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, the potential impact of COVID-19 on our Company, including on our
business activities, 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, including those
discussed in Part II, Item 1A of this Quarterly Report and in any of our
subsequent reports filed with the SEC. 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.
There can be no assurance that the Company's products will receive the required
governmental approvals, including for marketing, in the future. Further, even if
such approvals are obtained, 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 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 acute postoperative
inflammatory complications, in particular after esophageal cancer surgery.
Further, the Company believes that Elafin appears to be a promising compound for
the treatment of pulmonary arterial hypertension, for preventing complications
of organ transplantation and for treatment of acute respiratory distress
syndrome ("ARDS").
The Company's success, among other factors, depends on its ability to prove that
Elafin is well tolerated by humans and its efficacy in the indicated diseases in
order to demonstrate a favorable benefit/risk balance. There can be no assurance
that the Company will receive government approval for the use of Elafin in
further clinical trials or its use as a drug in any of the intended
applications.
The Company has obtained Orphan drug designations within the European Union for
the use of Elafin for the treatment of pulmonary arterial hypertension and
chronic thromboembolic pulmonary hypertension as well as for the treatment of
esophageal cancer. The latter indication, especially the postoperative
inflammation, the main reason for postoperative morbidity, will be targeted by
Elafin treatment. 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.
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 Institute of
Health ("NIH") and the British MRC, supported preclinical and clinical studies
on Elafin with high volume grants.
The Company currently focuses on the clinical development of Elafin for
prophylactic treatment of acute postoperative inflammatory complications in the
surgical therapy of esophageal cancer and Elafin for chronical treatment of
pulmonary arterial hypertension ("PAH"). Future clinical trials for PAH will be
conducted in cooperation with third parties.
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The tolerability of Elafin in healthy male subjects was demonstrated in a Phase
I clinical intravenous single dose escalating study. A placebo-controlled Phase
II clinical trial on the effect of Elafin on the postoperative inflammatory
reactions and postoperative clinical course was conducted in patients undergoing
transthoracic esophagectomy for esophageal cancer. A further Phase II study,
EMPIRE (Elafin Myocardial Protection from Ischemia Reperfusion Injury), an
investigator-initiated trial at Edinburgh University, was conducted to
investigate the safety and efficacy of Elafin in coronary bypass surgery. The
result from the EMPIRE trial which indicates that Elafin has cardioprotective
properties by reducing the cardiac troponin I release has been published in 2015
(Alam et al., Heart 2015). Further details are described in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the
SEC on May 7, 2020.
In June 2016, we announced that our subsidiary has been awarded a BFEI grant
(the "Grant") from the German State of Schleswig-Holstein. The Grant has a
volume of up to Euro 874,000 and will be used for the R&D program to develop a
new formulation of Proteo's lead compound Elafin. If effective, a new Elafin
formulation would allow Proteo to extend the development pipeline to treat
chronic diseases, such as pulmonary arterial hypertension ("PAH"). In June 2018,
we received approval from the German State of Schleswig-Holstein to extend the
project under the BFEI grant for a further 12 months until November 30, 2019. In
November of 2019, the Company was granted a second extension through April 30,
2020. During April 2020, the Company applied for a third extension of 6 months
due to delays caused by the COVID-19 pandemic. On April 22, 2020, we received
approval from the German State of Schleswig-Holstein to extend the project under
the Grant for another 6 months through October 31, 2020.
In September 2016, we entered into a Preferred Stock Purchase Agreement (the
"Agreement") with a third-party. Pursuant to the Agreement, the Company agreed
to issue and sell to the third-party 1,000,000 shares of the Company's Series
B-1 Preferred Stock at the price of 1.00 Euro per share, for an aggregate
purchase price of 1,000,000 Euro. Through the end of December 31, 2019, the
Company received 120,000 Euros, and 120,000 shares of Series B-1 Preferred Stock
were issued. Currently, Management believes that the Company will not receive
any further payments under the Agreement. See Note 8 to the accompanying
condensed consolidated financial statements for additional information.
In October 2018, our subsidiary established the test site, Proteo R&D, for the
operation of an archive in accordance with the principles of Good Laboratory
Practice ("GLP") for archiving GLP documents related to our own development
products. We have applied for GLP attestation of test category 9 for the test
site. The GLP inspection occurred in December 2018. In February 2019, we
received the GLP Certificate from the competent authority. After archiving of
the first GLP documents during 2019, a GLP re-inspection occurred in September
2019. The Inspectors did not note any major deviations from GLP principles.
In December 2018, the Company entered into a Common Stock Purchase Agreement
with the purchaser of its stock, Jork von Reden, who is also a member of our
board of directors. Pursuant to the Agreement, we agreed to issue and sell to
the Investor 1,000,000 shares of Proteo's Common Stock at the price of $0.08 per
share, for an aggregate purchase price of USD $80,000. The Purchase Price was
equal to the closing price of our common stock as quoted on the OTCQB on
December 6, 2018. See Note 8 to the accompanying condensed consolidated
financial statements for additional information.
In March 2019, we were informed by our research partners at Stanford University
School of Medicine that The Duke University Early Phase Research Unit has
initiated the recruitment of healthy individuals for the Phase I clinical trial
in the U.S. to assess the safety and tolerability of repeated single
subcutaneous doses of Elafin. Proteo's research partners and investigators at
Stanford University School of Medicine, Dr. Marlene Rabinovitch and Dr. Roham
Zamanian, are responsible for the conduct of the investigator-initiated trial.
The trial with the title "Safety and Tolerability of Escalating Doses of
Subcutaneous Elafin (Tiprelestat) Injection in Healthy Normal Subjects" marks
the beginning of the clinical development program of Elafin for chronic use
initially focusing on the treatment of patients suffering from the still fatal
disease pulmonary arterial hypertension (PAH). In October 2019, we were informed
by our research partners at Stanford University School of Medicine that dosing
and follow-up of the last subject has been completed. No severe adverse events
occurred. A final report is expected during the first half of 2020.
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In April 2019, we entered into a Preferred Stock Purchase Agreement with a
third-party. Pursuant to the Agreement, the Company agreed to issue and sell to
the third-party 1,000,000 shares of the Company's Series B-2 Preferred Stock at
the price of 1.00 Euro per share, for an aggregate purchase price of 1,000,000
Euros. See Note 8 to the accompanying condensed consolidated financial
statements for additional information.
In January 2020, the European Patent Office granted a patent "Use of Elafin for
disorders associated with elastase independent increase in troponin" for
preventing or treating certain disorders associated with cardiac muscle damage
with Elafin.
On February 28, 2020, we entered into a Common Stock Purchase Agreement with a
third-party. Pursuant to the Agreement, the Company agreed to issue and sell to
the third-party 4,250,000 shares of the Company's common stock at the price of
$0.0247 per share for an aggregate purchase price of $104,975.
On February 29, 2020, we entered into a Common Stock Purchase Agreement with
another third-party. Pursuant to the Agreement, the Company agreed to issue and
sell to this third-party 4,250,000 shares of the Company's common stock at the
price of $0.0247 per share for an aggregate purchase price of $104,975.
During the first quarter of 2020, the Company continued its discussions to make
its Elafin technology available for licensing and partnership with external
partners. There can be no assurance that the Company will be successful in its
pursuit of any such licensing or partnership arrangements.
COVID-19 Update: Following the COVID-19 diagnosis for one of the Company's
employees, the Company closed its corporate offices and requested all employees
to work remotely until further notice. Due to recent developments, including the
impact of the COVID-19 outbreak and disruptions in government spending, the
Company is unlikely to receive funding under a new grant. At this time, we
cannot predict the impact of COVID-19 on our ability to obtain financing
necessary for the Company to fund our working capital requirements and on our
ability to conduct preclinical and clinical trials.
RESULTS OF OPERATIONS
REVENUES
Revenue includes net Grant funds received or accrued in excess of research and
development expenses incurred during the period. As more fully discussed below,
Grant funds, net of R&D expenses for the three-month period ended March 31, 2020
approximated $500.
OPERATING EXPENSES
The Company's operating expenses for the three-month period ended March 31, 2020
were approximately $60,000, an increase of approximately $7,000 over the same
period of the prior year. General and administrative expenses (mostly accounting
and professional fees) for the three-month period ended March 31, 2020 increased
$11,000 due primarily to increased professional fees. Research and development
expenses decreased by approximately $4,000 over the same three-month period. The
decrease in research and development expenses was primarily due an increase in
the Grant reimbursement reported. Grant funds recorded during the three months
ended March 31, 2019 approximated $31,000, which were netted against $35,000 of
research and development expenses and presented research and development, net of
grants, while during the three months ended March 31, 2020, Grant funds of
approximately $35,000 were offset against approximately $34,000 of R&D costs and
presented as net Grant revenue. This net revenue is driven by differences
between eligible expense reporting under the grant agreement and expense
recognition under GAAP.
INTEREST AND OTHER INCOME (EXPENSE)
Interest and other income (expense), net for the three-month period ended March
31, 2020, approximated $15,000, a decrease of $5,000 over the same period in
2019. The decrease was driven primarily by smaller foreign currency transaction
gains during 2020, due to a strengthening of the U.S. Dollar compared to the
Euro, compared to similar gains in 2019. Foreign currency transaction gains were
primarily driven by unrealized gains and losses on accrued licensing fees
related to the Licensing Agreement, which is denominated in Euros.
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INCOME TAXES
There is no material income tax expense recorded for the three-month periods
ended March 31, 2020 and 2019, due to the Company's net losses. The Company had
a deferred tax asset of $2,018,000 at March 31, 2020 relating primarily to tax
net operating loss carryforwards and temporary differences related to the
recognition of accrued licensing fees. Full valuation allowances have been
established against these deferred tax assets as it is likely that the Company
will not be able to utilize them.
The Federal NOL expires in varying years through 2025. The foreign net operating
loss relates to Germany and does not have an expiration date. In the event the
Company undergoes a greater than 50% change in ownership, as defined in Section
382 of the Internal Revenue Code, the utilization of the Company's Federal NOLs
could be restricted.
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
The Company experienced other comprehensive losses related to foreign currency
translation adjustments of approximately ($6,000) and ($2,000) during the
three-month periods ended March 31, 2020 and 2019, 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
The Company owns 100% of Proteo Biotech AG, its operating subsidiary in Germany
(the "Subsidiary"). To date the Subsidiary has not had any significant earnings,
and it does not expect to have any significant earnings for several years
pending the approval of its first product candidate. In this regard, there were
no undistributed earnings of the Subsidiary to repatriate to the Company.
The Company continues to use cash in excess of grant funds received to support
its operations and development activities, with cash used in operating
activities for the three-month periods ended March 31, 2020 and 2019,
approximating $29,000 and $35,000, respectively. Positive cash flows for the
three-month periods ended March 31, 2020 and 2019 are driven by financing
activities (mostly stock transactions), as discussed below.
In June 2016, the German State of Schleswig-Holstein granted the Subsidiary
approximately 874,000 Euro (the "Grant") for further research and development of
the Company's pharmaceutical product Elafin. The Grant covers 50% of eligible
research and development costs incurred from December 1, 2015 through October
31, 2020. Grant funds approximating $35,000 and $31,000 were recorded during the
three-month periods ended March 31, 2020 and 2019, respectively.
In September 2016, the Company entered into a Preferred Stock Purchase Agreement
(the "Agreement") with a third-party ("Investor"). Pursuant to the Agreement,
the Company agreed to issue and sell to the Investor 1,000,000 shares of the
Company's Series B-1 Preferred Stock at the price of 1.00 Euro per share, for an
aggregate purchase price of 1,000,000 Euro. The initial 100,000 Euro
(approximately $117,000) deposit was fully received by September 2018, with
$20,000 received during the three-months ended September 30, 2018. As conditions
for the initial closing were met, 100,000 shares of Series B-1 Preferred Stock
were issued during September 2018. In 2019 we received 20,000 Euro and issued
20,000 shares of Series B-1 Preferred Stock. In January 2020 we received an
additional 10,000 Euro and issued 10,000 shares of Series B-1 Preferred Stock.
However, the Investor failed to deliver the full purchase price. Currently,
Management believes that the Company will not receive any further payments under
the B-1 Stock Agreement.. See Note 8 to the accompanying condensed consolidated
financial statements for additional information.
In December 2018, the Company entered into a Common Stock Purchase Agreement
with the purchaser of its stock, Jork von Reden (the "Investor"). Pursuant to
the Agreement, we agreed to issue and sell to the Investor 1,000,000 shares of
Proteo's Common Stock at the price of $0.08 per share, for an aggregate purchase
price of USD $80,000. We received $40,000 in December 2018 and $40,000 in
January 2019 under this agreement.
In April 2019, the Company entered into a Preferred Stock Purchase Agreement
with a third-party. Pursuant to the Agreement, the Company agreed to issue and
sell to the Investor 1,000,000 shares of the Company's Series B-2 Preferred
Stock at the price of 1.00 Euro per share, for an aggregate purchase price of
1,000,000 Euros. The initial 100,000 Euros (approximately $113,000) deposit was
fully received by June 2019. As conditions for the initial closing were met,
100,000 shares of Series B-2 Preferred Stock were issued during June 2019.
During the three-month period ended September 30, 2019, further 59,800 Euros
(approximately $67,000) were received and 59,800 shares of Series B-2 Preferred
Stock were issued. In September 2019 the B-2 Stock Investor requested the
Company to renegotiate the Preferred Stock Purchase Agreement. Currently,
Management believes that an agreement cannot be reached and that the Company
will not receive any further payments under the B-2 Stock Agreement.
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In November 2019, Dr. Wiedow agreed in writing to waive any non-payment defaults
under the License Agreement and to defer all current payments to November 15,
2021. See Note 5 to the condensed consolidated financial statements included
elsewhere for the payment terms under the License Agreement.
On February 28, 2020, we entered into a Common Stock Purchase Agreement with a
third-party. Pursuant to the Agreement, the Company agreed to issue and sell to
Investor 4,250,000 shares of the Company's common stock at the price of $0.0247
per share for an aggregate purchase price of $104,975. In March 2020 we received
$104,975 under this agreement.
On February 29, 2020, we entered into a Common Stock Purchase Agreement with a
third-party. Pursuant to the Agreement, the Company agreed to issue and sell to
Investor 4,250,000 shares of the Company's common stock at the price of $0.0247
per share for an aggregate purchase price of $104,975. In March 2020 we received
$104,975 under this agreement.
On March 10, 2020, the World Health Organization declared the COVID-19 outbreak
to be a pandemic. Actions taken around the world to help mitigate the spread of
the coronavirus include restrictions on travel, quarantines in certain areas,
and forced closures for certain types of public places and businesses. The
coronavirus and actions taken to mitigate it have had and are expected to
continue to have an adverse impact on the economies and financial markets of
many countries, including the geographical areas in which the Company operates.
While it is unknown how long these conditions will last and what the complete
financial effects will be to the Company, the Company believes it reasonably
possible that it is vulnerable to the risk of a near-term severe impact. The
coronavirus has caused a substantial disruption in U.S. and international
financial markets. Our business may suffer from the severity or longevity of the
COVID-19 outbreak. COVID-19 is currently impacting countries, communities,
supply chains and markets, as well as the global financial markets. To date,
COVID-19 has not had a material impact on the Company. However, the Company
cannot predict whether COVID-19 will have a material impact on our financial
condition and results of operations due to understaffing, disruptions in
government spending, among other factors. In addition, at this time we cannot
predict the impact of COVID-19 on our ability to obtain financing necessary for
the Company to fund its working capita1 requirements and our ability to conduct
preclinical and clinical studies. In most respects, it is too early in the
COVID-19 pandemic to be able to quantify or qualify the longer-term
ramifications on our business and/or our potential investors.
The Company has cash approximating $285,000 at March 31, 2020. Such cash is held
by the Subsidiary in Germany in Euro and is to be used to fund the Subsidiary's
continued operations. The Company does not intend to repatriate any amount of
this cash to the United States. Given the Company's current cash on hand and the
Grant of the German State of Schleswig-Holstein, management believes the Company
will have sufficient cash resources to cover its operations through one year
from the filing of this Form 10-Q. As for periods beyond this filing, we expect
to continue to direct the majority of our research and development expenses
towards the development of Elafin. It is extremely difficult for us to
reasonably estimate all future research and development costs associated with
Elafin due to the number of unknowns and uncertainties associated with
preclinical and clinical trial development.
These unknown variables and uncertainties include, but are not limited to:
· the uncertainty of future clinical trial results;
· the uncertainty of the ultimate number of patients to be treated in any
current or future clinical trial;
· the uncertainty of the applicable regulatory bodies allowing our
studies to move forward;
· the uncertainty of the rate at which patients are enrolled into any
current or future study. Any delays in clinical trials could
significantly increase the cost of the study and would extend the
estimated completion dates;
· the uncertainty of terms related to potential future partnering or
licensing arrangements;
· the uncertainty of protocol changes and modifications in the design of
our clinical trial studies, which may increase or decrease our future
costs,
· the uncertainty of the influence of the COVID-19 pandemic on the
ability to conduct preclinical and clinical trials, Closure of study
sites, interruptions of study conduct and any impairment of the ability
to follow the study protocols may have substantial impact on study
results and may also lead to delays and premature termination.
· 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 the sale of debt
securities. There can be no assurance, however, that the Company will be able to
generate revenues from out-licensing activities and/or to consummate debt or
equity financing in a timely manner, or on a basis favorable to the Company, if
at all. If we are unable to secure additional financing when needed, we may
choose to delay or reduce other spending including Elafin research and
development spending.
GRANT FUNDS RECEIVABLE
Grant funds receivable decreased from $34,000 at December 31, 2019 to $20,000 at
March 31, 2020. The Company received approximately $34,000 during the
three-month period ended March 31, 2020 and submitted an additional $20,000 for
reimbursement that was not received by March 31, 2020.
LONG TERM ASSETS
The Company's capitalized property and equipment, which are all located in
Germany, decreased during 2020, primarily due to amortization.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities increased from $110,000 at December 31,
2019 to $128,000 at March 31, 2020, primarily due to the increase in operating
expenses, as previously discussed.
ACCRUED LICENSING FEES - RELATED PARTY
Accrued licensing fees decreased from $639,000 at December 31, 2019 to $627,000
at March 31, 2020, due to a strengthening of the U.S. Dollar compared to Euro.
The Licensing Agreement is denominated in Euro, and the accrued licensing fee
was 570,000 Euro at both March 31, 2020 and December 31, 2019.
OTHER LIABILITIES
Other liabilities at March 31, 2020 and December 31, 2019 consist of employee
compensation that was incurred in 2015 to 2017, but for which payment was agreed
to be deferred until 2021.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not currently have any off-balance sheet arrangements.
CAPITAL EXPENDITURES
The Company does not have any material capital expenditures.
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PROTEO, INC. 
