug substance Elafin at
the Annual International Conference of the American Thoracic Society in New Orleans in May 2010. The data showed that the treatment
with Elafin during mechanical ventilation largely prevented the inflammation in lungs of newborn mice. In August 2010 the cooperation
agreement with Stanford University was extended by a further project. In the third quarter of 2011 the Stanford School of Medicine
research team led by Marlene Rabinovitch, was awarded a five-year, $10.8 million grant from the National Heart, Lung and Blood
Institute for the study of Elafin’s ability to treat three distinct lung diseases. The grant will fund one preclinical project
for each disease, all three of which are notoriously difficult to treat: pulmonary hypertension, ventilator-induced injury of the
immature lung in premature babies, and chronic lung transplant rejection. The group has published further evidence for the use
of Elafin in the treatment of newborn infants whose lungs are incompletely developed in June 2012 (Am J Physiol Lung Cell Mol Physiol).
Vascular damage
The Company entered into an agreement with
the Molecular Imaging North Competence Center (MOIN CC) at the Christian-Albrechts-University of Kiel in April 2010. Under this
agreement the effects of Elafin on vascular changes are being examined in animal models. The federal state of Schleswig-Holstein
is backing the creation and infrastructure of MOIN CC with 8.2 million EUR using funding from the federal state and the European
Regional Development Fund (ERDF), as well as resources from the second German economic stimulus package. The researchers presented
results of a biodistribution study with radiolabeled Elafin at the 50th annual meeting of the German Society of Nuclear Medicine
(DGN) held in Bremen, April 2012. They 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.
Life-threatening Infections
In June 2010, the Company has signed a cooperative
research and development agreement with the US Army Medical Research Institute of Infectious Diseases (“USAMRIID”).
This agreement allows USAMRIID to use Proteo's Elafin and related scientific data in order to plan and conduct preclinical research
on the development of new therapeutic strategies to combat life-threatening infectious diseases, in an investigation into the use
of Elafin as a co-therapy with antibiotics.
OUR SUBSIDIARY
PBAG, our operating subsidiary, was formed
in Kiel, Germany on April 6, 2000. PBAG is in the business of developing pharmaceutical products based on the human protein called
Elafin and possible by-products thereof as well as related technologies. The Chief Executive Officer of PBAG is currently Birge
Bargmann. The members of the Supervisory Board of PBAG are Oliver Wiedow, MD, Barbara Kahlke, PhD and Florian Wegner. PBAG has
four employees as of December 31, 2012.
COLLABORATION WITH OTHER COMPANIES
The Company actively seeks further out-licensing
partners, co-development partnerships and other collaborations with third parties to generate revenues and/or to expedite the Company's
product development. However, there can be no assurance that the Company's efforts to build such alliances will be successful at
any time or in any way.
COMPETITION
The market for our planned products and technologies
is highly competitive, and we expect competition to increase. We compete with many other companies involved in the development
of pharmaceuticals, most of which are larger than Proteo. Some of our anticipated competitors offer a broad range of equipment,
supplies, products and technology, including many of the products and technologies contemplated to be offered by us. To the extent
that customers exhibit loyalty to the supplier that first supplies them with a particular product or technology, our competitors
may have an advantage over us with respect to such products and technologies. Additionally, many of our competitors have, and will
continue to have, greater research and development, marketing, financial and other resources than us and, therefore, represent
and will continue to represent significant competition in our anticipated markets. As a result of their size and the breadth of
their product offering, certain of these companies have been and will be able to establish managed accounts by which, through a
combination of direct computer links and volume discounts, they seek to gain a disproportionate share of orders for health care
products and technologies from prospective customers. Such managed accounts present significant competitive barriers for us. It
is anticipated that we will benefit from their participation in selected markets, which, as they expand, may attract the attention
of our competitors. The business of research and development of pharmaceuticals is intensely competitive. Major companies with
immense financial and personal resources are also engaged in this field.
The patents related to the substance Elafin
expired in 2012. Elastase inhibitors such as Elafin have been under research and development in the pharmaceutical industry for
decades. Currently, hundreds of related patents have been granted. Most of these substances are produced synthetically, and are
not applicable in the treatment of human diseases. Currently two elastase inhibitors are used as pharmaceuticals, alpha-1-antitrypsin
worldwide and Sivelestat in Japan and Korea.
Alpha-1-antitrypsin
Human blood naturally contains relatively large
amounts of alpha-1-antitrypsin. Alpha-1-antitrypsin is marketed for more than 20 years currently by Grifols, CSL Behring and Baxter
as a plasma-derived product to supply patients with genetic deficiency of functional alpha-1-antitrypsin.
Sivelestat
Ono Pharmaceutical Co. Ltd., in Japan has developed
the synthetic elastase inhibitor Sivelestat. Ono received approval in 2002 to use Sivelestat as a drug for the indication "Amelioration
of acute lung disease accompanying generalized inflammatory syndrome" in Japan and in Korea (Dong-A, Pharmaceutical Co., Ltd.,
Seoul) in 2006.
GOVERNMENT REGULATION
The Company is, and will continue to be, subject
to governmental regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances
Control Act, and other similar laws of general application, as to all of which we believe we are in material compliance. Any future
change in, and the cost of compliance with, these laws and regulations could have a material adverse effect on the business, financial
condition, and results of operations of the Company.
Because of the nature of our operations, the
use of hazardous substances, and our ongoing research and development and manufacturing activities, we are subject to stringent
federal, state and local and foreign laws, rules, regulations and policies governing the use, generation, manufacturing, storage,
air emission, effluent discharge, handling and disposal of certain materials and wastes. Although we believe that we are in material
compliance with all applicable governmental and environmental laws, rules, regulations and policies, there can be no assurance
that the business, financial conditions, and results of operations of the Company will not be materially adversely affected by
current or future environmental laws, rules, regulations and policies, or by liability occurring because of any past or future
releases or discharges of materials that could be hazardous.
Additionally, the clinical testing, manufacture,
promotion and sale of a significant majority of the products and technologies of the Company, if those products and technologies
are to be offered and sold in the United States, are subject to extensive regulation by numerous governmental authorities in the
United States, principally the FDA and corresponding state regulatory agencies. Additionally, to the extent those products and
technologies are to be offered and sold in markets other than the United States, the clinical testing, manufacture, promotion and
sale of those products and technologies will be subject to similar regulation by corresponding foreign regulatory agencies. In
general, the regulatory framework for biological health care products is more rigorous than for non-biological health care products.
Generally, biological health care products must be shown to be safe, pure, potent and effective. There are numerous state and federal
statutes and regulations that govern or influence the testing, manufacture, safety, effectiveness, labeling, storage, record keeping,
approval, advertising, distribution and promotion of biological health care products. Non-compliance with applicable governmental
requirements can result in, among other things, fines, injunctions, seizures of products, total or partial suspension of product
marketing, failure of the government to grant pre-market approval, withdrawal of marketing approvals, product recall and criminal
prosecution.
PATENTS, LICENSES & ROYALTIES
On December 30, 2000 the Company entered into
an exclusive worldwide license agreement (the “License Agreement”) with Dr. Wiedow, which was amended by an Amendment
Agreement to the License Agreement (the "Amendment") dated December 23, 2008. These agreements enable the Company
to develop, manufacture or sell Elafin. The Amendment modified the annual payments and also 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. Pursuant to
the License Agreement, as amended, Dr. Wiedow may terminate the License Agreement in the event of a breach which is not cured within
90 days following written notice of such breach. In addition, Dr. Wiedow may terminate the License Agreement immediately
in the event of the Company’s bankruptcy, insolvency, assignment for the benefit of creditors, liquidation, assignment of
all or substantially all of its assets, failure to continue to develop Elafin. After any termination, to the extent
permitted by applicable law, the Company will return all documents, information and data received by Dr. Wiedow and will immediately
cease to develop, manufacture or sell Elafin. Please see Management’s
Discussion and Analysis – Liquidity and Capital Resources, and Note 6 of the Consolidated Financial Statements included in
this Form 10-K, for financial information.
On November 15, 2004, the Company entered into
an exclusive worldwide license and collaboration agreement with ARTES Biotechnology GmbH ("ARTES"). This agreement enables
the Company to economically produce Elafin on a large scale by using the sublicensed yeast HANSENULA POLYMORPHA as a high performance
expression system. Rhein Biotech GmbH ("Rhein") has licensed the yeast to ARTES, who in-turn sublicensed it to the Company.
The agreement has a term of fifteen years with an annual license fee equal to the greater of 10,000 Euros or 2.5% royalties on
the future sales of Elafin. Should the license agreement between Rhein and ARTES terminate, Rhein will assume the sublicense agreement
with the Company under similar terms.
In August 2007, the Company's subsidiary entered
into an agreement with Rhein Minapharm ("Minapharm") for clinical development, production and marketing of Elafin. The
Company has granted Minapharm the right to exclusively market Elafin in Egypt and certain Middle Eastern and African countries. Under
this agreement, the Company had received upfront payments and may receive additional milestone-payments upon Minapharm's attainment
of certain clinical milestones as well as royalties on any future net product sales.
The original patents related to
the substance Elafin all expired in 2012. As a result, the Company will no longer be required to pay Astra Zeneca, Inc. a
royalty for the use of patents related to Elafin.
Please see Management’s Discussion and
Analysis – Interest and Other Income, and Note 6 of the Consolidated Financial Statements included in this Form 10-K, for
financial information.
EMPLOYEES
As of December 31, 2012, Proteo had four employees,
all working at our offices in Germany.
ITEM 1A. – RISK FACTORS
A smaller reporting company (“SRC”)
is not required to provide any information in response to Item 503(c) of Regulation S-K.
ITEM 1B. – UNRESOLVED STAFF COMMENTS
None
ITEM 2 - PROPERTIES
The Company has entered into several leases
for office and laboratory facilities. The aggregate monthly rental under the foregoing leases was approximately $4,700.
ITEM 3 - LEGAL PROCEEDINGS
The Company may from time to time be involved
in various claims, lawsuits, and disputes with third parties, actions involving allegations of discrimination, or breach of contract
actions incidental to the operation of its business. The Company is not currently involved in any litigation which it believes
could have a materially adverse effect on its financial condition or results of operations.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
PROTEO, INC. AND SUBSIDIARY
AND FOR THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31, 2012
PROTEO, INC. AND SUBSIDIARY
AND FOR THE PERIOD
FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31, 2012
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION/NATURE OF BUSINESS
Proteo, Inc. and Proteo Marketing, Inc. ("PMI"),
a Nevada corporation, which began operations in November 2000, entered into a reorganization and stock exchange agreement in December
2000 with Proteo Biotech AG ("PBAG"), a German corporation, incorporated in Kiel, Germany. Pursuant to the terms of the
agreement, all of the shareholders of PBAG exchanged their common stock for 2,500,000 shares of PMI common stock. As a result,
PBAG became a wholly owned subsidiary of PMI. Proteo Inc.'s common stock is quoted on the OTCQB under the symbol "PTEO".
During 2001, PMI entered into a Shell Acquisition
Agreement (the "Acquisition Agreement") with Trivantage Group, Inc. ("Trivantage"), a public "shell"
company, in a transaction accounted for as a reverse merger. In accordance with the Acquisition Agreement, PMI first acquired 176,660,280
shares (1,313,922 post-reverse split shares, as described below) of Trivantage's common stock representing 90% of the issued and
outstanding common stock of Trivantage, in exchange for a cash payment of $500,000 to the sole shareholder of Trivantage. Secondly,
Trivantage completed a one for one-hundred-fifty reverse stock split. Finally, effective April 25, 2002, the shareholders of PMI
exchanged their shares of PMI for an aggregate of 20,286,512 shares of Trivantage to effect a reverse merger between PMI and Trivantage.
Subsequently, Trivantage changed its name to Proteo, Inc. Effective December 31, 2004, PMI merged into Proteo, Inc. PBAG and Proteo,
Inc. are hereinafter collectively referred to as the "Company."
The Company intends to develop, promote and
market pharmaceuticals and other biotech products. The Company is focused on the development of pharmaceuticals based on the human
protein Elafin. Elafin is a human protein that naturally occurs in human skin, lungs, and mammary glands. The Company believes
Elafin may be useful in the treatment of post-surgery damage to tissue, complications resulting from organ transplantation, pulmonary
hypertension, serious injuries caused by accidents, cardiac infarction, as well as other diseases.
Since its inception, the Company has primarily
been engaged in the research and development of its proprietary product Elafin. Once the research and development phase is complete,
the Company will obtain the various governmental regulatory approvals for the marketing of Elafin. The Company is in the development
stage and has not generated any significant revenues from product sales. The Company believes that none of its planned products
will produce sufficient revenues in the near future. There are no assurances, however, that the Company will be able to obtain
regulatory approvals for marketing of Elafin, or if approved, that Elafin will be accepted in the marketplace.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
DEVELOPMENT STAGE
The Company has been in the development stage
since it began operations on November 22, 2000 and has not generated any revenues from operations and has incurred net losses since
inception of approximately $8,757,000. There is no assurance of any future revenues. At December 31, 2012, the Company has working
capital of approximately $692,000 and stockholders' equity of approximately $22,000.
The Company will require substantial additional
funding for continuing research and development, obtaining regulatory approval, and for the commercialization of its products.
Management has taken action to address these
matters. They include:
|
·
|
Retention of experienced management personnel with particular skills in the development of such products.
|
|
·
|
Attainment of technology to develop biotech products.
|
|
·
|
Raising additional funds through the sale of debt and/or equity securities.
|
The Company's products, to the extent they
may be deemed drugs or biologics, are governed by the United States Federal Food, Drug and Cosmetics Act and the regulations of
state and various foreign government agencies. The Company's proposed pharmaceutical products to be used with humans are subject
to certain clearance procedures administered by the above regulatory agencies. There can be no assurance that the Company will
receive the regulatory approvals required to market its proposed products elsewhere or that the regulatory authorities will review
the product within the average period of time.
Management plans to generate revenues from
product sales, but there are no purchase commitments for any of the proposed products. Additionally, the Company may generate revenues
from out-licensing activities. There can be no assurance that further out-licensing may be achieved and may 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 sales of 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.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
CONCENTRATIONS
The Company maintains substantially all of
its cash in bank accounts at a private German commercial bank. The Company's bank accounts at this financial institution
are presently protected by the voluntary Deposit Protection Fund of The German Private Commercial Banks. As such, the Company's
bank is a member of this deposit protection fund. The Company has not experienced any losses in these bank accounts.
The Company's research and development activities
and most of its assets are located in Germany. The Company's operations are subject to various political, economic, and
other risks and uncertainties inherent in Germany and the European Union.
OTHER RISKS AND UNCERTAINTIES
The Company's line of future
pharmaceutical products being developed by its German subsidiary are considered drugs or biologics, and as such, are
governed by the Federal Food and Drug and Cosmetics Act and by the regulations of state agencies and various
foreign government agencies. There can be no assurance that the Company will obtain the regulatory approvals required to
market its products. The pharmaceutical products under development in Germany will be subject to more stringent
regulatory requirements because they are recombinant proteins for use in humans. The Company has no experience in
obtaining regulatory approvals for these types of products. Therefore, the Company will be subject to the risks of
delays in obtaining or failing to obtain regulatory clearance and other uncertainties, including financial, operational,
technological, regulatory and other risks associated with an emerging business, including the potential risk of
business failure.
As substantially all of the Company's operations are in
Germany, they are exposed to risks related to fluctuations in foreign currency exchange rates. The Company does not
utilize derivative instruments to hedge against such exposure.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include
the accounts of Proteo, Inc. and Proteo Biotech AG, its wholly owned subsidiary. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Furthermore, the Company classifies noncontrolling
interests (previously referred to as "minority interest") as part of consolidated net earnings and includes the accumulated
amount of noncontrolling interests as part of stockholders' equity. Earnings per share reflects amounts attributable only to the
Company, excluding noncontrolling interests. Increases and decreases in the Company's controlling financial interests in consolidated
subsidiaries will be reported in equity similar to treasury stock transactions. If a change in ownership of a consolidated subsidiary
results in loss of control and deconsolidation, any retained ownership interests are remeasured with the gain or loss reported
in net earnings. The Company has a substantive contractual arrangement that specifies the attribution of net earnings and loss
not to exceed the noncontrolling interest.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
STARTUP ACTIVITIES
The Other Expenses Topic (Start-Up Costs Sub-topic)
of the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC” or
“Codification”) requires that all non-governmental entities expense the costs of startup activities as incurred,
including organizational costs.
GRANTS
At times the Company has received grants from
the German government which were used to fund research and development activities and the acquisition of equipment. Grant
receipts for the reimbursement of research and development expenses were offset against such expenses in the accompanying
consolidated statements of operations and comprehensive loss when the related expenses are incurred. Grants related to
the acquisition of tangible property were recorded as a reduction of such property's historical cost.
The Company has not received any grant funds
for the years ended December 31, 2012 and 2011, nor has it applied for any additional grants during such periods.
USE OF ESTIMATES
The Company prepares its consolidated
financial statements in conformity with GAAP, which requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues (if any) and expenses during the reporting
period. Significant estimates made by management include, among others, realizability of long-lived assets and estimates
for deferred tax asset valuation allowances. Actual results could materially differ from such estimates.
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 and cash equivalents, accounts payable
and accrued liabilities, approximate their fair value at December 31, 2012 and 2011 due to their short-term nature. The Company
did not have any assets or liabilities that are measured at fair value on a recurring or non-recurring basis during the years ended
December 31, 2012 and 2011 and for the period from November 22, 2000 (Inception) through December 31, 2012.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
FOREIGN CURRENCY FINANCIAL REPORTING
Assets and liabilities of the Company's
German operations are translated from Euros (the functional currency) into U.S. dollars (the reporting currency)
at period-end exchange rates. Expense and grant receipts are translated at weighted average exchange rates for the
period. Net exchange gains or losses resulting from such translation are excluded from the consolidated statements
of operations and are included in comprehensive loss and accumulated in a separate component of stockholders'
equity. Accumulated gains approximated $187,000 and $153,000 at December 31, 2012 and 2011, respectively.
The Company records
payables related to a certain licensing agreement (Note 6) in accordance with the Foreign Currency Matters Topic of the Codification.
Quarterly commitments under such agreement are denominated in Euros. For each reporting period, the Company translates the quarterly
amount to U.S. dollars at the exchange rate effective on that date. If the exchange rate changes between when the liability is
incurred and the time payment is made, a foreign exchange gain or loss results
The Company paid
30,000 Euros under this agreement during the year ended December 31, 2012 and realized a $3,000 gain. The Company made no payments
under this licensing agreement during the year ended December 31, 2011, and did not realize any significant foreign currency exchanges
gains or losses.
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 gain (loss) of approximately ($29,000) and $28,000 for the years ended December 31, 2012
and 2011, respectively, which are included in interest and other income (expense), net in the accompanying consolidated statements
of operations and comprehensive loss.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary
cash investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents consist
primarily of deposits with banks.
RESEARCH SUPPLIES
Research supplies inventory is stated at
cost, and is entirely comprised of research supplies and materials that are expensed as consumed.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
LONG-LIVED ASSETS
Property and equipment are recorded at
cost and depreciated using the straight-line method over their expected useful lives, which range from 3 to
14 years. Leasehold improvements are amortized over the expected useful life of the improvement or the remaining
lease term, whichever is shorter. Expenditures for normal maintenance and repairs are charged to income, and
significant improvements are capitalized. The cost and related accumulated depreciation or amortization of assets are
removed from the accounts upon retirement or other disposition; any resulting gain or loss is reflected in the
consolidated statements of operations and comprehensive loss.
The Codification requires that
certain long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. If the cost basis of a long-lived asset is greater than the projected future
undiscounted net cash flows from such asset, an impairment loss is recognized. Impairment losses are calculated as the
difference between the cost basis of an asset and its estimated fair value. Assets to be disposed are reported at the lower
of the carrying amount or fair value less costs to sell. Management believes that no indicators of impairment existed as of
or during the years ended December 31, 2012 and 2011. As noted in Subsequent Events below, during March 2013, management made the decision to close their
research plant as significant internal research and development was no longer deemed necessary. Capitalized plant costs at
December 31, 2012 of $195,000, net of accumulated depreciation of $159,000, will likely be written off in 2013. Other pieces
of laboratory equipment are currently being evaluated and may be disposed or sold in 2013.
REVENUE RECOGNITION
It is the Company's intent to recognize revenues
from future product sales at the time of product delivery. The Company believes that once significant operating revenues
are generated, the Company's revenue recognition accounting policies will conform to the Revenue Recognition Topic of the
Codification.
RESEARCH AND DEVELOPMENT
Research and development costs are charged
to operations as incurred. Grant funds received are reported as a reduction of research and development costs.
PATENTS AND LICENSES
The Company operates related to
the Elafin technology under a technology license agreement with a related party (see Note 6). Under such license
agreement, the Company has agreed to pay all costs related to new patents, patents pending, and patent maintenance associated
with the Elafin technology. The Company expenses such costs as incurred. The original patents related to Elafin all expired
in 2012; however, new patents are under development regarding the novel uses of Elafin.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
INCOME TAXES
The Company accounts for income taxes using
the liability method in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized
for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. A valuation allowance is provided for significant deferred tax assets when it
is more likely than not that such assets will not be recovered.
The Company also follows the provisions of
ASC 740-10 relating to accounting for uncertain tax positions. Under ASC 740-10, the Company must recognize the
tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial
statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized
upon ultimate resolution. The Company did not recognize any additional liabilities for uncertain tax positions as a
result of ASC 740-10. The Company expects any resolution of unrecognized tax benefits, if created, would occur while the full valuation
allowance of deferred tax assets is maintained; therefore, the Company does not expect to have any unrecognized tax benefits that,
if recognized, would affect the effective tax rate.
The Company will recognize interest and penalties
related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statement of operations.
As of December 31, 2012 and 2011, the Company has not recognized liabilities for penalty and interest as the Company does not have
liability for unrecognized tax benefits.
The Company’s uncertain tax positions
are related to tax years that remain subject to examination by the relevant taxing authorities. The Company is currently
not under examination by any taxing authorities.
ACCOUNTING FOR STOCK-BASED COMPENSATION
From inception to December 31, 2012, the Company
has not granted any stock options, stock warrants, or stock appreciation rights, and has not adopted any stock option plan.
LOSS PER COMMON SHARE
Basic loss per common share is computed
based on the weighted average number of shares outstanding for the period. Diluted loss per common share is computed by dividing
net loss available to common stockholders by the weighted average shares outstanding assuming all dilutive potential common
shares were issued. There were no dilutive potential common shares outstanding at December 31, 2012 or 2011.
SUBSEQUENT EVENTS
Management has evaluated subsequent
events through the date the accompanying financial statements were filed with the SEC for transactions and other events which
may require adjustment of and/or disclosure in such financial statements. During March 2013, management made the decision to
close their research plant as significant internal research and development was no longer deemed necessary. Capitalized plant
costs at December 31, 2012 of $195,000, net of accumulated depreciation of $159,000, will likely be written off in 2013.
Other pieces of laboratory equipment are currently being evaluated and may be disposed or
sold in 2013.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
COMPREHENSIVE LOSS
Total comprehensive loss represents the
net change in stockholders' equity (deficit) during a period from sources other than transactions with stockholders and
as such, includes net earnings or loss. For the Company, other comprehensive loss represents the foreign
currency translation adjustments, which are recorded as components of stockholders' equity.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company considers itself to
operate in one segment and has had no operating revenues from inception. See Note 2 for information on long-lived assets
located in Germany.
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
In June 2011, the FASB issued ASU No. 2011-05,
Comprehensive Income (Topic 220)
. In this Update, an entity has the option to present the total of comprehensive
income, the components of net income, and the components of other comprehensive income either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component
of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive
income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive
income as part of the statement of changes in stockholders' equity. The amendments in this Update do not change the items that
must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. For
public entities, the Update is effective for fiscal years and interim periods within those fiscal years beginning after December
15, 2011. The Company believes that its consolidated financial statements already comply with the requirements of this
standard.
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
that are expected to have a material impact on the Company's future consolidated financial statements.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
2. PROPERTY AND EQUIPMENT
Property and equipment, all of which is located in Kiel, Germany,
consist of the following:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Technical and laboratory equipment
|
|
$
|
408,761
|
|
|
$
|
400,473
|
|
Plant
|
|
|
195,341
|
|
|
|
191,381
|
|
Leasehold improvements
|
|
|
4,914
|
|
|
|
4,815
|
|
Office equipment
|
|
|
23,072
|
|
|
|
22,606
|
|
|
|
|
632,088
|
|
|
|
619,275
|
|
Less accumulated depreciation and amortization
|
|
|
(549,360
|
)
|
|
|
(496,285
|
)
|
Total
|
|
$
|
82,728
|
|
|
$
|
122,990
|
|
Depreciation and amortization expense included
in general and administrative expense in the consolidated statements of operations approximated $42,000 and $48,000 for the years
ended December 31, 2012 and 2011, respectively.
3. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company is authorized to issue 300,000,000
shares of $0.001 par value common stock. The holders of the Company's common stock are entitled to one vote for each
share held of record on all matters to be voted on by those stockholders.
In November 2000, the Company sold and
issued 4,800,000 shares of restricted common stock at $0.001 per share for $4,800 in cash, which was received in fiscal
2001; therefore the issuance was accounted for as a stock subscription receivable at December 31, 2000. During the year ended
December 31, 2001, the Company sold and issued an additional 7,200,000 shares of restricted common stock to related
parties at $0.001 per share for $7,200 in cash.
In November 2000, the Company sold and issued
50,000 shares of restricted common stock at $3.00 per share for $150,000 in cash.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
3. STOCKHOLDERS' EQUITY (continued)
COMMON STOCK (continued)
In December 2000, the Company issued
2,500,000 shares of restricted common stock in connection with the reorganization and stock exchange agreement with PBAG
(see "Organization/Nature of Business" in Note 1).
During the year ended December 31, 2001,
the Company issued and sold 450,000 shares of restricted common stock at $3.00 per share to Euro-American GmbH for
$1,350,000 in cash.
During the year ended December 31, 2001,
the Company entered into a subscription agreement and note receivable for 6,000,000 shares of the Company's
restricted common stock with Euro-American GmbH, valued at $2,400,000. During the year ended December 31, 2001,
5,286,512 shares of Company common stock were issued under such subscription, of which approximately $435,000, $680,000, and
$794,000 was received against this receivable during the years ended December 31, 2005, 2004, and the period from
Inception through December 31, 2003, respectively. In May 2003, FID-Esprit AG ("FID-Esprit") assumed the common
stock subscription agreement with Euro-American GmbH. The Company received the outstanding balance in installments
through March 28, 2006.
During the year ended December 31, 2002, the
Company issued 1,313,922 shares of restricted common stock in conjunction with the reverse merger with PMI (see "Organization/Nature
of Business" in Note 1).
Additionally, the Company entered into a common
stock purchase agreement with FID-Esprit to sell up to 1,000,000 shares of the Company's restricted common stock. Under
the agreement, the Company agreed to sell its common stock at a price per share equal to 40% of the average ask price for
the 20 trading days previous to the date of subscription, as quoted on a public market. However, the price per share
will be no less than $0.40. During the years ended December 31, 2004 and 2003, the Company issued 412,249 and 66,667 shares,
respectively, at $0.40 and $0.60 per share, respectively, for cash. Such agreement was not renewed after it expired on
December 31, 2004.
In November 2005, the Company entered into
a common stock purchase agreement with FID-Esprit to sell 300,000 of the Company's restricted common shares at $0.84
per share, or $252,000. Concurrent with such transaction, FID-Esprit issued a promissory note to the Company for $252,000
to be paid in four installments of $63,000 each, due on March 31, 2006, June 30, 2006, September 30, 2006, and December
31, 2006. The promissory note was paid in full during the year ended December 31, 2006.
In December 2006, the Company entered
into a common stock purchase agreement with FID-Esprit to sell 1,500,000 of the Company's restricted common shares at
$0.60 per share, or $900,000. Concurrent with such transaction, FID-Esprit issued a promissory note to the Company for
$900,000 to be paid in five installments of $180,000 each through December 31, 2007. FID-Esprit made a partial payment
of $37,894 against the note in December 2006. FID-Esprit paid the remaining balance in 2007.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
3. STOCKHOLDERS' EQUITY (continued)
PREFERRED STOCK
The Company is authorized to issue 10,000,000
shares of preferred stock, $0.001 par value per share. Except as described below, the Board of Directors has not designated
any liquidation value, dividend rates or other rights or preferences with respect to any shares of preferred stock.
The Board of Directors has designated 750,000
preferred shares as non-voting Series A Preferred Stock. 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.
On June 9, 2008, the Company entered into
a Preferred Stock Purchase Agreement ("Stock Purchase Agreement") with FID-Esprit (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”),
which matured on March 31, 2009. The Series A Preferred Stock note receivable is reported as a reduction of stockholders' equity.
During the year ended December 31, 2009, the Company received payments approximating $514,000 (including payments received under
the Forbearance Agreement, as described below), in connection with the Stock Purchase Agreement. The unpaid principal balance
of the Series A Preferred Stock note receivable as of December 31, 2009, which represents a technical default under the Note,
approximated $1,731,000.
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 December 31, 2009, the Company had only
received approximately $148,000 since the inception of the Forbearance Agreement (approximately $5,000 of which was applied
to the late charge), and therefore the Investor was technically in default. 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-K. The receivable
for late fees was fully reserved at December 31, 2011.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
3. STOCKHOLDERS' EQUITY (continued)
PREFERRED STOCK (continued)
On February 11, 2010, the Company entered into
an Agreement on the Assumption of Debt (“Agreement”) between the Company, btd biotech development GmBH (“Assignee”),
and Axel J. Kutscher (the “Guarantor” of the Note). Pursuant to the Agreement, the Company consented to Assignee’s
assumption of the obligations owed to the Company by Investor under the Note, Stock Purchase Agreement and Forbearance Agreement.
The Guarantor consented to the assumption of the obligations owed to the Company by Investor and acknowledged, agreed, and consented
to the continuing validity of his guaranty. During the years ended December 31, 2012, 2011 and 2010, the Company received
payments approximating $362,000 (including late fees approximating $60,000), $622,000 and $747,000, respectively, in connection
with this agreement. The note receivable was paid in full at December 31, 2012.
Effective June 30, 2011, 2010 and 2009, the Company declared stock
dividends of 33,090 shares, 31,500 shares and 30,000 shares, respectively, of Series A Preferred Stock payable to its
Series A Preferred Stock holders pursuant to the Stock Purchase Agreement.
4. NONCONTROLLING INTEREST
On September 28, 2006, a shareholder of
the Company entered into an agreement and contributed 50,000 Euros (approximately $63,000 at such time) to PBAG for a
15% non-voting interest in PBAG, in accordance with certain provisions of the German Commercial Code. The party
will receive 15% of profits, as determined under the agreement, not to exceed in any given year 30% of the capital
contributed. Additionally, the party will be allocated 15% of losses, as determined under the agreement, not to
exceed the capital contributed. The party is under no obligation to provide additional capital contributions to the
Company or absorb losses beyond his ownership interest. Prior to 2008, allocated losses reduced the minority stockholder's
capital account to $0, which has been reported as net loss attributable to noncontrolling interest in the accompanying
consolidated financial statements.
5. INCOME TAXES
There is no material income tax expense recorded
for the years ended December 31, 2012 or 2011 due to the Company's net losses.
Income tax expense for the years ended December
31, 2012 and 2011 differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent to the
pretax loss for the following reasons:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit at U.S. federal statutory rates
|
|
$
|
(243,000
|
)
|
|
$
|
(265,000
|
)
|
Change in valuation allowance
|
|
|
243,000
|
|
|
|
265,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
–
|
|
|
$
|
–
|
|
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
5. INCOME TAXES (continued)
The Company has a deferred tax asset
and an equal amount of valuation allowance of approximately $2,281,000 and $2,064,000 at December 31, 2012 and
2011, respectively, relating primarily to tax net operating loss carryforwards, as discussed below, and timing
differences related to the recognition of accrued licensing fees.
As of December 31, 2012, the Company had
tax net operating loss carryforwards ("NOLs") of approximately $1,577,000 and $5,953,000 available to offset
future taxable Federal and foreign income, respectively. The Federal NOL expires in varying years through 2025. The
foreign net operating loss relates to Germany and does not have an expiration date.
In the event the Company were to experience
a greater than 50% change in ownership, as defined in Section 382 of the Internal Revenue Code, the utilization of the
Company's Federal tax NOLs could be restricted.
6. COMMITMENTS AND CONTINGENCIES
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 both December 2008 and February 2012, the Company paid Dr. Wiedow 30,000
Euros. No other payments were made under this agreement. In July 2011, and again in December 2012, Dr. Wiedow agreed in writing
to waive the non-payment defaults and agreed to defer the due dates of each payment. Specifically, the Licensor defers to April
15, 2015 the installments payable by Licensee in the amount of 330,000 Euros, which otherwise would be due on December 31, 2012
(30,000 Euros), April 15, 2013 (60,000 Euros), December 31, 2013 (120,000 Euros) and December 31, 2014 (120,000 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 (0.12% as of January 1, 2012) 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 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.
No royalty expense has been recognized under
the License Agreement or the Amendment since the Company has yet to generate any related revenues. At December 31, 2012 and
2011, the Company has accrued approximately $753,000 and $777,000, respectively, of licensing fees payable to Dr. Wiedow, of which
approximately $0 and $155,000, respectively, is included in current liabilities with the remainder included in long-term liabilities.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
6. COMMITMENTS AND CONTINGENCIES (continued)
DR. WIEDOW LICENSE AGREEMENT (continued)
Pursuant to the License Agreement, as amended,
Dr. Wiedow may terminate the License Agreement in the event of a breach which is not cured within 90 days following written notice
of such breach. In addition, Dr. Wiedow may terminate the License Agreement immediately in the event of the Company’s bankruptcy,
insolvency, assignment for the benefit of creditors, insolvency, liquidation, assignment of all or substantially all of its assets,
failure to continue to develop Elafin. After any termination, to the extent permitted by applicable law, the Company will return
all documents, information and data received by Dr. Wiedow and will immediately cease to develop, manufacture or sell Elafin.
Dr. Wiedow, who is a director of the Company, beneficially owned
approximately 45% of the Company's outstanding common stock as of December 31, 2012.
ARTES BIOTECHNOLOGY LICENSE AGREEMENT
On November 15, 2004, the Company entered
into an exclusive worldwide license and collaboration agreement with ARTES Biotechnology GmbH ("ARTES"). This
agreement enables the Company to economically produce Elafin on a large scale by using the sublicensed yeast HANSENULA
POLYMORPHA as a high performance expression system. Rhein Biotech GmbH ("Rhein") has licensed the yeast to
ARTES, who in-turn sublicensed it to the Company. The agreement has a term of fifteen years with an annual
license fee equal to the greater of 10,000 Euros or 2.5% royalties on the future sales of Elafin. Should the license
agreement between Rhein and ARTES terminate, Rhein will assume the sublicense agreement with the Company under similar
terms.
RHEIN MINAPHARM AGREEMENT
In August 2007, the Company's subsidiary
entered into an agreement with Rhein Minapharm ("Minapharm") for clinical development, production and marketing of
Elafin. The Company has granted Minapharm the right to exclusively market Elafin in Egypt and certain Middle Eastern
and African countries. Under this agreement, the Company had deferred certain amounts received until the expiration of a
refund period in October 2010. Accordingly, approximately $108,000 is included as other income for 2010 in the
accompanying consolidated statements of operations. The Company may receive additional milestone-payments upon Minapharm's
attainment of certain clinical milestones as well as royalties on any future net product sales. No payments under this
agreement were received in 2012.
LEASES
The Company has entered into several leases
for office and laboratory facilities in Germany on a month-to-month basis. The Company also leases office space in Irvine,
California on a month-to-month basis. Total rental expense (including additional expenses) for all facilities for the years
ended December 31, 2012 and 2011 approximated $55,000, and $53,000, respectively.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
6. COMMITMENTS AND CONTINGENCIES (continued)
LEGAL
The Company may from time to time be
involved in various claims, lawsuits, disputes with third parties, actions involving allegations of discrimination,
or breach of contract actions incidental to the operation of its business. The Company is not currently involved in any
such litigation which it believes could have a material adverse effect on its financial condition or results
of operations.
7. LOSS PER COMMON SHARE
The following is a reconciliation of the numerators
and denominators of the basic and diluted loss per common share computations for the years ended December 31, 2012 and
2011:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted loss per common share:
|
|
|
|
|
|
|
|
|
Net loss attributable to Proteo, Inc.
|
|
$
|
(693,806
|
)
|
|
$
|
(778,956
|
)
|
Preferred stock dividend
|
|
|
–
|
|
|
|
(33
|
)
|
Net loss attributable to common stockholders
|
|
|
(693,806
|
)
|
|
|
(778,989
|
)
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted loss per common share:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
23,879,350
|
|
|
|
23,879,350
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|