NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business Organization and Nature of Operations
Provectus Biopharmaceuticals, Inc., a Delaware corporation (together with its subsidiaries, Provectus or the Company), is a
biopharmaceutical company that is focusing on developing minimally invasive products for the treatment of psoriasis and other topical diseases, and certain forms of cancer including melanoma, breast cancer, and cancers of the liver. To date, the
Company has not generated any revenues from planned principal operations. The Companys activities are subject to significant risks and uncertainties, including failing to successfully develop and license or commercialize the Companys
prescription drug candidates, or sell or license the Companys
over-the-counter
(OTC) products or
non-core
technologies.
2. Liquidity and Financial Condition
The Companys cash and cash equivalents were $1,165,738 at December 31, 2016, compared with $14,178,902 at December 31, 2015. The Company
continues to incur significant operating losses and management expects that significant
on-going
operating expenditures will be necessary to successfully implement the Companys business plan and develop
and market its products. These circumstances raise substantial doubt about the Companys ability to continue as a going concern within one year after the date that the financial statements are issued. Implementation of the Companys plans
and its ability to continue as a going concern will depend upon the Companys ability to develop
PV-10
and raise additional capital.
On October 13, 2016, the Company received notice from NYSE MKT that NYSE MKT commenced delisting procedures and immediately suspended trading in the
Companys common stock and class of warrants that was listed on NYSE MKT (Listed Warrants) and on October 17, 2016, our common stock began trading on the OTCQB Marketplace. On October 20, 2016, the Company submitted a
request for a review of such delisting determination and on November 10, 2016, the Company submitted to the Listing Qualifications Panel its written submission in connection with its appeal. In addition, on November 23, 2016, the Company
received notice from NYSE MKT stating that the Company is not in compliance with the Exchanges continued listing standards. Specifically, the Company is not in compliance with Section 1003(a)(iii) of the NYSE MKT Company Guide (requiring
stockholders equity of $6.0 million or more if the Company has reported losses from continuing operations and/or net losses in its five most recent fiscal years). As of December 31, 2016, the Company had stockholders equity of
approximately $3.5 million. Accordingly, the Company has become subject to the procedures and requirements of Section 1009 of the NYSE MKT Company Guide and must submit a plan of compliance by December 23, 2016, addressing how the
Company intends to regain compliance with Section 1003(a)(iii) by May 23, 2018.
The hearing before the Listing Qualifications Panel occurred on
January 25, 2017. On January 31, 2017, the Company received notice from the Listing Qualifications Panel that it affirmed NYSE MKTs original determination to delist the Companys common stock and Listed Warrants. On
February 14, 2017, the Company submitted a request for the Committee for Review to reconsider the Listing Qualification Panels decision. The Committee for Review considered the Companys request for review on March 30, 2017.
On February 21, 2017, the Company issued a convertible promissory note in favor of Eric A. Wachter, the Companys Chief Technology Officer,
evidencing an unsecured loan from the lender to the Company in the original principal amount of up to $2,500,000. See Note 13 Subsequent Events.
The Company plans to access capital resources through possible public or private equity offerings, exchange offers, debt financings, corporate collaborations
or other means. In addition, the Company continues to explore opportunities to strategically monetize its lead drug candidates,
PV-10
and
PH-10,
through potential
co-development
and licensing transactions, although there can be no assurance that the Company will be successful with such plans. The Company has historically been able to raise capital through equity offerings,
although no assurance can be provided that it will continue to be successful in the future. If the Company is unable to raise sufficient capital through the 2017 Financing or otherwise (see Note 13Subsequent Events), it will not be able to pay
its obligations as they become due.
53
3. Significant Accounting Policies
Principles of Consolidation
Intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. The Companys significant estimates and assumptions include the collectability of long-term receivables, the recoverability and useful lives of long-lived assets, stock-based compensation, derivative liabilities and the
valuation allowance related to the Companys deferred tax assets. Certain of the Companys estimates, including the carrying amount of the intangible assets, could be affected by external conditions, including those unique to the Company
and general economic conditions. It is reasonably possible that these external factors could have an effect on the Companys estimates and could cause actual results to differ from those estimates.
Cash and Cash Equivalents
The Company considers all
highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Cash Concentrations
Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits of $250,000 although the Company
seeks to minimize this through treasury management. The Company has never experienced any losses related to these balances.
Equipment and Furnishings
Equipment and furnishings are stated at cost less accumulated depreciation. Depreciation of equipment is provided for using the straight-line method
over the estimated useful lives of the assets. Computers and laboratory equipment are being depreciated over five years; furniture and fixtures are being depreciated over seven years. Maintenance and repairs are charged to operations as incurred.
The Company capitalizes cost attributable to the betterment of property and equipment when such betterment extends the useful life of the assets.
Long-Lived Assets
The Company reviews the carrying
values of its long-lived assets for possible impairment whenever an event or change in circumstances indicates that the carrying amount of the assets may not be recoverable. Any long-lived assets held for disposal are reported at the lower of their
carrying amounts or fair value less cost to sell. Management has determined there to be no impairment.
Patent Costs, net
Internal patent costs are expensed in the period incurred. Patents purchased are capitalized and amortized over the remaining life of the patent.
Patents at December 31, 2016 were acquired as a result of the merger with Valley Pharmaceuticals, Inc. on November 19, 2002. The majority
stockholders of Provectus also owned all of the shares of Valley and therefore the assets acquired from Valley were recorded at their carry-over basis. The patents are being amortized over the remaining lives of the patents, which range from
1-6
years. Annual amortization of the patents is expected to approximate $671,000 in 2017, 2018 and 2019, and $228,000 in 2020.
Long-Term Related Party Receivables
The Company carries
long-term receivables from certain current and former employees in connection with the Kleba Shareholder Derivative Lawsuit (see Note 12). The long-term receivables are carried at their contractual amounts, less a reserve for any amounts deemed by
management to be uncollectible. Management evaluates the collectability of the receivables at least quarterly. Management estimates the reserve for uncollectibility based on existing economic conditions, the financial conditions of the current and
former employees, and the amount and age of past due receivables. Receivables are considered past due if full payment is not received by the contractual due date. Past due amounts are generally written off against the reserve for uncollectibility
only after all collection attempts have been exhausted. See Note 5 Long-Term Receivables.
54
Research and Development
Research and development costs are charged to expense when incurred. An allocation of payroll expenses to research and development is made based on a
percentage estimate of time spent. The research and development costs include the following: payroll, consulting and contract labor, lab supplies and pharmaceutical preparations, legal, insurance, rent and utilities, and depreciation and
amortization.
Income Taxes
The Company accounts for
income taxes under the liability method in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740 Income Taxes. Under this method, deferred income tax assets and
liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A
valuation allowance is established if it is more likely than not that all, or some portion, of deferred income tax assets will not be realized. The Company has recorded a full valuation allowance to reduce its net deferred income tax assets to zero.
In the event the Company were to determine that it would be able to realize some or all its deferred income tax assets in the future, an adjustment to the deferred income tax asset would increase income in the period such determination was made.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained upon an examination. Any
recognized income tax positions would be measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement would be reflected in the period in which the change in judgment occurs. The Company
would recognize any corresponding interest and penalties associated with its income tax positions in income tax expense. There were no income taxes, interest or penalties incurred in 2016, 2015 or 2014. Tax years going back to 2013 remain open for
examination by the IRS.
Basic and Diluted Loss Per Common Share
Basic loss per common share is computed by dividing net loss by the weighted average number of vested common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that could occur if securities or other instruments to issue common stock were exercised or converted into common stock. The following securities are excluded from the calculation of weighted
average dilutive common shares because their inclusion would have been anti-dilutive:
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December 31,
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2016
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2015
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2014
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Warrants
|
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189,991,541
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80,121,595
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63,235,956
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Options
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3,500,000
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10,630,000
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10,845,098
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Convertible preferred stock
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5,647,009
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Total potentially dilutive shares
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199,138,551
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90,751,595
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74,081,054
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Derivative Instruments
The Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative financial
instruments to be separately accounted for in accordance with FASB ASC Topic 815. The accounting treatment of derivative financial instruments requires that the Company record warrants and conversion options at their fair values as of the inception
date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as
non-operating,
non-cash
income or expense for
each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified
as of the date of the event that caused the reclassification. Warrants and conversion options are recorded as a discount to the host instrument.
55
The Monte-Carlo Simulation model was used to estimate the fair value of the warrants that were classified as
derivative liabilities. The model includes subjective input assumptions that can materially affect the fair value estimates. The expected volatility is estimated based on the most recent historical period of time equal to the weighted average life
of the warrants.
Fair Value of Financial Instruments
The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 Fair Value Measurements and Disclosures
(ASC 820) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Company determines the estimated fair value of amounts presented in these consolidated
financial statements using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented in the financial statements
are not necessarily indicative of the amounts that could be realized in a current exchange between buyer and seller. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value
amounts. These fair value estimates were based upon pertinent information available as of December 31, 2016 and 2015. The carrying amounts of the Companys financial assets and liabilities, such as cash and cash equivalents, short-term
settlement receivable, other current assets and accrued expenses approximate fair values due to the short-term nature of these instruments.
ASC 820
defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three
levels of inputs that may be used to measure fair value:
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Level 1
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Inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
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Level 2
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Inputs use directly or indirectly observable inputs. These inputs include quoted prices for similar assets and liabilities in active markets as well as other inputs such as interest rates and yield curves that are observable at
commonly quoted intervals.
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Level 3
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Inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.
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In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value
measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Companys assessment of the significance of particular inputs to these fair measurements requires judgment and considers
factors specific to each asset or liability.
Both observable and unobservable inputs may be used to determine the fair value of positions that are
classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category may include changes in fair value that were attributable to both observable (e.g., changes in market interest
rates) and unobservable (e.g., changes in historical company data) inputs. Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least
one significant model assumption or input is unobservable.
See Note 11 - Fair Value of Financial Instruments.
Stock-Based Compensation
The Company measures the cost
of services received in exchange for an award of equity instruments based on the fair value of the award. For employees, the fair value of the award is measured on the grant date and for
non-employees,
the
fair value of the award is measured on the measurement date and
re-measured
on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized
over the period during which services are required to be provided in exchange for the award, usually the vesting period. The Company computes the fair value of equity-classified warrants and options granted using the Black-Scholes option pricing
model. Option valuation models require the input of highly subjective assumptions including the expected volatility factor of the market price of the Companys common stock which is determined by reviewing its historical public market closing
prices.
56
Reclassifications
Certain prior period amounts have been reclassified for comparative purposes to conform to the fiscal 2016 presentation. These reclassifications have no impact
on the previously reported net loss.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (ASU)
No. 2014-09,
Revenue from
Contracts with Customers (ASU
2014-09),
which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU
2014-09
is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.
ASU
2014-09
defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S.
GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the
standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU
2014-09
recognized at
the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of its pending adoption of ASU
2014-09
on its consolidated financial statements and have
not yet determined the method by which it will adopt the standard in 2018. The Company currently does not have revenues but will consider any related impact going forward.
In June 2014, the FASB issued ASU No.
2014-12, Accounting
for Share-Based Payments When the Terms of an
Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU
2014-12).
ASU
2014-12
requires that a
performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the
award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for
which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The adoption of this ASU did not have a
material impact on the Companys consolidated financial statements.
In August 2014, the FASB issued ASU
No. 2014-15,
Presentation of Financial Statements Going Concern (Subtopic
205-40):
Disclosure of Uncertainties about an Entitys Ability to
Continue as a Going Concern (ASU
2014-15).
ASU
2014-15
explicitly requires management to evaluate, at each annual or interim reporting period, whether
there are conditions or events that exist which raise substantial doubt about an entitys ability to continue as a going concern and to provide related disclosures. ASU
2014-15
is effective for annual
periods ending after December 15, 2016, and annual and interim periods thereafter, with early adoption permitted. The Company adopted this ASU during the year ended December 31, 2016.
In November 2014, the FASB issued ASU
No. 2014-16,
(Topic 815) Derivatives and
Hedging (ASU
2014-16),
which provides clarification on how current guidance should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid
financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features in evaluating the host contract and that no single term or feature would necessarily
determine the economic characteristics and risks of the host contract. ASU
2014-16 is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2015. The amendment should be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the year for which the amendments are effective. The adoption of this ASU did not
have a material impact on the Companys consolidated financial statements.
In May 2015, the FASB issued ASU
2015-07, Fair
Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (ASU
2015-07). ASU
2015-07
removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset
value per share practical expedient. The standard is effective for financial statements issued for interim and annual reporting periods beginning after December 15, 2015, and requires retrospective presentation. The adoption of this
ASU did not have a material impact on the Companys consolidated financial statements.
In February 2016, the FASB issued ASU
No. 2016-02,
Leases (ASU
2016-02),
which amends the existing accounting standards for lease accounting, including requiring lessees to recognize
most leases on their balance sheets and making targeted changes to lessor accounting. ASU
2016-02
will be effective beginning in the first quarter of 2019. Early adoption of ASU
2016-02
is permitted.
57
The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition
relief. The Company is currently evaluating the impact of adopting ASU
2016-02
on its consolidated financial statements.
In March 2016, the FASB issued ASU
No. 2016-03,
Derivatives and Hedging (Topic 815): Contingent Put and
Call Options in Debt Instruments, which clarifies the requirements for assessing whether contingent call or put options that can accelerate the repayment of principal on debt instruments are clearly and closely related to their debt hosts.
This guidance will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods, and early adoption is permitted. The Company is currently evaluating the provisions
of this guidance and assessing its impact on its consolidated financial statements and disclosures.
In March 2016, the FASB issued ASU No.
2016-06, Derivatives
and Hedging (Topic 815). The amendments apply to all entities that are issuers of, or investors in, debt instruments (or hybrid financial instruments in this Update that are
determined to have a debt host) with embedded call (put) options. The amendments in this ASU clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly
and closely related to their debt host. An entity performing the assessment under the amendments in this ASU is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. For public business
entities, the amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim
period. This ASU is not expected to have a material impact on the Companys consolidated financial statements.
In March 2016, the FASB issued ASU
No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This ASU amends the principal versus agent guidance in ASU
2014-09.
Further, in April 2016, the FASB issued ASU
No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and
Licensing. This ASU also amends ASU
2014-09
and is related to the identification of performance obligations and accounting for licenses. The effective date and transition requirements for both of these
amendments to ASU
2014-09
are the same as those of ASU
2014-09,
which was deferred for one year by ASU
No. 2015-14,
Revenue
from Contracts with Customers (Topic 606): Deferral of the Effective Date. That is, the guidance under these standards is to be applied using a full retrospective method or a modified retrospective method, as outlined in the guidance, and is
effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted only for annual periods, and interim period within those annual periods, beginning after
December 15, 2016. The Company is currently evaluating the provisions of each of these standards and assessing their impact on its consolidated financial statements and disclosures.
In March 2016, the FASB issued ASU
No. 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting. This ASU makes targeted amendments to the accounting for employee share-based payments. This guidance is to be applied using various transition methods such as full retrospective, modified
retrospective, and prospective based on the criteria for the specific amendments as outlined in the guidance. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016.
Early adoption is permitted, as long as all of the amendments are adopted in the same period. The Company is currently evaluating the provisions of this guidance and assessing its impact on its consolidated financial statements and disclosures.
In September 2016, the FASB issued ASU
No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments, which clarifies whether the following items should be categorized as operating, investing or financing in the statement of cash flows: (i) debt prepayments and extinguishment costs,
(ii) settlement of
zero-coupon
debt, (iii) settlement of contingent consideration, (iv) insurance proceeds, (v) settlement of corporate-owned life insurance (COLI) and bank-owned life
insurance (BOLI) policies, (vi) distributions from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) receipts and payments with aspects of more than one class of cash flows. The new
standard takes effect in 2018 for public companies. If an entity elects early adoption, it must adopt all of the amendments in the same period. The Company is currently evaluating the provisions of this guidance and assessing its impact on its
consolidated financial statements and disclosures.
In October 2016, the FASB issued ASU No.
2016-17, Consolidation
(Topic 810) Interests Held through Related Parties That Are under Common Control (ASU
2016-17).
ASU
2016-17
requires, when assessing which party is the primary beneficiary in a VIE, that the decision maker considers interests held by entities under common control on a proportionate basis instead of treating those
interests as if they were that of the decision maker itself, as current GAAP requires. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2016. Early application is permitted in any interim or
annual period. The Company is currently evaluating the provisions of this guidance and assessing its impact on its consolidated financial statements and disclosures.
58
In November 2016, the FASB issued ASU No.
2016-18, Statement
of Cash Flows (Topic 230) - Restricted Cash (ASU
2016-18).
ASU
2016-18
requires that restricted cash and restricted cash equivalents should be
included with cash and cash equivalents when reconciling the
beginning-of-period
and
end-of-period
total amounts shown on the statement of cash flows. The ASU is effective beginning after December 15, 2017, and interim periods within those fiscal
years. Early adoption is permitted. The ASU should be applied using a retrospective transition method to each period presented. The Company is currently evaluating the provisions of this guidance and assessing its impact on its
consolidated financial statements and disclosures.
4. Related Party Transactions
Dr. Dees Travel Expenses and Related Collection Efforts
As reported in the Companys press release furnished with the Companys Current Report on Form
8-K
filed with
the Commission on February 29, 2016, in connection with the resignation of Dr. Dees as the Companys Chief Executive Officer and Chairman of the Board of Directors, which was effective February 27, 2016, the Audit Committee
conducted a review of Company procedures, policies and practices, including travel expense advancements and reimbursements. The Audit Committee retained independent counsel and an advisory firm with forensic accounting expertise to assist the Audit
Committee in conducting the investigation. On March 15, 2016, the Audit Committee completed this investigation and made the following findings: (1) in 2015, Dr. Dees received $898,430 in travel expense advances but submitted receipts
totaling only $297,170, most of which did not appear to be authentic; (2) in 2014, Dr. Dees received $819,000 for travel expense advances, for which no receipts were submitted; and (3) in 2013, Dr. Dees received $752,034 for
travel expense advances; no receipts were submitted by Dr. Dees for $698,000 of these expenses and $54,034 of submitted receipts did not appear to be authentic. In addition, the Company advanced travel expenses to Dr. Dees in the amount of
$56,627 in the first quarter of 2016 prior to his resignation and prior to the Companys investigation.
On May 5, 2016, the Company filed a
lawsuit in the United States District Court for the Eastern District of Tennessee at Knoxville against Dr. Dees and his wife (together with Dr. Dees, the Defendants). The Company alleges that between 2013 and the present,
Dr. Dees received approximately $2.4 million in advanced or reimbursed travel and entertainment expenses from the Company and that Dr. Dees did not use these funds for legitimate travel and entertainment expenses as he requested and
the Company intended. Instead, the Company alleges that Dr. Dees created false receipts and documentation for the expenses and applied the funds to personal use. The Company and Dr. Dees are parties to a Stipulated Settlement Agreement
dated June 6, 2014 (the Kleba Settlement Agreement) that was negotiated to resolve certain claims asserted against Dr. Dees derivatively. Pursuant to the terms of the Kleba Settlement Agreement, Dr. Dees agreed to repay
the Company compensation that was paid to him along with legal fees and other expenses incurred by the Company. As of the date of his resignation, Dr. Dees still owed the Company $2,267,750 under the Kleba Settlement Agreement. See Note 5
Long-Term Receivables. Dr. Dees has failed to make such payment, and the Company has notified him that he is in default and demanded payment in full. Therefore, the Company is alleging counts of conversion, fraud, breach of fiduciary
duty, breach of contract, breach of Kleba Settlement Agreement, unjust enrichment and punitive damages in this lawsuit. The Company is seeking that the Defendants be prohibited from disposing of any property that may have been paid for with the
misappropriated funds, the Defendants be disgorged of any funds shown to be fraudulently misappropriated and that the Company be awarded compensatory damages in an amount not less than $5 million. Furthermore, the Company is seeking for the
damages to be joint and several as to the Defendants and that punitive damages be awarded against Dr. Dees in the Companys favor. The Company is also seeking foreclosure of the Companys first-priority security interest in the
1,000,000 shares of common stock granted by Dr. Dees to the Company as collateral pursuant to that certain Stock Pledge Agreement dated October 3, 2014, between Dr. Dees and the Company in order to secure Dr. Dees
obligations under the Kleba Settlement Agreement. The United States District Court for the Eastern District of Tennessee at Knoxville entered a default judgment against Dr. Dees on July 20, 2016; however, the Company cannot predict when
these shares will be recovered by the Company. The Court issued a Temporary Restraining Order upon the Companys application for same upon notice that Dr. Dees was attempting to sell his shares of the Companys common stock. The
Temporary Restraining Order was converted to a Preliminary Injunction on September 16, 2016, which order will remain in place until the resolution of the underlying lawsuit absent further court order or agreement of the parties, and the Company
is presently engaged in discovery regarding damages.
59
Under the terms of the Amended and Restated Executive Employment Agreement entered into by Dr. H. Craig
Dees, the Companys former Chairman and Chief Executive Officer and the Company on April 28, 2014 (the Dees Agreement), Dr. Dees is owed no severance payments as a result of his resignation on February 27, 2016.
Dr. Deess employment terminated with his resignation without Good Reason as that term is defined in the Dees Agreement. Under section 6 of the Dees Agreement, Effect of Termination, a resignation by Dr. Dees
without Good Reason terminates any payments due to Dr. Dees as of the last day of his employment.
Mr. Culpepper Travel Expenses
and Related Collection Efforts
On December 27, 2016, the Companys Board of Directors unanimously voted to terminate Peter R. Culpepper,
effective immediately, from all positions he held with the Company and each of its subsidiaries, including Interim Chief Executive Officer and Chief Operating Officer of the Company, for cause, in accordance with the terms of the Amended and
Restated Executive Employment Agreement entered into by Peter R. Culpepper and the Company on April 28, 2014 (the Culpepper Employment Agreement) based on the results of the investigation conducted by a Special Committee of the
Board of Directors regarding improper travel expense advancements and reimbursements to Mr. Culpepper.
The Special Committee retained independent
counsel and an advisory firm with forensic accounting expertise to assist the Special Committee in conducting the investigation. The Special Committee found that Mr. Culpepper received $294,255 in travel expense reimbursements and advances that
were unsubstantiated. The Company seeks to recover from Mr. Culpepper the entire $294,255 in unsubstantiated travel expense reimbursements and advances, as well as all attorneys fees and auditors/experts fees incurred by the
Company in connection with the examination of his travel expense reimbursements. The Company is in the process of determining whether any or all of Mr. Culpeppers unsubstantiated travel expenses and advances should be treated as a theft
loss and therefore whether any uncollectible amounts will be treated as income to Mr. Culpepper and whether a Form 1099 MISC will be issued by the Company to Mr. Culpepper in 2017 in that regard.
Under the terms of the Culpepper Employment Agreement, Mr. Culpepper is owed no severance payments as a result of his termination For Cause
as that term is defined in the Culpepper Employment Agreement. Under section 6 of the Culpepper Employment Agreement, Effect of Termination, a termination For Cause terminates any payments due to Mr. Culpepper as of the
last day of his employment. Furthermore, Mr. Culpepper is no longer entitled to the 2:1 credit under the settlement agreement with respect to the Kleba Shareholder Derivative Lawsuit (see Note 12), such that the total $2,240,000 owed by
Mr. Culpepper pursuant to the settlement agreement plus Mr. Culpeppers proportionate share of the litigation cost in the amount of $227,750 less the amount that he repaid as of December 31, 2016 is immediately due and payable.
The Company sent Mr. Culpepper a notice of default in January 2017 for the total amount he owes the Company and intends to resolve these claims pursuant to the alternative dispute resolution provision of the Culpepper Employment Agreement. The
Company has established a reserve of $2,051,083 as of December 31, 2016, which amount represents the amount the Company currently believes Mr. Culpepper owes to the Company, while the Company pursues collection of this amount. See Note 5
Long-Term Receivables.
Mr. Culpepper disputes that he was terminated for cause under the Culpepper Employment Agreement and
Mr. Culpepper has demanded this issue be resolved by mediation in accordance with the Culpepper Employment Agreement. The Company is in the process of responding to Mr. Culpeppers demand, and the mediation has been scheduled for June
28, 2017. Concurrently, the Company is seeking from Mr. Culpepper immediate payment of amounts due under the Kleba Settlement Agreement as noted above.
Other Related Party Transactions
During the year ended
December 31, 2016, the Company made a donation of $100,000 to a charitable foundation in connection with the foundations annual dinner, for which the Companys Chairman of the Board serves as the director, secretary and dinner
chairman for the foundation. As of December 31, 2016, the $100,000 is included within accounts payable on the consolidated balance sheet.
Director
fees during the years ended December 31, 2016, 2015 and 2014 were $335,000, $270,000 and $270,000, respectively.
60
5. Long-Term Receivables
The following table summarizes the long-term receivables at December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Legal Fees
|
|
|
Settlement
|
|
|
Total
|
|
Gross receivable
|
|
$
|
911,000
|
|
|
$
|
2,864,753
|
|
|
$
|
3,775,753
|
|
Reserve for uncollectibility
|
|
|
(455,500
|
)
|
|
|
(1,549,043
|
)
|
|
|
(2,004,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net receivable
|
|
|
455,500
|
|
|
|
1,315,710
|
|
|
|
1,771,210
|
|
Short-term receivable
|
|
|
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term receivable
|
|
$
|
455,500
|
|
|
$
|
1,015,710
|
|
|
$
|
1,471,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Legal Fees
|
|
|
Settlement
|
|
|
Total
|
|
Gross receivable
|
|
$
|
911,000
|
|
|
$
|
3,382,313
|
|
|
$
|
4,293,313
|
|
Reserve for uncollectibility
|
|
|
(227,750
|
)
|
|
|
(870,578
|
)
|
|
|
(1,098,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net receivable
|
|
|
683,250
|
|
|
|
2,511,735
|
|
|
|
3,194,985
|
|
Short-term receivable
|
|
|
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term receivable
|
|
$
|
683,250
|
|
|
$
|
2,011,735
|
|
|
$
|
2,694,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2016, 2015, and 2014, the Company recorded a reserve for uncollectibility of
settlement receivable of $678,465, $870,578 and $0, respectively, in its consolidated statements of operations. During the years ended December 31, 2016, 2015, and 2014, the Company recorded a reserve for uncollectibility of legal fees
receivable of $227,750, $227,750 and $0, respectively, in its consolidated statements of operations.
See Note 4 - Related Party Transactions and Note 12
Litigation for additional details associated with the Companys receivables.
6. Stockholders Equity
Authorized Capital
As of December 31, 2016, the
Company was authorized to issue 1,000,000,000 shares of common stock, $0.001 par value, and 25,000,000 shares of preferred stock, $0.001 par value. The holders of the Companys common stock are entitled to one vote per share. The preferred
stock is designated as follows: 240,000 shares to Series B Convertible Preferred Stock and 24,760,000 shares undesignated.
Series A Convertible
Preferred Stock
In January 2014, 33,334 shares of the Companys Series A 8% Convertible Preferred Stock were converted into 33,334 shares of the
Companys common stock. There were no shares of Series A 8% Convertible Preferred Stock outstanding at December 31, 2016 and 2015. On April 30, 2014, the Company filed a Certificate of Elimination with the Secretary of State of the
State of Delaware to cancel the Series A 8% Convertible Preferred Stock.
Series B Convertible Preferred Stock
On August 25, 2016, the Company filed the Series B Certificate of Designation with the Delaware Secretary of State. The Series B Certificate of
Designation provides for the issuance of the Series B Convertible Preferred Stock, par value $0.001 per share (the Series B Preferred Stock). In the event of the Companys liquidation, dissolution, or winding up, holders of Series B
Preferred Stock will be entitled to receive the amount of cash, securities or other property to which such holder would be entitled to receive with respect to such shares of Series B Preferred Stock if such shares had been converted to common stock
immediately prior to such event (without giving effect for such purposes to any beneficial ownership limitation), subject to the preferential rights of holders of any class or series of the Companys capital stock specifically ranking by its
terms senior to the Series B Preferred Stock as to distributions of assets upon such event, whether voluntarily or involuntarily. The Series B Preferred Stock has no voting rights.
61
The holders of Series B Preferred Stock will be entitled to receive cumulative dividends at the rate per share of
8% per annum of the stated value per share, until the fifth anniversary of the date of issuance of the Series B Preferred Stock. The dividends become payable, at the Companys option in either cash or in shares of common stock, (i) upon
any conversion of the Series B Preferred Stock, (ii) on each such other date as the Board may determine, subject to written consent of the holders of Series B Preferred Stock holding a majority of the then issued and outstanding Series B
Preferred Stock, (iii) upon the Companys liquidation, dissolution or winding up, and (iv) upon occurrence of a fundamental transaction, which includes any merger or consolidation, sale of all or substantially all of the
Companys assets, exchange or conversion of all of the common stock by tender offer, exchange offer or reclassification; provided, however, that if Series B Preferred Stock is converted into shares of common stock at any time prior to the fifth
anniversary of the date of issuance of the Series B Preferred Stock, the holder will receive a make-whole payment in an amount equal to all of the dividends that, but for the early conversion, would have otherwise accrued on the applicable shares of
Series B Preferred Stock being converted for the period commencing on the conversion date and ending on the fifth anniversary of the date of issuance, less the amount of all prior dividends paid on such converted Series B Preferred Stock before the
date of conversion. Make-whole payments are payable at the Companys option in either cash or in shares of common stock. With respect to any dividend payments and make-whole payments paid in shares of common stock, the number of shares of
common stock to be issued to a holder of Series B Preferred Stock will be an amount equal to the quotient of (i) the amount of the dividend payable to such holder divided by (ii) the conversion price then in effect.
Warrant Exchange Programs
As of December 31, 2015,
the Company had outstanding warrants to purchase an aggregate of 59,861,601 shares of common stock, which were issued between January 6, 2011 and November 1, 2015 in transactions exempt from registration under the Securities Act (the
Existing Warrants). Each Existing Warrant had an exercise price of between $1.00 and $3.00 per share, and expires between January 6, 2016 and November 1, 2020. On December 31, 2015, the Company offered pursuant to an Offer
Letter/Prospectus 59,861,601 shares of its common stock for issuance upon exercise of the Existing Warrants. The shares issued upon exercise of the Existing Warrants are unrestricted and freely transferable. The Offer was to temporarily modify the
terms of the Existing Warrants so that each holder who tendered Existing Warrants during the Offer Period for early exercise were able to do so at a discounted exercise price of $0.50 per share. Each Existing Warrant holder who tendered existing
Warrants for early exercise during the Offer Period received, in addition to the shares of Common Stock purchased upon exercise, an equal number of new warrants to purchase common stock, with an exercise price of $0.85 per share, expiring
June 19, 2020 (the Replacement Warrants). The modification of the exercise price of the Existing Warrants and the Replacement Warrants are treated as an inducement to enter into the exchange offer and were accounted for as of the
closing date. The exchange offer expired at 4:00 p.m., Eastern Time, on March 28, 2016. The Company accepted for purchase approximately 7,798,507 Existing Warrants properly tendered, resulting in the issuance of approximately 7,798,507 shares
of common stock upon exercise of Existing Warrants and the issuance of approximately 7,798,507 Replacement Warrants, resulting in gross proceeds of $3,899,254 upon closing of the exchange offer. The placement agents received a total of $264,214 in
placement agent fees and 467,910 warrants with a cash exercise price of $0.85 per share which expire on June 19, 2020, unless sooner exercised. In connection with the exchange offer, a warrant incentive expense totaling $2,718,407 was recorded
during the year ended December 31, 2016. The value was determined using the Black-Scholes option-pricing model between the Existing Warrants exchanged and the common stock and Replacement Warrants received. See Note 11.
Common Stock Issued for Services
During the years ended
December 31, 2016, 2015 and 2014, the Company issued 51,745 shares, 305,627 shares and 300,000 shares of common stock to consultants in exchange for services, respectively. Consulting costs charged to operation during the years ended
December 31, 2016, 2015 and 2014 were $20,163, $202,814 and $418,250, respectively. As the fair market of these services was not readily determinable, these services were valued based on the fair market value of stock at grant date.
Warrants Issued for Services
During the year ended
December 31, 2014, the Company issued 2,444,913 fully vested warrants to consultants in exchange for services. Consulting costs charged to operations were $2,321,327. As the fair market value of these services was not readily determinable,
these services were valued based on the fair market value of the warrants, determined using the Black-Scholes option-pricing model. The fair market value for the warrants issued in 2014 ranged from $0.55 to $2.56 per share. See
Note 7Stock Incentive Plan and Warrants for valuation assumptions.
During the year ended December 31, 2015, the Company issued 1,948,702
fully vested warrants to consultants in exchange for services. Consulting costs charged to operations were $552,358. As the fair market value of these services was not readily determinable, these services were valued based on the fair market value
of the warrants, determined using the Black-Scholes option-pricing model. The fair market value for the warrants issued in 2015 ranged from $0.14 to $0.54 per share. See Note 7Stock Incentive Plan and Warrants for valuation assumptions.
62
There are no provisions or obligations that would require the Company to cash settle any of its outstanding
warrants. The equity classification of certain of the Companys warrants is appropriate considering that these warrants provide the counterparties the right to purchase a fixed number of shares at a fixed price and the terms are not subject to
any potential adjustments.
Private Offerings of Common Stock and Warrants
During the year ended December 31, 2014, the Company completed a private offering of common stock and warrants to accredited investors for gross proceeds
of $5,000,000. The Company accepted subscriptions, in the aggregate, for 2,000,000 shares of common stock and five year warrants to purchase 2,000,000 shares of common stock. Investors received five year fully vested warrants to purchase up to 100%
of the number of shares purchased by the investors in the offering. The warrants have an exercise price of $3.00 per share. The purchase price for each share of common stock together with the warrants was $2.50. In connection with the offering, the
Company paid $650,000 and issued five year fully vested warrants to purchase 300,000 shares of common stock with an exercise price of $2.50 per share to the placement agent.
During the year ended December 31, 2014, the Company received subscriptions, in the aggregate, for 3,586,300 shares of common stock and five year
warrants to purchase 1,793,150 shares of common stock for aggregate gross proceeds of $3,586,300. Investors received five year fully vested warrants to purchase up to 50% of the number of shares purchased in the offering. The warrants have an
exercise price of $1.25 per share. The purchase price for each share of common stock together with the warrants is $1.00. In connection with the offering, the Company paid $466,219 and issued five year fully vested warrants to purchase 358,630
shares of common stock with an exercise price of $1.25 per share to the placement agent.
During the year ended December 31, 2014 the Company
completed a private offering of common stock and warrants to accredited investors for gross proceeds of $4,198,300. The Company accepted subscriptions, in the aggregate, for 4,198,300 shares of common stock and five year warrants to purchase
2,099,150 shares of common stock. Investors received five year fully vested warrants to purchase up to 50% of the number of shares purchased in the offering. The warrants have an exercise price of $1.25 per share. The purchase price for each share
of common stock together with the warrants was $1.00. In connection with the offering, the Company paid $545,779 and issued five year fully vested warrants to purchase 419,830 shares of common stock with an exercise price of $1.25 per share to the
placement agent.
During the year ended December 31, 2015, the Company completed a private offering of common stock and warrants to accredited
investors for gross proceeds of $776,000. The Company received subscriptions, in the aggregate, for 776,000 shares of common stock and five year warrants to purchase 388,000 shares of common stock. Investors received five year fully vested warrants
to purchase up to 50% of the number of shares purchased in the offering. The warrants have an exercise price of $1.25 per share. The purchase price for each share of common stock together with the warrants is $1.00. In connection with the offering,
the Company paid $100,880 and issued five year fully vested warrants to purchase 77,600 shares of common stock with an exercise price of $1.25 per share to the placement agent.
During the year ended December 31, 2015, the Company completed a private offering of common stock and warrants to accredited investors for gross proceeds
of $1,011,100. The Company received subscriptions, in the aggregate, for 1,011,100 shares of common stock and five year warrants to purchase 505,550 shares of common stock. Investors received five year fully vested warrants to purchase up to 50% of
the number of shares purchased in the offering. The warrants have an exercise price of $1.25 per share. The purchase price for each share of common stock together with the warrants is $1.00. In connection with the offering, the Company paid $131,443
and issued five year fully vested warrants to purchase 101,110 shares of common stock with an exercise price of $1.25 per share to the placement agent.
63
During the year ended December 31, 2016, the Company did not complete any private offerings of its equity
securities.
June 2015 Public Offering of Common Stock and Warrants
On June 24, 2015, the Company completed a public offering of common stock and warrants for gross proceeds of $13,151,250 (the Offering). The
Offering consisted of 17,500,000 shares of common stock and warrants to purchase 17,500,000 shares of common stock with a public offering price of $0.75 for a fixed combination of one share of common stock and a warrant to purchase one share of
common stock. Investors received five year fully vested warrants to purchase up to 100% of the number of shares purchased in the Offering. The warrants have an exercise price of $0.85 per share. The warrants met the criteria for equity treatment. At
the closing, the underwriters exercised their over-allotment option with respect to warrants to purchase up to an additional 2,625,000 shares of common stock at $0.01 per warrant. The warrants issued in the Offering began trading on the NYSE MKT on
June 22, 2015, under the ticker symbol PVCTWS. In connection with the Offering, the Company paid $1,052,100 to the placement agent. As of December 31, 2016, 0 tradable warrants are outstanding.
August 2016 Public Offering
On August 30, 2016, the
Company closed a public offering (the August 2016 Offering) of 240,000 shares of its Series B Preferred Stock (which were initially convertible into an aggregate of 24,000,000 shares of the Companys common stock) and warrants,
which were initially exercisable to purchase an aggregate of 24,000,000 shares of common stock at an exercise price of $0.275 per share of common stock (the August 2016 Warrants). The Series B Preferred Stock and August 2016 Warrants
were sold together at a price of $25.00 for a combination of one share of Series B Preferred Stock and 100 August 2016 Warrants to purchase one share of common stock each, resulting in aggregate net proceeds of $5,288,530 (gross proceeds of
$6,000,000 less issuance costs of $711,470) to the Company.
The conversion feature embedded within the Series B Preferred Stock was subject to
anti-dilution price protection such that if the conversion price in effect on the 60th trading day following the date of issuance of the Series B Preferred Stock (the Price Reset Date) exceeded 85% of the average of the 45 lowest volume
weighted average trading prices of the common stock during the period commencing on the date of issuance of the Series B Preferred Stock and ending on the Price Reset Date (as adjusted for stock splits, stock dividends, recapitalizations,
reorganizations, reclassification, combinations, reverse stock splits or other similar events during such period) (the Adjusted Conversion Price), then the conversion price shall be reset to the Adjusted Conversion Price and shall be
further subject to adjustment as provided in the Series B Certificate of Designation. In either case, if a holder of Series B Preferred Stock converted its shares of Series B Preferred Stock prior to any such price reset event, then such holder was
entitled to receive additional shares of common stock equal to the number of shares of common stock that would have been issued assuming for such purposes the Adjusted Conversion Price were in effect at such time less the shares issued at the then
Conversion Price (subject to being held in abeyance based on beneficial ownership limitations). On the Price Reset Date, the Adjusted Conversion Price was set at $0.0533 pursuant to the terms of the Series B Certificate of Designation. During the
year ended December 31, 2016, the Company issued to holders who converted their shares of Series B Preferred Stock an aggregate of 151,943,945 shares of common stock, which included dividends paid in kind which is discussed below.
The August 2016 Warrants expire on August 30, 2021. Pursuant to the terms of the August 2016 Warrants, because the exercise price in effect on the Price
Reset Date exceeded 85% of the average of the 45 lowest volume weighted average trading prices of the common stock during the period commencing on the date of issuance of the August 2016 Warrants and ending on the Price Reset Date (as adjusted for
stock splits, stock dividends, recapitalizations, reorganizations, reclassification, combinations, reverse stock splits or other similar events during such period) (the Adjusted Exercise Price), then (i) the exercise price was reset
to the Adjusted Exercise Price (and without giving effect to any prior conversions) and shall be further subject to adjustment as provided in the August 2016 Warrants, and (ii) the number of shares of common stock issuable upon exercise of the
August 2016 Warrants will be reset to equal the number of shares of common stock issuable upon conversion of Series B Preferred Stock after giving effect to the Adjusted Exercise Price. If a holder of August 2016 Warrants exercised its August 2016
Warrants prior to such repricing, then such holder was entitled to receive shares of common stock equal to the difference between the exercise price and the Adjusted Exercise Price. The exercise price of the August 2016 Warrants is further subject
to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the common stock. On the Price Reset Date, the Adjusted Exercise Price was set at
$0.0533 pursuant to the terms of the August 2016 Warrants. No holder of August 2016 Warrants had exercised its August 2016 Warrants prior to the Price Reset Date, so no additional shares of common stock were due to holders of August 2016 Warrants as
of the Price Reset Date. Holders of August 2016 Warrants are entitled to exercise their August 2016 Warrants at the Adjusted Exercise Price and will receive an aggregate of 112,570,356 shares of common stock upon exercise of the August 2016
Warrants.
64
The Series B Preferred Stock does not contain a redemption provision and an overall analysis of its features
performed by the Company determined that it is more akin to equity and therefore, has been classified within stockholders equity on the consolidated balance sheet. While the embedded conversion option (ECO) is subject to an
anti-dilution price adjustment, since the ECO is clearly and closely related to the equity host, it is not required to be bifurcated and accounted for as a derivative liability under ASC 815. To analyze whether the Series B Preferred Stock included
a beneficial conversion feature (BCF), the Company allocated the $6,000,000 of the gross proceeds between the August 2016 Warrants and the Series B Preferred Stock. The Company allocated the commitment date fair value of $3,678,989 to
the August 2016 Warrants (which is allocated at fair value because the August 2016 Warrants were determined to be derivative liabilities as discussed in Note 11) resulting in an amount allocated to the Series B Preferred Stock of $2,321,011. Next,
the Company computed the number of shares of common stock issuable at the commitment date to be 24,000,000 in order to arrive at an effective conversion price of $0.097 per share. When compared to the market price of the Companys common stock
of $0.127 per share as of the commitment date, it was determined that a BCF did exist and, as a result, the Company recorded a deemed dividend in net loss available to common stockholders of $726,989. On November 23, 2016, the Series B
Preferred Stock conversion price became fixed and, as a result, the contingency was resolved. Accordingly, the Company analyzed for a BCF. The Company computed the number of shares of common stock issuable by the Company at the commitment date to be
112,570,356 to arrive at an effective conversion price of $0.021 per share. When compared to the market price of the Companys common stock of $0.038 per share as of the commitment date, it was determined that a BCF did exist and, as a result,
the Company recognized a deemed dividend of $1,318,801.
During the year ended December 31, 2016, holders converted 231,400 shares of Series B
Preferred Stock such that they were entitled to dividends, including a make-whole payment, of $2,314,000 that the Company elected to pay in shares of common stock. As a result, the Company issued 9,477,412 shares of common stock related to the
Series B Preferred Stock dividends during the year ended December 31, 2016 and included the $2,314,000 of dividends paid in kind in its computation of net loss applicable to common shareholders during the year ended December 31, 2016. The
Company accounted for the dividends on the Series B Preferred Stock by recording a debit and credit to additional paid-in capital for $2,314,000. In addition, the Company included $72,453 as dividends paid in kind in its computation of net loss
applicable to common shareholders during the year ended December 31, 2016 for the 8% dividends related to the shares of Series B Preferred Stock that were not converted as of December 31, 2016.
The net carrying value of the Series B Preferred Stock is $2,045,789 (gross proceeds of $6,000,000 less preferred stock discount associated with August 2016
Warrants of $3,678,989 less issuance costs allocated to Series B Preferred Stock of $275,222). Since the Series B Preferred Stock doesnt contain a redemption provision, it is not probable that the Series B Preferred Stock will become
redeemable, therefore the preferred stock discount is not amortized.
The August 2016 Warrants were determined to be derivative liabilities at issuance
due to the presence of an anti-dilution feature whereby the Company may not have a sufficient number of authorized and unissued shares, which resulted in the assumption of a cash settlement of the warrant. Utilizing a Monte Carlo valuation method,
the Company, with the assistance of a valuation specialist, determined that the August 2016 Warrants had an issuance date value of $3,678,989. The derivative liability was
marked-to-the-market
on November 23, 2016, when the exercise price became fixed, at which time the $3,160,114 value of the August 2016 Warrants was reclassified to equity because the August 2016
Warrants were no longer subject to the anti-dilution adjustment. As a result, the Company recognized a gain on change in fair value of warrant liability of $518,875 during the year ended December 31, 2016.
In connection with the closing of the August 2016 Offering, the Company incurred $711,470 of cash issuance costs. $436,248 of the issuance costs were
allocated to the August 2016 Warrants (the August 2016 Warrants comprised $3,678,989, or 61%, of the aggregate gross proceeds of $6,000,000), which were classified at issuance as a derivative liability and, as a result, were expensed immediately
(and included within other expense
(non-operating)
on the consolidated statement of operations) and $275,222 of the issuance costs were allocated to the Series B Preferred Stock, which is classified as equity
and, as a result, were charged against additional
paid-in
capital.
7. Stock Incentive Plan and Warrants
The Provectus Biopharmaceuticals, Inc. 2014 Equity Compensation Plan provides for the issuance of up to 20,000,000 shares of common stock pursuant
to stock options for the benefit of eligible employees and directors of the Company. Options granted under the 2014 Equity Compensation Plan are either incentive stock options within the meaning of Section 422 of the Internal
Revenue Code or options which are not incentive stock options. The stock options are exercisable over a period determined by the Board of Directors (through its Compensation Committee), but generally no longer than 10 years after the date they are
granted. As of December 31, 2016, there were 18,900,000 shares available for issuance under the 2014 Equity Compensation Plan.
65
For stock options granted to employees during 2016, 2015 and 2014, the Company has estimated the fair value of
each option granted using the Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Weighted average fair value per option granted
|
|
|
N/A
|
|
|
$
|
0.38
|
|
|
$
|
0.77
|
|
Significant assumptions (weighted average) risk-free rate at grant date
|
|
|
N/A
|
|
|
|
0.25
|
%
|
|
|
0.25
|
%
|
Expected stock price volatility
|
|
|
N/A
|
|
|
|
90% - 92
|
%
|
|
|
85% - 92
|
%
|
Expected option life (years)
|
|
|
N/A
|
|
|
|
10
|
|
|
|
10
|
|
The Company has computed the fair value of options granted using the Black-Scholes option pricing model. Option forfeitures
are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate will be adjusted periodically based on the extent to which actual option forfeitures differ, or are expected to differ, from the
previous estimate, when it is material. The Company estimated forfeitures related to option grants at an annual rate of 0% for options granted during the years ended December 31, 2016, 2015 and 2014. The expected term used for options
issued to
non-employees
is the contractual life and the expected term used for options issued to employees and directors is the estimated period of time that options granted are expected to be outstanding. The
Company utilizes the simplified method to develop an estimate of the expected term of plain vanilla employee option grants. The Company is utilizing an expected volatility figure based on a review of the historical
volatility, over a period of time, equivalent to the expected life of the instrument being valued, of the Companys historical common stock market prices. The risk-free interest rate was determined from the implied yields from U.S. Treasury
zero-coupon
bonds with a remaining term consistent with the expected term of the instrument being valued.
During the
year ended December 31, 2014, holders exercised an aggregate of 1,502,108 options at exercise prices ranging from $0.64 to $1.25 per share for aggregate proceeds of $1,446,393. During the year ended December 31, 2014, the Company issued an
aggregate of 150,000 stock options to its
re-elected
non-employee
members of the board of directors. The stock options vested on the date of grant and have an exercise
price equal to the fair market price on the date of issuance. Three employees of the Company had options rescinded during the three months ended December 31, 2014 due to the terms of the settlement discussed in Note 12.
During the year ended December 31, 2015, holders exercised an aggregate of 590,098 options at exercise prices ranging from $0.64 to $1.02 per share for
aggregate proceeds of $549,730. During the year ended December 31, 2015, the Company issued an aggregate of 150,000 stock options to its
re-elected
non-employee
members of the board of directors and an aggregate of 1,600,000 stock options to its four executive officers then in office. All of the stock options issued in 2015 vested on the date of grant and have an exercise price equal to $0.75 per share of
common stock which is greater than the fair market price on the date of issuance.
During the year ended December 31, 2016, no holders exercised
stock options. The Company did not issue any stock options during the year ended December 31, 2016. All of Dr. Dees stock options expired during the year ended December 31, 2016 as a result of his resignation.
Included in the results for the years ended December 31, 2016, 2015 and 2014 is $0, $670,576 and $115,645, respectively, of stock-based compensation
expense. As of December 31, 2016, there was no unrecognized compensation cost related to
non-vested
share-based compensation arrangements granted under the Plan.
66
The following table summarizes option activity during the years ended December 31, 2014, 2015 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Exercise Price
Per Share
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at January 1, 2014
|
|
|
15,322,206
|
|
|
$
|
0.62 - 1.50
|
|
|
$
|
0.97
|
|
Granted
|
|
|
150,000
|
|
|
|
0.88
|
|
|
|
0.88
|
|
Settlement (Note 11)
|
|
|
(2,800,000
|
)
|
|
|
0.93 - 1.00
|
|
|
|
0.97
|
|
Exercised
|
|
|
(1,502,108
|
)
|
|
|
0.64 - 1.25
|
|
|
|
0.96
|
|
Forfeited
|
|
|
(325,000
|
)
|
|
|
0.95 - 1.10
|
|
|
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2014
|
|
|
10,845,098
|
|
|
$
|
0.64 - 1.50
|
|
|
$
|
0.97
|
|
Granted
|
|
|
1,750,000
|
|
|
|
0.75
|
|
|
|
0.75
|
|
Exercised
|
|
|
(590,098
|
)
|
|
|
0.64 - 1.02
|
|
|
|
0.93
|
|
Forfeited
|
|
|
(1,375,000
|
)
|
|
|
0.62 - 0.94
|
|
|
|
0.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2015
|
|
|
10,630,000
|
|
|
$
|
0.67 - 1.50
|
|
|
$
|
0.96
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(7,130,000
|
)
|
|
|
0.67 - 1.50
|
|
|
|
0.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
3,500,000
|
|
|
$
|
0.67 - 1.50
|
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options outstanding at December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
Price
|
|
|
Number Outstanding
at December 31,
2016
|
|
|
Weighted Average
Remaining Contractual
Life
|
|
|
Number Exercisable
at December 31,
2016
|
|
$
|
0.67
|
|
|
|
200,000
|
|
|
|
6.60
|
|
|
|
200,000
|
|
$
|
0.75
|
|
|
|
950,000
|
|
|
|
7.13
|
|
|
|
950,000
|
|
$
|
0.84
|
|
|
|
150,000
|
|
|
|
5.50
|
|
|
|
150,000
|
|
$
|
0.88
|
|
|
|
150,000
|
|
|
|
7.60
|
|
|
|
150,000
|
|
$
|
0.93
|
|
|
|
575,000
|
|
|
|
4.76
|
|
|
|
575,000
|
|
$
|
0.99
|
|
|
|
50,000
|
|
|
|
4.50
|
|
|
|
50,000
|
|
$
|
1.00
|
|
|
|
625,000
|
|
|
|
3.26
|
|
|
|
625,000
|
|
$
|
1.04
|
|
|
|
400,000
|
|
|
|
3.50
|
|
|
|
400,000
|
|
$
|
1.16
|
|
|
|
250,000
|
|
|
|
3.08
|
|
|
|
250,000
|
|
$
|
1.50
|
|
|
|
150,000
|
|
|
|
0.50
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,500,000
|
|
|
|
4.95
|
|
|
|
3,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during 2015 and 2014 was $0.38 per share and $0.77 per share,
respectively. The total intrinsic value of options exercised during 2015 and 2014 was $16,151 and $1,327,300, respectively. As of December 31, 2016, the intrinsic value of outstanding and exercisable options was $0. No stock options were
granted during the year ended December 31, 2016.
During the year ended December 31, 2014, 14,116,280 warrants were exercised on a cashless
basis resulting in 10,016,291 common shares being issued. During the year ended December 31, 2014, 3,408,218 warrants were exercised for $3,044,364 resulting in 3,408,218 common shares issued.
67
The following table summarizes warrant activity during the years ended December 31, 2014, 2015 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
Exercise Price
Per Warrant
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at January 1, 2014
|
|
|
73,037,416
|
|
|
$
|
0.68 - 2.00
|
|
|
$
|
1.03
|
|
Granted
|
|
|
9,415,673
|
|
|
|
1.00 - 3.00
|
|
|
|
1.61
|
|
Exercised
|
|
|
(17,524,498
|
)
|
|
|
0.68 - 1.50
|
|
|
|
1.01
|
|
Forfeited
|
|
|
(1,692,635
|
)
|
|
|
0.95 - 1.25
|
|
|
|
1.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2014
|
|
|
63,235,956
|
|
|
$
|
0.68 - 3.00
|
|
|
$
|
1.12
|
|
Granted
|
|
|
23,145,962
|
|
|
|
0.85 - 1.25
|
|
|
|
0.88
|
|
Forfeited
|
|
|
(6,260,323
|
)
|
|
|
0.95 - 1.50
|
|
|
|
1.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2015
|
|
|
80,121,595
|
|
|
$
|
0.68 - 3.00
|
|
|
$
|
1.05
|
|
Granted
|
|
|
32,357,344
|
|
|
|
0.28 - 0.85
|
|
|
|
0.42
|
|
Warrant repricing
|
|
|
88,570,356
|
|
|
|
0.05
|
|
|
|
[1
|
]
|
Exercised
|
|
|
(7,798,507
|
)
|
|
|
0.50
|
|
|
|
0.50
|
|
Forfeited
|
|
|
(3,259,247
|
)
|
|
|
0.68 - 2.00
|
|
|
|
1.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
189,991,541
|
|
|
$
|
0.05 - 3.00
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1]
|
On November 23, 2016, the exercise price of the August 2016 Warrants was reset to $0.0533 per share and holders will receive an aggregate of 112,564,968 shares upon exercise. See Note 6 Stockholders
Equity August 2016 Public Offering.
|
The following table summarizes information about warrants outstanding at December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
Price
|
|
|
Number Outstanding
at December 31,
2016
|
|
|
Weighted Average
Remaining Contractual
Life
|
|
|
Number Exercisable
at December 31,
2016
|
|
|
|
|
|
$
|
0.053
|
|
|
|
112,570,356
|
|
|
|
4.66
|
|
|
|
112,570,356
|
|
$
|
0.85
|
|
|
|
28,482,344
|
|
|
|
3.47
|
|
|
|
28,482,344
|
|
$
|
1.00
|
|
|
|
42,363,449
|
|
|
|
1.66
|
|
|
|
42,363,449
|
|
$
|
1.12
|
|
|
|
763,296
|
|
|
|
1.12
|
|
|
|
763,296
|
|
$
|
1.25
|
|
|
|
4,474,520
|
|
|
|
2.93
|
|
|
|
4,474,520
|
|
$
|
2.00
|
|
|
|
123,000
|
|
|
|
1.88
|
|
|
|
123,000
|
|
$
|
2.50
|
|
|
|
280,276
|
|
|
|
2.33
|
|
|
|
280,276
|
|
$
|
3.00
|
|
|
|
934,300
|
|
|
|
2.33
|
|
|
|
934,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189,991,541
|
|
|
|
|
|
|
|
189,991,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
8. Income Taxes
The income tax provision (benefit) consists of the following:
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
|
|
|
$
|
|
|
Deferred
|
|
|
(4,195,688
|
)
|
|
|
(8,387,000
|
)
|
|
|
|
State and local:
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
(555,312
|
)
|
|
|
(1,103,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,751,000
|
)
|
|
|
(9,490,000
|
)
|
Change in valuation allowance
|
|
|
4,751,000
|
|
|
|
9,490,000
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliations between the statutory federal income tax rate and the Companys effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
Tax benefit at federal statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State income taxes, net of federal benefit
|
|
|
(4.5
|
)%
|
|
|
(4.5
|
)%
|
Permanent differences
|
|
|
4.2
|
%
|
|
|
(0.2
|
)%
|
True-up of tax provision
|
|
|
14.9
|
%
|
|
|
0.0
|
%
|
Change in valuation allowance
|
|
|
19.4
|
%
|
|
|
38.7
|
%
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
The components of the Companys deferred income taxes are summarized below:
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
52,999,000
|
|
|
$
|
42,457,000
|
|
Stock-based compensation
|
|
|
3,251,000
|
|
|
|
12,235,000
|
|
Research and development credits
|
|
|
2,163,000
|
|
|
|
|
|
Theft loss
|
|
|
963,000
|
|
|
|
963,000
|
|
Receivable allowance
|
|
|
772,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
60,148,000
|
|
|
|
55,655,000
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(863,000
|
)
|
|
|
(1,121,000
|
)
|
|
|
|
Valuation allowance
|
|
|
(59,285,000
|
)
|
|
|
(54,534,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net of valuation allowance
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in valuation allowance
|
|
$
|
(4,751,000
|
)
|
|
$
|
(9,490,000
|
)
|
|
|
|
|
|
|
|
|
|
69
A valuation allowance against deferred tax assets is required if, based on the weight of available evidence, it
is more likely than not that some or all of the deferred tax assets may not be realized. The Company is in the early stages of development and realization of the deferred tax assets is not considered more likely than not. As a result, the Company
has recorded a full valuation allowance for the net deferred tax asset.
Since inception of the Company on January 17, 2002, the Company has
generated tax net operating losses of approximately $140 million, expiring in 2022 through 2036. The tax loss carry-forwards of the Company may be subject to limitation by Section 382 of the Internal Revenue Code with respect to the amount
utilizable each year. This limitation reduces the Companys ability to utilize net operating loss carry-forwards. The Company completed a Section 382 study for the period from inception through the year ended December 31, 2014 and
recorded a limitation of $3.2 million to their net operating loss carry-forward.
The Company has determined that there are no uncertain tax
positions as of December 31, 2016 or 2015 and does not expect any significant change within the next year.
The Company files income tax returns in
the U.S. federal jurisdiction and the state of Tennessee.
9. Commitments
Leases
The Company leases office and laboratory space in
Knoxville, Tennessee on an annual basis, continuing for five years to January 1, 2020, unless 30 days notice is given by either party to terminate the agreement. Rent expense was $60,000 for the years ended December 31, 2016, 2015 and
2014.
Employee Agreements
On April 28, 2014,
the Company entered into amended and restated executive employment agreements (the Employment Agreements) with each of the following executive officers of the Company: H. Craig Dees, Ph.D. to serve as its Chief Executive Officer, Timothy
C. Scott, Ph.D. to serve as its President, Eric A. Wachter, Ph.D. to serve as its Chief Technology Officer, and Peter R. Culpepper to serve as its Chief Financial Officer and Chief Operating Officer (collectively, the executives).
Effective February 27, 2016, Dr. Dees resigned as Chief Executive Officer and Chairman of the Board of Directors. Under the terms of the Amended and Restated Executive Employment Agreement entered into by Craig Dees and the Company on
April 28, 2014 (the Dees Agreement), Dr. Dees is owed no severance payments as a result of his resignation. Dr. Deess employment terminated with his resignation without Good Reason as that term is defined
in the Dees Agreement. Under section 6 of the Dees Agreement, Effect of Termination, a resignation by Dr. Dees without Good Reason terminates any payments due to Dr. Dees as of the last day of his employment.
Mr. Culpepper was terminated for Cause as the Interim Chief Executive Officer and Chief Operating Officer of the Company effective
December 27, 2016 pursuant to the terms of the Amended and Restated Executive Employment Agreement entered into by Mr. Culpepper and the Company on April 28, 2014 (the Culpepper Agreement). Mr. Culpepper was owed no
severance payments because he was terminated by us for Cause (as that term is defined in the Culpepper Agreement). Under section 6 of the Culpepper Agreement, a termination by us of Mr. Culpepper for Cause terminates any
payments that would otherwise be due to Mr. Culpepper as of the last day of his employment. Mr. Culpepper disputes that he was terminated for cause under the Culpepper Agreement and Mr. Culpepper has demanded this issue be
resolved by mediation. The mediation has been scheduled for June 28, 2017.
Each Employment Agreement provides that such executive will be employed for an
initial term of five years, subject to automatic renewal for successive
one-year
periods, unless the executive or the Company (i) terminates the Employment Agreement and the executives employment
thereunder as provided in the Employment Agreement or (ii) provides notice of his or its intent not to renew. Each executives initial base salary is $500,000 per year, and any increases to such executives base salary shall be
determined by the Compensation Committee of the Companys Board of Directors in its sole discretion (the Compensation Committee). The executives are also eligible for annual bonuses and annual equity incentive awards as determined
by the Compensation Committee in its sole discretion.
Each of the Employment Agreements generally provides that in the event that the executives
employment is terminated (i) voluntarily by the executive without Good Reason (as defined in the Employment Agreement), or (ii) by the Company for Cause (as defined in the Employment Agreement), the Company shall pay the executives
compensation only through the last day of the employment period and, except as may otherwise be expressly provided, the Company shall have no further obligation to the executive. In the event that the executives employment is terminated by the
Company other than for Cause (including death or disability), or if the
70
executive voluntarily resigns for Good Reason, for so long as the executive is not in breach of his continuing obligations under the
non-competition,
non-solicitation
and confidentiality restrictions contained in the Employment Agreement, the Company shall continue to pay the executive (or his estate) an amount equal to his base salary in effect immediately prior
to the termination of his employment for a period of 24 months, to be paid in accordance with the Companys regular payroll practices through the end of the fiscal year in which termination occurs and then in one lump sum payable to the
executive in the first month of the calendar year following termination, as well as any prorated bonuses determined by the Compensation Committee, plus benefits on a substantially equivalent basis to those which would have been provided to the
executive.
During the term of each executives employment by the Company, and for a period of twenty-four (24) months following termination of
employment, in the event that such executive voluntarily terminates his employment with the Company other than for Good Reason or such executive is terminated for Cause, then neither the executive nor any other person or entity with executives
assistance shall (i) participate in any business that is directly competitive with the Companys business or (ii) directly or indirectly, solicit any employee of the Company to quit or terminate their employment with the Company or
employ as an employee, independent contractor, consultant, or in any other position, any person who was an employee of the Company or the Companys affiliates within the preceding six months, subject to certain exceptions. In addition, without
the express written consent of the Company, each executive shall not at any time (either during or after the termination of executives employment) use (other than for the benefit of the Company) or disclose to any other business entity
proprietary or confidential information concerning the Company, any of their affiliates, or any of its officers. Neither shall such executive disclose any of the Companys or the Companys affiliates trade secrets or inventions of
which he gained knowledge during his employment with the Company (subject to certain exceptions).
10. 401(K) Profit Sharing Plan
The Company maintains a retirement plan under Section 401(k) of the Internal Revenue Code, which covers all eligible employees. All employees with U.S. source
income are eligible to participate in the plan immediately upon employment. Contributions made by the Company totaled approximately $159,000, $212,000 and $320,000 in 2016, 2015 and 2014, respectively.
11. Fair Value of Financial Instruments
The
FASBs authoritative guidance on fair value measurements establishes a framework for measuring fair value, and expands disclosure about fair value measurements. This guidance enables the reader of the financial statements to assess the inputs
used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. Under this guidance, assets and liabilities carried at fair value must be classified and
disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
71
In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities
that are measured and reported on a fair value basis. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. The fair value of certain of
the Companys financial instruments. The fair value of derivative instruments is determined by management with the assistance of an independent third party valuation specialist. The warrant liability is a derivative instrument and is classified
as Level 3. The Company used the Monte-Carlo Simulation model to estimate the fair value of the warrants using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
2010 Warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average term
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
0.2 years
|
|
Probability the warrant exercise price be reset
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
5
|
%
|
Volatility
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
63.7
|
%
|
Risk free interest rate
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
0.03% - 0.04
|
%
|
|
|
|
|
2011 Warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average term
|
|
|
N/A
|
|
|
|
0 years
|
|
|
|
1.0 years
|
|
Probability the warrant exercise price be reset
|
|
|
N/A
|
|
|
|
5
|
%
|
|
|
5
|
%
|
Volatility
|
|
|
N/A
|
|
|
|
40.4
|
%
|
|
|
159.2
|
%
|
Risk free interest rate
|
|
|
N/A
|
|
|
|
0.13
|
%
|
|
|
0.25
|
%
|
|
|
|
|
2016 Warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term
|
|
|
4.77 - 5.00 years
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Volatility
|
|
|
107.8% - 114.7
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Risk free interest rate
|
|
|
0.88% - 1.40
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
The value of the warrant liability was determined based on the Monte-Carlo Simulation model at the date the warrants were
issued. The warrant liability is then revalued at each subsequent quarter. During the year ended December 31, 2014, 1,850,000 of the warrants included in the warrant liability were exercised, which is the remainder of the 2013 warrants. The
Company determined the fair value of the warrants exercised on the date of exercise and adjusted the related warrant liability accordingly. The adjusted fair value of the warrants exercised in 2014 of $4,047,116 was reclassified into additional
paid-in
capital. For the year ended December 31, 2014 there was a loss recognized from the revaluation of the warrant liability of $878,806.
The warrant liability measured at fair value on a recurring basis is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability at December 31, 2016
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Warrant liability at December 31, 2015
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
A reconciliation of the warranty liability measured at fair value on a recurring basis with the use of significant
unobservable inputs (Level 3) from January 1, 2015 to December 31, 2016 follows:
|
|
|
|
|
Balance at January 1, 2015
|
|
$
|
146,560
|
|
Gain on change in fair value of warrant liability
|
|
|
(146,560
|
)
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
|
|
Issuance of warrants
|
|
|
3,678,989
|
|
Gain on change in fair value of warrant liability
|
|
|
(518,875
|
)
|
Reclassification to warrant liability
|
|
|
(3,160,114
|
)
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
|
|
|
|
|
|
|
72
See Note 6 Stockholders Equity August 2016 Public Offering.
12. Litigation
Kleba Shareholder Derivative
Lawsuit
On January 2, 2013, Glenn Kleba, derivatively on behalf of the Company, filed a shareholder derivative complaint in the Circuit Court for
the State of Tennessee, Knox County (the Court), against Dr. Dees, Timothy C. Scott, Eric A. Wachter, and Peter R. Culpepper (collectively, the Executives), Stuart Fuchs, Kelly M. McMasters, and Alfred E. Smith, IV
(collectively, together with the Executives, the Individual Defendants), and against the Company as a nominal defendant (the Shareholder Derivative Lawsuit). The Shareholder Derivative Lawsuit alleged (i) breach of
fiduciary duties, (ii) waste of corporate assets, and (iii) unjust enrichment, all three claims based on Mr. Klebas allegations that the defendants authorized and/or accepted stock option awards in violation of the terms of the
Companys 2002 Stock Plan (the Plan) by issuing stock options in excess of the amounts authorized under the Plan and delegated to defendant Dr. Dees the sole authority to grant himself and the other Executives cash bonuses that
Mr. Kleba alleges to be excessive.
In April 2013, the Companys Board of Directors appointed a special litigation committee to investigate the
allegations of the Shareholder Derivative Complaint and make a determination as to how the matter should be resolved. The special litigation committee conducted its investigation, and proceedings in the case were stayed pending the conclusion of the
committees investigation. At that time, the Company established a reserve of $100,000 for potential liabilities because such is the amount of the self-insured retention of its insurance policy. On February 21, 2014, an Amended Shareholder
Derivative Complaint was filed which added Don B. Dale (Mr. Dale) as a plaintiff.
On March 6, 2014, the Company filed a Joint
Notice of Settlement (the Notice of Settlement) in the Shareholder Derivative Lawsuit. In addition to the Company, the parties to the Notice of Settlement are Mr. Kleba, Mr. Dale and the Individual Defendants.
On June 6, 2014, the Company, in its capacity as a nominal defendant, entered into a Stipulated Settlement Agreement and Mutual Release (the
Settlement) in the Shareholder Derivative Lawsuit. In addition to the Company and the Individual Defendants, Plaintiffs Glenn Kleba and Don B. Dale are parties to the Settlement.
By entering into the Settlement, the settling parties resolved the derivative claims to their mutual satisfaction. The Individual Defendants have not admitted
the validity of any claims or allegations and the settling plaintiffs have not admitted that any claims or allegations lack merit or foundation. Under the terms of the Settlement, (i) the Executives each agreed (A) to
re-pay
to the Company $2.24 million of the cash bonuses they each received in 2010 and 2011, which amount equals 70% of such bonuses or an estimate of the
after-tax
net
proceeds to each Executive; provided, however, that subject to certain terms and conditions set forth in the Settlement, the Executives are entitled to a 2:1 credit such that total actual repayment may be $1.12 million each; (B) to
reimburse the Company for 25% of the actual costs, net of recovery from any other source, incurred by the Company as a result of the Shareholder Derivative Lawsuit; and (C) to grant to the Company a first priority security interest in 1,000,000
shares of the Companys common stock owned by each such Executive to serve as collateral for the amounts due to the Company under the Settlement; (ii) Drs. Dees and Scott and Mr. Culpepper agreed to retain incentive stock options for
100,000 shares but shall forfeit 50% of the nonqualified stock options granted to each such Executive in both 2010 and 2011. The Settlement also requires that each of the Executives enter into new employment agreements with the Company, which were
entered into on April 28, 2014, and that the Company adhere to certain corporate governance principles and processes in the future. Under the Settlement, Messrs. Fuchs and Smith and Dr. McMasters have each agreed to pay the Company $25,000
in cash, subject to reduction by such amount that the Companys insurance carrier pays to the Company on behalf of such defendant pursuant to such defendants directors and officers liability insurance policy. The Settlement also provides
for an award to plaintiffs counsel of attorneys fees and reimbursement of expenses in connection with their role in this litigation, subject to Court approval. See Note 5 Long-Term Receivables.
On July 24, 2014, the Court approved the terms of the proposed Settlement and awarded $911,000 to plaintiffs counsel for attorneys fees and
reimbursement of expenses in connection with their role in the Shareholder Derivative Lawsuit. The payment to plaintiffs counsel was made by the Company during October 2014 and was recorded as other current assets at December 31, 2014, as
the Company is seeking reimbursement of the full amount from its insurance carrier. If the full amount is not received from insurance, the amount remaining will be reimbursed to the Company from the Individual Defendants. A reserve for
uncollectibility of $227,750 was established at December 31, 2015 in connection with the resignation of Dr. Dees. A reserve for uncollectibility of $227,750 was established at December 31, 2016 in connection with the termination
of Mr. Culpepper. As of December 31, 2016 and 2015, the net amount of the receivable of $455,500 and $683,250, respectively, is included in
non-current
assets on the consolidated balance sheets.
73
On October 3, 2014, the Settlement was effective and stock options for Dr. Dees, Dr. Scott and
Mr. Culpepper were rescinded, totaling 2,800,000. $900,000 was repaid by the Executives as of December 31, 2015 and $600,000 was repaid by the Executives during the year ended December 31, 2016. The remaining cash settlement amounts
will continue to be repaid to the Company over the next three years with the final payment to be received by October 3, 2019. $82,440 and $103,969 of the settlement discount was amortized during the year ended December 31, 2016 and 2015,
respectively, which is included within general and administrative expenses on the consolidated statements of operations and within cash flows from operating activities on the consolidated statements of cash flows. The remaining balance due the
Company as of December 31, 2016 is $1,315,710, including a reserve for uncollectibility of $1,549,043 in connection with the resignation of Dr. Dees and termination of Mr. Culpepper, with a present value discount remaining of $57,623.
As a result of his resignation, Dr. Dees is no longer entitled to the 2:1 credit, such that his total repayment obligation of $2,040,000 (the total $2.24 million owed by Dr. Dees pursuant to the Settlement less the $200,000 that he
repaid as of December 31, 2015) plus Dr. Deess proportionate share of the litigation costs is immediately due and payable. The Company sent Dr. Dees a notice of default in March 2016 for the total amount he owes the Company. As
a result of his termination, Mr. Culpepper is no longer entitled to the 2:1 credit, such that his total repayment obligation of $2,051,083 (the total $2,240,000 owed by Mr. Culpepper pursuant to the Settlement plus
Mr. Culpeppers proportionate share of the litigation cost of $227,750 less the $416,667 that he repaid as of December 31, 2016) is immediately due and payable. The Company sent Mr. Culpepper a notice of default in January 2017
for the total amount he owes the Company. See Note 4 Related Party Transactions and Note 5 Long-Term Receivables.
Class Action
Lawsuits
On May 27, 2014, Cary Farrah and James H. Harrison, Jr., individually and on behalf of all others similarly situated (the Farrah
Case), and on May 29, 2014, each of Paul Jason Chaney, individually and on behalf of all others similarly situated (the Chaney Case), and Jayson Dauphinee, individually and on behalf of all others similarly situated (the
Dauphinee Case) (the plaintiffs in the Farrah Case, the Chaney Case and the Dauphinee Case collectively referred to as the Plaintiffs), each filed a class action lawsuit in the United States District Court for the Middle
District of Tennessee against the Company, Dr. Dees, Timothy C. Scott and Peter R. Culpepper (the Defendants) alleging violations by the Defendants of Sections 10(b) and 20(a) of the Exchange Act and Rule
10b-5
promulgated thereunder and seeking monetary damages. Specifically, the Plaintiffs in each of the Farrah Case, the Chaney Case and the Dauphinee Case allege that the Defendants are liable for making false
statements and failing to disclose adverse facts known to them about the Company, in connection with the Companys application to the FDA for Breakthrough Therapy Designation (BTD) of the Companys melanoma drug,
PV-10,
in the Spring of 2014, and the FDAs subsequent denial of the Companys application for BTD.
On
July 9, 2014, the Plaintiffs and the Defendants filed joint motions in the Farrah Case, the Chaney Case and the Dauphinee Case to consolidate the cases and transfer them to United States District Court for the Eastern District of Tennessee. By
order dated July 16, 2014, the United States District Court for the Middle District of Tennessee entered an order consolidating the Farrah Case, the Chaney Case and the Dauphinee Case (collectively and, as consolidated, the Securities
Litigation) and transferred the Securities Litigation to the United States District Court for the Eastern District of Tennessee.
On
November 26, 2014, the United States District Court for the Eastern District of Tennessee (the Court) entered an order appointing Fawwaz Hamati as the Lead Plaintiff in the Securities Litigation, with the Law Firm of Glancy
Binkow & Goldberg, LLP as counsel to Lead Plaintiff. On February 3, 2015, the Court entered an order compelling the Lead Plaintiff to file a consolidated amended complaint within 60 days of entry of the order.
On April 6, 2015, the Lead Plaintiff filed a Consolidated Amended Class Action Complaint (the Consolidated Complaint) in the Securities
Litigation, alleging that Provectus and the other individual defendants made knowingly false representations about the likelihood that
PV-10
would be approved as a candidate for BTD, and that such
representations caused injury to Lead Plaintiff and other shareholders. The Consolidated Complaint also added Eric Wachter as a named defendant.
On
June 5, 2015, Provectus filed its Motion to Dismiss the Consolidated Complaint (the Motion to Dismiss). On July 20, 2015, the Lead Plaintiff filed his response in opposition to the Motion to Dismiss (the Response).
Pursuant to order of the Court, Provectus replied to the Response on September 18, 2015.
On October 1, 2015, the Court entered an order staying
a ruling on the Motion to Dismiss pending a mediation to resolve the Securities Litigation in its entirety. A mediation occurred on October 28, 2015. On January 28, 2016, a settlement terms sheet (the Terms Sheet) was executed
by counsel for the Company and counsel for the Lead Plaintiff in the consolidated Securities Litigation.
74
Pursuant to the Terms Sheet, the parties agreed, contingent upon the approval of the court in the consolidated
Securities Litigation, to settle the cases as a class action on the basis of a class period of December 17, 2013 through May 22, 2014. The Company and its insurance carrier agreed to pay the total amount of $3.5 million (the
Settlement Funds), $1.85 million of which was paid by the Company, and $1.65 million of which was paid by the insurance carrier directly to the plaintiffs trust escrow account. The $1.85 million paid by the Company
was accrued as of December 31, 2015 and paid during 2016.
A Stipulation of Settlement encompassing the details of the settlement and procedures for
preliminary and final court approval was filed on March 8, 2016. The Stipulation of Settlement incorporates the provisions of the Terms Sheet and includes the procedures for providing notice to stockholders who bought or sold stock of the
Company during the class period. The Stipulation of Settlement further provides for (1) the methodology of administering and calculating claims, final awards to stockholders, and supervision and distribution of the Settlement Funds and
(2) the procedure for preliminary and final approval of the settlement of the Securities Litigation.
On April 7, 2016, the court in the
Securities Litigation held a hearing on preliminary approval of the settlement, entered an order preliminarily approving the settlement, ordered that the class be notified of the settlement as set forth in the Stipulation of Settlement, and set a
hearing on September 26, 2016 to determine whether the proposed settlement is fair, reasonable, and adequate to the class; whether the class should be certified and the plan of allocation of the Settlement Funds approved; whether to grant Lead
Plaintiffs request for expenses and Lead Plaintiffs counsels request for fees and expenses; and whether to enter judgment dismissing the Securities Litigation as provided in the Stipulation of Settlement. On September 16,
2016, the Lead Plaintiff notified the court that approximately 6,300 stockholders did not receive notification of the proposed settlement until late August 2016 because of the delayed receipt of potential Settlement Class Member information
from a number of brokers. As a result, on September 22, 2016, the parties filed a joint motion requesting that the court extend the deadlines to file a Proof of Claim, request exclusion from the settlement, or file an objection to the
settlement, and that the court schedule a continued settlement hearing. The court granted the motion, cancelling the settlement hearing that had been set for September 26 and
re-setting
the hearing to
take place on December 12, 2016. On December 2, 2016, the Lead Plaintiffs counsel reported to the court that there have been no requests for exclusion from the settlement and no objections to the proposed settlement. On
December 12, 2016, the court held a final hearing on the fairness of the settlement and entered an order approving the settlement and dismissing the action with prejudice.
2014-2015 Derivative Lawsuits
On June 4, 2014,
Karla Hurtado, derivatively on behalf of the Company, filed a shareholder derivative complaint in the United States District Court for the Middle District of Tennessee against H. Craig Dees, Timothy C. Scott, Jan E. Koe, Kelly M. McMasters, and
Alfred E. Smith, IV (collectively, the Individual Defendants), and against the Company as a nominal defendant (the Hurtado Shareholder Derivative Lawsuit). The Hurtado Shareholder Derivative Lawsuit alleges (i) breach of
fiduciary duties and (ii) abuse of control, both claims based on Ms. Hurtados allegations that the Individual Defendants (a) recklessly permitted the Company to make false and misleading disclosures and (b) failed to
implement adequate controls and procedures to ensure the accuracy of the Companys disclosures. On July 25, 2014, the United States District Court for the Middle District of Tennessee entered an order transferring the case to the United
States District Court for the Eastern District of Tennessee and, in light of the pending Securities Litigation, relieving the Individual Defendants from responding to the complaint in the Hurtado Shareholder Derivative Lawsuit pending further order
from the United States District Court for the Eastern District of Tennessee.
On October 24, 2014, Paul Montiminy brought a shareholder derivative
complaint on behalf of the Company in the United States District Court for the Eastern District of Tennessee (the Montiminy Shareholder Derivative Lawsuit) against H. Craig Dees, Timothy C. Scott, Jan E. Koe, Kelly M. McMasters, and
Alfred E. Smith, IV (collectively, the Individual Defendants). As a practical matter, the factual allegations and requested relief in the Montiminy Shareholder Derivative Lawsuit are substantively the same as those in the Hurtado
Shareholder Derivative Lawsuit. On December 29, 2014, the United States District Court for the Eastern District of Tennessee (the Court) entered an order consolidating the Hurtado Shareholder Derivative Lawsuit and the Montiminy
Derivative Lawsuit. On April 9, 2015, the United States District Court for the Eastern District of Tennessee entered an Order staying the Hurtado and Montiminy Shareholder Derivative Lawsuits pending a ruling on the Motion to Dismiss filed by
the Company in the Securities Litigation.
On October 28, 2014, Chris Foley, derivatively on behalf of the Company, filed a shareholder derivative
complaint in the Chancery Court of Knox County, Tennessee against H. Craig Dees, Timothy C. Scott, Jan E. Koe, Kelly M. McMasters, and Alfred E. Smith, IV (collectively, the Individual Defendants), and against the Company as a nominal
defendant (the Foley Shareholder Derivative Lawsuit). The Foley Shareholder Derivative Lawsuit was brought by the same attorney as the Montiminy Shareholder Derivative Lawsuit, Paul Kent Bramlett of Bramlett Law Offices. Other than the
difference in the named plaintiff, the complaints in the Foley
75
Shareholder Derivative Lawsuit and the Montiminy Shareholder Derivative Lawsuit are identical. On March 6, 2015, the Chancery Court of Knox County, Tennessee entered an Order staying the
Foley Derivative Lawsuit until the United States District Court for the Eastern District of Tennessee issues a ruling on the Motion to Dismiss filed by the Company in the Securities Litigation.
On June 24, 2015, Sean Donato, derivatively on behalf of the Company, filed a shareholder derivative complaint in the Chancery Court of Knox County,
Tennessee against H. Craig Dees, Timothy C. Scott, Jan. E. Koe, Kelly M. McMasters, and Alfred E. Smith, IV (collectively, the Individual Defendants), and against the Company as a nominal defendant (the Donato Shareholder
Derivative Lawsuit). Other than the difference in the named plaintiff, the Donato Shareholder Derivative Lawsuit is virtually identical to the other pending derivative lawsuits. All of these cases assert claims against the Defendants for
breach of fiduciary duties based on the Companys purportedly misleading statements about the likelihood that
PV-10
would be approved by the FDA.
As a nominal defendant, no relief is sought against the Company itself in the Hurtado, Montiminy, Foley, and Donato Shareholder Derivative Lawsuits.
While the parties to the Securities Litigation were negotiating and documenting the Stipulation of Settlement in the Securities Litigation, the parties to the
Hurtado, Montiminy, and Foley Shareholder Derivative Lawsuits, through counsel, engaged in settlement negotiations as well. On or about April 11, 2016, the parties entered into a Stipulation of Settlement, which was filed with the United States
District Court for the Eastern District of Tennessee on April 29, 2016.
Pursuant to the Stipulation of Settlement, the parties agreed to settle the
cases, contingent upon the approval of the court. The Company agreed to implement certain corporate governance changes, including the adoption of a Disclosure Controls and Procedures Policy, and to use its best efforts to replace one of its existing
directors with an independent outside director by June 30, 2017. The Company agreed to pay from insurance proceeds the amount of $300,000 to plaintiffs counsel in the Hurtado, Montiminy, Foley, and Donato Shareholder Derivative Lawsuits.
The insurance carrier paid such amount directly to the plaintiffs trust escrow account and it did not pass through the Company.
The United States
District Court for the Eastern District of Tennessee preliminarily approved the settlement by order dated June 2, 2016. Pursuant to this court order, the notice to the class was filed with the SEC, published on the Companys website, and
posted on plaintiffs counsels websites by June 13, 2016. On August 26, 2016, the court held a final hearing on the fairness of the settlement and entered an order approving the settlement and dismissing the action with
prejudice.
Dees Collection Lawsuit and Culpepper Claims
See Note 4 - Related Party Transactions for information regarding the Companys lawsuit against Dr. Dees and claims against Mr. Culpepper and
Mr. Culpeppers claims against the Company.
The Bible Harris Smith Lawsuit
On November 17, 2016, the Company filed a lawsuit in the Circuit Court for Knox County, Tennessee against Bible Harris Smith PC (BHS) for professional
negligence, common law negligence and breach of fiduciary duty arising from accounting services provided by BHS to the Company. The Company alleges that between 2013 and the present, Dr. Dees received approximately $2.4 million in advanced
or reimbursed travel and entertainment expenses from the Company and that Dr. Dees did not submit
back-up
documentation in support of substantially all of the advances he received purportedly for future
travel and entertainment expenses. The Company further alleges that had BHS provided competent accounting and tax preparation services, it would have discovered Dr. Deess failure to submit
back-up
documentation supporting the advanced travel funds at the inception of Dr. Deess conduct, and prevented the misuse of these and future funds. The Company has made a claim for damages against BHS in an amount in excess of $3 million.
The Complaint against BHS has been filed and served, an answer has been received and the parties have begun discovery.
Other Regulatory Matters
The Company has received a subpoena from the staff of the SEC related to the travel expense advancements and reimbursements received by H. Craig Dees,
the Companys former Chief Executive Officer, and the Company has received a subsequent subpoena from the staff of the SEC related to the travel expense advancements and reimbursements received by Peter R. Culpepper, the Companys former
Interim Chief Executive Officer and Chief Operating Officer and former Chief Financial Officer. At this time, the staffs investigation into these matters remains ongoing. The Company is cooperating with the staff but cannot predict with any
certainty what the outcome of the foregoing may be.
76
13. Selected Quarterly Financial Data (Unaudited)
The following tables present a summary of quarterly results of operations for 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
2016
|
|
|
June 30,
2016
|
|
|
September 30,
2016
|
|
|
December 31,
2016
|
|
|
|
(in thousands, except per share data)
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating loss
|
|
$
|
(8,507
|
)
|
|
$
|
(5,045
|
)
|
|
$
|
(5,777
|
)
|
|
$
|
(5,183
|
)
|
Other income (expense), net
|
|
|
1
|
|
|
|
1
|
|
|
|
(99
|
)
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(8,506
|
)
|
|
|
(5,044
|
)
|
|
|
(5,876
|
)
|
|
|
(5,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders
|
|
$
|
(8,506
|
)
|
|
$
|
(5,044
|
)
|
|
$
|
(8,861
|
)
|
|
$
|
(6,449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per common share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.02
|
)
|
Weighted average number of common shares outstanding- basic and diluted
|
|
|
205,279
|
|
|
|
212,829
|
|
|
|
222,960
|
|
|
|
293,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
2015
|
|
|
June 30,
2015
|
|
|
September 30,
2015
|
|
|
December 31,
2015
|
|
|
|
(in thousands, except per share data)
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating loss
|
|
$
|
(4,620
|
)
|
|
$
|
(4,592
|
)
|
|
$
|
(5,779
|
)
|
|
$
|
(9,663
|
)
|
Other income (expense), net
|
|
|
95
|
|
|
|
47
|
|
|
|
(1
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(4,525
|
)
|
|
|
(4,545
|
)
|
|
|
(5,780
|
)
|
|
|
(9,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders
|
|
$
|
(4,525
|
)
|
|
$
|
(4,545
|
)
|
|
$
|
(5,780
|
)
|
|
$
|
(9,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per common share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.05
|
)
|
Weighted average number of common shares outstanding- basic and diluted
|
|
|
185,196
|
|
|
|
187,793
|
|
|
|
204,610
|
|
|
|
204,735
|
|
14. Subsequent Events
The Company has evaluated subsequent events through the date of the filing of these financial statements.
Convertible Promissory Note
On February 21, 2017,
the Company issued a convertible promissory note in favor of Eric A. Wachter, the Companys Chief Technology Officer (Lender), evidencing an unsecured loan from Lender to the Company in the original principal amount of up to
$2,500,000 (the Promissory Note). Interest accrues on the outstanding balance of the Promissory Note at six percent (6%) per annum calculated on a
360-day
basis.
As of March 29, 2017, the Company has borrowed the entire $2,500,000 principal amount under the Promissory Note. Sixty percent (60%) of the proceeds
advanced under the Promissory Note must be used for the Companys research and development expenses, and the remaining forty percent (40%) of the proceeds advanced under the Promissory Note must be used for the Companys general
administrative expenses.
Pursuant to the terms of the Promissory Note, in the event that, prior to the repayment in full of the Promissory Note, the
Company consummates a bona fide equity financing conducted with the principal purpose of raising capital, pursuant to which the Company sells shares or units of an equity security or preferred equity approved by the board of directors, which board
of directors must consist of at least a majority of the members on the board of directors serving as of the date of the Promissory Note (a Qualified Equity Financing), then such amount of the outstanding principal due under the
Promissory Note plus all accrued but unpaid interest that may be included in the Qualified Equity Financing shall automatically convert into the equity securities or securities convertible into equity securities of the Company issued in such
Qualified Equity Financing (New Securities) at the price per New Security at which the Company issues any New Securities in any public or private offering during the period that the Promissory Note is outstanding and otherwise on the
same terms (including the same rights, preferences and privileges) as the other investors that purchase New Securities in such Qualified Equity Financing.
The Promissory Note matures on the earlier of (i) May 22, 2017, (ii) the date upon which the Company defaults under the Promissory Note or
(iii) the date on which the Promissory Note is converted into New Securities (the earliest of such dates, the Maturity Date). In lieu of repayment on the Maturity Date, Lender may elect in his sole discretion to apply any and all
amounts due and owing to Lender under the Promissory Note to Lenders obligations under that certain Settlement Agreement dated June 6, 2014 by and between Lender and the Company.
Further, under the Promissory Note, the Company has agreed to pay to Lender up to $25,000 for Lenders reasonable legal fees and expenses incurred in
connection with the transactions contemplated by the Promissory Note. The Company may prepay principal and interest under the Promissory Note at any time, in whole or in part, without premium or other prepayment charges.
Pursuant to a Waiver of Rights Agreement, Lender further agreed to waive his rights (A) to foreclose on the assets of the Company or (B) to
initiate, or cause the initiation of, any proceeding in bankruptcy or the appointment of any custodian, trustee or liquidator of the Company or of all or a portion of the Companys assets in the event of default under the Promissory Note so
long as (i) any shares of Series C Preferred Stock of the Company issued pursuant to the Rights Offering commenced by the Company on January 30, 2017 remain outstanding (other than such shares of Series C Preferred Stock held by Lender)
and (ii) a change in control of the Company has not occurred, which is any transaction that results in either (a) the shareholders of the Company not continuing to hold at least 50% of the voting interest in the Company after such
transaction or (b) the directors of the Company serving on the board of directors as of February 21, 2017 no longer represent a majority of the outstanding board members.
Termination of Rights Offering
On October 5, 2016,
the Company filed a registration statement on Form
S-1
with the SEC, as amended on November 1, 2016, November 22, 2016, December 6, 2016, December 21, 2016, January 19, 2017 and
January 26, 2017 to issue subscription rights
77
(Rights) to the Companys existing common stockholders and holders of the Companys class of warrants with an exercise price of $0.85 expiring June 19, 2020 (the
Listed Warrants) to purchase units (Units) consisting of shares of common stock and Series C Preferred Stock (the Rights Offering). Each share of Series C Preferred Stock was to be convertible into eight
(8) shares of common stock. Each Right would have entitled holders of the Companys common stock and Listed Warrants to purchase one Unit. On March 20, 2017, the Company announced the termination of the Rights Offering without
accepting any funds from investors. Broadridge Corporate Issuer Solutions, Inc., the subscription agent for the Rights Offering (Broadridge), returned all subscription payments received by Broadridge to investors, without interest or
penalty. All subscription rights expired upon termination of the Rights Offering. On March 24, 2017, the Company filed a Certificate of Elimination to cancel the Series C Preferred Stock with the Secretary of State of the State of Delaware.
Term Sheet for 2017 Financing
On March 19,
2017, the Company entered into an exclusive Definitive Financing Commitment Term Sheet with a group of the Companys stockholders, which was amended and restated effective as of March 19, 2017 (the Term Sheet), which sets forth
the terms on which such investors will use their best efforts to arrange for a financing of a minimum of $10,000,000 and maximum of $20,000,000 (the 2017 Financing), $2,500,000 of which will be funded into Escrow (as defined below) upon
the execution of definitive documents, and, the $2,500,000 Promissory Note will be exchanged for a Note (as defined below) on the terms described below upon the funding of such first tranche into Escrow.
The 2017 Financing will be in the form of a secured convertible loan (the Loan) from the investors (collectively, the Investors). The
Loan will be evidenced by secured convertible promissory notes (each, a Note) from the Company to the Investors. In addition to the customary provisions, the Note shall contain the following provisions:
(i) It will be secured by a first priority security interest on the Companys intellectual property (the IP);
(ii) The Loan will bear interest at the rate of eight percent (8%) per annum on the outstanding principal amount of the Loan that has been
funded to the Company;
(iii) The Loan proceeds will be held in one or more accounts (the Escrow) pending the funding of the
tranches of the 2017 Financing pursuant to borrowing requests made by the Company;
(iv) In the event there is a change of control of the
Companys board of directors (Board) as proposed by any person or group other than the Investors, the term of the Note will be accelerated and all amounts due under the Note will be immediately due and payable, plus interest at the
rate of eight percent (8%) per annum, plus a penalty in the amount equal to ten times (10x) the outstanding principal amount of the Loan that has been funded to the Company;
(v) The outstanding principal amount and interest payable under the Loan will be convertible at the sole discretion of the Investors into
shares of the Companys Series D Preferred Stock, a new series of preferred stock to be designated by the Board, at a price per share equal to $0.2862; and
(vi) Notwithstanding (v) above, the principal amount of the Note and the interest payable under the Loan will automatically convert into
shares of the Companys Series D Preferred Stock at a price per share equal to $0.2862 effective on the 18 month anniversary of the funding of the final tranche of the 2017 Financing subject to certain exceptions.
The Series D Preferred Stock shall have a first priority right to receive proceeds from the sale, liquidation or dissolution of the Company or
any of the Companys assets (each, a Company Event). If a Company Event occurs within two (2) years of the date of issuance of the Series D Preferred Stock (the Date of Issuance), the holders of Series D Preferred
Stock shall receive a preference of four times (4x) their respective investment amount. If a Company Event occurs after the second (2nd) anniversary of the Date of Issuance, the holders of the Series D Preferred Stock shall receive a preference of
six times (6x) their respective investment amount.
The Series D Preferred Stock shall be convertible at the option of the holders thereof
into shares of the Companys common stock based on a formula to achieve a
one-for-one
conversion ratio. The Series D Preferred Stock shall automatically convert
into shares of Common Stock upon the fifth anniversary of the Date of Issuance. On an
as-converted
basis, the Series D Preferred Stock shall carry the right to one (1) vote per share. The Series D
Preferred Stock shall not have any dividend preference but shall be entitled to receive, on a pari passu basis, dividends, if any, that are declared and paid on any other class of the Companys capital stock. The holders of Series D Preferred
Stock shall not have anti-dilution protection.
78