PROTEO, INC. AND SUBSIDIARY
PROTEO, INC. AND SUBSIDIARY
AND FOR THE PERIOD FROM NOVEMBER 22, 2000
(INCEPTION) THROUGH DECEMBER 31, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
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, 2013 AND 2012
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 $9,309,000. There is no assurance of any future revenues.
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, 2013 AND 2012
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, 2013 AND 2012
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, 2013 and 2012, 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, 2013 and 2012 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, 2013 and 2012 and for the period from November 22, 2000 (Inception) through December
31, 2013.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
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' (deficit) equity. Accumulated gains approximated
$251,000 and $187,000 at December 31, 2013 and 2012, 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, 2013, 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 losses of approximately $59,000 and $29,000 for the years ended December 31, 2013 and 2012,
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, 2013 AND 2012
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, 2013 and
2012.
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, if any, 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, 2013 AND 2012
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
INCOME TAXES
The Company accounts for income taxes using
the liability method in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized
for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. A valuation allowance is provided for significant deferred tax assets when it
is more likely than not that such assets will not be recovered.
The Company also follows the provisions
of ASC 740-10 relating to accounting for uncertain tax positions. Under ASC 740-10, the Company must recognize
the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial
statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized
upon ultimate resolution. The Company has not recognized any liabilities for uncertain tax positions as a result of
ASC 740-10. The Company expects any resolution of unrecognized tax benefits, if created, would occur while the full valuation allowance
of deferred tax assets is maintained; therefore, the Company does not expect to have any unrecognized tax benefits that, if recognized,
would affect the effective tax rate.
The Company will recognize interest and
penalties related to any unrecognized tax benefits within the income tax expense line in the accompanying consolidated statements
of operations. As of December 31, 2013 and 2012, management believes the Company has no unrecognized tax benefits.
The Company’s income tax returns
remain open for examination by taxing authorities for a statutory defined period of time. The Company is currently
not under examination by any taxing authorities.
ACCOUNTING FOR STOCK-BASED COMPENSATION
From inception to December 31, 2013, 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, 2013 or 2012.
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.
PROTEO,
INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
COMPREHENSIVE LOSS
Total comprehensive loss represents the
net change in stockholders' (deficit) equity during a period from sources other than transactions with stockholders and as
such, includes net earnings or loss. For the Company, other comprehensive loss represents the foreign currency translation
adjustments, which are recorded as components of stockholders' (deficit) 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 February 2013, the FASB issued ASU No.
2013-02,
Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
. This
Update does not change the current requirements for reporting net income or other comprehensive income in financial statements.
The Update requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income
by component. In addition, an entity is required to present, either on the face of the statement where net income is presented
or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of
net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same
reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity
is required to cross-reference to other disclosures required under GAAP that provide additional details about those amounts. The
Update became effective for the Company on January 1, 2013. The Company does not believe it had any significant amounts reclassified
out of other comprehensive income during the year ended December 31, 2013.
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, 2013 AND 2012
2. PROPERTY AND EQUIPMENT
Property and equipment, all of which is located in Kiel,
Germany, consist of the following:
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Technical and laboratory equipment
|
|
$
|
254,366
|
|
|
$
|
408,761
|
|
Plant
|
|
|
–
|
|
|
|
195,341
|
|
Leasehold improvements
|
|
|
5,119
|
|
|
|
4,914
|
|
Office equipment
|
|
|
24,418
|
|
|
|
23,072
|
|
|
|
|
283,903
|
|
|
|
632,088
|
|
Less accumulated depreciation and amortization
|
|
|
(263,402
|
)
|
|
|
(549,360
|
)
|
Total
|
|
$
|
20,501
|
|
|
$
|
82,728
|
|
Depreciation and amortization expense included
in general and administrative expense in the consolidated statements of operations approximated $17,000 and $42,000 for the years
ended December 31, 2013 and 2012, respectively.
During 2013, management made the decision
to terminate the month-to-month lease at its pilot research plant as significant in-house process development for fermentation
is no longer deemed necessary. In connection with this matter, property and equipment with a net depreciated book value of approximately
$46,000 was disposed of for cash proceeds approximating $35,000. The net loss approximating $11,000 is included in interest and
other income (expense), net, in the accompanying consolidated statements of operations and comprehensive loss.
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, 2013 AND 2012
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, 2013 AND 2012
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, 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 did not chose to enforce the remedies under the Forbearance Agreement or the Stock Purchase Agreement. 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.
In October 2013, the Company issued 29,000 shares of its Series
A Preferred Stock for cash to one unrelated party at a price of $14.50 per share.
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
or benefit recorded for the years ended December 31, 2013 or 2012 due to the Company's net losses and related deferred tax asset
full valuation allowance.
Income tax expense (benefit) for the years
ended December 31, 2013 and 2012 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:
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Income tax benefit at U.S. federal statutory rates
|
|
$
|
(187,000
|
)
|
|
$
|
(243,000
|
)
|
Change in valuation allowance
|
|
|
187,000
|
|
|
|
243,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
–
|
|
|
$
|
–
|
|
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
5. INCOME TAXES (continued)
The Company has a deferred tax asset and an
equal amount of valuation allowance of approximately $2,468,000 and $2,281,000 at December 31, 2013 and 2012, respectively,
relating primarily to tax net operating loss carryforwards, as discussed below, and temporary differences related to
the recognition of accrued licensing fees.
As of December 31, 2013, the Company had
tax net operating loss carryforwards ("NOLs") of approximately $1,700,000 and $7,400,000 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 (-0.13% as of January 1, 2013) 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, 2013
and 2012, the Company has accrued approximately $785,000 and $753,000, respectively, of licensing fees payable to Dr. Wiedow is
included in long-term liabilities.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
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, 2013.
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.
The Company may receive milestone-payments upon Minapharm's attainment of certain clinical milestones as well as royalties on any
future net product sales. No payments under this agreement were received in 2012 or 2013.
LEASES
The Company has entered into several leases
for office and laboratory facilities in Germany. The Company also leases office space in Irvine, California on a month-to-month basis.
Total rental expense (including additional expenses) for all facilities for the years ended December 31, 2013 and 2012 approximated
$32,000, and $55,000, respectively.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
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, 2013
and 2012:
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted loss per common share:
|
|
|
|
|
|
|
|
|
Net loss attributable to Proteo, Inc.
|
|
$
|
(551,807
|
)
|
|
$
|
(693,806
|
)
|
Preferred stock dividend
|
|
|
–
|
|
|
|
–
|
|
Net loss attributable to common stockholders
|
|
|
(551,807
|
)
|
|
|
(693,806
|
)
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|