SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROTEO, INC. AND SUBSIDIARY
AND FOR THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH MARCH 31, 2013
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROTEO, INC. AND SUBSIDIARY
AND FOR THE PERIOD FROM NOVEMBER 22, 2000 (INCEPTION) THROUGH MARCH 31, 2013
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2013 (UNAUDITED)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
BASIS OF PRESENTATION
The accompanying condensed consolidated balance
sheet as of December 31, 2012, which has been derived from audited financial statements, and the accompanying interim condensed
consolidated financial statements as of March 31, 2013, for the three-month periods ended March 31, 2013 and 2012, and for the
period from November 22, 2000 (Inception) through March 31, 2013 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, 2013 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2013, 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, 2012 filed with the
SEC on March 29, 2013.
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 March 31, 2013, the Company has working capital of approximately $609,000. 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
March 31, 2013 (UNAUDITED)
DEVELOPMENT STAGE CONSIDERATIONS (continued)
Management has taken action to address these matters, which include:
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Retention of experienced management personnel with particular skills in the development of such products;
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Attainment of technology to develop biotech products; and
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Raising additional funds through the sale of debt and/or equity securities.
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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, estimates of
future operating expenditures and incomes, management believes that the Company has sufficient cash to cover its operations for
the next 12 to 15 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.
The Company'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
The Company's line of future pharmaceutical
products being developed by its German subsidiary are considered drugs or biologics, and as such, are governed by the Federal Food,
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 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.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2013 (UNAUDITED)
PRINCIPLES OF CONSOLIDATION (continued)
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 Fair Value Measurements and Disclosures
Topic of the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”
or “Codification”) 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, 2013 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, 2013 and 2012 and for the period from November 22, 2000 (Inception) through March 31, 2013, did not have
any assets or liabilities that were measured at fair value on a non-recurring basis.
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
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, 2012, 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, 2012, the Company received payments approximating $79,000 in connection with this agreement. The note receivable was paid in
full at December 31, 2012.
There were no issuances of common stock during
the three-month periods ended March 31, 2013 and 2012, nor have any stock options been granted from inception to date.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2013 (UNAUDITED)
3. DISPOSAL OF PROPERTY & EQUIPMENT
During the three-months ended March 31,
2013, management made the decision to terminate the month-to-month lease at its pilot research plant as significant in-house
process development for fermentation is no longer deemed necessary. In connection with this matter, property and equipment
with a net depreciated book value of approximately $46,000 was disposed of for proceeds approximating $35,000. The net loss
approximating $11,000 is included in interest and other income (expense), net, in the accompanying condensed consolidated
statements of operations and comprehensive loss.
4. 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, 2013 and 2012. 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.
5. 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 March 31, 2013 and $187,000 at December 31, 2012.
6. FOREIGN CURRENCY TRANSACTIONS
The Company records payables related to a certain
licensing agreement (Note 8) 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 three-month
period ended March 31, 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. No further payments
have been made under this agreement.
Additionally, the Company computes a foreign
exchange gain or loss at each balance sheet date on all recorded transactions denominated in foreign currencies that have not been
settled. The difference between the exchange rate that could have been used to settle the transaction on the date it occurred and
the exchange rate at the balance sheet date is the gain or loss that is currently recognized. The Company recorded foreign currency
transaction gains (losses) of approximately $43,000 and $(39,000) for the three-month periods ended March 31, 2013 and 2012, which
are included in interest and other income (expense), net in the accompanying condensed consolidated statements of operations and
comprehensive loss.
7. 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.
PROTEO, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2013 (UNAUDITED)
8. LONG-TERM LIABILITIES
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. The License Agreement was
amended in 2004 and again in December 2008 to waive non-payment defaults and to defer the due dates of each payment. In July 2011,
and again in December 2012, Dr. Wiedow agreed in writing to waive the non-payment defaults and agreed to defer the due dates of
the payments for the outstanding balance of 570,000 Euro. As a result installments payable by Licensee in the amount of 330,000
Euros are due on April 15, 2015, and installments of 120,000 Euros are due on December 31, 2015 and 2016. 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, 2012) plus six percent. In the event that the Company's financial
condition improves, the parties can agree to increase and/or accelerate the payments. Dr. Wiedow, who is a director of the Company,
beneficially owned approximately 45% of the Company's outstanding common stock as of March 31, 2013.
At March 31, 2013, the Company has accrued
approximately $731,000 of licensing fees payable to Dr. Wiedow which are included in long-term liabilities. This is a decrease
over the respective accrual of approximately $753,000 at December 31, 2012 was solely due to changes in foreign currency exchange
rates.
9. 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, 2013 and 2012, due to the Company's net losses and related changes to the valuation allowance for
deferred tax assets.
As of March 31, 2013, the Company has a deferred
tax asset and an equal amount of valuation allowance of approximately $2,251,000, relating primarily to federal and foreign net
operating loss carryforwards of approximately $514,000 and $1,466,000, respectively, and temporary differences related to the recognition
of accrued licensing fees of approximately $271,000.
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 March 31, 2013, 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
Proteo is a clinical stage drug
development company 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.
The Company 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.
Within the United
States Proteo has obtained Orphan drug designations for the use of Elafin for the treatment of pulmonary arterial hypertension
as well as for the
prevention of inflammatory complications of transthoracic esophagectomy. This
is associated with reduced fees to regulatory agencies and guarantees 7-year marketing exclusivity in the US on drug sales for
the first company to obtain marketing approval of a particular drug.
For the development of its lead product Elafin Proteo has established
a network of globally renowned research institutes, physicians and hospitals in Europe and the US. The development of Elafin has
been widely supported by public grants. Worldwide leading funding bodies, such as the American 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 in clinical development for three indications:
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. In March 2013, the U.S.
Food and Drug Administration (FDA) has granted orphan drug designation to Elafin for the prevention of inflammatory complications
of transthoracic esophagectomy.
Treatment of Coronary Bypass Patients
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. Currently, approximately 85 percent of the patients have been treated. 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. Minapharm 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 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
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. 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 ventilator-induced injury. The group
presented 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 showed 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). At year end 2012, the FDA granted Proteo Orphan
Drug Designation to Elafin for the treatment of pulmonary arterial hypertension.
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 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. The researchers presented
results of a biodistribution study with radiolabeled Elafin at the 50th annual meeting of the German Society of Nuclear Medicine
(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.
RESULTS OF OPERATIONS
OPERATING EXPENSES
The Company's operating expenses for the three-month
period ended March 31, 2013 approximated $107,000, a decrease of approximately $85,000 over the respective period of the prior
year. General and administrative expenses (mostly professional and legal fees) for the three-month period decreased $9,000, which
was due to lower professional fees related to SEC filings. Research and development expenses decreased $76,000 over the same period.
The decrease in research and development expenses was primarily driven by a decrease in research related wages in 2013 as well
as reduction to research related expenditures. The clinical research described above was primarily conducted prior to 2013.
INTEREST AND OTHER INCOME (EXPENSE)
Net interest and other income (expense) for
the three-month period ended March 31, 2013 approximated $34,000, compared to ($36,000) for the respective period in 2012, a net
change of approximately $70,000. The increase is driven primarily by foreign currency transaction gains during the three-month
period ended March 31, 2013 due to a strengthening of the U.S. Dollar compared to the Euro, compared to a weakening U.S. Dollar
during the similar period in 2012.
INCOME TAXES
There is no material income tax expense recorded
for the periods ended March 31, 2013 and 2012, due to the Company's net losses. As of March 31, 2013, the Company has a deferred
tax asset and an equal amount of valuation allowance of approximately $2,251,000, relating primarily to federal and foreign net
operating loss carryforwards of approximately $514,000 and $1,466,000, respectively, and temporary differences related to the recognition
of accrued licensing fees of approximately $271,000.
The Company has federal and foreign net operating
loss carry forwards approximating $1,513,000 and $5,865,000, respectively at March 31, 2013, 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 ($43,000) and $48,000 in foreign currency translation adjustments during the three-month periods ended March 31,
2013 and 2012, 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 three-month period ended March 31,
2013, the Company received payments approximating $35,000 in connection with the closure of its pilot plant for recombinant production
scale up for the sale of large scale fermentation equipment. During the first quarter of 2013, management made the decision to
close the pilot plant as significant in house process development for fermentation was no longer deemed necessary.
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).
In December 2012, Dr. Wiedow agreed in writing
to waive any non-payment defaults under the License Agreement and to defer all current payments to April 2015. See Note 8 to the
consolidated financial statements included elsewhere for the payment terms under the License Agreement.
The Company has cash approximating $300,000
as of March 31, 2013 to support current and future operations. This is a decrease of $76,000 over the December 31, 2012 cash balance
of approximately $376,000. 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 to 15 months. As for periods beyond the
next 12 to 15 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:
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the uncertainty of future clinical trial results;
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the uncertainty of the ultimate number of patients to be treated in any current or future clinical trial;
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the uncertainty of the applicable regulatory bodies allowing our studies to move forward;
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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;
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the uncertainty of terms related to potential future partnering or licensing arrangements;
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the uncertainty of protocol changes and modifications in the design of our clinical trial studies, which may increase or decrease our future costs; and
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the uncertainty of our ability to raise additional capital to support our future research and development efforts.
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As a result of the foregoing, the Company's
success will largely depend on its ability to generate revenues from out-licensing activities, secure additional funding through
the sale of its Common/Preferred Stock and/or debt securities. There can be no assurance, however, that the Company will be able
to generate revenues from outlicensing activities and/or to consummate debt or equity financing in a timely manner, or on a basis
favorable to the Company, if at all.
PROPERTY AND EQUIPMENT
The Company’s capitalized property and equipment decreased
from $83,000 at December 31, 2012 to $28,000 at March 31, 2013. The decrease is primarily the result of the closure of the pilot
plant and related sales of large scale fermentation equipment, as previously discussed. Weakening of the Euro (our functional currency)
compared to the U.S. Dollar (our reporting currency) further contributed to the decrease.
RESEARCH SUPPLIES
The Company’s capitalized research supplies
were relatively consistent between December 31, 2012 and March 31, 2013. No significant research supplies were consumed during
the first quarter of 2013.
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 March 31, 2013. Based on that evaluation, Ms. Bargmann
concluded that as of March 31, 2013, 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:
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31.1
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Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32
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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.
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Schema Document
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101.CAL
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XBRL Calculation Linkbase Document
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101.DEF
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XBRL Definition Linkbase Document
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101.LAB
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XBRL Label Linkbase Document
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101.PRE
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XBRL Presentation Linkbase Document
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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.
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PROTEO, INC.
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Dated: May 9, 2013
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By:
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/s/ Birge Bargmann
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Birge Bargmann
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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)
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