NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Business Organization, Nature of Operations and Basis of Presentation
Provectus Biopharmaceuticals,
Inc., a Delaware corporation (together with its subsidiaries, “Provectus” or the “Company”), is a biopharmaceutical
company that is focusing on developing products based on halogenated xanthenes, such as Rose Bengal, for the treatment of adult
solid tumor cancers, pediatric cancers, and inflammatory dermatoses. To date, the Company has not generated any revenues from
planned principal operations. The Company’s activities are subject to significant risks and uncertainties, including failing
to successfully develop and license or commercialize the Company’s prescription drug candidates, or sell or license the
Company’s over-the-counter (“OTC”) products or non-core technologies.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial information pursuant to Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements
and should be reviewed in conjunction with the Company’s audited consolidated financial statements included in Form 10-K
for the year ended December 31, 2016 filed with the U.S. Securities and Exchange Commission (“SEC”) on March 31, 2017.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six months ended June 30, 2017 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2017.
2.
Liquidity and Financial Condition
The
Company’s cash and cash equivalents were $1,127,834 at June 30, 2017, compared with $1,165,738 at December 31, 2016.
The Company continues to incur significant operating losses and management expects that significant on-going operating
expenditures will be necessary to successfully implement the Company’s business plan and develop and market its products.
These circumstances raise substantial doubt about the Company’s ability to continue as a going concern within one year after
the date that the financial statements are issued. Implementation of the Company’s plans and its ability to continue as
a going concern will depend upon the Company’s ability to develop PV-10 and raise additional capital.
The 2017 Financing
On
March 23, 2017, the Company entered into an exclusive Definitive Financing Commitment Term Sheet with a group of the Company’s
stockholders (the “PRH Group”), which was amended and restated effective as of March 19, 2017 (the “Term
Sheet”), which sets forth the terms on which the PRH Group 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”). As of June 30, 2017, the Company had received aggregate
Loans (as defined below) of $5,550,000 in connection with the 2017 Financing. See Note 4 – Convertible Notes Payable. Subsequent
to June 30, 2017, the Company received aggregate Loans of $300,000 in connection with the 2017 Financing. See Note 7 – Subsequent
Events.
The
2017 Financing is in the form of a secured convertible loan (the “Loan”) from the PRH Group or other investors in
the 2017 Financing (the “Investors”). The Loan is evidenced by secured convertible promissory notes (individually
a “PRH Note” and collectively, the “PRH Notes”) from the Company to the PRH Group or the Investors. In
addition to the customary provisions, the PRH Note contains the following provisions:
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(i)
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It is secured by a first priority security interest on the Company’s
intellectual property (the “IP”);
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(ii)
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The Loan bears 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;
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(iii)
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The Loan proceeds are 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;
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(iv)
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The PRH Notes, including interest and principal, is due and
payable in full on the earlier of: (i) on such date upon which the Company defaults under the PRH Notes, (ii) upon a change
of control of the Company, or (iii) dates ranging from April 2, 2019 to the twenty-four (24) month anniversary of the funding
of the Final Tranche, depending on the specific PRH Note. In the event there is a change of control of the Company’s
board of directors (the “Board”) as proposed by any person or group other than the Investors, the term of the
PRH Notes will be accelerated and all amounts due under the PRH Notes 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;
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(v)
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The outstanding principal amount and interest payable under
the Loan will be convertible at the sole discretion of the Investors into shares of the Company’s 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
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(vi)
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Notwithstanding (v) above, the principal amounts of the PRH
Notes and the interest payable under the Loan will automatically convert into shares of the Company’s 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.
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As of June 30, 2017,
and through the date of filing, the Series D Preferred Stock had not been designated by the Board. As a result, the PRH Notes
were not convertible as of their respective dates of issuance or as of June 30, 2017.
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 Company’s 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 Company’s common stock
based on a formula to achieve a one-for-one conversion ratio such that one share of Series D Preferred Stock would convert
into one share of common stock. 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 Company’s capital stock.
The holders of Series D Preferred Stock shall not have anti-dilution protection
The
Company plans to access capital resources through possible public or private equity offerings, including the 2017 Financing, 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, it will not be able to pay
its obligations as they become due.
The primary business
objective of Management is to build the Company into a fully integrated global biotechnology company. However, the Company cannot
assure you that they will be successful in co-developing or licensing PV-10, PH-10, or any other halogenated xanthene-based
drug candidate developed by the Company, entering into any equity transaction, or selling a majority stake of the OTC and other non-core assets
via a spin-out transaction and licensing the Company’s existing non-core products. Moreover, even if the
Company is successful in improving their current cash flow position, the Company nonetheless plans to seek additional funds to
meet their long-term requirements in 2017 and beyond. The Company anticipates that these funds will otherwise come from the proceeds
of private placements, including the 2017 Financing, the exercise of existing warrants and outstanding stock options, or public
offerings of debt or equity securities. While the Company believes that it has a reasonable basis for its expectation that it
will be able to raise additional funds, the Company cannot provide assurance that it will be able to complete additional financing
in a timely manner. In addition, any such financing may result in significant dilution to stockholders.
NYSE
Delisting
On
October 13, 2016, the Company received notice from NYSE MKT that NYSE MKT commenced delisting procedures and immediately
suspended trading in the Company’s common stock and class of warrants that was listed on NYSE MKT (“Listed Warrants”)
and on October 17, 2016, the Company’s 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 was 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.
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 MKT’s original determination to delist the Company’s
common stock and Listed Warrants. On February 14, 2017, the Company submitted a request for the Committee for Review to reconsider
the Listing Qualification Panel’s decision. The Committee for Review considered the Company’s request for review on
March 30, 2017. On April 21, 2017, the NYSE MKT filed a Form 25 with the SEC, notifying the SEC of the NYSE MKT’s intention
to remove the Company’s shares of common stock and Listed Warrants from listing and registration on the NYSE MKT effective
May 1, 2017, pursuant to the provisions of Rule 12d2-2(b) of the Securities Exchange Act of 1934, as amended. The Company’s
common stock and Listed Warrants continue to trade on the OTCQB following the delisting from the NYSE MKT under the trading symbols
“PVCT” and “PVCTWS,” respectively. The Company can provide no assurance that its common stock and Listed
Warrants will continue to trade on the OTCQB in the future, however.
3.
Significant Accounting Policies
The
Company’s significant accounting policies are disclosed in Note 3 – Significant Accounting Policies in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2016. Since the date of the Annual Report, there have been no material
changes to the Company’s significant accounting policies, except as disclosed below.
Recent
Accounting Pronouncements
In
March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-06, “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 is effective for annual reporting periods beginning after December
15, 2016, including interim periods within those annual reporting periods, and early adoption is permitted.
The
adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.
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 intends to apply this ASU prospectively, and its adoption is not expected to have
a material impact on the Company’s condensed consolidated financial statements.
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 variable interest entity (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 adoption of this ASU did not have a material impact on the Company’s condensed consolidated
financial statements.
In
May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”
(“ASU 2017-09”). ASU 2017-09 provides clarity on the accounting for modifications of stock-based awards. ASU 2017-09
requires adoption on a prospective basis in the annual and interim periods beginning after December 15, 2017 for share-based payment
awards modified on or after the adoption date. The Company is currently evaluating the effect that adopting this new accounting
guidance will have on its condensed consolidated financial statements and related disclosures.
4.
Convertible Notes Payable
Convertible
Notes Payable – Related Parties
On February 21, 2017,
the Company issued a promissory note in favor of Eric A. Wachter, Ph.D., the Company’s Chief Technology Officer (the “Lender”),
evidencing an unsecured loan from the Lender to the Company in the original principal amount of up to $2,500,000 (the “Wachter
Note”). Interest accrues on the outstanding balance of the Wachter Note at six percent (6%) per annum calculated on a 360-day basis.
As of March 31, 2017, the Company had borrowed the entire $2,500,000 principal amount under the Wachter Note. The Company
evaluated the terms of the Wachter Note and determined that since the conversion price is not yet fixed and will be based upon
the price per New Security issued upon the completion of a future Qualified Equity Financing, that the measurement of a beneficial
conversion feature cannot be completed. On April 3, 2017, the Wachter Note was amended and restated in order to modify the terms
of the Wachter Note to mirror the PRH Notes and to convert it into the 2017 Financing. The Company accounted for the amendment
as a debt modification. There was no material impact as a result of applying debt modification accounting.
On April 3,
2017, the Company entered into a PRH Note with Cal Enterprises LLC, a Nevada limited liability company, an affiliate of Dominic
Rodrigues, a director of the Company, in the principal amount of up to $2.5 million. As of June 30, 2017, the Company had
borrowed $500,000 under this note.
See Note 2 –
Liquidity and Financial Condition for the terms of the PRH Notes. As of June 30, 2017, and through the date of filing, the Series
D Preferred Stock had not been designated by the Board. As a result, the PRH Notes were not convertible as of their respective
dates of issuance or as of June 30, 2017.
Convertible Notes
Payable – Non-Related Parties
During the three
months ended June 30, 2017, the Company entered into PRH Notes with accredited investors in the aggregate principal amount of
up to $2,550,000. As of June 30, 2017, the Company had borrowed the entire $2,550,000 principal amount under the notes.
See Note 2 –
Liquidity and Financial Condition for the terms of the PRH Notes. As of June 30, 2017, and through the date of filing, the Series
D Preferred Stock had not been designated by the Board. As a result, the PRH Notes were not convertible as of their respective
dates of issuance or as of June 30, 2017.
5.
Stockholders’ Deficiency
Conversion
of Series B Preferred Stock
During
the six months ended June 30, 2017, holders converted 8,500 shares of Series B Preferred Stock into 3,986,676 shares of common
stock such that they were entitled to dividends, including a make-whole payment, that the Company elected to pay in shares of
common stock. As a result, the Company issued 1,594,670 shares of common stock related to the Series B Preferred Stock dividends
during the six months ended June 30, 2017. The Company recorded aggregate dividends paid in kind of $50 and $14,057 during the
three and six months ended June 30, 2017, respectively.
6.
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 H. Craig Dees, Ph.D., Timothy C. Scott, Ph.D., Dr. 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. Kleba’s allegations
that the defendants authorized and/or accepted stock option awards in violation of the terms of the Company’s 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 Company’s 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 committee’s
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 “Derivative Lawsuit 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 Derivative Lawsuit Settlement. By entering into the Derivative
Lawsuit 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 Derivative Lawsuit 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 Derivative Lawsuit 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 Company’s common stock owned by each such Executive to serve
as collateral for the amounts due to the Company under the Derivative Lawsuit 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 Derivative Lawsuit 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 Derivative Lawsuit 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 Company’s
insurance carrier pays to the Company on behalf of such defendant pursuant to such defendant’s directors and officers liability
insurance policy. The Derivative Lawsuit 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.
On July 24,
2014, the Court approved the terms of the proposed Derivative Lawsuit 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 plaintiff’s 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. As of June 30, 2017 and
December 31, 2016, the net amount of the receivable of $455,500 is reported as non-current assets on the condensed
consolidated balance sheets.
On October 3,
2014, the Derivative Lawsuit Settlement was effective and an aggregate of 2,800,000 stock options for Dr. Dees, Dr. Scott
and Mr. Culpepper were rescinded. A total of $1.7 million had been repaid by the Executives as of June 30, 2017. The remaining
cash settlement amounts will continue to be repaid to the Company with the final payment to be received by October 3, 2019.
The remaining balance of executive repayment due the Company as of June 30, 2017 is $1,132,381, including a reserve for uncollectibility
of $1,549,043 in connection with the resignation of Dr. Dees, the Company’s former Chairman and Chief Executive Officer,
and termination of Mr. Culpepper, the Company’s former Chief Financial Officer and Chief Operating Officer, and former
interim Chief Executive Officer following Dr. Dees’ resignation, 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 Derivative Lawsuit Settlement less the $200,000
that he repaid), plus Dr. Dees’s 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. On July 25, 2017, the United States
District Court for the Eastern District of Tennessee at Knoxville issued a Memorandum Opinion finding, among other findings, that
the Company is entitled to receive total damages in the amount of $6,027,652, including $2,494,525 for Dr. Dees’ breach
of the Derivative Lawsuit Settlement. See “Dees Collection Lawsuit” below. As a result of his termination “for
cause”, Mr. Culpepper is no longer entitled to the 2:1 credit, such that his total repayment obligation of $2,051,083
(the total $2.24 million owed by Mr. Culpepper pursuant to the Derivative Lawsuit Settlement plus Mr. Culpepper’s
proportionate share of the litigation cost of $227,750 less the $416,667 that he repaid) 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. Mr. Culpepper disputes that
he was terminated “for cause” and thus disputes that he owes the full $2,051,083 repayment amount under the Derivative
Lawsuit Settlement.
Dees
Collection Lawsuit
On May 5, 2016,
the Company filed a lawsuit in the United States District Court for the Eastern District of Tennessee at Knoxville (the “Court”)
against Dr. Dees and his wife, Virginia Godfrey (together with Dr. Dees, the “Defendants”). The Company
alleged that between 2013 and 2015, 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 alleged 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 the Derivative
Lawsuit Settlement that was negotiated to resolve certain claims asserted against Dr. Dees derivatively. Pursuant to the
terms of the Derivative Lawsuit Settlement, 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 Derivative Lawsuit Settlement. Dr. Dees has failed to make such payment, and the Company has notified
him that he is in default and demanded payment in full. The Company established a reserve of $2,267,750 as of June 30, 2017 and
December 31, 2016, which amount represents the amount the Company believed Dr. Dees owed to the Company as of those dates. Therefore,
the Company alleged counts of conversion, fraud, breach of fiduciary duty, breach of contract, breach of the Derivative Lawsuit
Settlement, unjust enrichment and punitive damages in this lawsuit. The Company sought an order 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 sought for the damages to be joint and several as to the Defendants and that punitive
damages be awarded against Dr. Dees in the Company’s favor. The Company also sought foreclosure of the Company’s
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 Derivative Lawsuit Settlement. The Court entered a default judgment against
the Defendants 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 Company’s application for same upon notice that Dr. Dees was
attempting to sell his shares of the Company’s common stock. The Temporary Restraining Order was converted to a Preliminary
Injunction on September 16, 2016. On March 15, 2017, the Court granted Ms. Godfrey’s motion to set aside
the default judgment against her and set a deadline of March 30, 2017 for Ms. Godfrey to file an answer to the Company’s
complaint. Ms. Godfrey filed her answer on March 28, 2017 demanding that the complaint against her be dismissed. The Court held
a hearing on April 26, 2017 to determine damages with respect to the motion for default judgment against Dr. Dees. On July
25, 2017, the Court issued a Memorandum Opinion finding that the Company is entitled to receive total damages in the amount of
$6,027,652, comprising compensatory damages for misappropriation of travel and expense funds, compensatory damages for Dr. Dees’
breach of the Derivative Lawsuit Settlement, and punitive damages, plus costs. There can be no assurance, however, that the Company
will be able to recover any or all of the damages awarded to the Company. The Court also will enter a permanent injunction enjoining
Dr. Dees from selling or dissipating assets until the judgment against him is satisfied.
Culpepper Travel
Expenses and Related Collection Efforts
On
December 27, 2016, the Company’s 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 attorney’s fees and auditors’/experts’ fees incurred
by the Company in connection with the examination of his travel expense reimbursements.
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 Derivative Lawsuit Settlement such that the total $2,240,000 owed
by Mr. Culpepper pursuant to the Derivative Lawsuit Settlement plus Mr. Culpepper’s 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 June 30, 2017 and 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.
Mr. Culpepper disputes
that he was terminated “for cause” under the Culpepper Employment Agreement. Pursuant to the alternative dispute resolution
provisions of that agreement, the Company and Mr. Culpepper participated in a mediation of their dispute on June 28, 2017. Having
reached no resolution during the mediation, the parties are proceeding to arbitration, which will encompass both Mr. Culpepper’s
claim for severance against Provectus and Provectus’ claims against Mr. Culpepper for improper expense reimbursements and
amounts Culpepper owes Provectus under the Derivative Lawsuit Settlement.
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 2015, 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. Dees’ failure to submit back-up
documentation supporting the advanced travel funds at the inception of Dr. Dees’ 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 are in the midst of discovery.
The
RSM Lawsuit
On June 9, 2017,
the Company filed a lawsuit in the Circuit Court of Mecklenburg County, North Carolina against RSM USA LLP (“RSM”)
for professional negligence, common law negligence, gross negligence, intentional misrepresentation, negligent misrepresentation
and breach of fiduciary duty arising from accounting, internal auditing and consulting services provided by RSM to the Company.
The Company alleges that between 2013 and 2015, 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 similarly alleges that Mr.
Culpepper received $294,255 in travel expense reimbursements and advances that were unsubstantiated. The Company further alleges
that had RSM provided competent accounting, internal audit and consulting services, it would have discovered Dr. Dees’ and
Mr. Culpepper’s conduct at its inception and prevented the misuse of these and future funds. The Company has made a claim
for damages against RSM in an amount in excess of $10 million. The Complaint against RSM has been filed and served, but no answer
has been received.
Other
Regulatory Matters
From time to time
the Company receives subpoenas and/or requests for information from governmental agencies with respect to its business. The Company
received a subpoena from the staff of the SEC related to the travel expense advancements and reimbursements received by Dr. Dees.
The Company also received a subsequent subpoena from the staff of the SEC related to the travel expense advancements and reimbursements
received by Mr. Culpepper. At this time, the staff’s investigation into these matters remains ongoing, and the Company is
cooperating with the staff. The Company also has engaged in settlement negotiations with the staff but no agreement has been approved
by the Commission at this time.
7.
Subsequent Events
Convertible
Notes Payable
On
July 20, 2017, the Company entered into PRH Notes with accredited investors in the aggregate principal amount of $300,000 in connection
with Loans received by the Company for the same amount. See Note 2 – Liquidity and Financial Condition for the terms of
the PRH Notes.
Warrant
Exercise
Subsequent
to June 30, 2017, an investor exercised a warrant to purchase 10,000 shares of common stock with an exercise price of $0.0533
per share. As a result, the Company issued 10,000 shares of common stock to the investor.