Form 10-K Proteo Inc

10-K - Annual report [Section 13 and 15(d), not S-K Item 405]

Published: 2010-03-26 18:15:17
Submitted: 2010-03-29
Period Ending In: 2009-12-31
proteo_10k-123109.htm PROTEO, INC. FORM 10-K


proteo_10k-123109.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 

FORM 10-K

(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2009.
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to               .
 
Commission File Number: 000-30728

PROTEO, INC.
(Exact Name of Registrant as Specified in Its Charter)

Nevada
88-0292249
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
   
2102 Business Center Drive
Irvine, California 92612
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (949) 253-4616

Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Name of Each Exchange on Which Registered

None
None
 
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001

 
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 o   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.
 
 
Large accelerated filer  ¨
Accelerated filer  ¨
     
 
Non-accelerated filer  ¨
Smaller reporting company  þ
 
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 common stock held by non-affiliates as of December 31, 2009 was $13,871,000.(1)

Number of shares of Common Stock outstanding as of March 19, 2010:  23,879,350
____________
 1) Excludes 12,782,500 shares of common stock held by directors and officers, and any stockholder whose ownership exceeds five percent of the shares outstanding as of December 31, 2009
 
Documents Incorporated by Reference

None.
 
Transitional Small Business Disclosure Format (check one): Yes ¨ No þ
 


 
 

 
 
PROTEO, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
 
TABLE OF CONTENTS

CAUTIONARY STATEMENT
1
     
PART I
 
1
     
Item 1.
Business
1
Item 1A.
Risk Factors
  7
Item 1B.
Unresolved Staff Comments
  7
Item 2.
Properties
8
Item 3.
Legal Proceedings
8
Item 4.
[Removed and Reserved]
8
     
PART II
 
8
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
8
Item 6.
Selected Financial Data
10
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
10
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
15
Item 8.
Financial Statements and Supplementary Data
15
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
15
Item 9A.(T)
Controls and Procedures
15
Item 9B.
Other Information
16
     
PART III
 
  16
     
Item 10.
Directors, Executive Officers and Corporate Governance
16
Item 11.
Executive Compensation
18
Item 12.
Security Ownership of Certain Beneficial Owners and Management
20
Item 13.
Certain Relationships and Related Transactions, and Director Independence
20
Item 14.
Principal Accountant Fees and Services
21
     
PART IV
 
  21
     
Item 15.
Exhibits and Financial Statement Schedules
22
     
SIGNATURES
  23
 
 
 
 

 


CAUTIONARY STATEMENT
 
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 Over-The-Counter Bulletin Board ("OTCBB") under the symbol "PTEO.OB". 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 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.
 
DESCRIPTION OF BUSINESS
 
The Company seeks to identify potential drug candidates in the field of inflammation. The Company's focus is on natural occurring compounds which have proven superior biologic activity over almost all known compounds. The focus on natural occurring compounds is driven by the assumption that these compounds will have fewer side effects regarding metabolism and excretion. Whenever possible, human peptides and proteins, which have no allergenic potential, will be used.
 
The Company intends to develop, manufacture, promote, and market pharmaceuticals and other biotech products. However, we do not believe that any of our planned products will produce sufficient revenues in the next several years to support us financially. We currently expect to sell only small quantities of these products in the next few years. As a result, we intend to identify and develop other potential products. To achieve profitable operations, the Company, independently or in collaboration with others, must successfully identify, develop, manufacture, and market proprietary products. The products and technologies we intend to develop will require significant commitments of personnel and financial resources.

 
1

 

Our business strategy is focused on 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.
 
Elafin is a human protein that naturally occurs in human skin and lungs and the mammary gland. Elafin is an elastase inhibitor which inhibits the activity of two enzymes, elastase and proteinase 3. Both of these enzymes are known to be involved in the breakdown of tissue in various inflammatory diseases. Elafin has proven in animal tests that it protects tissue against destruction by these enzymes.
 
The company believes that it is favorable to target orphan drug indications first. Orphan drugs are pharmaceuticals for the treatment of rare diseases, which do not affect more than 200,000 people in the US and about 230,000 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 United States (“US”) or European Union which not only associated with reduced fees to regulatory agencies and facilitated drug approval but also guarantees 7-year or 10-year monopoly in the US and European Union, respectively, on drug sales for the first company to obtain FDA marketing approval of a particular drug.

Proteo has obtained Orphan drug designations within the European Union for the use of Elafin in treatment of pulmonary arterial hypertension and for the treatment of esophagus carcinoma. In the latter indication especially the postoperative inflammation will be targeted by Elafin treatment.

The excellent tolerability of recombinant Elafin for injection in human subjects was demonstrated in a Phase I clinical trial. A Phase II clinical trial on patients undergoing esophagectomy for esophagus carcinoma was started in the University Hospital of Schleswig-Holstein, Campus Kiel in November 2008. In 2009 the clinical trial was extended to two further University Hospitals, the University Hospital of the Technical University Munich and the University Hospital of the University Münster. The aim of the trial is to investigate the effectiveness of Elafin at suppressing the postoperative inflammatory processes.

Elafin may also be used in the course of transplantation. To transplant organs successfully, simultaneous treatment with anti-inflammatory drugs is necessary. Inflammations of transplanted organs are mainly caused either by rejection of the organ by the immune system or by blood supply deficiencies during the transplantation. Although various drugs are used today to avoid the rejection of the organ, such rejections still occur quite often. Therefore, additional anti-inflammatory drugs are needed, which may potentially prevent damage caused by blood supply deficiencies. Tests carried out on rabbits at the University of Toronto have demonstrated the effectiveness of an infusion with Elafin after a heart transplant. In cases where Elafin was not administered, a substantial thickening of the coronary vessel walls occurred due to temporary circulation reduction. Thus, frequently the heart was not sufficiently supplied with blood. Inflammation and destruction of the heart musculature, which was partly replaced by functionless scar tissue, was the result. Treatment with Elafin has been shown to reduce such damage to a minimal level.

The University of Cairo will conduct a Phase II clinical trial to study the efficacy of Elafin on kidney transplant patients. The Phase II clinical trial has already been approved by the Ethical Committee of the University of Cairo. The study will be conducted as a Phase II trial for prevention of acute and chronic allograft nephropathy, which is a devastating complication of kidney transplantation that is responsible for a significant portion of graft loss.

We believe a further indication for Elafin is as a drug in the treatment of cardiac infarction. Cardiac infarction appears as a result of deficiencies in the blood supply of heart muscles caused by damage to the supplying coronary vessels. As an immediate result, the heart weakens and the heart muscles are destroyed. Damage to tissue caused by cardiac infarction will slowly form scars. Current methods of treatment are aimed at restoring the blood supply to the heart, either by replacement with new blood vessels (bypass surgery), by stent implantation or by removal of blood-clots in the coronary vessels (lyse therapy). Animal experiments have shown that Elafin may be effective in protecting the heart muscles against destruction after blood supply was interrupted.
 
Elafin may also be useful in the treatment of the seriously injured. Similar to damage of heart muscles as described above, much of the damage caused by serious injuries appears after the injury causing event (e.g. traffic accidents). In emergency treatment following accidents, the blood supply, nerve fibers and the stability of bones and joints are given priority. Due to blood supply deficiencies, inflammation will occur in injured muscles and in injured vessels. Because muscles may be destroyed by the inflammation, limbs may have to be amputated despite successful surgeries. Elafin may protect muscles against damage caused by inflammation. In animal experiments, rat legs treated with Elafin remained almost unaffected, although the blood supply to the leg was cut off for six hours.

 
2

 

Other preliminary data indicate that Elafin may be useful in a broad range of other applications whether pharmaceutical or not. Therefore, we will attempt to encourage other scientists, research centers as well as other companies to do research and development on Elafin for applications other than those described above. For example, Elafin may also be effective in the treatment of lung diseases and defects, dermatological diseases and defects, or as an ingredient to coat medical devices, such as stents, or in cosmetics.

Proteo owns licenses to exclusively develop products based on patents and filings relating to Elafin, including fourteen issued patents. Of these issued patents, three were issued in the U.S.

Further, Proteo intends to engage in the research and development of other drugs and biotechnical products based on natural proteins. We may also be able to implement unique technologies and biotechnological production procedures that may enable us to offer related services to other companies. Additional research and development has already begun in the areas of Leech-derived Tryptase Inhibitors (LDTI), and Bis-acyl ureas. LDTI has been successfully expressed in yeast, and is an inhibitor of human mast cell tryptase. LDTI inhibits tryptase-induced human fibroblast proliferation. LDTI may be a drug candidate for the treatment of keloid formation, scleroderma and asthma.
 
Bis-acyl ureas have been identified as a relevant compound in yeasts able to induce inflammation. It activates human neutrophils in vitro and may be a potential candidate for immune system stimulation. Methods for isolation of bis-acyl urea from yeasts as well as synthetic production have been established. Bis-acyl ureas and LDTIs are in the early pre-clinical stage.
 
Proteo works closely with the interdisciplinary research unit at the University of Kiel in the identification of drug targets for the prevention and treatment of infections.
 
After developing a production procedure for Elafin, Proteo has initiated clinical trials to achieve governmental approval for the use of Elafin as a drug in Europe. For this purpose, Proteo has contracted Eurogentec, an experienced Contract Manufacturing Organization (CMO) located in Belgium to produce Elafin in accordance with GMP (good manufacturing practices) standards as required for clinical trials.
 
In December 2005, Proteo successfully completed a first Phase I trial for Elafin. Elafin was tested on 32 healthy male volunteers in a single-ascending-dose, double blind, randomized, placebo-controlled trial to evaluate its tolerability and safety at the Institut fur Klinische Pharmakologie in Kiel, Germany. All intravenously applied doses were well tolerated. No severe adverse events occurred.
 
In 2006, we gathered and evaluated additional data from the results of the Phase I study. In addition, during 2006, we established a procedure to incorporate Elafin as an active ingredient in cream.
 
In September 2006, Windhover Information, Inc., an established provider of business information for decision makers in the biotechnology and pharmaceutical industries, chose the Company's Elafin project as one of the top 10 most interesting cardiovascular projects. We presented the Elafin project at the "Windhover's Therapeutic Alliances Cardiovascular Conference" in Chicago on November 16, 2006.


 
3

 

In September 2006 we filed an application with the EMEA (European Medicines Agency) to obtain orphan drug status in the European markets for Elafin to be used in the treatment of pulmonary hypertension. Subsequent to December 31, 2006, the Committee for Orphan Medical Products of the EMEA issued a positive opinion recommending the granting of orphan medicinal product designation for Elafin for treatment of pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension. On March 20, 2007 the orphan drug designation became effective upon adoption of the recommendation by the European Commission. Orphan Drug Designation of the European Commission assures exclusive marketing rights for the treatment of this disease within the European Union for a period of up to ten years after receiving market approval. Additionally, registration as an Orphan Drug enables accelerated marketing approval in all member states of the European Union.

In July 2007, we entered into an agreement with the University of Alberta, Canada to cooperate in research on Elafin for the treatment of pulmonary diseases in neonates. Animal experiments on newborn rats will be carried out by Dr. Bernard Thebaud, associate professor at the Department of Pediatrics and Neonatology.
 
In August 2007, our subsidiary entered into a license agreement with Rhein Minapharm ("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 received ethic approval for conducting a Phase II clinical trial in December 2008. Minapharm will initiate a Phase II clinical trial to study the efficacy of Elafin on kidney transplant patients. The study will be conducted as a Phase II trial for prevention of acute and chronic allograft nephropathy at the University of Cairo.  Setup of the trial is currently ongoing.
 
In January 2008, the Company entered into an agreement with Stanford University in California, to cooperate in preclinical studies related to Elafin treatment of pulmonary arterial hypertension. Proteo provides support for animal experiments that are currently conducted by Marlene Rabinovitch, Research Director of the Vera Moulton Wall Center for Pulmonary Vascular Disease at Stanford University who is a renowned expert in the field, and her group at the university.
 
In April 2008, we initiated a placebo-controlled randomized trial to evaluate the effect of Elafin on cytokine profiles after major surgery (clinical phase II), which was approved in May 2008 by the responsible Ethics Committee and in August 2008 by the German Federal Institute for Drugs and Medical Devices. In November 2008 the Phase II clinical trial on patients undergoing esophagectomy for esophagus carcinoma was started in the Department for General and Thoracic Surgery at the University Hospital of Kiel University, Germany. Since December 2009 the clinical trial is ongoing with two additional clinical trial centers. Approximately 75% of the patients have been treated so far.

In September 2009, the Company’s subsidiary has signed a Memorandum of Understanding with the University of Edinburgh. Within the framework of collaboration, it is intended to investigate the effect of Elafin on the damage and inflammation of cardiac muscle after coronary bypass operations in a Phase II clinical trial at the University of Edinburgh.
 
In January 2010, following the recommendation of the European Medicines Agency EMEA as of November 2009, the European Commission has granted Orphan Drug Designation for the protease inhibitor Elafin to be used in the treatment of esophagus carcinoma. Orphan Drug Designation of the European Commission assures exclusive marketing rights for the treatment of this disease within the European Union for a period of up to ten years after receiving market approval. Additionally, registration as an Orphan Drug enables accelerated marketing approval in all member states of the European Union.

Our goal is to obtain our first governmental regulatory approval for the first indication of our initial product in 2012. It should be noted that the first indication, if successfully developed, would have a market potential substantially smaller than the overall market of Elafin for more widespread applications such as for the treatment of cardiac infarction.
 
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 President, Chief Executive Officer and Chief Financial 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 six employees as of December 31, 2009.
 
To date, the Company has not had profitable operations. Furthermore, we do not anticipate that we will have profitable operations in the near future.


 
4

 

COLLABORATION WITH OTHER COMPANIES

In an effort to provide the Company with some revenue which will be utilized in the implementation of our business plan, our Subsidiary periodically may provide research and development and manufacturing services as a sub-contractor and/or consultant to unaffiliated companies which do not compete with the Company. We plan to explore such opportunities if deemed advantageous to the Company.
 
Further, the Company actively seeks 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.
 
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. Two other elastase inhibitors, alpha-1-antitrypsin and recombinant monocyte/neutrophil elastase inhibitor (rM/NEI), are similar to Elafin in that they are of human descent and may be applied like Elafin principally. From the human protein inter-alpha-trypsin inhibitor a highly specific elastase inhibitor, Depelestat, has been engineered. Sivelestat is a synthetic elastase inhibitor which may have effectiveness comparable to that of Elafin.
 
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 Talecris, Behring and Baxter as a plasma-derived product to supply patients with genetic deficiency of functional alpha-1-antitrypsin. Arriva Pharmaceuticals Inc., is currently running clinical trials for the use of recombinant alpha-1-antitrypsin as an aerosol for the treatment of hereditary emphysema.
 
Recombinant monocyte/neutrophil elastase inhibitor (rm/nei)
 
This compound of human descent is currently under development for the treatment of cystic fibrosis and to be applied by inhalation devices. IVAX Corporation has entered into a license option agreement with the Center for Blood Research, Inc. (CBR), an affiliate of the Harvard Medical School, which holds the rights to this compound.
 

 
5

 

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.
 
Depelestat
 
A further elastase inhibitor has been engineered from the Kunitz domain of human inter-alpha-trypsin inhibitor. This peptide was found to be a potent inhibitor of human elastase, however, other than in the case of Elafin, it is reported that no other proteases, including proteinase 3, were inhibited. Currently Depelestat is being clinically developed by Debiopharm for use in the treatment of cystic fibrosis and acute respiratory distress syndrome.
 
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
 
The Company owns licenses to exclusively develop products based on patents and filings including fourteen patents already issued. The issued patents include three patents which have been issued in the United States of America. The Company does not have title to any patents; title to the patents rests with Dr. Wiedow.  The Company’s rights with respect to patents are derived pursuant to a license agreement between the Company and Dr. Wiedow (the “License Agreement”) dated December 30, 2000, which was amended by an Amendment Agreement to the License Agreement (the"Amendment") dated December 23, 2008.
 
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 through 2006. In December 2007 the Company paid Dr. Wiedow 30,000 Euros.
 

 
6

 

Pursuant to the Amendment, the Company and Dr. Wiedow have agreed that the Company would pay the outstanding balance of 630,000 Euros to Dr. Wiedow as follows: for fiscal years 2008 to 2012, the Company shall pay Dr. Wiedow 30,000 Euros per year, and for fiscal years 2013 to 2016, the Company shall pay Dr. Wiedow 120,000 Euros per year. The foregoing payments shall be made on or before December 31 of each fiscal year. In December 2008 the Company paid Dr. Wiedow 30,000 Euros.  No other payments have been made to Dr. Wiedow as of December 31, 2009, which is a technical breach of the agreement. Dr. Wiedow waived such breach and deferred the prior year payments to 2010.  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, 2010) 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 a three percent (3%) 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.
 
AstraZeneca Inc. (formerly Zeneca Inc., formerly ICI Pharmaceuticals Inc.) had held the patents for Elafin for several years and has significantly contributed to the current knowledge. Therefore, AstraZeneca Inc. will receive two percent of the net sales of the Company from products based on patents in which Dr. Wiedow was the principal inventor. Proteo holds an exclusive license for the following patents, which expire between June 2010 and November 2012:
 
Country
 
Patent Number
     
USA
US
5464822
USA
US
6245739
USA
US
6893843
European Union
EP
0402068
Japan
JP
2989853
Australia
AU
636148
Canada
CA
2018592
Finland
FI
902880
Ireland
IE
070520
Israel
IL
094602
New Zealand
NZ
233974
Norway
NO
177716
Portugal
PT
094326
South Africa
ZA
9004461
 
EMPLOYEES
 
As of December 31, 2009, Proteo had six 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.


 
7

 

ITEM 2 - PROPERTIES
 
The Company has entered into several leases for office and laboratory facilities in Germany expiring at dates through December 2011. The aggregate monthly rental under the foregoing leases was approximately $4,200.
 
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 – [REMOVED AND RESERVED]
 
PART II
 
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our common stock is quoted on the OTC Bulletin Board under the symbol PTEO.OB. The table below gives the range of high and low bid prices of our common stock for each quarter during the fiscal years ended December 31, 2009 and 2008 based on information provided by the OTC Bulletin Board. Such over-the-counter market quotations reflect inter-dealer prices, without mark-up, mark-down or commissions and may not necessarily represent actual transactions or a liquid trading market.
 

YEAR
PERIOD
HIGH
 
LOW
2009
First Quarter
$1.49
 
$1.00
 
Second Quarter
1.49
 
0.94
 
Third Quarter
1.38
 
0.64
 
Fourth Quarter
1.25
 
0.51
         
2008
First Quarter
$1.95
 
$0.51
 
Second Quarter
3.65
 
0.65
 
Third Quarter
2.49
 
1.39
 
Fourth Quarter
1.70
 
0.60
 
On March 19, 2010, the last sales price of our common stock was $1.00 per share. No cash dividends have been paid on our common stock for the 2009 and 2008 fiscal years and no change of this policy is under consideration by the Board of Directors. The payment of cash dividends in the future will be determined by the Board of Directors in light of conditions then existing, including our Company's earnings (if any), financial requirements, and opportunities for reinvesting earnings (if any), business conditions, and other factors. Except as described in the "Preferred Stock" section of Note 3 to the Company's consolidated financial statements included elsewhere herein, there are otherwise no restrictions on the payment of dividends.

NUMBER OF SHAREHOLDERS
 
As of March 19, 2010, the number of shareholders of record of the Company's common stock was 1,765.

 
8

 


PENNY STOCK
 
Until we satisfy the initial listing requirements for the Nasdaq Stock Market and successfully apply to have our shares of common stock traded thereon, our common stock will continue to be quoted on the OTCBB. As a result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the price of, our common stock. Our common stock is subject to provisions of Section 15(g) and Rule 15g-9 of the Exchange Act, commonly referred to as the "penny stock rule." Section 15(g) sets forth certain requirements for transactions in penny stocks, and Rule 15g-9(d) incorporates the definition of "penny stock" that is found in Rule 3a51-1 of the Exchange Act. The SEC generally defines "penny stock" to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. Since our common stock is deemed to be a penny stock, trading in our shares is subject to additional sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors. "Accredited investors" include (i) certain entities as defined in Rule 501(a) of Regulation D, (ii) directors and executive officers of the issuer of the securities being offered or sold and (iii) persons with a net worth exceeding $1,000,000 or annual income exceeding $200,000 (or $300,000 together with their spouse) in each of the two most recent years and reasonably expect to reach the same income level in the current year. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of such security and must have the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the first transaction, of a risk disclosure document, prepared by the SEC, relating to the penny stock market. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information for the penny stocks held in an account and information on the limited market in penny stocks. Consequently, these rules may restrict the ability of a broker-dealer to trade and/or maintain a market in our common stock and may affect the ability of our shareholders to sell their shares.
 
DIVIDEND POLICY
 
To date, we have declared no cash dividends on our common or preferred stock, and do not expect to pay cash dividends on our common and preferred stock in the near term. We intend to retain future earnings, if any, to provide funds for operation of our business.
 
EQUITY COMPENSATION PLAN INFORMATION
 
We have no equity compensation plans as of December 31, 2009.
 
RECENT SALES OF UNREGISTERED SECURITIES

On June 9, 2008, the Company entered into a Preferred Stock Purchase Agreement ("Stock Purchase Agreement") with FIDEsprit AG (“Investor”). Pursuant to the Stock Purchase Agreement, the Company sold and issued to the Investor 600,000 shares of Series A 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, Investor delivered to the Company a promissory note in the amount of $3,600,000 (“Promissory Note”). The Promissory Note, which  matured on March 31, 2009, is guaranteed by Axel J. Kutscher (the “Guarantor”). 

On July 6, 2009, the Registrant and Investor entered into a Forbearance Agreement and General Release (the “Forbearance Agreement”). Pursuant to the Forbearance Agreement, the Investor acknowledged and agreed that, as of July 6, 2009, it was obligated to the Registrant under the Promissory 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. In exchange for the Registrant’s agreement to forbear from exercising its rights under the Promissory 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. In addition, as of December 31, 2009, the Company had only received approximately $148,000 since the inception of the Forbearance Agreement, 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.

As of February 11, 2010, Investor owed Registrant $1,803,632 pursuant to the Promissory Note, in the original principal amount of $3,600,000, which was issued in connection with the Stock Purchase Agreement, as modified by the  Forbearance Agreement. On February 11, 2010, the Registrant entered into an Agreement on the Assumption of Debt (“Agreement”) among the Registrant, btd biotech development GmBH (“Assignee”), and Axel J. Kutscher (“Guarantor”). Pursuant to the Agreement, Registrant consented to Assignee’s assumption of the obligations owed to Registrant by Investor under the Note, Stock Purchase Agreement, and Forbearance Agreement. The Guarantor consented to the assumption of the obligations owed to Registrant by Investor and acknowledged, agreed, and consented to the continuing validity of his guaranty.

For additional information see the "Preferred Stock" section of Note 3 to the Company's consolidated financial statements included elsewhere herein.
 
The other information required by Item 701 of Regulation S-K relating to the transaction described in the preceding paragraphs was included in the Company's Forms 8-K filed with the SEC on June 11, 2008, July 6, 2009 and February 11, 2010.

 
9

 


ITEM 6. SELECTED FINANCIAL DATA.

An SRC is not required to provide any information in response to Item 301 of Regulation S-K.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
CAUTIONARY STATEMENT

This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. Accordingly, to the extent that this Annual Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that the Company's actual financial condition, operating results and business performance may differ materially from that projected or estimated by management in forward-looking statements. The differences may be caused by a variety of factors, including but not limited to adverse economic conditions, intense competition, including intensification of price competition and entry of new competitors and products, adverse federal, state and local government regulation, inadequate capital, unexpected costs and operating deficits, increases in general and administrative expenses, and other specific risks that may be alluded to in this Annual Report or in other reports filed with the SEC by the Company. In addition, the business and operations of the Company are subject to substantial risks that increase the uncertainty inherent in the forward-looking statements. The inclusion of forward-looking statements in this Annual Report should not be regarded as a representation by management or any other person that the objectives or plans of the Company will be achieved.
 
See page one for additional information regarding forward-looking statements.
 
The Company currently generates minor non-operating revenue from its out-licensing activities and does not expect to report any significant operating revenue until the successful development and marketing of its planned pharmaceutical and other biotech products. Additionally, after the launch of the Company's products, there can be no assurance that the Company will generate positive cash flow and there can be no assurance as to the level of operating revenues, if any, the Company may actually achieve from its planned principal operations.
 
OVERVIEW
 
The Company specializes in the research, development and marketing of drugs for inflammatory diseases with Elafin as its first project. The Company's management deems Elafin to be one of the most prospective substances in the treatment of serious tissue and muscle damage. Independently conducted animal experiments have indicated that Elafin may have benefits in the treatment of tissue and muscle damage caused by insufficient oxygen supply and therefore may be useful in the treatment of heart attacks, serious injuries and in the course of organ transplants. Other applications have yet to be determined.
 

 
10

 

The Company intends to implement Elafin as a drug in the treatment of inflammatory diseases, and intends to achieve governmental approval in Europe first. Currently, management estimates that it will take at least three years to achieve its first governmental approval for the use of Elafin as a drug for the first indication.
 
The Company's success will depend on its ability to prove that Elafin is well tolerated by humans and its efficacy in the indicated treatment. There can be no assurance that the Company will be able to develop feasible production procedures in accordance with Good Manufacturing Practices ("GMP") standards, or that Elafin will receive any governmental approval for its use as a drug in any of the intended applications.
  
In August 2007, the Company's subsidiary entered into an agreement with Minapharm 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. Proteo received an upfront payment, and will receive milestone-payments and royalties on net product sales. In addition, Minapharm will take over the funding of clinical research activities for the designated region. In December 2008 the responsible authority in Cairo granted approval for a Phase II clinical trial to study the efficacy of Elafin on kidney transplant patients.
 
In January 2008 we entered into an agreement with Stanford University in California, to cooperate in preclinical studies related to Elafin's treatment of pulmonary arterial hypertension. Proteo will provide support for animal experiments conducted by Marlene Rabinovitch, Research Director of the Vera Moulton Wall Center for Pulmonary Vascular Disease at Stanford University who is a renowned expert in the field, and her group at the university.
 
In August 2008 the Company's subsidiary received the approval for a Phase II clinical trial with Elafin by the German Federal Institute for Drugs and Medical Devices (BfArM). In this randomized, placebo-controlled Phase II trial the effect of Elafin on inflammatory parameters will be investigated in patients undergoing esophagectomy for esophagus carcinoma. The trial will be performed at the Department of General and Thoracic Surgery, University Medical Center Schleswig-Holstein, Campus Kiel. Patient recruitment was started in November 2008. The trial conduct was initially planned for one year. In summer 2009 it became apparent that the clinical trial center could not recruit sufficient numbers of patients to meet the planning. Thus, the Company has extended the monocentric trial to a multicentric trial. In December 2009 all regulatory approvals were obtained to expand the trial. Two additional trial centers started recruiting patients and the trial should be completed by mid-2010.

In May 2009 the Company has submitted an application for Orphan Medicinal Product Designation to the EMEA (the European FDA equivalent). Subsequent to November 5, 2009, the Committee for Orphan Medical Products of the EMEA issued a positive opinion recommending the granting of orphan medicinal product designation for recombinant human elafin for treatment of esophagus carcinoma. On January 28, 2010 the orphan designation was granted by the European Commission.

RESULTS OF OPERATIONS
 
OPERATING EXPENSES
 
The Company's operating expenses for the year ended December 31, 2009 were approximately $901,000, a decrease of approximately $93,000 over the year ended December 31, 2008. This decrease is due to decreases in general and administrative and research and development expenses during the year ended December 31, 2009 of approximately$70,000 and $23,000, respectively.   General and administrative expenses decreased primarily due to decreased accounting and legal fees during 2009.
 

 
11

 


INTEREST AND OTHER INCOME
 
Interest and other income for the year ended December 31, 2009 was approximately $44,000, a decrease of $61,000 from the year ended December 31, 2008. Interest income decreased by approximately $38,000, miscellaneous income decreased by approximately $51,000, and other expenses increased by approximately $28,000.
 
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
 
We experienced a gain of approximately $37,000 in foreign currency translation adjustments during the year ended December 31, 2009. For the year ended December 31, 2008, the Company recognized a loss of approximately $91,000. This represents a net increase of approximately $128,000. The increase is primarily due to a strengthening U.S. Dollar (our reporting currency) compared to the Euro (our functional currency) during 2009.

INCOME TAXES

The Company has a deferred tax asset of approximately $1,879,000 and $1,593,000 at December 31, 2009 and 2008, respectively, relating primarily to tax net operating loss carryforwards, as discussed below, and timing differences related to the recognition of accrued licensing fees.  Full valuation allowances have been established against these deferred tax assets due to going concern issues.

As of December 31, 2009, the Company had tax net operating loss carryforwards ("NOLs") of approximately $1,203,000 and $4,711,000 (3,287,000 Euros) 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.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Since our inception we have raised a total of (i) approximately $4,983,000 from the sale of 20,065,428 shares of our common stock, of which 6,585,487 shares, 300,000 shares and 1,500,000 shares have been sold at $0.40 per share, $0.84 per share and $0.60 per share, respectively, under stock subscription agreements in the amount of approximately $2,035,000, $252,000 and $900,000, respectively, and (ii) $1,869,000 from the sale of 600,000 shares of the Company's non-voting Series A Preferred Stock. The balance of the purchase price for the Series A Preferred Stock is evidenced by a promissory note which, as of December 31, 2009, had a principal balance of $1,731,306. See Note 3 to the consolidated financial statements included elsewhere herein for the payment terms under the promissory note.
 
The Company has cash and cash equivalents approximating $689,000 as of December 31, 2010. This is a decrease over the December 31, 2008 balance of approximately $1,237,000, mainly due to operating and research and development expenditures in excess of receipts on the promissory note receivable resulting from the sale of the Company's Series A Preferred Stock.
 
Management believes that the Company will not generate any significant operating revenues for at least the next three years, nor will it have sufficient cash to fund operations. As a result, the Company's success will largely depend on its ability to generate revenues from out-licensing activities, secure additional funding through the sale of its Common/Preferred Stock and/or the sale of debt securities. There can be no assurance, however, that the Company will be able to generate revenues from out-licensing activities and/or to consummate debt or equity financing in a timely manner, or on a basis favorable to the Company, if at all.
 
CAPITAL EXPENDITURES
 
None significant.
 

 
12

 

GOING CONCERN
 
The Company's independent registered public accounting firm has stated in their Auditor's Report included in this Form 10-K that the Company will require a significant amount of additional capital to advance the Company's products to the point where they may become commercially viable and has incurred significant losses since inception. These conditions, among others, raise substantial doubt about the Company's ability to continue as a going concern.
 
Therefore, the Company will be required to seek additional funds to finance its long-term operations. The successful outcome of future activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results.
 
INFLATION
 
Management believes that inflation has not had a material effect on the Company's results of operations.
 
OFF BALANCE SHEET ARRANGEMENTS
 
The Company does not currently have any off balance sheet arrangements.
 
ACCOUNTING MATTERS

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our results of operations, liquidity and capital resources is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.
 
The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates.
 
The following represents a summary of our critical accounting policies, defined as those policies that we believe are: (a) the most important to the portrayal of our financial condition and results of operations, and (b) that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the matters that are inherently uncertain. We discuss each of these policies below, as well as the estimates and judgments involved. We also have other policies that we consider key accounting policies; however, these policies do not meet the definition of critical accounting estimates, because they do not generally require us to make estimates or judgments that are difficult or subjective.
 
FOREIGN CURRENCY TRANSLATION
 
Assets and liabilities of the Company's German operations are translated into U.S. dollars at period-end exchange rates. Grants and expenses are translated at weighted average exchange rates for the period. Net exchange gains or losses resulting from such translation are excluded from net loss but are included in comprehensive loss and accumulated in a separate component of stockholders' equity. Such amount approximated $317,000 and $279,000 at December 31, 2009 and 2008, respectively.
 

 
13

 

INCOME TAXES
 
The Company accounts for income taxes using the liability method in accordance with the Income Taxes Topic of the ASC. 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.

As of December 31, 2009 and 2008, the Company did not increase or decrease the liability for unrecognized tax benefit related to uncertain tax positions in prior periods nor did the Company increase its liability for any uncertain tax positions in the current year. Furthermore, there were no adjustments to the liability or lapse of any statutes of limitation or settlements with taxing authorities.

The Company expects resolution of unrecognized tax benefits, if created, would occur while the 100% 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 its effective income tax rate.

The Company will recognize interest and penalty related to unrecognized tax benefits and penalties as income tax expense. As of December 31, 2009, the Company has not recognized any liabilities for penalty or interest as the Company does not have any liability for unrecognized tax benefits.

The Company is subject to taxation in the US and various states. The Company's 2005 through 2009 tax years are subject to examination by the taxing authorities. With few exceptions, the Company is no longer subject to U.S. federal, state, local or foreign examinations by taxing authorities for years before 2005.
 
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. 
 

 
14

 

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, 2009 or 2008.
 
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A SRC is not required to provide any information in response to Item 305 of Regulation S-K.
 
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The information required by this item is submitted as a separate section of this report immediately following the signature page.
 
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
 
None.
 
ITEM 9A(T) - CONTROLS AND PROCEDURES
 
Under the supervision and with the participation of management, including Birge Bargmann, our chief executive officer and chief financial officer, we have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, Ms. Bargmann has concluded that these controls and procedures were effective as of December 31, 2009, including those to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC, and is accumulated and communicated to management, including the principal executive officer   and the principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
 
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
The Management of Proteo is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
 
The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, (iii) provide reasonable assurance that receipts and expenditures of the company are being made only in accordance with authorization of management and directors of the company, and (iv) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
 

 
15

 

Management has assessed the Company's internal control over financial reporting as of December 31, 2009. The assessment was based on criteria for effective internal control over financial reporting described in the Internal Control—Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment, Management believes that the Company maintained effective internal control over financial reporting as of December 31, 2009.
 
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this annual report.
 
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
 
There have been no significant changes in the Company's internal control over financial reporting during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Inherent limitations exist in any system of internal control including the possibility of human error and the potential of overriding controls. Even effective internal controls can provide only reasonable assurance with respect to financial statement preparation. The effectiveness of an internal control system may also be affected by changes in conditions.
 
ITEM 9B - OTHER INFORMATION
 
None .
 
PART III
 
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The following table sets forth the names and ages of the current and incoming directors and executive officers of the Company and the principal offices and positions with the Company held by each person. The Board of Directors elects the executive officers of the Company annually. The directors serve one-year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors
 
NAME
AGE
POSITIONS
Birge Bargmann
48
President, Chief Executive Officer,
   
Chief Financial Officer and Director
Dr. Barbara Kahlke
45
Secretary
Professor Oliver Wiedow, MD.
52
Director
Prof. Hartmut Weigelt, Ph.D.
64
Director

BIOGRAPHICAL INFORMATION
 
Birge Bargmann has served as our President, Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") since November 2005 and a Director of the Company since December 2000. In November 2005, she was appointed CEO and CFO of the Company and its subsidiary. Ms. Bargmann was a member of the Supervisory Board of Proteo Biotech AG from 2000 to 2005. Since 1989, Ms. Bargmann has worked as a medical technique assistant engaged in the Elafin project at the University of Kiel. She co-developed and carried out procedures to detect and to purify Elafin.


 
16

 


Dr. Barbara Kahlke has served as our Secretary since August 2004. She has been a member of the Supervisory Board of Proteo Biotech AG since May 2002, and a scientific researcher for Proteo Biotech AG since May 2000. Dr. Kahlke is a biologist, having received her doctorate from Christian-Albrechts-University in Kiel, Germany. Since 1994, Dr. Kahlke has worked for a medium-sized German pharmaceutical company with responsibilities in molecular biology and in protein production in compliance with GMP. She discovered the biological activity of bis-acyl urea.
 
Prof. Oliver Wiedow, M.D. has served as a Director of the Company since December 2000. Professor Wiedow served as our President, Chief Executive Officer and Chief Financial Officer from January 2004 to June 2004 and has served as a member of the Supervisory Board of Proteo Biotech AG since 2000. Since 1985 Professor Wiedow has served as physician and scientist at the University of  Kiel, Germany. Prof. Wiedow discovered Elafin in human skin and has researched its biological effects.
 
Prof. Hartmut Weigelt, Ph.D. has served as a Director of the Company since December 2000. Prof. Weigelt was a member of the Supervisory Board of Proteo Biotech AG from 2000 to 2003. Since 1996, Prof. Weigelt has served as the managing director of Eco Impact GmbH which he co-founded. Prof. Weigelt was a co-founder of the first German private university, Witten/Herdecke and he is currently Chief Scientific Officer ("CSO") of MedEcon Ruhr GmbH, and head of the Department of Dental Biomedicine at the University of Applied Sciences in Hamm (Northrhine-Westphalia, Germany). Prof. Weigelt studied chemistry and biology and graduated with a M.Sc., Ph.D., and D.Sc. in biology.

AUDIT COMMITTEE AND FINANCIAL EXPERT
 
Proteo, Inc. is not a "listed company" under SEC rules and is therefore not required to have an audit committee comprised of independent directors. We do not currently have an audit committee; however, for certain purposes of the rules and regulations of the SEC and in accordance with the Sarbanes-Oxley Act of 2002, our board of directors is deemed to be its audit committee and as such functions and performs some of the same duties as an audit committee including: (1) selection and oversight of our independent accountant; (2) establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal controls and auditing matters; and (3) engaging outside advisors. Our board of directors has determined that its members do not include a person who is an "audit committee financial expert" within the meaning of the rules and regulations of the SEC.
 
The board of directors has determined that each of its members is able to read and understand fundamental financial statements and has substantial business experience that results in that member's financial sophistication. Accordingly, the board of directors believes that each of its members has sufficient knowledge and experience necessary to fulfill the duties and obligations that an audit committee would have. The Company does not have a formal compensation committee. The Board of Directors, acting as a compensation committee, periodically meets to discuss and deliberate on issues surrounding the terms and conditions of executive officer compensation.
 
 
 
17

 

FAMILY RELATIONSHIPS
 
There are no family relationships between or among the directors, executive officers or persons nominated by the Company to become directors or executive officers.
 
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
 
To the best of the management's knowledge, during the past five years, none of the following occurred with respect to a present or former director or executive officer of the Company: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
 
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
Section 16(a) of the Exchange Act requires the Company's directors and executive officers and persons who own more than ten percent of a registered class of the Company's equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent beneficial owners of our common stock are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on the review of copies of such reports furnished to the Company and written representations that no other reports were required, the Company has been informed that all Section 16(a) filing requirements applicable to the Company's officers, directors and greater than ten percent beneficial owners of our common stock were complied with.
 
CODE OF ETHICAL CONDUCT
 
The Company maintains a code of ethical conduct applicable to all employees, officers and directors. The Company will also provide to any person without charge, and upon request, a copy of the Code of Ethics by making a request in writing to: info@proteo.us.
 
ITEM 11 - EXECUTIVE COMPENSATION
 
The following table sets forth the total compensation earned over each of the past two fiscal years ended December 31, 2009 by each person who served as the principal executive officer of Proteo during fiscal years ended 2009 and 2008. There were no other executive officers who had compensation of $100,000 or more during fiscal years ended 2009 and 2008.
 
SUMMARY COMPENSATION TABLE

Name and Principal Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
(#)
Non-Qualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)
Total
Compensation
($)
Birge Bargmann
2008
$  141,250
-0-
-0-
-0-
-0-
-0-
-0-
141,250
(Chief Executive
                 
Officer and Chief
2009
$  133,888
-0-
-0-
-0-
-0-
-0-
-0-
133,888
Financial Officer)
                 

Ms. Bargmann’s salary is paid by the Company’s wholly owned subsidiary Proteo Biotech AG.

 
18

 

OPTION/STOCK APPRECIATION RIGHTS GRANTS TABLE
 
The Company does not have a stock option plan, and has not granted any stock options or stock appreciation rights to date.
 
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
 
Not applicable.
 
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
 
The Company does not have any equity compensation plans.
 
COMPENSATION OF DIRECTORS
 
The Directors have not received any compensation for serving in such capacity, and the Company does not currently contemplate compensating its Directors in the future for serving in such capacity.
 
EMPLOYMENT AND CONSULTING AGREEMENTS
 
The Company has no employment contracts with any of its officers or directors and maintains no retirement, fringe benefit or similar plans for the benefit of its officers or directors. However, Ms. Bargmann does have an employment contract with the Company’s wholly owned subsidiary Proteo Biotech AG, which is described below. The Company may, however, enter into employment contracts with its officers and key employees, adopt various benefit plans and begin paying compensation to its officers and directors as it deems appropriate to attract and retain the services of such persons.  The Company does not pay fees to directors who are not executive officers for their attendance at meetings of the Board of Directors or its committees; however, the Company may adopt a policy of making such payments in the future. The Company will reimburse out-of-pocket expenses incurred by directors in attending Board and committee meetings.
 
COMPENSATION COMMITTEE AND INSIDER PARTICIPATION
 
The current Board of Directors includes Birge Bargmann, who also serves as an executive officer of the Company. As a result, this director discusses and participates in deliberations of the Board of Directors on matters relating to the terms of executive compensation. In this regard, a director whose executive compensation is voted upon by the Board of Directors must abstain from such vote.

REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
 
The following statement made by the Board of Directors, sitting as a Compensation Committee, shall not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, and shall not otherwise be deemed filed under either of such Acts.
 
The Company does not have a formal compensation committee and the Company’s officers receive no compensation from the Company at this time.  Ms. Bargmann, our President, Chief Executive Officer and Chief Financial Officer, receives compensation from our wholly-owned subsidiary, Proteo Biotech AG. The Supervisory Board of Proteo Biotech AG entered into an employment contract with Ms. Bargmann on August 1, 2007. The contract became effective on August 1, 2007 and expires on July 31, 2010. Pursuant to the agreement, Ms. Bargmann received a salary of 8,000 Euro per month, which amounted to total annual compensation of $141,000 for the year ended December 31, 2008 and $134,000 for the year ended December 31, 2009.  The supervisory Board and Ms. Bargmann are obliged to negotiate the compensation at any time on the request of either party taking into consideration the economic performance of the Company. If no understanding can be reached within one month, the requesting party is allowed to terminate the agreement three months after at month’s end.
 

 
19

 

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 
 
The following table sets forth, as of December 31, 2009, certain information with respect to the Company's equity securities owned of record or beneficially by (i) each director and executive officer; (ii) each person who owns beneficially more than 5% of each class of the Company's outstanding equity securities; and (iii) all directors and executive officers as a group. The address for all of the following individuals is c/o Proteo, Inc., 2102 Business Center Drive, Irvine, California 92612.

 
Name of Beneficial Owner
 
Number of Common Shares Beneficially Owned (1)
 
Percent of Class
 
Prof. Oliver Wiedow, M.D.
 
10,680,000
 
44.7%
 
Birge Bargmann
 
2,000,000
 
8.4%
 
Dr. Barbara Kahlke
 
10,000
 
*
 
Prof. Hartmut Weigelt, Ph.D.
 
72,500
 
*
 
Holger Pusch
 
20,000
 
*
 
All directors and executive officers as a group
(5 persons)
 
12,782,500
 
53.5%
_________________
* less than 1%
(1) Based on 23,879,350 common shares outstanding as of December 21, 2009.
 
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
Pursuant to a 30-year License Agreement we have agreed to pay Dr. Wiedow three percent of the gross revenues of the Company from products based on patents where he was the principal inventor. Furthermore, we agreed to pay licensing fees of 110,000 Euro per year, for a term of six years through the year ending December 31, 2006, for a total of 660,000 Euros. This equated to annual license fees of approximately $130,000 for the year ending December 31, 2005 and $140,000 for the year ending December 31, 2006. We also agreed to refund all expenses needed to maintain such patents (e.g., patent fees, legal fees, etc).

As of December 31, 2007, we have accrued $927,900 of licensing fees payable to Dr. Wiedow. During 2004, the licensing agreement was amended to require annual payments of 30,000 Euros, to be paid on July 15 of each year, beginning in 2004. Such amount can be increased up to 110,000 Euros by June 1 of each year based on an assessment of the Company's financial ability to make such payments. The annual payments will continue until the entire obligation of 660,000 Euros has been paid. In December 2007, the Company paid to Dr. Wiedow 30,000 Euros (approx. $43,000). No other payments had been made to Dr. Wiedow as of December 31, 2007, which was a technical breach of the agreement. Dr. Wiedow waived such breach and deferred the prior year payments to 2008.

On December 23, 2008, we entered into an Amendment Agreement to the License Agreement with Dr. Oliver Wiedow (the "Amendment"). Pursuant to the original license agreement, which was entered into on December 30, 2000, we 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 original license agreement was amended to require us 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 our financial ability to make such payments. Except as described in the preceding paragraph, no other payments have been made under the original license agreement and the amount payable to Dr. Wiedow as of December 31, 2008 was 630,000 Euros.
 
Pursuant to the Amendment, Dr. Wiedow agreed that we shall pay the 630,000 Euros to him as follows: for fiscal years 2008 to 2012, we shall pay Dr. Wiedow 30,000 Euros per year, and for fiscal years 2013 to 2016, we shall pay Dr. Wiedow 120,000 Euros per year. The foregoing payments shall be made on or before December 31 of each fiscal year. In December 2008 the Company paid Dr. Wiedow 30,000 Euros.  No other payments have been made to Dr. Wiedow as of December 31, 2009, which is a technical breach of the agreement. Dr. Wiedow waived such breach and deferred the prior year payments to 2010.   While the total amount owed does not currently bear interest, the Amendment provides that any late payment shall be subject to interest at an annual rate equal to the German Base Interest Rate (1.6% as of January 1, 2009) plus six percent. In the event that our financial condition improves, the parties can agree to increase and/or accelerate the payments.


 
20

 

The Amendment also modified the royalty payment such that we will not only pay a three percent royalty on gross revenues from our 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 us or our subsidiary from the sublicensing of the licensed technology.

On September 28, 2006, Dr. Wiedow entered into an agreement to contribute 50,000 Euros (approximately $63,000) to PBAG for a 15% non-voting interest in PBAG, in accordance with certain provisions of the German Commercial Code. Dr. Wiedow will receive 15% of profits, as determined under the agreement, not to exceed in any given year 30% of the capital contributed. Additionally, he will be allocated 15% of losses, as determined under the agreement, not to exceed the capital contributed. Dr. Wiedow is under no obligation to provide additional capital contributions to the Company. During the years ended December 31, 2007 and 2006, losses of 50,000 Euros (approximately $63,000) were allocated against the contributed capital account, which is presented as minority interest in the profits and losses of Proteo Biotech on the accompanying statements of operations and comprehensive loss.
 
The disclosure requirements of Item 407(a) of Regulation S-K are not applicable to this filing.
 
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
AUDIT FEES:
 
We were billed approximately $85,000 and $83,000 for the fiscal years ended December 31, 2009 and 2008, respectively, for professional services rendered by the principal accountant for the audit of the our annual consolidated financial statements and the review of our quarterly unaudited consolidated financial statements.
 
AUDIT RELATED FEES:
 
None
 
TAX FEES:
 
We were billed approximately $5,500 and $5,500 for the fiscal years ended December 31, 2009 and 2008, respectively, for professional services rendered by the principal accountant for tax compliance.
 
ALL OTHER FEES:
 
There were no other professional services rendered by our principal accountant during the two years ended December 31, 2009 that were not included in the three categories above.
 
All of the services provided by our principal accountant were approved by our Board of Directors. No more than 50% of the hours expended on our audit for the last fiscal year were attributed to work performed by persons other than full-time employees of our principal accountant.
 
PART IV
 
Item 15.    Exhibits and Financial Statement Schedules
 
(a)(1) Financial Statements.    Reference is made to the Index to Consolidated Financial Statements on page F-1 for a list of financial statements filed as a part of this Annual Report.
 
(2) Financial Statement Schedules.    All financial statement schedules are omitted because of the absence of the conditions under which they are required to be provided or because the required information is included in the financial statements listed above and/or related notes.

(3) List of Exhibits.    The following is a list of exhibits filed as a part of this Annual Report on Form 10-K.
 
Exhibit No.
 
Description
21   
 
List of Subsidiaries of Proteo, Inc.
     
31.1
 
Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act 2002
     
31.2
 
Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act 2002
     
32   
 
Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act 2002

 
21

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
PROTEO, INC.
(Registrant)
 
       
       
Dated: March 26, 2010
By:
/s/ Birge Bargmann
 
   
Birge Bargmann
 
   
Chief Executive Officer and
Chief Financial Officer
 
       
 

Pursuant to requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

Signature
Capacity
Date
     
/s/ Birge Bargmann
Chief Executive Officer and
Chief Financial Officer
March 26, 2010
Birge Bargmann
   
     
/s/ Oliver Wiedow, M.D.
Director
March 26, 2010
Oliver Wiedow, M.D.
   
     
/s/ Hartmut Weigelt, Ph.D.
Director
March 26, 2010
Hartmut Weigelt, Ph.D.
   

 

 
22

 

PROTEO, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
Annual Consolidated Financial Statements:
 
   
Report of Independent Registered Public Accounting Firm
F-2
   
Consolidated Balance Sheets as of December 31, 2009 and 2008
F-3
   
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2009 and 2008 and for the Period From November 22, 2000 (Inception) Through December 31, 2009
F-4
   
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2009 and 2008 and for the Period From November 22, 2000 (Inception) Through December 31, 2009
F-5
   
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008 and for the Period from November 22, 2000 (Inception) Through December 31, 2009
F-8
   
Notes to Consolidated Financial Statements
F-9
 
 
 

 
F-1

 

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Proteo, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheets of Proteo, Inc. and Subsidiary (collectively the "Company"), a Development Stage Company, as of December 31, 2009 and 2008, and the related consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for the years ended December 31, 2009 and 2008, and for the period from November 22, 2000 (Inception) to December 31, 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company was not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Proteo, Inc. and Subsidiary as of December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for the years ended December 31, 2009 and 2008, and for the period from November 22, 2000 (Inception) to December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As reported in the accompanying consolidated financial statements, the Company is a development stage enterprise which has experienced significant losses since inception with no operating revenues. As of December 31, 2009, the Company's deficit accumulated during the development stage approximated $6.8 million. As discussed in Note 1 to the consolidated financial statements, a significant amount of additional capital will be necessary to advance the development of the Company's products to the point at which they may become commercially viable. These conditions, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding these matters are also described in Note 1. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ Squar, Milner, Peterson, Miranda & Williamson, LLP

March 26, 2010
Newport Beach, California
 

 
F-2

 

PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS

 
           
   
December 31,
   
December 31,
 
ASSETS
 
2009
   
2008
 
                 
CURRENT ASSETS
               
Cash and cash equivalents
  $ 689,126     $ 1,237,450  
Research supplies inventory
    581,919       114,650  
Prepaid expenses and other current assets
    67,469       191,599  
      1,338,514       1,543,699  
                 
PROPERTY AND EQUIPMENT, NET
    232,469       265,245  
                 
    $ 1,570,983     $ 1,808,944  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES
               
Accounts payable and accrued liabilities
  $ 190,627     $ 138,225  
Accrued licensing fees
    85,998       42,291  
      276,625       180,516  
                 
LONG TERM LIABILITIES
               
Deferred fees
    117,230       115,300  
Accrued licensing fees
    773,982       803,529  
      891,212       918,829  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS' EQUITY
               
Non-voting preferred stock, par value $0.001 per share; 10,000,000 shares authorized; 630,000 and 600,000 shares issued and outstanding at December 31, 2009 and 2008, respectively (Liquidation preference - Note 3)
    630       600  
Common stock, par value $0.001 per share; 300,000,000 shares authorized; 23,879,350 shares issued and outstanding
    23,880       23,880  
Additional paid-in capital
    8,567,634       8,567,634  
Note receivable for sale of preferred stock
    (1,731,306 )     (2,245,389 )
Accumulated other comprehensive income
    316,528       279,280  
Deficit accumulated during development stage
    (6,774,220 )     (5,916,406 )
                 
Total Proteo, Inc. Stockholders' Equity
    403,146       709,599  
                 
Noncontrolling Interest
    -       -  
                 
Total Stockholders' Equity
    403,146       709,599  
                 
Total Liabilities and Stockholders' Equity
  $ 1,570,983     $ 1,808,944  

SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
 
F-3

 
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
AND FOR THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31, 2009

   
2009
   
2008
   
NOVEMBER 22, 2000 (INCEPTION)THROUGH DECEMBER 31,
2009
 
                         
CONSOLIDATED STATEMENTS OF OPERATIONS
                       
                         
REVENUES
  $ -     $ -     $ -  
                         
EXPENSES
                       
General and administrative
    388,371       458,023       4,374,697  
Research and development
    513,080       536,365       2,665,709  
                         
      901,451       994,388       7,040,406  
                         
INTEREST AND OTHER INCOME (EXPENSE), NET
    43,667       104,506       203,212  
                         
NET LOSS
    (857,784 )     (889,882 )     (6,837,194 )
                         
LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
    -       -       63,004  
                         
NET LOSS ATTRIBUTABLE TO PROTEO, INC.
    (857,784 )     (889,882 )     (6,774,190 )
                         
PREFERRED STOCK DIVIDEND
    (30 )     -       (30 )
                         
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
  $ (857,814 )   $ (889,882 )   $ (6,774,220 )
 
                       
BASIC AND DILUTED LOSS ATTRIBUTABLE TO PROTEO, INC. COMMON SHAREHOLDERS
  $ (0.04 )   $ (0.04 )        
                         
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
    23,879,350       23,879,350          
                         
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                       
                         
NET LOSS ATTRIBUTABLE TO PROTEO, INC.
  $ (857,784 )   $ (889,882 )   $ (6,774,190 )
                         
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
    37,248       (91,098 )     316,528  
                         
COMPREHENSIVE LOSS
  $ (820,536 )   $ (980,980 )   $ (6,457,662 )

SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS

F-4


 
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008, AND FOR THE PERIOD
FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31, 2009
 
   
Preferred Stock Shares
   
Amount
   
Common Stock Shares
   
Amount
   
Additional Paid-in Capital
   
Stock Subscriptions Receivable
   
Accumulated Other Comprehensive Income (Loss)
   
Deficit Accumulated During Development Stage
   
Total
 
BALANCE - November 22, 2000 (Inception)
    -     $ -       -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                                         
Common stock subscribed at $0.001 per share
    -       -       4,800,000       4,800       -       (4,800 )     -       -       -  
                                                                         
Common stock issued for cash at $3.00 per share
    -       -       50,000       50       149,950       -       -       -       150,000  
                                                                         
Reorganization with Proteo Biotech AG
    -       -       2,500,000       2,500       6,009       -       -       -       8,509  
                                                                         
Net loss
    -       -       -       -       -       -       -       (60,250 )     (60,250 )
                                                                         
BALANCE - December 31, 2000
    -       -       7,350,000       7,350       155,959       (4,800 )     -       (60,250 )     98,259  
                                                                         
Common stock issued for cash at $3.00 per share
    -       -       450,000       450       1,349,550       -       -       -       1,350,000  
                                                                         
Cash received for common stock subscribed at $0.001 per share
    -       -       -       -       -       4,800       -       -       4,800  
                                                                         
Common stock issued for cash at $0.40 per share
    -       -       201,025       201       80,209       -       -       -       80,410  
                                                                         
Common stock subscribed at $0.40 per share
    -       -       5,085,487       5,086       2,029,109       (2,034,195 )     -       -       -  
                                                                         
Common stock issued for cash to related parties at $0.001 per share
    -       -       7,200,000       7,200       -       -       -       -       7,200  
                                                                         
Other comprehensive loss
    -       -       -       -       -       -       (20,493 )     -       (20,493 )
                                                                         
Net loss
    -       -       -       -       -       -       -       (374,111 )     (374,111 )
                                                                         
BALANCE - December 31, 2001
    -     $ -       20,286,512     $ 20,287     $ 3,614,827     $ (2,034,195 )   $ (20,493 )   $ (434,361 )   $ 1,146,065  
                                                                         
 
 
F-5

 
Common stock issued in connection with reverse merger
    -     $ -       1,313,922     $ 1,314     $ (1,314 )   $ -     $ -     $ -     $ -  
                                                                         
Cash received for common stock subscribed at $0.40 per share
    -       -       -       -       -       406,440       -       -       406,440  
                                                                         
Other comprehensive income
    -       -       -       -       -       -       116,057       -       116,057  
                                                                         
Net loss
    -       -       -       -       -       -       -       (1,105,395 )     (1,105,395 )
                                                                         
BALANCE - December 31, 2002
    -       -       21,600,434       21,601       3,613,513       (1,627,755 )     95,564       (1,539,756 )     563,167  
                                                                         
Common stock issued for cash at $0.60 per share
    -       -       66,667       67       39,933       -       -       -       40,000  
                                                                         
Cash received for common stock subscribed at $0.40 per share
    -       -       -       -       -       387,800       -       -       387,800  
                                                                         
Other comprehensive income
    -       -       -       -       -       -       164,399       -       164,399  
                                                                         
Net loss
    -       -       -       -       -       -       -       (620,204 )     (620,204 )
                                                                         
BALANCE - December 31, 2003
    -       -       21,667,101       21,668       3,653,446       (1,239,955 )     259,963       (2,159,960 )     535,162  
                                                                         
Common stock issued for cash at $0.40 per share
    -       -       412,249       412       164,588       -       -       -       165,000  
                                                                         
Cash received for common stock subscribed at $0.40 per share
    -       -       -       -       -       680,000       -       -       680,000  
                                                                         
Other comprehensive income
    -       -       -       -       -       -       93,186       -       93,186  
                                                                         
Net loss
    -       -       -       -       -       -       -       (639,746 )     (639,746 )
                                                                         
BALANCE - December 31, 2004
    -       -       22,079,350       22,080       3,818,034       (559,955 )     353,149       (2,799,706 )     833,602  
                                                                         
Common stock subscribed at $0.84 per share
    -       -       300,000       300       251,700       (252,000 )     -       -       -  
                                                                         
Cash received for common stock subscribed at $0.40 per share
    -       -       -       -       -       435,284       -       -       435,284  
                                                                         
Other comprehensive income
    -       -       -       -       -       -       (134,495 )     -       (134,495 )
                                                                         
Net loss
    -       -       -       -       -       -       -       (1,131,781 )     (1,131,781 )
                                                                         
BALANCE - December 31, 2005
    -     $ -       22,379,350     $ 22,380     $ 4,069,734     $ (376,671 )   $ 218,654     $ (3,931,487 )   $ 2,610  
                                                                         
 
F-6

 
Common stock subscribed at $0.60 per share
    -     $ -       1,500,000     $ 1,500     $ 898,500     $ (900,000 )   $ -     $ -     $ -  
                                                                         
Cash received for common stock subscribed at $0.40 per share
    -       -       -       -       -       414,590       -       -       414,590  
                                                                         
Other comprehensive income
    -       -       -       -       -       -       61,737       -       61,737  
                                                                         
Net loss
                    -       -       -       -       -       (649,868 )     (649,868 )
                                                                         
BALANCE - December 31, 2006
    -       -       23,879,350       23,880       4,968,234       (862,081 )     280,391       (4,581,355 )     (170,931 )
                                                                         
Cash received for common stock subscribed  at $0.60 per share
    -       -       -       -       -       862,081       -       -       862,081  
                                                                         
Other comprehensive income
    -       -       -       -       -       -       89,987       -       89,987  
                                                                         
Net loss
    -       -       -       -       -       -       -       (445,169 )     (445,169 )
                                                                         
BALANCE - December 31, 2007
    -       -       23,879,350       23,880       4,968,234       -       370,378       (5,026,524 )     335,968  
                                                                         
Preferred stock subscribed at $6.00 per share
    600,000       600       -       -       3,599,400       (3,600,000 )     -       -       -  
                                                                         
Cash received for preferred stock subscribed at $2.26 per share
    -       -       -       -       -       1,354,611       -       -       -  
                                                                         
Other comprehensive income
    -       -       -       -       -       -       (91,098 )     -       (91,098 )
                                                                         
Net loss
    -       -       -       -       -       -       -       (889,882 )     (889,882 )
                                                                         
BALANCE - December 31, 2008
    600,000       600       23,879,350       23,880       8,567,634       (2,245,389 )     279,280       (5,916,406 )     709,599  
                                                                         
Cash received for preferred stock subscribed at $2.26 per share
    -       -       -       -       -       514,083       -       -       514,083  
                                                                         
Preferred stock dividend
    30,000       30                                               (30 )     -  
                                                                         
Other comprehensive income
    -       -       -       -       -       -       37,248       -       37,248  
                                                                         
Net loss
    -       -       -       -       -       -       -       (857,784 )     (857,784 )
                                                                         
BALANCE - December 31, 2009
    630,000     $ 630       23,879,350     $ 23,880     $ 8,567,634     $ (1,731,306 )   $ 316,528     $ (6,774,220 )   $ 403,146  
 
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS

F-7


PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
AND FOR THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH DECEMBER 31, 2009

   
2009
   
2008
   
NOVEMBER 22,
2000
(INCEPTION)
THROUGH
DECEMBER 31,2009
 
                      -  
CASH FLOWS FROM OPERATING ACTIVITIES
                       
Net loss
  $ (857,784 )   $ (889,882 )   $ (6,774,190 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Depreciation
    56,523       59,279       391,201  
Bad debt expense
    60,408       0       60,408  
Loss on disposal of equipment
    -       -       4,518  
Unrealized foreign currency transaction (gains) losses
    14,160       (41,685 )     197,562  
Changes in operating assets and liabilities:
                       
Research supplies inventory
    (452,808 )     7,760       (583,500 )
Prepaid expenses and other current assets
    63,497       (119,520 )     (126,722 )
Accounts payable and accrued liabilities
    60,429       7,004       152,424  
Deferred revenue
    -       120,341       120,341  
Accrued licensing fees
    -       (42,100 )     660,713  
                      -  
NET CASH USED IN OPERATING ACTIVITIES
    (1,055,575 )     (898,803 )     (5,897,245 )
                      -  
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Acquisition of property and equipment
    (20,308 )     (5,284 )     (633,614 )
Cash of reorganized entity
    -       -       27,638  
                      -  
NET CASH USED IN INVESTING ACTIVITIES
    (20,308 )     (5,284 )     (605,976 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Proceeds from issuance of common stock
    -       -       1,792,610  
Proceeds from subscribed common stock and issuance of preferred stock to related party
    514,083       1,354,591       5,059,669  
                         
NET CASH PROVIDED BY FINANCING ACTIVITIES
    514,083       1,354,591       6,852,279  
                         
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
    13,476       (15,799 )     340,068  
                      -  
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (548,324 )     434,705       689,126  
CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD
    1,237,450       802,745       -  
                      -  
CASH AND CASH EQUIVALENTS--END OF PERIOD
  $ 689,126     $ 1,237,450     $ 689,126  
                         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
                       
                         
Preferred stock dividend
  $ 30     $ -     $ 30  
                         
Common stock issued for subscriptions receivable
  $ -     $ -     $ 1,627,755  
                         
Net assets (excluding cash) of reorganized entity received in exchange for equity securities
  $ -     $ -     $ 8,509  
                         
Unpaid balance of note receivable for issuance of preferred stock
  $ -     $ 2,245,389     $ 2,245,389  
 
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
 

 
F-8

 

PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 

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 Over-the-Counter Bulletin Board under the symbol "PTEO.OB".

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, manufacture, 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 cardiac infarction, serious injuries caused by accidents, post surgery damage to tissue and complications resulting from organ transplants.

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 begin to manufacture and 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 produce such products, or if produced, that they will be accepted in the marketplace.
 
 
 
F-9

 

PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

DEVELOPMENT STAGE AND GOING CONCERN MATTERS

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 $6,787,000. There is no assurance of any future revenues. At December 31, 2009, the Company has working capital of approximately $1,062,000, stockholders' equity of approximately $403,000, and an accumulated deficit of approximately $6.8 million.

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. 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.

These circumstances, among others, raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 

 
F-10

 
 
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 

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 condensed 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.
 
Effective January 1, 2009, the Company adopted new guidance to the Consolidation Topic of the Financial Accounting Standard Board’s (“FASB”) new Accounting Standards Codification (“ASC” or “Codification”).  This guidance improves the relevance, comparability and transparency of the financial information that a company provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This standard requires the Company to classify noncontrolling interests (previously referred to as "minority interest") as part of consolidated net earnings and to include the accumulated amount of noncontrolling interests as part of stockholders' equity.

 
 
F-11

 
 
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

PRINCIPLES OF CONSOLIDATION (continued)

The net loss amounts the Company has previously reported are now presented as "Net loss attributable to Proteo, Inc" and, as required by the Codification, earnings per share continues to reflect amounts attributable only to the Company. Similarly, in the presentation of stockholders' equity, the Company distinguishes between equity amounts attributable to the Company's stockholders and amounts attributable to the noncontrolling interest - previously classified as minority interest outside of stockholders' equity. In addition to these financial reporting changes, this guidance provides for significant changes in accounting related to noncontrolling interests; specifically, increases and decreases in the Company's controlling financial interests in consolidated subsidiaries will be reported in equity similar to treasury stock transactions. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interests are remeasured with the gain or loss reported in net earnings. Except for presentation, the implementation of this guidance did not have a material effect on the Company's consolidated financial statements because a substantive contractual arrangement specifies the attribution of net earnings and loss not to exceed the noncontrolling interest.

STARTUP ACTIVITIES

The Other Expenses Topic (Start-Up Costs Sub-topic) of the ASC requires that all non-governmental entities expense the costs of startup activities as incurred, including organizational costs. This standard has not materially impacted the Company's financial position or results of operations.

GRANTS

In the past, the Company received grants from the German government which were used to fund research and development activities and the acquisition of equipment (see Note 6). 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.

Funds were available at the earliest from January 1 of each budget year with a funds request submitted on or before December 5 of the preceding year. Funds reserved for each budget year may not be assigned, and funds not requested by December 5 of each budget year expired.
 
The Company has not applied for any additional grants since the May 2004 amended grant described in Note 6.

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.

                               
 
F-12

 
 
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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, 2009 and 2008 due to their short-term nature. The Company does not have any assets or liabilities that are measured at fair value on a recurring or non-recurring basis during the years ended December 31, 2009 and 2008 and for the period from November 22, 2000 (Inception) through December 31, 2009.

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. Such accumulated amount approximated $317,000 and $279,000 at December 31, 2009 and 2008, 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 approximately $0 and $42,000 under this licensing agreement during the years ended December 31, 2009 and 2008, respectively, and did not realize any significant foreign currency exchanges gains or losses. Prior to 2008 the Company paid approximately $43,000 under such agreement.

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 $(14,000) and $42,000 for the years ended December 31, 2009 and 2008, respectively, which are included in interest and other income (expense), net in the accompanying consolidated statements of operations and comprehensive loss.
 
 
 
F-13

 
 
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 
 
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 of deposits with banks and short-term certificates of deposit.

RESEARCH SUPPLIES INVENTORY

Research supplies inventory is stated at cost, and is entirely comprised of research supplies and materials that are expensed as consumed.

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, 2009 and 2008. There can be no assurance, however, that market conditions or demand for the Company's products or services will not change which could result in long-lived asset impairment charges in the future.

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.


 
F-14

 
 
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 (see Note 6).

PATENTS AND LICENSES

The Company does not own any patents or patents pending related to the Elafin technology and instead operates 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.

INCOME TAXES

The Company accounts for income taxes using the liability method in accordance with the Income Taxes Topic of the ASC. 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.

As of December 31, 2009 and 2008, the Company did not increase or decrease the liability for unrecognized tax benefit related to uncertain tax positions in prior periods nor did the Company increase its liability for any uncertain tax positions in the current year. Furthermore, there were no adjustments to the liability or lapse of any statutes of limitation or settlements with taxing authorities.

The Company expects resolution of unrecognized tax benefits, if created, would occur while the 100% 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 its effective income tax rate.

The Company will recognize interest and penalty related to unrecognized tax benefits and penalties as income tax expense. As of December 31, 2009, the Company has not recognized any liabilities for penalty or interest as the Company does not have any liability for unrecognized tax benefits.

The Company is subject to taxation in the US and various states. The Company's 2005 through 2009 tax years are subject to examination by the taxing authorities. With few exceptions, the Company is no longer subject to U.S. federal, state, local or foreign examinations by taxing authorities for years before 2005.



 
F-15

 
 
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 
 
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

ACCOUNTING FOR STOCK-BASED COMPENSATION

From inception to December 31, 2009, 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, 2009 or 2008..

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

Effective September 30, 2009, the Company adopted the FASB’s new Accounting Standard Codification as the single source of authoritative accounting guidance under the Generally Accepted Accounting Principles Topic.  The ASC does not create new accounting and reporting guidance, rather it reorganizes GAAP pronouncements into approximately 90 topics within a consistent structure.  All guidance in the ASC carries an equal level of authority.  Relevant portions of authoritative content, issued by the SEC, for SEC registrants, have been included in the ASC.  After the effective date of the Codification, all nongrandfathered, non-SEC accounting literature not included in the ASC is superseded and deemed nonauthoritative.  Adoption of the Codification also changed how the Company references GAAP in its consolidated financial statements.

The FASB has issued Accounting Standards Update (“ASU”) No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB believes these amendments remove potential conflicts with the SEC’s literature. All of the amendments in the ASU were effective upon issuance (February 24, 2010).
 
 
 
F-16

 

PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS (continued)

In January 2010, the FASB issued ASU No. 2010-02, Consolidation (Topic 810) – Accounting and Reporting for Decreases in Ownership of a Subsidiary - A Scope Clarification. This ASU clarifies that the scope of the decrease in ownership provisions of Subtopic 810-10 and related guidance applies to:
 
·
A subsidiary or group of assets that is a business or nonprofit activity;
·
A subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and
·
An exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity (including an equity method investee or joint venture).
 
ASU 2010-02 also clarifies that the decrease in ownership guidance in Subtopic 810-10 does not apply to: (a) sales of in substance real estate; and (b) conveyances of oil and gas mineral rights, even if these transfers involve businesses. The amendments in this ASU expand the disclosure requirements about deconsolidation of a subsidiary or derecognition of a group of assets to include:
 
·
The valuation techniques used to measure the fair value of any retained investment;
·
The nature of any continuing involvement with the subsidiary or entity acquiring the group of assets; and
·
Whether the transaction that resulted in the deconsolidation or derecognition was with a related party or whether the former subsidiary or entity acquiring the assets will become a related party after the transaction.
 
ASU 2010-02 is effective beginning in the period that an entity adopts FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB 51 (now included in Subtopic 810-10). If an entity has previously adopted Statement 160, the amendments are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009.  The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

The FASB also issued in January 2010, ASU No. 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments to the Codification in this ASU clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. This ASU codifies the consensus reached in EITF Issue No. 09-E, "Accounting for Stock Dividends, Including Distributions to Shareholders with Components of Stock and Cash." ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis.  The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

In August 2009, the FASB issued ASU 2009-05, Fair Value Measurements and Disclosures (Topic 820): Measuring Liabilities at Fair Value, which includes amendments to Subtopic 820-10, Fair Value Measurements and Disclosures—Overall, for the fair value measurement of liabilities and provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the techniques provided for in this update. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.
 
 
 
F-17

 

PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008


 
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS (continued)

In April 2009, the FASB issued additional guidance under the Fair Value Measurements and Disclosures Topic of the ASC.  This update relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales.  This update provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased.  Also included is guidance on identifying circumstances that indicate a transaction is not orderly.  The adoption of this guidance had no impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued additional guidance under the Financial Instruments Topic of the ASC.  This update requires disclosures about the fair value of financial instruments for interim reporting periods as well as in annual financial statements.  This update also requires interim financial reporting disclosures in summarized financial information at interim reporting periods. The adoption of this guidance had no impact on the Company’s consolidated financial statements.

 In April 2009, the FASB issued additional guidance under the Investments – Debt and Equity Securities Topic of the ASC.  For debt securities, this guidance replaces the management assertion that it has the intent and ability to hold an impaired debt security until recovery with the requirement that management assert if it either has the intent to sell the debt security or if it is more likely than not the entity will be required to sell the debt security before recovery of its amortized cost basis.  If management intends to sell the debt security or it is more likely than not the entity will be required to sell the debt security before recovery of its amortized cost basis, an other than temporary impairment (“OTTI”) shall be recognized in earnings equal to the entire difference between the debt security's amortized cost basis and its fair value at the reporting date.  After the recognition of an OTTI, the debt security is accounted for as if it had been purchased on the measurement date of the OTTI, with an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings.  The update also changes the presentation in the financial statements of non credit related impairment amounts for instruments within its scope.  When the entity asserts it does not have the intent to sell the security and it is more likely than not it will not have to sell the security before recovery of its cost basis, only the credit related impairment losses are to be recognized in earnings and non credit losses are to be recognized in other comprehensive income (“OCI”).  Additionally, this update provides for enhanced presentation and disclosure of OTTIs of debt and equity securities in the financial statements.  The adoption of this guidance had no impact on the Company’s consolidated financial statements.

Effective January 1, 2009, the Company adopted additional guidance to the Intangibles – Goodwill and Other Topic of the FASB ASC.  This update amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset.  The intent of this update is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under accounting for business combinations, and other U.S. GAAP.  The adoption of this guidance did not have any impact on the Company's consolidated financial statements.

 
 
F-18

 

PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS (continued)

Effective January 1, 2009, the Company adopted new guidance to the Business Combinations Topic of the FASB ASC.  This guidance establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, recognizes and measures the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  The adoption of this guidance had no impact on the Company's consolidated financial statements.  The Company will apply this guidance prospectively to any business combination on or after January 1, 2009 as required.

Effective January 1, 2009, the Company adopted additional guidance under the Fair Value Measurement and Disclosures Topic of the FASB ASC, which delays the effective date of the adoption of new guidance under the Fair Value Measurements and Disclosures Topic to January 1, 2009 for certain nonfinancial assets and nonfinancial liabilities.  Examples of applicable nonfinancial assets and nonfinancial liabilities to which this update applies include, but are not limited to:

·  
Nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination that are not subsequently remeasured at fair value;
·  
Reporting units measured at fair value in the goodwill impairment test as described in the Intangibles – Goodwill and Other Topic of the FASB ASC and nonfinancial assets and nonfinancial liabilities measured at fair value in the goodwill impairment test, if applicable; and
·  
Nonfinancial long-lived assets measured at fair value for impairment assessment under the Property, Plant and Equipment Topic of the FASB ASC.
 
The adoption of this update had no impact on the Company's consolidated financial statements.

FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The Company is currently evaluating the impact of this statement on the consolidated financial statements.

 
 
F-19

 
 
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS (continued)

In December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which codifies FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). ASU 2009-17 represents a revision to former FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. ASU 2009-17 also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. ASU 2009-17 is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. Early application is not permitted.  The adoption of this update is not expected to result in a material impact to the Company’s future consolidated financial statements.

In June 2009, the FASB issued Statements on Financial Accounting Standards (“SFAS”) No. 166, Accounting for Transfers of Financial Assets—An Amendment of FASB Statement 140, which eliminates the concept of qualified special purpose entities (QSPEs) and provides additional criteria transferors must use to evaluate transfers of financial assets. This standard modifies certain guidance contained in FASB ASC 860 and is adopted into the Codification through the issuance of ASU 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets. In order to determine whether a transfer is accounted for as a sale, the transferor must assess whether it and all of its consolidated entities have surrendered control of the financial assets. The standard also requires financial assets and liabilities retained from a transfer accounted for as a sale to be initially recognized at fair value. This standard is effective for fiscal years and interim periods beginning after November 15, 2009, with adoption applied prospectively for transfers that occur on or after the effective date.   The Company is currently evaluating the impact of this statement on the consolidated financial statements.

Except as described above, in the opinion of management, neither the FASB, its Emerging Issues Task Force, the AICPA, nor the SEC have issued any additional accounting pronouncements that are expected to have material impact on the Company's future consolidated financial statements.



 
F-20

 
 
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 

2. PROPERTY AND EQUIPMENT

Property and equipment, all of which is located in Kiel, Germany, consist of the following:
 
   
December 31,
 
   
2009
   
2008
 
Technical and laboratory equipment
 
$
442,319
   
$
422,855
 
Plant
   
211,819
     
208,331
 
Leasehold improvements
   
5,329
     
5,241
 
Office equipment
   
29,925
     
36,639
 
     
689,392
     
673,066
 
Less accumulated depreciation and amortization
   
(456,923
)
   
(407,821
)
Total
 
$
232,469
   
$
265,245
 
 
Depreciation and amortization expense included in general and administrative expense in the consolidated statements of operations was approximately $57,000 and $59,000 for the years ended December 31, 2009 and 2008, respectively.  
 
During the two years ended December 31, 2009, there were no long-lived assets that were considered to be impaired.


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.
 
 
 
F-21

 
 
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 

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 purchase 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.
 

 
F-22

 
 
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 

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 FIDEsprit (the “Investor”), a common stockholder and related party. Pursuant to the Stock Purchase Agreement, the Company sold and issued to the Investor 600,000 shares of Series A Preferred Stock at a price of $6.00 per share, for an aggregate price of $3,600,000 ("Purchase Price"). In payment of the Purchase Price, the Investor delivered to the Company a promissory note in the amount of $3,600,000 (the “Note”), which matured on March 31, 2009. During the years ended December 31, 2009 and 2008, the Company received payments approximating $514,000 (including payments received under the Forbearance Agreement, as described below) and $1,355,000, respectively, 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. The Series A Preferred Stock note receivable is reported as a reduction of stockholders' equity at December 31, 2009.
 
On July 6, 2009, the Company and Investor entered into a Forbearance Agreement and General Release (the “Forbearance Agreement”) to renegotiate the terms of the Note.  Pursuant to the Forbearance Agreement, the Investor acknowledged and agreed that, as of July 6, 2009, it was obligated to the Company under the Note for the aggregate sum of $1,940,208 (the “Indebtedness”), which represents the unpaid principal amount as of such date plus a late charge equal to three percent (3%) of the unpaid principal amount (approximately $65,000).  In exchange for the Company’s agreement to forbear from exercising its rights under the Note and Guaranty, the Investor has agreed to pay the Indebtedness by making monthly payments in the amount of $140,000 commencing on the first business day of September 2009 and continuing on the first business day of each succeeding month thereafter until the Indebtedness is paid in full.  As of 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 (see Note 8). The receivable for late fees was fully reserved at December 31, 2009.
 
Effective June 30, 2009, the Company declared a stock dividend of 30,000 shares of Series A Preferred Stock payable to its Series A Preferred Stock holders pursuant to the Stock Purchase Agreement.
 
 
 
F-23

 
 
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 

4. NONCONTROLLING INTEREST

On September 28, 2006, a shareholder of the Company entered into an agreement to contribute 50,000 Euros (approximately $63,000) 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. 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 statements of operations.

5. INCOME TAXES

There is no material income tax expense recorded for the years ended December 31, 2009 or 2008 due to the Company's net losses.

Income tax expense for the years ended December 31, 2009 and 2008 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:
 
   
2009
   
2008
 
             
Income tax benefit at U.S. federal statutory rates
 
$
(286,000
)
 
$
(303,000
)
Change in valuation allowance
   
 286,000
     
303,000
 
State and local income taxes, net of federal income tax effect
   
800
     
800
 
                 
   
$
800
   
$
800
 

The Company has a deferred tax asset and an equal amount of valuation allowance of approximately $1,879,000 and $1,593,000 at December 31, 2009 and 2008, 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, 2009, the Company had tax net operating loss carryforwards ("NOLs") of approximately $1,203,000 and $4,711,000 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

GRANTS

In May 2004, the German State of Schleswig-Holstein granted Proteo Biotech AG approximately 760,000 Euros (the "Grant") for further research and development of the Company's pharmaceutical product Elafin. The Grant, as amended, covered the period from April 1, 2004 to December 31, 2007 if certain milestones were reached by September 30 of each year. The Grant covered approximately 50% of eligible research and development costs and was subject to the Company's ability to otherwise finance the remaining costs.
 

 
F-24

 
 
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 

6. COMMITMENTS AND CONTINGENCIES (continued)

GRANTS (continued)

The Company received approximately 24,000 Euros ($34,000) of grant funds during the year ended December 31, 2008. The Company had not applied for any other grants from the German government since the Grant described above.

DR. WIEDOW LICENSE AGREEMENT

On December 30, 2000, the Company entered into a thirty-year license agreement, beginning January 1, 2001 (the "License Agreement"), with Dr. Oliver Wiedow, MD, the owner and inventor of several patents, patent rights and technologies related to Elafin. Pursuant to the License Agreement, the Company agreed to pay Dr. Wiedow an annual license fee of 110,000 Euros for a period of six years. No payments were made through fiscal year 2003. In 2004, the License Agreement was amended to require the Company to make annual payments of 30,000 Euros, to be paid on July 15 of each year, beginning in 2004. Such annual payment could be increased to 110,000 Euros by June 1 of each year based on an assessment of the Company's financial ability to make such payments. In December 2007 the Company paid Dr. Wiedow 30,000 Euros. The License Agreement was again amended by an Amendment Agreement to the License Agreement (the "Amendment") dated December 23, 2008. Pursuant to the Amendment, the Company and Dr. Wiedow have agreed that the Company would pay the outstanding balance of 630,000 Euros to Dr. Wiedow as follows: for fiscal years 2008 to 2012, the Company shall pay Dr. Wiedow 30,000 Euros per year, and for fiscal years 2013 to 2016, the Company shall pay Dr. Wiedow 120,000 Euros per year. The foregoing payments shall be made on or before December 31 of each fiscal year. In December 2008 the Company paid Dr. Wiedow 30,000 Euros. No payments were made under this agreement during 2009. While the total amount owed does not currently bear interest, the Amendment provides that any late payment shall be subject to interest at an annual rate equal to the German Base Interest Rate (1.6% as of January 1, 2009) plus six percent. In the event that the Company's financial condition improves, the parties can agree to increase and/or accelerate the payments.  
 
The Amendment also modified the royalty payment such that 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, 2009 and 2008, the Company has accrued approximately $860,000 and $846,000, respectively, of licensing fees payable to Dr. Wiedow, of which approximately $86,000 and $42,000, respectively, is included in current liabilities with the remainder included in long-term liabilities.

Dr. Wiedow, who is a director of the Company, beneficially owned approximately 45% of the Company's outstanding common stock as of December 31, 2009.
 

 
F-25

 
 
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 

6. COMMITMENTS AND CONTINGENCIES (continued)

DR. WIEDOW LICENSE AGREEMENT (continued)

On October 4, 1999, Dr. Wiedow and AstraZeneca PLC (formerly Zeneca Limited) entered into an agreement to assign all patents and technology related to Elafin to Dr. Wiedow in exchange for a royalty of 2% of any future net sales from such patents and technology. The Company, under its December 30, 2000 licensing agreement with Dr. Wiedow discussed above, assumed such royalty obligation.

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 has deferred certain amounts received, and may receive additional milestone-payments upon Minapharm's attainment of certain clinical milestones as well as royalties on any future net product sales. 

LEASES

The Company has entered into several leases for office and laboratory facilities in Germany, expiring at dates through December 2011.
 

 
F-26

 
 
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 

6. COMMITMENTS AND CONTINGENCIES (continued)

LEASES (continued)
 
Future minimum rental payments under non-cancelable operating leases, in Euros and equivalent U.S. dollars (based on the December 31, 2009 exchange rate), approximate the following for the years ending December 31:
 
2010
 
50,000
 
2011
   
23,000
 
         
   
 $
73,000
 

The Company also leases office space in Irvine, California on a month-to-month basis. Total rental expense for all facilities for the years ended December 31, 2009 and 2008, and for the period November 22, 2000 (Inception) to December 31, 2009 approximated $35,000, $38,000 and $315,000, respectively.

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, 2009 and 2008:

   
2009
   
2008
 
             
Numerator for basic and diluted loss per common share:
           
     Net loss attributable to Proteo, Inc.
 
$
(857,784
)
 
$
(889,882
)
     Preferred stock dividend
   
(30
)
   
-
 
     Net loss charged to common stockholders
   
(857,814
)
   
(889,882
)
                 
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
 
$
(0.04)
   
$
(0.04)
 
 
 

 
F-27

 
 
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 

8. SUBSEQUENT EVENTS

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 (Guarantor of the Note, see Note 3). 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 (see Note 3). 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.
 





 
F-28

 

proteo_10k-ex2100.htm SUBSIDIARIES


proteo_10k-ex2100.htm


EXHIBIT 21

SUBSIDIARIES OF PROTEO, INC.

Proteo Biotech AG, a German joint stock corporation
proteo_10k-ex3101.htm CERTIFICATION


proteo_10k-ex3101.htm


EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Birge Bargmann, certify that:

1. I have reviewed this annual report on Form 10-K (hereinafter referred to as "this report") of Proteo, Inc. (hereinafter referred to as "the registrant");

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

b)  designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)  evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)  disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to affect, the registrant's internal control over financial reporting; and;

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 26, 2010

 
By: /s/ Birge Bargmann
 
Birge Bargmann
 
Chief Executive Officer
 
(Principal Executive Officer)
 
proteo_10k-ex3102.htm CERTIFICATION


proteo_10k-ex3102.htm


EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Birge Bargmann, certify that:
 
1. I have reviewed this annual report on Form 10-K (hereinafter referred to as "this report") of Proteo, Inc. (hereinafter referred to as "the registrant");

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

b)  designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)  evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)  disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to affect, the registrant's internal control over financial reporting; and;

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 26, 2010
 
 
By: /s/ Birge Bargmann
 
Birge Bargmann
 
Chief Financial Officer
 
(Principal Accounting Officer)
 
proteo_10k-ex3200.htm CERTIFICATION


proteo_10k-ex3200.htm


EXHIBIT 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies, in her capacity as an officer of Proteo, Inc. (the "Company"), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to her knowledge:

(1) the Annual Report of the Company on Form 10-K for the period ended December 31, 2009 (hereinafter referred to as the "Annual Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 26, 2010

/s/ Birge Bargmann

Birge Bargmann
Chief Executive Officer and
Chief Financial Officer
 


A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO PROTEO, INC. AND WILL BE RETAINED BY PROTEO, INC. AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.

THIS CERTIFICATION IS BEING FURNISHED PURSUANT TO RULE 15(D) AND SHALL NOT BE DEEMED "FILED" FOR PURPOSES OF SECTION 18 OF THE EXCHANGE ACT (15 U.S.C. 78R), OR OTHERWISE SUBJECT TO THE LIABILITY OF THAT SECTION. THIS CERTIFICATION SHALL NOT BE DEEMED TO BE INCORPORATED BY REFERENCE INTO ANY FILING UNDER THE SECURITIES ACT OR THE EXCHANGE ACT, EXCEPT TO THE EXTENT THAT THE COMPANY SPECIFICALLY INCORPORATES IT BY REFERENCE.


Additional Files
FileSequenceDescriptionTypeSize
0001019687-10-001144.txt   Complete submission text file   1567579
$PTEO

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