Item 1. Financial Statements
PROTEO, INC. AND SUBSIDIARY
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROTEO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2012 AND 2011
AND FOR THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH SEPTEMBER 30, 2012
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROTEO, INC. AND SUBSIDIARY
AND FOR THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH SEPTEMBER 30, 2012
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012 (UNAUDITED)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
BASIS OF PRESENTATION
The accompanying condensed consolidated
balance sheet as of December 31, 2011, which has been derived from audited financial statements, and the accompanying interim condensed
consolidated financial statements as of September 30, 2012, for the three-month and nine-month periods ended September 30, 2012
and 2011, and for the period from November 22, 2000 (Inception) through September 30, 2012 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 and nine-month periods ended September 30, 2012 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2012, 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, although the Company believes that the disclosures made are adequate to make the information
not misleading. 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, 2011 filed with the SEC on March 27, 2012.
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.
From time to time, the Company enters into
collaborative arrangements for the research and development (R&D), manufacture and/or commercialization of products and product
candidates. These collaborations may provide for non-refundable, upfront license fees, R&D and commercial performance
milestone payments, cost sharing, royalty payments and/or profit sharing. The Company's collaboration agreements with third
parties are generally performed on a “best efforts” basis with no guarantee of either technological or commercial success.
Proteo, Inc.'s common stock is currently
quoted on the OTC QB under the symbol "PTEO".
DEVELOPMENT STAGE 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
operation. There is no assurance of any future revenues. At September 30, 2012, the Company has working capital of
approximately $729,000 and stockholders' equity of approximately $202,000. The Company will require substantial additional
funding for continuing research and development, obtaining regulatory approval, and for the commercialization of its
products.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012 (UNAUDITED)
DEVELOPMENT STAGE 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.
|
The Company's products, to the extent they
may be deemed drugs or biologics, are governed by the United States Federal Food, Drug and Cosmetics Act and the regulations of
state and various foreign government agencies. The Company's proposed pharmaceutical products to be used with humans are subject
to certain clearance procedures administered by the above regulatory agencies. There can be no assurance that the Company will
receive the regulatory approvals required to market its proposed products elsewhere or that the regulatory authorities will review
the product within the average period of time.
Management plans to generate revenues from
product sales, but there are no purchase commitments for any of the proposed products. Additionally, the Company may generate revenues
from out-licensing activities. There can be no assurance that further out-licensing may be achieved or whether such will generate
significant profit. In the absence of significant sales and profits, the Company may seek to raise additional funds to meet its
working capital requirements through the additional placement of debt and/or 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.
Based on current cash on hand and estimates
of future operating expenditures (which are largely based on historical averages), management believes that the Company has sufficient
cash to cover its operations for the next 12 months. There is no assurance that actual operating expenses will match management's
estimates. 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.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012 (UNAUDITED)
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.
Furthermore, the Company classifies noncontrolling
interests (previously referred to as "minority interest") as part of consolidated net earnings and includes the accumulated
amount of noncontrolling interests as part of stockholders' equity. Earnings per share reflects amounts attributable only to the
Company, excluding noncontrolling interests. Increases and decreases in the Company's controlling financial interests in consolidated
subsidiaries will be reported in equity similar to treasury stock transactions. If a change in ownership of a consolidated subsidiary
results in loss of control and deconsolidation, any retained ownership interests are remeasured with the gain or loss reported
in net earnings. The Company has a substantive contractual arrangement that specifies the attribution of net earnings and loss
not to exceed the noncontrolling interest.
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 MEASUREMENTS
The Company does not have any assets or
liabilities that are measured at fair value on a recurring basis and, during the three-month and nine-month periods ended September
30, 2012 and 2011 and for the period from November 22, 2000 (Inception) through September 30, 2012, did not have any assets or
liabilities that were measured at fair value on a non-recurring basis.
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
In June 2011, the FASB issued Accounting
Standards Update (ASU) No. 2011-05,
Presentation of Comprehensive Income
. Under the amendments to Topic 220,
Comprehensive
Income
, in this Update, an entity has the option to present the total of comprehensive income, the components of net income,
and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate
but consecutive statements. In both choices, an entity is required to present each component of net income along with total net
income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for
comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the
statement of changes in stockholders' equity. The amendments in this Update do not change the items that must be reported in other
comprehensive income or when an item of other comprehensive income must be reclassified to net income. This Update is effective
for public entities with fiscal years beginning after December 15, 2011. The accompanying condensed consolidated financial statements
comply with the requirements of the Update.
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, 2011, Form 10-K that are expected to have material impact on the Company's future consolidated
financial statements.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012 (UNAUDITED)
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 issued 33,090 preferred shares during the nine-month
period ended September 30, 2011 in connection the annual stock dividend.
The Company entered into a Preferred Stock
Purchase Agreement, as amended, for preferred shares sold in 2008. During the nine-month period ended September 30,
2012, the note receivable was repaid in full. The Company also received approximately $60,000 during this period that was related
to late fees assessed on the subscription agreement in a prior period. Such fees were fully reserved for in 2009 and have been
recognized in other income in the accompanying condensed consolidated statement of operations for 2012.
There were no issuances of common stock
during the nine-month periods ended September, 2012 and 2011, 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 September 30, 2012 and 2011. 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.
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 $144,000 at September 30, 2012 and $153,000 at December 31, 2011.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012 (UNAUDITED)
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 repaid 30,000 Euros under this licensing agreement during the nine-month
period ended September 30, 2012, and realized a currency exchange loss approximating $3,000, which is included in interest and
other income (expense), net in the accompanying condensed consolidated statements of operations and comprehensive loss.
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 gains (losses) of approximately $9,000 and ($37,000) for the nine-month periods
ended September 30, 2012 and 2011, 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.
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 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, 2010 or 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. Subsequent to December 31, 2011, Dr. Wiedow agreed to waive the non-payment defaults and these
payments were further deferred to dates through April 2013, with 30,000 Euros paid in February 2012 and another 90,000 Euros due
within the next 12 months.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012 (UNAUDITED)
7. DR. WIEDOW LICENSE AGREEMENT
(continued)
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 September 30, 2012,
the Company has accrued approximately $733,000 of licensing fees payable to Dr. Wiedow, of which approximately $116,000 is included
in current liabilities with the remainder included in long-term liabilities.
Pursuant to the License Agreement, as amended,
Dr. Wiedow may terminate the License Agreement in the event of a breach which is not cured within 90 days following written notice
of such breach. In addition, Dr. Wiedow may terminate the License Agreement immediately in the event of the Company’s bankruptcy,
insolvency, assignment for the benefit of creditors, insolvency, liquidation, assignment of all or substantially all of its assets,
failure to continue to develop Elafin. After any termination, to the extent permitted by applicable law, the Company will return
all documents, information and data received by Dr. Wiedow and will immediately cease to develop, manufacture or sell Elafin.
Dr. Wiedow, who is a director of the Company,
beneficially owned approximately 45% of the Company's outstanding common stock as of September 30, 2012.
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.
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 September 30, 2012 and 2011, due to the Company's net losses and related changes to the valuation
allowance for deferred tax assets.
As of September 30, 2012, the Company has
a deferred tax asset and an equal amount of valuation allowance of approximately $2,205,000, relating primarily to federal and
foreign net operating loss carryforwards of approximately $543,000 and $1,419,000, respectively, and temporary differences related
to the recognition of accrued licensing fees of approximately $243,000.
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 September 30, 2012, there were no increases or decreases to liability for income taxes associated
with uncertain tax positions.
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
and intends to develop, promote and market pharmaceuticals and other biotech products. The Company's focus is on the development
of anti-inflammatory treatments for rare diseases with significant unmet needs. Proteo is engaged in the development of pharmaceuticals
based on the body's own tools and weapons to fight inflammatory diseases. Specifically, we are focusing our research on the development
of drugs based on the human protein Elafin. We strongly believe that Elafin will be useful in the treatment of post-surgery damage
to tissue, complications resulting from organ transplantation, pulmonary hypertension, serious injuries caused by accidents, cardiac
infarction, as well as other diseases.
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 esophagus carcinoma. 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 European Medicines
Agency (“EMA”), the European FDA equivalent, can be drawn upon.
For the development of its lead product
Elafin Proteo has established a network of globally renowned research institutes, physicians and hospitals in Europe and the US.
The development of Elafin has been widely supported by public grants. Worldwide leading funding bodies, such as the American National
Institutes of Health (NIH) and the British Medical Research Council (MRC), support preclinical and clinical studies on Elafin with
high volume grants.
Proteo currently focuses on the clinical
development of Elafin for treatment of postoperative inflammatory complications in the surgical therapy of esophagus carcinoma.
Clinical trials for further indications and preclinical research into new fields of application are conducted in cooperation with
Universities and our licensing partner Minapharm.
Our strategy and goal is to develop into
a profitable company by developing drug candidates for orphan diseases with high medical needs. The company intends to generate
revenue by out-licensing and marketing activities. To date, the Company has not had profitable operations. Furthermore, we do not
anticipate that we will have profitable operations in the near future.
The products and technologies we intend
to develop will require significant commitments of personnel and financial resources. However, we do not believe that any of our
planned products will produce sufficient revenues in the next several years to support us financially. To achieve profitable operations,
the Company, independently or in collaboration with others, must successfully identify, develop, manufacture, obtain regulatory
approval for and market proprietary products.
CLINICAL DEVELOPMENT
After developing a production procedure
for Elafin, the Company has initiated clinical trials to achieve governmental approval for the use of Elafin as a drug in Europe.
For this purpose, the Company has contracted an experienced Contract Manufacturing Organization in Europe to produce Elafin in
accordance with GMP standards as required for clinical trials. The excellent tolerability of Elafin in human subjects was demonstrated
in a Phase I clinical single dose escalating study. The drug candidate is currently being investigated in clinical trials for three
diseases:
Treatment of Esophagus 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. We announced the favorable influence of Elafin treatment
on the postoperative recovery in February 2011. The trial showed that intravenously administered Elafin has a very clear positive
effect on the period of recovery: 63 percent of the Elafin treated patients required only one day of intensive care. All patients
in the placebo group needed several days of postoperative intensive medical care. In January 2010 Orphan Drug Designation was awarded
to the Company by the European Commission for the use of Elafin in the treatment of esophagus carcinoma. At years end 2010 the
European Medicines Agency (“EMA”) gave scientific advice and protocol assistance to the Company for further clinical
development in this indication. Protocol assistance is the special form of scientific advice available for companies developing
medicines for 'orphan' or rare diseases. 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, the recruitment and
treatment of patients into the EMPIRE (Elafin Myocardial Protection from Ischaemia Reperfusion Injury) Study, which is
investigating the efficacy of Elafin in preventing complications of coronary bypass surgery, was started in the third quarter
of 2011. EMPIRE is a placebo-controlled, double-blinded, monocentric Phase-II study with 80 patients. In June 2012, we
announced that the planned interim safety analysis of the EMPIRE study has already been conducted. No safety concerns were
raised by the Data Monitoring Committee and the continuation of the trial was recommended. The recruitment has been better
than expected; 70% percent of the patients have already been treated at end of October. The study is being
performed under the supervision of the cardiologist Dr. Peter Henriksen at NHS Lothian’s Edinburgh Heart Centre in
association with The University of Edinburgh, one of the leading European universities in the area of cardiovascular
research. The aim of the study is to investigate the efficacy and safety of intraoperatively administered Elafin in coronary
bypass surgery. The study is funded by the Medical Research Council (MRC) and Chest Heart & Stroke Scotland (CHSS) with
funding in excess of 500,000 GBP.
Treatment of Kidney Transplantation
In August 2007, we entered into a license
agreement with Minapharm Pharmaceuticals SAE ("Minapharm"), a well established Egyptian pharmaceutical company based
in Cairo, for clinical development, production and marketing of Elafin. We have granted Minapharm the right to exclusively market
Elafin in Egypt and certain Middle Eastern and African countries. 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 and
Lung Diseases
Since 2008, the Company has been cooperating
with scientists at Stanford University in California with respect to the preclinical development in the field of pulmonary arterial
hypertension and 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. In the third quarter of 2011 the Stanford School of Medicine
research team led by Marlene Rabinovitch, was awarded a five-year, $10.8 million grant from the National Heart, Lung and Blood
Institute for the study of Elafin’s ability to treat three distinct lung diseases. The grant will fund one preclinical project
for each disease, all three of which are notoriously difficult to treat: pulmonary hypertension, ventilator-induced injury of the
immature lung in premature babies, and chronic lung transplant rejection. The group has published further evidence for the use
of Elafin in the treatment of newborn infants whose lungs are incompletely developed in June 2012 (Am J Physiol Lung Cell Mol Physiol).
Vascular damage
The Company entered into an agreement with
the Molecular Imaging North Competence Center (MOIN CC) at the Christian-Albrechts-University of Kiel in April 2010. Under this
agreement the effects of Elafin on vascular changes are being examined in animal models. The researchers presented results of a
biodistribution study with radiolabeled elafin at the 50
th
annual meeting of the German Society of (DGN) held in Bremen,
April 2012. They found high accumulation in the kidney and concluded that this could be of great importance in the future as within
the treatment of reperfusion injury of the kidney.
Life-threatening Infections
In June 2010 the Company 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.
RESULTS OF OPERATIONS
OPERATING EXPENSES
The Company's operating expenses for the
three-month and nine-month periods ended September 30, 2012 approximated $201,000 and $548,000, respectively, a decrease of approximately
$77,000 and $94,000, respectively, over the respective periods of the prior year. General and administrative expenses (mostly professional
and legal fees) for the three-month and nine-month periods decreased $7,000 and $44,000, respectively, which was due to lower professional
fees related to SEC filings, as well as lower average exchange rates for the 2012 periods compared to those in 2011. Research and
development expenses decreased $70,000 and $50,000 over the same three-month and nine-month periods of the prior year. The decrease
in research and development expenses was primarily driven by the timing of the research activities described above and a 9% decrease
in the average exchange rate used to translate these amounts.
INTEREST AND OTHER INCOME (EXPENSE)
Net interest and other income
(expense) for the three-month and nine-month periods ended September 30, 2012 approximated $17,000, and $77,000,
respectively, compared to $80,000 and ($31,000) for the respective period in 2011, a net change of approximately ($62,000)
and $108,000, respectively. The nine month increase is driven primarily by the recognition of $56,000 of late fees
on the preferred stock subscription agreement during the three-month period ended June 30, 2012 that were fully reserved for
in 2009. An additional $4,000 of late fees were received and recognized during the three-months ended September 30, 2012.
Most of the balance of three month and nine month changes was driven by foreign currency fluctuations impacting transactions
denominated in Euros. The Company recorded foreign currency transaction gains (losses) of approximately $9,000 and ($37,000) for
the nine-month periods ended September 30, 2012 and 2011, respectively. For the three-month periods ended September 30, 2012
and 2011, the Company recorded foreign currency transaction gains of $8,000 and $79,000, respectively.
INCOME TAXES
There is no material income tax expense
recorded for the periods ended September 30, 2012 and 2011, due to the Company's net losses. As of September 30, 2012, the Company
has a deferred tax asset and an equal amount of valuation allowance of approximately $2,205,000, relating primarily to federal
and foreign net operating loss carryforwards of approximately $543,000 and $1,419,000, respectively, and temporary differences
related to the recognition of accrued licensing fees of approximately $243,000.
The Company has federal and foreign net
operating loss carry forwards approximating $1,596,000 and $5,676,000, respectively at September 30, 2012, 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
other comprehensive gain (loss) of approximately ($9,000) and $64,000 in foreign currency translation adjustments during the
nine-month periods ended September 30, 2012 and 2011, 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
During the nine-month period ended September
30, 2012, the Company received payments approximating $362,000 in connection with a subscription agreement for the sale of Series
A Preferred Stock. The related note receivable was fully repaid as of June 30, 2012.
Proteo is a holding company that owns 100%
of Proteo Biotech AG, its operating subsidiary in Germany (the “Subsidiary”). To date the Subsidiary has not had any
earnings, and it does not expect to have any 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).
As of December 31, 2011, the Company had
not made the required accrued licensing fee payments to Dr. Wiedow of 30,000 Euros on each of December 31, 2011, 2010 and 2009,
pursuant to the terms of their License Agreement, as amended. During the three-month period ended March 31, 2012, a payment in
the amount of 30,000 Euros was made to Dr. Wiedow. Dr. Wiedow has agreed in writing to waive the non-payment defaults and to defer
the other payments until April 2013. See Note 7 to the consolidated financial statements included elsewhere for the payment terms
under the License Agreement.
The Company has cash approximating $528,000
as of September 30, 2012 to support current and future operations. This is a decrease of $70,000 over the December 31, 2011 cash
balance of approximately $598,000. 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. Management
believes that the Company will not generate any significant revenues in the next few years. Given the Company's current cash on
hand, management believes the Company has sufficient cash on hand to cover its operations for the next 12 months. As for periods
beyond the next 12 months, we expect to continue to direct the majority of our research and development expenses towards the development
of Elafin, although 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; and
|
|
·
|
the uncertainty of our ability to raise additional capital to support our future research and development efforts.
|
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 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.
RESEARCH SUPPLIES
The Company’s capitalized research
supplies have decreased from $429,000 at December 31, 2011 to $346,000 at September 30, 2012. The decrease is primarily the result
of supplies being consumed in connection with the clinical research and development activities, as discussed previously in Part
1, Item 2 of this Form 10-Q.
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 4. 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 September 30, 2012. Based on that evaluation, Ms. Bargmann concluded
that as of September 30, 2012, 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.
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. MINE SAFETY DISCLOSURES
Not
applicable.
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.
|
|
|
|
|
101.INS
|
XBRL Instance Document
|
|
|
|
|
101.SCH
|
XBRL Schema Document
|
|
|
|
|
101.CAL
|
XBRL Calculation Linkbase Document
|
|
|
|
|
101.DEF
|
XBRL Definition Linkbase Document
|
|
|
|
|
101.LAB
|
XBRL Label Linkbase Document
|
|
|
|
|
101.PRE
|
XBRL Presentation Linkbase Document
|
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: November 8, 2012
|
By:
|
/s/ Birge Bargmann
|
|
|
|
Birge Bargmann
|
|
|
|
Principal 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)
|
|