UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549










FORM 10-Q







(Mark One)


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





For the quarterly period ended March 31, 2011





OR





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





For the transition period from _______________ to _______________





Commission file number 000-30728





PROTEO, INC.(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)





NEVADA
88-0292249(STATE OR OTHER JURISDICTION OF

INCORPORATION OR ORGANIZATION)
(I.R.S. EMPLOYER

IDENTIFICATION NO.)2102 BUSINESS CENTER DRIVE, IRVINE, CALIFORNIA
92612(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)





(949) 253-4616


(Registrant's telephone number, including area code)





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





Indicate by check mark whether the registrant has submitted electronically and posted on its web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes oNo o.





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 definition of "large accelerated filer," "an accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one)





Large accelerated filero
Accelerated fileroNon-accelerated filero
Smaller reporting companyx(Do not check if a smaller reporting company)





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x .





Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.





CLASS

NUMBER OF SHARES OUTSTANDINGCommon Stock, $0.001 par value

23,879,350 shares of common stock at May 9, 2011














PROTEO, INC.


AND SUBSIDIARY


(A DEVELOPMENT STAGE COMPANY)




TABLE OF CONTENTS





PagePART I.
FINANCIAL INFORMATIONItem 1.
Financial Statements:Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010
3Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three-month Periods Ended March 31, 2011 and 2010, and for the Period From November 22, 2000 (Inception) Through March 31, 2011
4Unaudited Condensed Consolidated Statements of Cash Flows for the Three-month Periods Ended March 31, 2011 and 2010, and for the Period From November 22, 2000 (Inception) Through March 31, 2011
5Notes to Unaudited Condensed Consolidated Financial Statements
6Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
13Item 3.
Quantitative and Qualitative Disclosure About Market Risk
16Item 4T.
Controls and Procedures
16PART II.
OTHER INFORMATION
17Item 1.
Legal Proceedings
17Item 1A.
Risk Factors
17Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
17Item 3.
Defaults Upon Senior Securities
17Item 4.
[Removed and Reserved]
17Item 5.
Other Information
17Item 6.
Exhibits
17SIGNATURES
18





2


PART II - FINANCIAL INFORMATION


PROTEO, INC. AND SUBSIDIARY


(A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED BALANCE SHEETS





ITEM 1.   FINANCIAL STATEMENTS


ASSETSMarch 31,

2011


December 31,

2010(Unaudited)CURRENT ASSETSCash and cash equivalents

$
688,089


$
698,534Research supplies


525,314



494,349Prepaid expenses and other current assets


55,853



33,6431,269,256



1,226,526PROPERTY AND EQUIPMENT, NET


167,519



168,168$
1,436,775


$
1,394,694LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable and accrued liabilities

$
152,382


$
106,424Accrued licensing fees


126,891



119,277279,273



225,701LONG TERM LIABILITIESAccrued licensing fees


719,049



675,903719,049



675,903COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS' EQUITYNon-voting preferred stock, par value $0.001 per share; 10,000,000shares authorized; 661,500 shares issued and outstanding


662



662Common stock, par value $0.001 per share; 300,000,000shares authorized; 23,879,350 shares issued andoutstanding


23,880



23,880Additional paid-in capital


8,567,634



8,567,634Note receivable for sale of preferred stock


(902,390
)


(984,400
)Accumulated other comprehensive income


289,401



169,680Deficit accumulated during development stage


(7,540,734
)


(7,284,366
)Total Proteo, Inc. Stockholders' Equity


438,453



493,090Noncontrolling Interest


-



-Total Stockholders' Equity


438,453



493,090Total Liabilities and Stockholders' Equity

$
1,436,775


$
1,394,694








SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 3





PROTEO, INC. AND SUBSIDIARY
 (A DEVELOPMENT STAGE COMPANY)
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2011 AND 2010
 AND FOR THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH MARCH 31, 2011


THREE MONTHS ENDED

MARCH 31,


NOVEMBER 22,

2000

(INCEPTION)

THROUGH

MARCH 31,2011


2010


2011CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSREVENUES

$
-


$
-


$
-EXPENSESGeneral and administrative


77,560



54,781



4,818,355Research and development


96,860



115,783



3,145,751174,420



170,564



7,964,106INTEREST AND OTHER INCOME (EXPENSE), NET


(81,948
)


55,289



360,430NET LOSS


(256,368
)


(115,275
)


(7,603,676
)LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST


-



-



63,004NET LOSS ATTRIBUTABLE TO PROTEO, INC.


(256,368
)


(115,275
)


(7,540,672
)PREFERRED STOCK DIVIDEND


-



-



(62
)NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

$
(256,368
)

$
(115,275
)

$
(7,540,734
)BASIC AND DILUTED LOSS ATTRIBUTABLE TO PROTEO, INC.COMMON SHAREHOLDERS

$
(0.01
)

$
(0.00
)WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING


23,879,350



23,879,350
 
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSNET LOSS ATTRIBUTABLE TO PROTEO, INC.

$
(256,368
)

$
(115,275
)

$
(7,540,672
)FOREIGN CURRENCY TRANSLATION ADJUSTMENTS


119,721



(111,169
)


289,401COMPREHENSIVE LOSS

$
(136,647
)

$
(226,444
)

$
(7,251,271
)





SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 4
 
 PROTEO, INC. AND SUBSIDIARY
 (A DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2011 AND 2010
 AND FOR THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH MARCH 31, 2011


THREE MONTHS ENDED

MARCH 31,


NOVEMBER 22,

2000

(INCEPTION)

THROUGH

MARCH 31,2011


2010


2011CASH FLOWS FROM OPERATING ACTIVITIESNet loss attributable to Proteo, Inc.

$
(256,368
)

$
(115,275
)

$
(7,540,672
)Adjustments to reconcile net loss to net cash used inoperating activities:Depreciation


11,877



12,928



451,223Bad debt expense


-



-



60,408Loss on disposal of equipment


-



-



4,518Foreign currency transaction losses (gains)


85,491



(52,680
)


177,061Changes in operating assets and liabilities:Research supplies


573



12,737



(539,110
)Prepaid expenses and other current assets


(22,649
)


24,240



(157,834
)Accounts payable and accrued liabilities


44,665



(87,496
)


122,560Deferred fees


-



-



11,944Accrued licensing fees


-



-



660,713NET CASH USED IN OPERATING ACTIVITIES


(136,411
)


(205,546
)


(6,749,189
)CASH FLOWS FROM INVESTING ACTIVITIESAcquisition of property and equipment


(843
)


-



(635,716
)Cash of reorganized entity


-



-



27,638NET CASH USED IN INVESTING ACTIVITIES


(843
)


0



(608,078
)CASH FLOWS FROM FINANCING ACTIVITIESProceeds from issuance of common stock


-



-



1,792,610Proceeds from subscribed common stock and issuanceof preferred stock to related party


82,010



36,199



5,888,585NET CASH PROVIDED BY FINANCING ACTIVITIES


82,010



36,199



7,681,195EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASHAND CASH EQUIVALENTS


44,799



(71,213
)


364,161NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


(10,445
)


(240,560
)


688,089CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD


698,534



689,126



-CASH AND CASH EQUIVALENTS--END OF PERIOD

$
688,089


$
448,566


$
688,089SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONPreferred stock dividend

$
-


$
-


$
62Common stock issued for subscriptions receivable

$
-


$
-


$
1,627,755Net assets (excluding cash) of reorganized entityreceived in exchange for equity securities

$
-


$
-


$
8,509Unpaid balance of note receivable for issuance ofpreferred stock

$
-


$
-


$
2,245,389





SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


5





PROTEO, INC. AND SUBSIDIARY


(A DEVELOPMENT STAGE COMPANY)


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


March 31, 2011 (UNAUDITED)





1.   NATURE OF BUSINESS AND BASIS OF PRESENTATION





BASIS OF PRESENTATION





The accompanying condensed consolidated balance sheet as of December 31, 2010, which has been derived from audited financial statements, and the accompanying interim condensed consolidated financial statements as of March 31, 2011, for the three-month periods ended March 31, 2011 and 2010, and for the period from November 22, 2000 (Inception) through March 31, 2011 have been prepared by management pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. These interim condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments and accruals) necessary to present fairly the financial condition, results of operations and cash flows of Proteo, Inc and its wholly owned subsidiary (hereinafter collectively referred to as the "Company") as of and for the periods presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Operating results for the three-month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 or for any other interim period during such year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC on March 15, 2011.





NATURE OF BUSINESS





The Company is a clinical stage drug development company focusing on the development of anti-inflammatory treatments for rare diseases with significant unmet needs. The Company's management deems its lead drug candidate Elafin for intravenous use to be one of the most prospective treatments of postoperative inflammatory complications in the surgical therapy of esophagus carcinoma, kidney transplantation and coronary arterial bypass surgery. Elafin appears to be also a promising compound for the treatment of pulmonary arterial hypertension. The clinical development is currently focused in Europe with the intention to receive the primary approval in Europe.





The products that the Company is developing are considered drugs or biologics, and hence are governed by the Federal Food, Drug and Cosmetics Act (in the United States) and the regulations of State and various foreign government agencies. The Company's proposed pharmaceutical products to be used by humans are subject to certain clearance procedures administered by the above regulatory agencies.





Since its inception, the Company has primarily been engaged in the research and development of its proprietary product Elafin. Once the research and development phase is complete, the Company intends to seek the various governmental regulatory approvals for the marketing of Elafin. Management believes that none of its planned products will produce sufficient revenues in the near future. As a result, the Company intends to generate revenue by out-licensing and marketing activities. There are no assurances, however, that the Company will be able to develop such products, or if produced, that they will be accepted in the marketplace.









Proteo, Inc.'s common stock is currently quoted on the OTC QB under the symbol "PTEO".





DEVELOPMENT STAGE AND GOING CONCERN CONSIDERATIONS





The Company has been in the development stage since it began operations on November 22, 2000, and has not generated any significant revenues from operations. Management plans to generate revenues from out-licensing and product sales, but there is no commitment by any persons for license of the company’s proprietary intellectual property or the purchase of any of the proposed products and there is no assurance of any future revenue. The Company will require substantial additional funding for continuing research and development, obtaining regulatory approvals and for the commercialization of its product. There can be 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.





6





PROTEO, INC. AND SUBSIDIARY


(A DEVELOPMENT STAGE COMPANY)


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


March 31, 2011 (UNAUDITED)





DEVELOPMENT STAGE AND GOING CONCERN CONSIDERATIONS (continued)





Management has taken action to address these matters, which include:


●
Retention of experienced management personnel with particular skills in the development of such products;●
Attainment of technology to develop biotech products; and●
Raising additional funds through the sale of debt and/or equity securities.





In the absence of significant sales and profits, the Company may seek to raise funds to meet its future working capital requirements through the additional sales of debt and/or equity securities. There is no assurance that the Company will be able to obtain sufficient additional funds when needed, or that such funds, if available, will be obtainable on terms satisfactory to the Company.





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





CONCENTRATIONS





The Company maintains substantially all of its cash in bank accounts at a German private commercial bank. The Company's bank accounts at this financial institution are presently protected by the voluntary "Deposit Protection Fund of The German Private Commercial Banks". The Company has not experienced any losses in these accounts.





Proteo, Inc.'s operations, including research and development activities and most of its assets are located in Germany. The Company's operations are subject to various political, economic, and other risks and uncertainties inherent in Germany and the European Union.





OTHER RISKS AND UNCERTAINTIES





Proteo, Inc.'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, Drug and Cosmetics Act (in the United States) and by the regulations of State agencies and various foreign government agencies. There can be no assurances that the Company will obtain the regulatory approvals required to market its products. The pharmaceutical products under development in Germany will be subject to more stringent regulatory requirements because they are recombinant products for humans. The Company has no experience in obtaining regulatory clearance on these types of products. Therefore, the Company will be subject to the risks of delays in obtaining or failing to obtain regulatory clearance and other uncertainties, including financial, operational, technological, regulatory and other risks associated with an emerging business, including the potential risk of business failure.





The Company is exposed to risks related to fluctuations in foreign currency exchange rates. Management does not utilize derivative instruments to hedge against such exposure.





PRINCIPLES OF CONSOLIDATION





The condensed consolidated financial statements have been prepared in accordance with GAAP and include the accounts of Proteo, Inc. and Proteo Biotech AG, 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.





7





PROTEO, INC. AND SUBSIDIARY


(A DEVELOPMENT STAGE COMPANY)


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


March 31, 2011 (UNAUDITED)





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, loss 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 condensed consolidated financial statements because a substantive contractual arrangement specifies the attribution of net earnings and loss not to exceed the noncontrolling interest.





RESEARCH SUPPLIES





The Company capitalizes the cost of supplies used in its research and development activities.  Such costs are expensed as used to research and development expenses in the accompanying condensed consolidated statements of operations.





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, accounts payable and accrued expenses, approximate their fair value at March 31, 2011 due to their short-term nature. The Company does not have any assets or liabilities that are measured at fair value on a recurring basis and, during the three-month periods ended March 31, 2011 and 2010 and for the period from November 22, 2000 (Inception) through March 31, 2011, did not have any assets or liabilities that were measured at fair value on a non-recurring basis.





SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS





The Company adopted the FASB’s new ASC 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 condensed consolidated financial statements.





In April 2010, the FASB issued Accounting Standards Update No. 2010-17. This Update provides guidance on defining a milestone under Topic 605 and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. Milestones should be considered substantive in their entirety and may not be bifurcated. An arrangement may contain both substantive and nonsubstantive milestones that should be evaluated individually. The adoption of this Update on January 2, 2011 had no material impact.





8





PROTEO, INC. AND SUBSIDIARY


(A DEVELOPMENT STAGE COMPANY)


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


March 31, 2011 (UNAUDITED)





SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS (continued)





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 since the Company filed its December 31, 2010, Form 10-K that are expected to have material impact on the Company's future consolidated financial statements.





2.   STOCK SUBSCRIPTIONS RECEIVABLE AND OTHER EQUITY TRANSACTIONS





The Company is authorized to issue 10,000,000 shares of preferred stock, $0.001 par value. 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.





The Company entered into a Preferred Stock Purchase Agreement, as amended, for preferred shares sold in 2008.  During the three-month period ended March 31, 2011, the Company received payments approximating $82,000, in connection with this agreement.  The note receivable approximated $902,000 at March 31, 2011.





There were no issuances of common stock during the three-month periods ended March 31, 2011 and 2010, nor have any stock options been granted from inception to date.





3.   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 attributable 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 March 31, 2011 and 2010. Additionally, there were no adjustments to net loss to determine net loss available to common shareholders. As such, basic and diluted loss per common share equals net loss, as reported, divided by the weighted average common shares outstanding for the respective periods.





9





PROTEO, INC. AND SUBSIDIARY


(A DEVELOPMENT STAGE COMPANY)


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


March 31, 2011 (UNAUDITED)





4.   FOREIGN CURRENCY TRANSLATION





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; equity transactions are translated at historical rates; and income and expenses are translated at weighted average exchange rates for the period. Net foreign currency exchange gains or losses resulting from such translations are excluded from the results of operations but are included in other comprehensive income and accumulated in a separate component of stockholders' equity. Accumulated comprehensive income approximated $289,000 at March 31, 2011 and $170,000 at December 31, 2010.





5.   FOREIGN CURRENCY TRANSACTIONS





The Company records payables related to a certain licensing agreement (Note 7) 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 has made no payments under this licensing agreement during the three-month periods ended March 31, 2011 and 2010, and, therefore, has not realized any significant foreign currency exchanges gains or losses during these periods.





Additionally, the Company computes a foreign exchange gain or loss at each balance sheet date on all recorded transactions denominated in foreign currencies that have not been settled. The difference between the exchange rate that could have been used to settle the transaction on the date it occurred and the exchange rate at the balance sheet date is the gain or loss that is currently recognized. The Company recorded foreign currency transaction (losses) gains of approximately $(85,000) and $53,000 for the three-month periods ended March 31, 2011 and 2010, which are included in interest and other income (expense), net in the accompanying condensed consolidated statements of operations and comprehensive loss.





6.   SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION





The Company considers itself to operate in one segment and has not generated any significant operating revenues since its inception. All of the Company's property and equipment is located in Germany.





10





PROTEO, INC. AND SUBSIDIARY


(A DEVELOPMENT STAGE COMPANY)


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


March 31, 2011 (UNAUDITED)





7.   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 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, 2010 or the three-months ended March 31, 2011.  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, 2011) 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 from the date of the Amendment the Company will not only pay Dr. Wiedow a three percent royalty on gross revenues from the Company's sale of products based on the licensed technology but also three percent of the license fees (including upfront and milestone payments and running royalties) received by the Company or its subsidiary from their sublicensing of the licensed technology. At March 31, 2011, the Company has accrued approximately $846,000.





Dr. Wiedow, who is a director of the Company, beneficially owned approximately 45% of the Company's outstanding common stock as of March 31, 2011.





8.   INCOME TAXES





The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management evaluates the need to establish a valuation allowance for deferred tax assets based upon the amount of existing temporary differences, the period in which they are expected to be recovered and expected levels of taxable income. A valuation allowance to reduce deferred tax assets is established when it is “more likely than not” that some or all of the deferred tax assets will not be realized. Management has determined that a full valuation allowance against the Company’s net deferred tax assets is appropriate.





There is no material income tax expense recorded for the periods ended March 31, 2011 and 2010, due to the Company's net losses and related changes to the valuation allowance for deferred tax assets.





As of March 31, 2011, the Company has a deferred tax asset and an equal amount of valuation allowance of approximately $2,076,000, relating primarily to federal and foreign net operating loss carryforwards of approximately $483,000 and $1,309,000, respectively, as discussed below, and timing differences related to the recognition of accrued licensing fees of approximately $285,000.





11





PROTEO, INC. AND SUBSIDIARY


(A DEVELOPMENT STAGE COMPANY)


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


March 31, 2011 (UNAUDITED)





8.   INCOME TAXES (continued)





The Company has federal and foreign net operating loss carry forwards approximating $1,420,000 and $5,235,000, respectively at March 31, 2011, which are expected to begin expiring in 2025 for federal purpose and for foreign purpose it has an indefinite life.





Utilization of the net operating losses (“NOL”) carry forwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the market value of a company by certain stockholders or public groups.   Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact its effective tax rate.  Any carry forwards that may expire prior to utilization as a result of such limitations will be removed, if applicable, from deferred tax assets with a corresponding reduction of the valuation allowance.





Based on management’s evaluation of uncertainty in income taxes, the Company concluded that there were no significant uncertain tax positions requiring recognition in its financial statements or related disclosures. Accordingly, no adjustments to recorded tax liabilities or accumulated deficit were required.  As of March 31, 2011, there were no increases or decreases to liability for income taxes associated with uncertain tax positions.





12





ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





CAUTIONARY STATEMENTS:





This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company intends that such forward-looking statements be subject to the safe harbors created by such statutes. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. Accordingly, to the extent that this Quarterly Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that the Company's actual financial condition, operating results and business performance may differ materially from that projected or estimated by management in forward-looking statements.





Such differences may be caused by a variety of factors, including but not limited to adverse economic conditions, intense competition, including intensification of price competition and entry of new competitors and products, adverse federal, state and local government regulation, inadequate capital, unexpected costs and operating deficits, increases in general and administrative costs and other specific risks that may be alluded to in this Quarterly Report or in other reports issued by the Company. In addition, the business and operations of the Company are subject to substantial risks that increase the uncertainty inherent in the forward-looking statements. The inclusion of forward looking statements in this Quarterly Report should not be regarded as a representation by management or any other person that the objectives or plans of the Company will be achieved.





Since inception, the Company has generated a relatively minor amount of non-operating revenue from its 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 assurances as to the level of revenues, if any, the Company may actually achieve from its planned principal operations.





OVERVIEW





The Company is a clinical stage drug development company focusing on the development of anti-inflammatory treatments for rare diseases with significant unmet needs. The Company's management deems its lead drug candidate Elafin for intravenous use to be one of the most prospective treatments of postoperative inflammatory complications in the surgical therapy of esophagus carcinoma, kidney transplantation and coronary arterial bypass surgery. Elafin appears to be also a promising compound for the treatment of pulmonary arterial hypertension. The clinical development is currently focused in Europe with the intention to receive the primary approval in Europe.





The 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 Good Manufacturing Practices ("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.





Proteo has obtained Orphan drug designations within the European Union for the use of Elafin in treatment for the treatment of pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension as well as for the treatment of esophagus carcinoma. 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 European Medicines Agency (“EMA”), the European FDA equivalent, can be drawn upon.





Proteo currently focuses on the development of Elafin for treatment of postoperative inflammatory complications in the surgical therapy of esophagus carcinoma. Clinical trials for further indications and preclinical research into new fields of application are conducted in cooperation with Universities and our licensing partner Minapharm.





Proteo has presented the current status of the clinical development on the Biochemical Society Meeting - Structure and function of Whey Acidic protein 4-disulphide core proteins – in Cambridge on April 2011.





CLINICAL DEVELOPMENT





After developing a production procedure for Elafin, the Company has initiated clinical trials to achieve governmental approval for the use of Elafin as a drug in Europe. For this purpose, the Company has contracted an experienced Contract Manufacturing Organization in Europe to produce Elafin in accordance with GMP standards as required for clinical trials. The excellent tolerability of Elafin in human subjects was demonstrated in a Phase I clinical single dose escalating study.





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Treatment of Esophagus Carcinoma





A double-blind, randomized, placebo-controlled Phase II clinical trial on the effect of Elafin on the postoperative inflammatory reactions and postoperative clinical course was conducted in patients undergoing esophagectomy for esophagus carcinoma was begun in November 2008.  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 involving two additional trial centers. We announced the favorable influence of Elafin treatment on the postoperative recovery in February 2011. In January 2010 Orphan Drug Designation was awarded to the Company by the European Commission for the use of Elafin in the treatment of esophagus carcinoma. The future clinical development and prerequisites for marketing authorization are currently subject to discussions with the EMA.





Treatment of Coronary Bypass Patients





In September 2009 the Company signed a Memorandum of Understanding with the University of Edinburgh. Within the framework of collaboration, it is intended to conduct a Phase II clinical trial to investigate the effect of Elafin on the damage and inflammation of cardiac muscle after coronary bypass operations. The trial will be headed by Dr. Peter Henriksen a leading expert in interventional cardiology at the Edinburgh Heart Centre. The study will be funded by the Medical Research Council (MRC) and Chest Heart and Stroke Scotland (CHSS) with 500,000 GBP. In February 2011 this clinical trial application with 80 patients has received approval by the responsible Ethics Committee of NHS Scotland and was submitted to the MHRA, the British FDA equivalent, at the end of March 2011.





Treatment of Kidney Transplantation





The Company’s licensing and development partner, Minapharm Pharmaceuticals SAE, has initiated a Phase II clinical trial on the use of Elafin in kidney transplantation patients. This trial is concerned with the prevention of acute organ rejection and chronic graft injury (allograft nephropathy) and will be conducted at the University of Cairo. The start and conduct of the trial may be influenced by the actual political situation in Egypt. Actually, the consequences cannot be overseen by management.





PRECLINICAL RESEARCH





Pulmonary arterial Hypertension





Since 2008, the Company cooperates with scientists at Stanford University in California with respect to the preclinical development in the field of pulmonary arterial hypertension and ventilation induced injury. The group presented new preclinical data on the Company’s drug substance Elafin at the Annual International Conference of the American Thoracic Society in New Orleans in May 2010. The data show that the treatment with Elafin during mechanical ventilation largely prevented the inflammation in lungs of newborn mice. In August 2010 the cooperation agreement with Stanford University was extended by a further project.





Vascular damage





The Company entered into an agreement with the Molecular Imaging North Competence Center (MOIN CC) at the Christian-Albrechts-University of Kiel in April 2010. Under this agreement the effects of Elafin on vascular changes will be examined in animal models. The federal state of Schleswig-Holstein is backing the creation and infrastructure of MOIN CC with 8.2 million EUR using funding from the federal state and the European Regional Development Fund (ERDF), as well as resources from the second German economic stimulus package.





Life-threating Infections





In June 2010 the Company signed a cooperative research and development agreement with the US Army Medical Research Institute of Infectious Diseases (USAMRIID). This agreement allows USAMRIID to use Proteo's Elafin and related scientific data in order to plan and conduct preclinical research on the development of new therapeutic strategies to combat life-threatening infectious diseases, in an investigation into the use of Elafin as a co-therapy with antibiotics.




14





RESULTS OF OPERATIONS





OPERATING EXPENSES





The Company's operating expenses for the three-month period ended March 31, 2011 approximated $174,000, an increase of approximately $4,000 over the respective period of the prior year. General and administrative expenses (mostly professional and legal fees) for the three-month period increased $23,000, and research and development expenses decreased $19,000 over the same period.





INTEREST AND OTHER INCOME (EXPENSE)





Net interest and other income (expense) for the three-month period ended March 31, 2011 approximated ($82,000), compared to $55,000 for the respective period in 2010, a net change of approximately ($137,000).  The decrease is driven primarily by foreign currency transaction losses in 2011 caused by the weakening of the U.S. Dollar compared to the Euro.





INCOME TAXES





There is no material income tax expense recorded for the periods ended March 31, 2011 and 2010, due to the Company's net losses. As of March 31, 2011, the Company has a deferred tax asset and an equal amount of valuation allowance of approximately $2,076,000, relating primarily to federal and foreign net operating loss carryforwards of approximately $483,000 and $1,309,000, respectively, as discussed below, and timing differences related to the recognition of accrued licensing fees of approximately $285,000.





The Company has federal and foreign net operating loss carry forwards approximating $1,420,000 and $5,235,000, respectively at March 31, 2011, which are expected to begin expiring in 2025 for federal purpose and for foreign purpose it has an indefinite life. 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 tax NOLs could be severely restricted.





FOREIGN CURRENCY TRANSLATION ADJUSTMENTS





The Company experienced a net gain (loss) of approximately $120,000 and $(111,000) in foreign currency translation adjustments during the three-month periods ended March 31, 2011 and 2010, respectively. The changes are primarily due to a fluctuating U.S. Dollar (our reporting currency) compared to the Euro (our functional currency) during the periods.





LIQUIDITY AND CAPITAL RESOURCES





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) $1,829,000 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 March 31, 2011, had a principal balance of approximately $902,000. See Note 2 to the condensed consolidated financial statements included elsewhere herein for the payment terms under the promissory note.





The Company has cash approximating $688,000 as of March 31, 2011 to support current and future operations. This is a decrease of $10,000 over the December 31, 2010 cash balance of approximately $698,000.





Management believes that the Company will not generate any significant revenues in the next few years, nor will it have sufficient cash to fund future 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 stock, preferred stock and/or 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 a debt or equity financing in a timely manner, or on terms favorable to the Company, if at all.





15





GOING CONCERN





The Company's independent registered public accounting firm stated in their Auditors’ Report included in the Company’s Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission on March 15, 2011, 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.





OFF BALANCE SHEET ARRANGEMENTS





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





CAPITAL EXPENDITURES





None significant.





ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK





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





ITEM 4T.   CONTROLS AND PROCEDURES





a) Evaluation of Disclosure Controls and Procedures





We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including to Birge Bargmann our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.





As required by Rule 13a-15 under the Exchange Act, our management, including Birge Bargmann our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2011. Based on that evaluation, Ms. Bargmann concluded that as of March 31, 2011, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were effective.





b) Changes in Internal Control Over Financial Reporting





Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has concluded there were no significant changes in our internal controls over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





16





PART II - OTHER INFORMATION





ITEM 1.    LEGAL PROCEEDINGS.





None.





ITEM 1A. RISK FACTORS





Not required for SRCs.





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





None.





ITEM 3.    DEFAULTS UPON SENIOR SECURITIES.





None.





ITEM 4.    [REMOVED AND RESERVED]











ITEM 5.    OTHER INFORMATION.





None.





ITEM 6.    EXHIBITS.





Exhibits:





31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.





31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.





32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.








17





SIGNATURES





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





PROTEO, INC.Dated: May 12, 2011
By:
/s/ Birge BargmannBirge BargmannPrincipal Executive Officer and Chief Financial Officer

(signed both as an Officer duly authorized to sign on behalf of the Registrant and Principal Financial Officer and Chief Accounting Officer)