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.
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.
See page ii for additional information regarding forward-looking statements.
OVERVIEW
Proteo is a clinical stage drug development company focusing on the development
of anti-inflammatory treatments for rare diseases with significant unmet needs.
The Company's management deems its drug candidate Elafin for intravenous use to
be one of the most prospective treatments of acute postoperative inflammatory
complications, in particular, after esophageal cancer surgery. Elafin also
appears to be a promising compound for the treatment of pulmonary arterial
hypertension, for preventing complications of organ transplantation and for
treatment of acute respiratory distress syndrome (ARDS).
The Company's success will depend on its ability to prove that Elafin is well
tolerated by humans and its efficacy in the indicated diseases in order to
demonstrate a favorable risk/benefit balance. There can be no assurance that the
Company will be able to develop feasible production procedures in accordance
with GMP standards, or that Elafin will receive any governmental approval for
its use in further clinical trials or its use as a drug in any of the intended
applications.
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Proteo has obtained Orphan drug designations within the European Union for the
use of Elafin for the treatment of pulmonary arterial hypertension and chronic
thromboembolic pulmonary hypertension as well as for the treatment of esophageal
cancer. In the latter indication, especially the postoperative inflammation, the
main reason for postoperative morbidity, will be targeted by Elafin treatment.
Orphan drug designation assures exclusive marketing rights for the treatment of
the respective disease within the EU for a period of up to ten years after
receiving market approval. In addition, a simplified, accelerated and less
expensive approval procedure with the assistance of EMA, the European FDA
equivalent, can be drawn upon.
Within the United States of America, Proteo has obtained Orphan drug
designations for the use of Elafin for the treatment of pulmonary arterial
hypertension as well as for the prevention of inflammatory complications of
transthoracic esophagectomy. These designations are associated with reduced fees
to regulatory agencies and provide a 7-year marketing exclusivity in the U.S. on
drug sales for the first company to obtain marketing approval of a particular
drug.
For the development of its lead product Elafin, Proteo has established a network
of globally renowned research institutes, physicians and hospitals in Europe and
the US. The development of Elafin has been widely supported by public grants.
Worldwide leading funding bodies, such as the American NIH and the British MRC,
supported preclinical and clinical studies on Elafin with high volume grants.
Proteo currently focuses on the clinical development of Elafin for prophylactic
treatment of acute postoperative inflammatory complications in the surgical
therapy of esophageal cancer and Elafin for chronical treatment of pulmonary
arterial hypertension ("PAH"). Clinical development for PAH is conducted in
cooperation with third parties. Further details are described in Item 1.
The tolerability of Elafin in healthy male subjects was demonstrated in a Phase
I clinical single dose escalating study. A placebo-controlled Phase II clinical
trial on the effect of Elafin on the postoperative inflammatory reactions and
postoperative clinical course was conducted in patients undergoing transthoracic
esophagectomy for esophageal cancer. A further Phase II study, EMPIRE (Elafin
Myocardial Protection from Ischemia Reperfusion Injury), an
investigator-initiated trial at Edinburgh University, was conducted to
investigate the safety and efficacy of Elafin in coronary bypass surgery.
Further details are described in Item 1.
In June 2016, we announced that our subsidiary has been awarded a BFEI grant
(the "Grant") from the German State of Schleswig-Holstein. The Grant has a
volume of up to Euro 874,000 and will be used for the R&D program to develop a
new formulation of Proteo's lead compound Elafin. If effective, a new Elafin
formulation would allow Proteo to extend the development pipeline to treat
chronic diseases, such as pulmonary arterial hypertension ("PAH"). In June 2018,
we received approval from the German State of Schleswig-Holstein to extend the
project under the Grant for another 12 months through November 30, 2019. In
November of 2019, the Company was granted a second extension through April 30,
2020. During April 2020, the Company applied for a third extension of 6 months
due to delays caused by the COVID-19 pandemic. On April 22, 2020, we received
approval from the German State of Schleswig-Holstein to extend the project under
Grant for another 6 months through October 31, 2020.
In September 2016, we entered into a Preferred Stock Purchase Agreement (the
"Agreement") with a third-party ("Investor"). Pursuant to the Agreement, the
Company agreed to issue and sell to the Investor 1,000,000 shares of the
Company's Series B-1 Preferred Stock at the price of 1.00 Euro per share, for an
aggregate purchase price of 1,000,000 Euros. The initial 100,000 Euros
(approximately $117,000) deposit was fully received by September 2018, and
100,000 shares of Series B-1 Preferred Stock were issued during September 2018.
During 2019, an additional 20,000 shares of Series B-1 Preferred Stock were
issued under this agreement. Subsequent to December 31, 2019, we received a
further 10,000 EUR, and 10,000 shares of Series B-1 Preferred Stock were issued
during January 2020. We are currently negotiating with the Investor to complete
the transaction, but at this time we believe it is unlikely that the full
transaction will close in the future. See Note 3 to the accompanying
consolidated financial statements for additional information.
In August 2017, the Company submitted a Drug Master File ("DMF") for Elafin to
the FDA for use in clinical trials within the United States. The DMF supports
the investigator-initiated Investigational New Drug ("IND") application of
Marlene Rabinovitch at Stanford University. At the end of September 2017, the
FDA completed its safety review of the IND application and concluded that
Marlene Rabinovitch at Stanford University may proceed with the proposed
clinical investigation with Elafin for the treatment of pulmonary arterial
hypertension. The conduct of a clinical phase I trial (subcutaneous
administration, 7 days in healthy volunteers) will be financed by a new
NIH-funded project of our cooperation partners and the trial started in 2019.
During the three-month period ended September 30, 2018, our cooperation partners
received the approval letters from the responsible Institutional Review Boards.
In September 2018, we entered into a Clinical Material Transfer Agreement with
our cooperation partners within the framework of the clinical phase I trial, and
as well into a Material Transfer Agreement with a third-party laboratory in the
US.
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In March 2019, we were informed by our research partners at Stanford University
School of Medicine that The Duke University Early Phase Research Unit has
initiated the recruitment of healthy individuals for the Phase I clinical trial
in the U.S. to assess the safety and tolerability of repeated single
subcutaneous doses of Elafin. Proteo's research partners and investigators at
Stanford University School of Medicine, Dr. Marlene Rabinovitch and Dr. Roham
Zamanian, are responsible for the conduct of the investigator-initiated trial.
The trial with the title "Safety and Tolerability of Escalating Doses of
Subcutaneous Elafin (Tiprelestat) Injection in Healthy Normal Subjects" marks
the beginning of the clinical development program of Elafin for chronic use
initially focusing on the treatment of patients suffering from the still fatal
disease pulmonary arterial hypertension (PAH). In October 2019, we were informed
by our research partners at Stanford University School of Medicine that dosing
and follow-up of the last subject has been completed. No severe adverse events
occurred. A final report is expected during the first half of 2020.
In October 2018, our subsidiary established the test site, Proteo R&D, for the
operation of an archive in accordance with the principles of Good Laboratory
Practice ("GLP") for archiving GLP documents related to our own development
products. We have applied for GLP attestation of test category 9 for the test
site. The GLP inspection occurred in December 2018. In February 2019, we
received the GLP Certificate from the competent authority. After archiving of
first GLP documents during 2019, a GLP re-inspection occurred in September 2019.
The Inspectors did not note any major deviations from GLP principles.
In December 2018, the Company entered into a Common Stock Purchase Agreement
with the purchaser of its stock, Jork von Reden (the "Investor"), who is also a
member of our board of directors. Pursuant to the Agreement, we agreed to issue
and sell to the Investor 1,000,000 shares of Proteo's Common Stock at the price
of $0.08 per share, for an aggregate purchase price of USD $80,000. The purchase
price was equal to the closing price of our common stock as quoted on the OTC
Pink on December 6, 2018. See Note 3 to the accompanying consolidated financial
statements for additional information.
In April 2019, we entered into a Preferred Stock Purchase Agreement with a
third-party. Pursuant to the Agreement, the Company agreed to issue and sell to
the Investor 1,000,000 shares of the Company's Series B-2 Preferred Stock at the
price of 1.00 Euro per share, for an aggregate purchase price of 1,000,000
Euros. See Note 3 to the accompanying consolidated financial statements for
additional information.
During 2019, and up to date, the Company continued its discussions to make its
Elafin technology available for licensing and partnership with external
partners.
Subsequent events
In January 2020, the European Patent Office granted a patent "Use of Elafin for
disorders associated with elastase independent increase in troponin" for
preventing or treating certain disorders associated with cardiac muscle damage
with Elafin.
On February 28, 2020, we entered into a Common Stock Purchase Agreement with a
third-party. Pursuant to the Agreement, the Company agreed to issue and sell to
Investor 4,250,000 shares of the Company's common stock at the price of $0.0247
per share for an aggregate purchase price of USD $104,975. The Purchase Price
was equal to the closing price of the Company's common stock as quoted on the
OTC Markets on February 25, 2020.
On February 29, 2020, we entered into a Common Stock Purchase Agreement with a
third-party. Pursuant to the Agreement, the Company agreed to issue and sell to
Investor 4,250,000 shares of the Company's common stock at the price of $0.0247
per share for an aggregate purchase price of USD $104,975. The Purchase Price
was equal to the closing price of the Company's common stock as quoted on the
OTC Markets on February 25, 2020.
RESULTS OF OPERATIONS
REVENUES
No revenues were recognized for the year ended December 31, 2019. Revenue
reported for 2018 primarily represent income recognized under the Development
Agreement and Grant revenue in excess of certain expenses, as described above
and in Notes 5 and 6 to the accompanying consolidated financial statements. The
Company entered into the Development Agreement during May 2014. The Company
received, inclusive of accruals, approximately 15,000 Euros ($18,000) for the
years ended December 31, 2018, which are non-refundable. No revenue sharing
payments will be made by the Company unless Elafin is commercialized.
Accordingly, the payments received are being accounted for as payments for the
Company to use reasonable efforts to complete development, obtain regulatory
approvals, and to commercialize Elafin. Therefore, the amounts received were
deferred and are being recognized as revenue over the projected performance
period under the agreement in direct relation to development expenses incurred.
Approximately $99,000 was recognized as development revenue during the year
ended December 31, 2018.
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Grant funds received in excess of research and development expenses are also
reported as revenues. Such amounts approximated $0 and $107,000 for the years
ended December 31, 2019 and 2018, respectively.
OPERATING EXPENSES
The Company's operating expenses for the year ended December 31, 2019 were
approximately $245,000, an increase of approximately $36,000 over the year ended
December 31, 2018. General and administrative expenses (mostly professional and
legal fees) for the year ended December 31, 2019 increased only $6,000 to
$215,000.
Research and development expenses, net of Grants, increased $30,000 over the
same periods to $30,000 for the year ended December 31, 2019. The increase in
research and development expenses was primarily due a reduction in the Grant
reimbursement reported. Grant funds recorded during the year ended December 31,
2018 approximated $306,000, which were netted against $199,000 of research and
development expenses and presented as net Grant revenue, while during the year
ended December 31, 2019, Grant funds of $128,000 were offset against $158,000 of
research and development costs and presented as research and development
expense, net of grants. Certain research expenses that were expensed in prior
periods under GAAP were not eligible for reimbursement under the Grant until the
first quarter of 2018, resulting in more grant funds being recognized than
expenses incurred that period. Research and development costs, excluding Grant
reimbursements, for the year ended December 31, 2019 decreased from the same
period in 2018 by $41,000, primarily due to a reduction in research and
development activities in 2019.
INTEREST AND OTHER INCOME (EXPENSE)
Interest and other income (expense), net for the year ended December 31, 2019
was $24,000 compared to $42,000 in 2018. The balances are primarily comprised of
foreign currency transaction gains on accrued licensing fees denominated in
Euros (but expected to be settled in U.S. Dollars) in each year, driven by a
strengthening of the U.S. Dollar compared to the Euro in both 2019 and 2018,
with a smaller increase in 2019.
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
We experienced other comprehensive losses of approximately $2,000 and $1,000 due
to foreign currency translation adjustments during the years ended December 31,
2019 and 2018, respectively. The increase is primarily due to a strengthening of
the U.S. Dollar (our reporting currency) compared to the Euro (the functional
currency of PBAG) during 2019 and 2018.
LIQUIDITY AND CAPITAL RESOURCES
Proteo, Inc. owns 100% of Proteo Biotech AG, its operating subsidiary in Germany
(the "Subsidiary"). To date the Subsidiary has not had any significant earnings,
and it does not expect to have any significant earnings for several years
pending the approval of its first product candidate. In this regard, there were
no undistributed earnings of the Subsidiary to repatriate to the U.S. parent
(i.e. the Company).
The Company received, net of accruals, 0 Euros ($0) and approximately 20,000
Euros ($24,000) under the Development Agreement during the years ended December
31, 2019 and 2018, respectively. At this time, we believe it is unlikely that
the Company will receive any future amounts under the Development Agreement.
In June 2016, the German State of Schleswig-Holstein granted PBAG approximately
874,000 Euros (approximately $1,047,000) for further research and development of
the Company's pharmaceutical product Elafin (the "Grant"). The Grant covers 50%
of eligible research and development costs incurred from December 1, 2015
through October 31, 2020. Grant funds, net of accruals, approximating 114,000
Euros ($128,000) and 259,000 Euros ($306,000) were recognized during 2019 and
2018, respectively. The Company expects to receive approximately 163,000 Euro
(approximately $183,000) in future periods under this Grant.
In September 2016, the Company entered into a Preferred Stock Purchase Agreement
(the "Agreement") with a third-party ("Investor"). Pursuant to the Agreement,
the Company agreed to issue and sell to the Investor 1,000,000 shares of the
Company's Series B-1 Preferred Stock at the price of 1.00 Euro per share, for an
aggregate purchase price of 1,000,000 Euro. The initial 100,000 Euro
(approximately $117,000) deposit was fully received by September 2018, with
$60,000 received during the nine-months ended September 30, 2018. As conditions
for the initial closing were met, 100,000 shares of Series B-1 Preferred Stock
were issued during September 2018. In 2019 we received 20,000 Euro and issued
20,000 shares of Series B-1 Preferred Stock. In January 2020 we received an
additional 10,000 Euro and issued 10,000 shares of Series B-1 Preferred Stock.
However, the Investor failed to deliver the full purchase price. Currently,
Management believes that the Company will not receive any further payments under
the Agreement. See Note 3 to the accompanying consolidated financial statements
for additional information.
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In April 2019, the Company entered into a Preferred Stock Purchase Agreement
with a third-party. Pursuant to the Agreement, the Company agreed to issue and
sell to the Investor 1,000,000 shares of the Company's Series B-2 Preferred
Stock at the price of 1.00 Euro per share, for an aggregate purchase price of
1,000,000 Euros. The initial 100,000 Euros (approximately $113,000) deposit was
fully received by June 2019. As conditions for the initial closing were met,
100,000 shares of Series B-2 Preferred Stock were issued during June 2019.
During the three-month period ended September 30, 2019, further 59,800 Euros
(approximately $67,000) were received and 59,800 shares of Series B-2 Preferred
Stock were issued. In September 2019 the B-2 Stock Investor requested the
Company to renegotiate the Preferred Stock Purchase Agreement. Currently,
Management believes that an agreement cannot be reached and that the Company
will not receive any further payments under the B-2 Stock Agreement.
In December 2018, the Company entered into a Common Stock Purchase Agreement
with the purchaser of its stock, Jork von Reden (the "Investor"). Pursuant to
the Agreement, we agreed to issue and sell to the Investor 1,000,000 shares of
Proteo's Common Stock at the price of $0.08 per share, for an aggregate purchase
price of USD $80,000. We received $40,000 in December 2018 and $40,000 in
January 2019 under this agreement.
In November 2019, Dr. Wiedow agreed in writing to waive any non-payment defaults
under the License Agreement and to defer all current payments to November 15,
2021. See Note 8 to the consolidated financial statements included elsewhere for
the payment terms under the License Agreement.
On March 10, 2020, the World Health Organization declared the coronavirus
outbreak to be a pandemic. Actions taken around the world to help mitigate the
spread of the coronavirus include restrictions on travel, quarantines in certain
areas, and forced closures for certain types of public places and businesses.
The coronavirus and actions taken to mitigate it have had and are expected to
continue to have an adverse impact on the economies and financial markets of
many countries, including the geographical areas in which the Company operates.
While it is unknown how long these conditions will last and what the complete
financial effects will be to the Company, the Company believes it reasonably
possible that it is vulnerable to the risk of a near-term severe impact. The
coronavirus has caused a substantial disruption in U.S. and international
financial markets. The Company cannot at this point determine the subsequent
near and long-term impact of the COVID-19 pandemic on the value of the Company.
The Company has cash approximating $100,000 as of December 31, 2019 to support
current and future operations. This is an increase of $11,000 over the December
31, 2018 cash balance of approximately $89,000. Additionally, in February 2020,
the Company received cash approximating $210,000 in connection with the sale of
8,500,000 shares of Common Stock. Such cash is held by the Subsidiary in Germany
in Euros. The Company does not intend to repatriate any amount of this cash to
the United States as it will be used to fund the Subsidiary's continued
operations. Given the Company's current cash on hand and anticipated collections
under the Grant of the German State of Schleswig-Holstein management believes
the Company will have sufficient cash resources to cover its operations through
one year from the filing of this Form 10-K. As for periods beyond this filing,
we expect to continue to direct the majority of our research and development
expenses towards the development of Elafin. It is extremely difficult for us to
reasonably estimate all future research and development costs associated with
Elafin due to the number of unknowns and uncertainties associated with
preclinical and clinical trial development.
These unknown variables and uncertainties include, but are not limited to:
· the uncertainty of future clinical trial results;
· the uncertainty of the ultimate number of patients to be treated in any
current or future clinical trial;
· the uncertainty of the applicable regulatory bodies allowing our studies
to move forward;
· the uncertainty of the rate at which patients are enrolled into any
current or future study. Any delays in clinical trials could significantly
increase the cost of the study and would extend the estimated completion
dates;
· the uncertainty of terms related to potential future partnering or
licensing arrangements;
· the uncertainty of protocol changes and modifications in the design of our
clinical trial studies, which may increase or decrease our future costs;
· the uncertainty of our ability to raise capital to support our future
research and development efforts;
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As a result of the foregoing, the Company's success will largely depend on its
ability to generate revenues from out-licensing activities, secure additional
funding through the sale of its Common/Preferred Stock and/or the sale of debt
securities. The company's management and the board of directors are currently
exploring strategic alternatives in order to meet its operating cash flow
requirements. There can be no assurance, however, that the Company will be able
to generate revenues from out-licensing activities and/or to consummate debt or
equity financing in a timely manner, or on a basis favorable to the Company, if
at all. If we are unable to secure additional financing when needed, we may
choose to delay or reduce other spending including Elafin research and
development spending.
RESEARCH SUPPLIES
The Company's capitalized research supplies, which are all held by PBAG in
Germany, have decreased from $58,000 at December 31, 2018 to $47,000 at December
31, 2019, primarily due to use of supplies during research and development
activities, as well as due to a strengthening U.S. Dollar relative to the Euro.
GRANT FUNDS RECEIVABLE
Grant funds receivable decreased from $38,000 at December 31, 2018 to $34,000 at
December 31, 2019. The Company received the 2018 receivable during 2019 and
accrued for an additional $34,000 for reimbursement at the end of 2019, which
was received in 2020.
LONG TERM ASSETS
The Company's capitalized property and equipment, which are all located in
Germany, decreased $1,000 during 2019, primarily due to depreciation.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities decreased from $127,000 at December 31,
2018 to $101,000 at December 31, 2019, primarily due to the payment of general
and administrative expenses during 2019.
ACCRUED LICENSING FEES
Accrued licensing fees decreased by $13,000 to $639,000 at December 31, 2019.
The decrease is solely due to the strengthening of U.S. Dollar relative to the
Euro. The Company owed 570,000 Euros under the licensing agreement at both
December 31, 2019 and 2018.
OTHER LIABILITIES
Other liabilities at December 31, 2018 and 2019 consist of certain employee
compensation that was incurred in 2015 through 2017, but for which payment was
agreed to be deferred until 2021.
CAPITAL EXPENDITURES
None significant.
INFLATION
Management believes that inflation has not had a material effect on the
Company's results of operations during 2019 and 2018.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not currently have any off balance sheet arrangements.
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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 of America.
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.
RESEARCH AND DEVELOPMENT ACTIVITIES
The Company capitalizes the cost of supplies used in its research and
development activities if such supplies are deemed to have alternative future
uses, usually in other research and development projects. Such costs are
expensed as used to research and development expenses in the accompanying
consolidated statements of operations.
Nonrefundable advance payments for goods or services that have the
characteristics that will be used or rendered for future research and
development activities are deferred and capitalized as prepaid expenses. Such
amounts are expensed to research and development as the related goods and
services are received.
The costs of materials that are acquired for a particular research and
development project and that have no alternative future uses (in other research
and development projects or otherwise) and therefore no separate economic values
are expensed as research and development costs at the time the costs are
incurred.
The Company may receive grants from the German government which are used to fund
research and development activities. Grant funds to be received for the
reimbursement of qualified research and development expenses are offset against
such expenses in the accompanying consolidated statements of operations and
comprehensive income (loss) when the related expenses are incurred.
FOREIGN CURRENCY FINANCIAL REPORTING
Assets and liabilities of the Company's German operations are translated from
Euros (the functional currency) into U.S. dollars (the reporting currency) at
period-end exchange rates. Expense and grant receipts are translated at weighted
average exchange rates for the period. Net exchange gains or losses resulting
from such translation are excluded from the consolidated statements of
operations and are included in comprehensive loss and accumulated in a separate
component of stockholders' deficit.
The Company records payables related to a certain licensing agreement 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 made no payments under this licensing
agreement during the years ended December 31, 2019 and 2018.
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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.
DEVELOPMENT AGREEMENT
On May 16, 2014, the Company entered into a funding and revenue sharing
agreement (the "Development Agreement") with an unrelated third party (disclosed
in the Company's Current Report on 8-K filed with the SEC on May 22, 2014). The
third party agreed to fund operational expenses of the Company as well as the
development costs related to the clinical development program aimed at receiving
regulatory approval for the use of Elafin for the intravenous treatment of
patients undergoing esophageal cancer surgery in the European Union. Revenue
participation right payments will be made to the party when and if Elafin is
commercialized within the European Union for the intravenous treatment of
patients undergoing esophageal cancer surgery. Total payments by the third party
to the Company were to not exceed 3.5 million Euros (approximately $4.1
million). Through December 31, 2019, the Company received approximately
1,633,000 Euros ($1,989,000) of the 3.5 million Euros maximum.
The Development Agreement will terminate after the earlier of 15 years or 10
complete and consecutive years after the first regulatory approval of Elafin for
this indication. Under no circumstances are the payments refundable, even if the
drug is never commercialized. As no revenue sharing payments will be made unless
Elafin is commercialized, the payments received are being accounted for as
payments for the Company to use reasonable efforts to complete development,
obtain regulatory approvals, and to commercialize Elafin (i.e. the performance
period). Therefore, amounts received from the third party will be deferred and
recognized as revenue over the projected performance period under the
Development Agreement in relation to expenses incurred.
For the years ended December 31, 2019 and 2018, the Company recognized
approximately $0 and $99,000, respectively, of development income under the
Development Agreement, which is included in revenues in the accompanying
consolidated statements of operations. There were no deferred revenues at
December 31, 2019 and 2018. At this time, the Company believes it is unlikely
that they will receive any future amounts under the Development Agreement.
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, 2019 and 2018, management believes the Company did not have
any uncertain tax positions and, accordingly, there is no accrual for any
liability for unrecognized tax benefits. 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 any interest and penalties related to unrecognized
tax benefits as income tax expense. As of December 31, 2019 and 2018, the
Company has not recognized any liability for unrecognized tax benefits.
The Company is subject to taxation in the United States of America, various
states, and Germany.
COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) represents the net change in stockholders'
deficit during a period from sources other than transactions with stockholders
and as such, includes net earnings or loss. For the Company, other comprehensive
income (loss) represents the foreign currency translation adjustments, which are
recorded as components of stockholders' deficit.
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EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is computed based on the weighted average
number of shares outstanding for the period. Diluted earnings (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, 2019 or 2018.
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