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 biotechnology company developing pharmaceutical drug products based on halogenated xanthenes,
such as Rose Bengal, for the treatment of solid tumor cancers in adults as well as pediatric cancers, and inflammatory dermatoses
for dermatology in both adults and children. 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, license
and/or commercialize the Company’s investigational drug products.
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 (the “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 nine months ended September 30, 2017 are not necessarily indicative
of the results that may be expected for the twelve months ending December 31, 2017.
2.
Liquidity and Financial Condition
The
Company’s cash and cash equivalents were $208,281 at September 30, 2017, compared with $1,165,738 at December 31, 2016.
The Company continues to incur significant operating losses. Management expects that significant on-going operating expenditures
will be necessary to successfully implement the Company’s business plan of developing, licensing and/or commercializing
its investigational drug 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, license and/or commercialize
its investigational drug products, and/or 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”)
that set forth the terms on which the PRH Group would 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 September 30, 2017, the Company had received aggregate Loans (as defined below) of $7,100,000 in connection with the 2017 Financing.
See Note 4 – Convertible Notes Payable. Subsequent to September 30, 2017, the Company received aggregate Loans of $2,150,000
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, are 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 24-month
anniversary of the funding of the Final Tranche of the 2017 Financing subject to certain exceptions.
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As
of September 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 September 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 or entering into any equity transaction. Moreover, even if the Company is successful in improving
its current cash flow position, the Company nonetheless plans to seek additional funds to meet its long-term requirements
in 2017 and beyond. The Company anticipates that these funds will otherwise come from the proceeds of private placement transactions,
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. However, the Company can provide no
assurance that its common stock and Listed Warrants will continue to trade on the OTCQB in the future.
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
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.
In
July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260) and Derivatives and Hedging (Topic 815) - Accounting
for Certain Financial Instruments with Down Round Features” (“ASU 2017-11”). Equity-linked instruments, such
as warrants and convertible instruments may contain down round features that result in the strike price being reduced on the basis
of the pricing of future equity offerings. Under ASU 2017-11, a down round feature will no longer require a freestanding equity-linked
instrument (or embedded conversion option) to be classified as a liability that is re-measured at fair value through the income
statement (i.e. marked-to-market). However, other features of the equity-linked instrument (or embedded conversion option) must
still be evaluated to determine whether liability or equity classification is appropriate. Equity classified instruments are not
marked-to-market. For earnings per share ("EPS") reporting, the ASU requires companies to recognize the effect of the
down round feature only when it is triggered by treating it as a dividend and as a reduction of income available to common shareholders
in basic EPS. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The Company is
currently evaluating ASU 2017-11 and its impact on its condensed consolidated financial statements.
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 (“Wachter”),
evidencing an unsecured loan from Wachter 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 (as defined in the Wachter Note) issued upon the completion of a future Qualified Equity Financing
(as defined in the Wachter Note), 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 its terms to mirror the PRH Notes and to convert the Wachter
Note 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 $2,500,000. As of September 30, 2017, the Company had borrowed
$1,500,000 under this note.
Convertible
Notes Payable – Non-Related Parties
During
the three months ended September 30, 2017, the Company entered into additional PRH Notes with accredited investors in the aggregate
principal amount of $550,000, of which, $150,000 was issued in satisfaction of trade debt. As of September 30, 2017, the Company
had borrowed $3,100,000 under these notes.
See
Note 2 – Liquidity and Financial Condition for the terms of the PRH Notes. As of September 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 September 30, 2017.
5.
Stockholders’ Deficiency
Conversion
of Series B Preferred Stock
During the nine months ended September 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 nine months ended September 30, 2017. The Company recorded aggregate dividends paid in kind
of $14,107 during the nine months ended September 30, 2017.
Exercise
of Warrants
During
the three months ended September 30, 2017, a warrant holder exercised a warrant to purchase 10,000 shares of common stock at a
price of $0.053 per share. In connection with the exercise, the Company received $533.
Issuance
of Common Stock
During
the three months ended September 30, 2017, the Company issued an aggregate of 372,500 shares of restricted unregistered
common stock at an average price of $0.046 per share in satisfaction of accounts payable of $17,300.
6.
Litigation
Kleba
Shareholder Derivative Lawsuit
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 filed by Glenn Kleba, derivatively on
behalf of the Company, and later amended to include Don B. Dale as a plaintiff, in the Circuit Court for the State of Tennessee,
Knox County (the “Court”), against H. Craig Dees, Ph.D., Timothy C. Scott, Ph.D., Eric A. Wachter, Ph.D., 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”), which alleged (i) breach of fiduciary duties; (ii) waste of corporate assets; and (iii)
unjust enrichment. Under the terms of the Derivative Lawsuit Settlement, among other things, 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. 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.
On
July 24, 2014, the Court approved the terms of the 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 September 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 $1,816,667 had been repaid by the Executives as of September 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 the Executives’ repayment due the Company as of September 30, 2017 is $1,039,770, 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’ 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. See Culpepper Travel
Expenses and Related Collection Efforts below.
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 September 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. 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 entered a permanent
injunction enjoining Dr. Dees from selling or dissipating assets until the judgment against him is satisfied. On September 1,
2017, the Company filed a motion with the Court to appoint a receiver to sell 1,000,000 shares of the Company’s common stock
held by Dr. Dees and pledged as security pursuant to the Derivative Lawsuit Settlement, and to remit the proceeds of this sale
to the Company.
Culpepper
Travel Expenses and Related Collection Efforts
On December 27, 2016,
the Company’s Board of Directors unanimously voted to terminate Mr. 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 Mr. 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. 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 is in the process of resolving 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 September
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, under the commercial rules of the American
Arbitration Association, which will include, among other claims, 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 RSM has moved to
dismiss the Complaint. The parties are briefing this motion and expect it to be argued to the Court in the next 60 days.
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, and there can be no assurance that a settlement will be reached.
7.
Subsequent Events
Convertible
Notes Payable
Subsequent
to September 30, 2017, the Company entered into PRH Notes with accredited investors in the aggregate principal amount of $1,150,000
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.
In
addition, the Company received the remaining $1,000,000 in funding available under the Cal Enterprises LLC note, such that $2,500,000
of principal is now outstanding under the note.