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 clinical-stage biotechnology company developing a new class of drugs for oncology and dermatology based on chemical small
molecules called halogenated xanthenes. Intralesional PV-10 is undergoing clinical study for adult solid tumor cancers, like melanoma
and gastrointestinal cancers, and preclinical study for pediatric cancers. Topical PH-10 is undergoing clinical study for inflammatory
dermatoses, like psoriasis and atopic dermatitis. 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.
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 the Company’s
Form 10-K for the year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission (the “SEC”)
on March 7, 2019. 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 three months ended March 31, 2019 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2019.
2.
Liquidity and Going Concern
The
Company’s cash and cash equivalents were $1,767,900 at March 31, 2019, 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 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 these 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 PH-10 and to raise additional capital.
The
Company plans to access capital resources through possible public or private equity offerings, including the 2017 Financing (as
defined in Note 4), 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 commercial-stage biotechnology company; however, the Company
cannot assure that it will be successful in co-developing, licensing, and/or commercializing PV-10, PH-10, and/or any other halogenated
xanthene-based drug candidate developed by the Company, or entering into any financial 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 2019 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.
3.
Critical Accounting Policies
Since
the date the Company’s December 31, 2018 consolidated financial statements were issued in its 2018 Annual Report, there
have been no material changes to the Company’s significant accounting policies, except as disclosed below.
Leases
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard related to leases to increase
transparency and comparability among organizations by requiring the recognition of operating lease right-of-use (“ROU”)
assets and lease liabilities on the balance sheet (“ASC 842”) with amendments issued in 2018. Most prominent among
the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating
leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess
the amount, timing, and uncertainty of cash flows arising from leases. The Company is also required to recognize and measure new
leases at the adoption date and recognize a cumulative-effect adjustment in the period of adoption using a modified retrospective
approach, with certain practical expedients available.
The
Company adopted ASC 842 effective January 1, 2019 and elected to apply the available practical expedients. The standard
had an impact on the Company’s condensed consolidated balance sheets but did not have a material impact on the Company’s
condensed consolidated statements of operations or condensed consolidated statements of cash flows upon adoption. The most significant
impact was the recognition of ROU assets and lease liabilities for operating leases, while the Company’s accounting for
finance leases remained substantially unchanged. The adoption of ASC 842 did not have a material impact in the current year and
prior year comparative periods and as a result, a cumulative-effect adjustment was not required.
Reclassifications
Certain
prior year balances have been reclassified in order to conform to current year presentation. These reclassifications have no effect
on previously reported results of operations or loss per share.
4.
Convertible Notes Payable
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 March 31, 2019, the Company had received aggregate loans of $17,732,000 in connection with the 2017 Financing.
As
of March 31, 2019, and through the date of filing, the Series D Preferred Stock had not been designated by the Company’s
Board of Directors (the “Board”). As a result, the Company did not analyze the loan for a potential beneficial conversion
feature as the definition of a firm commitment has not been met since the PRH Notes were not convertible as of their respective
dates of issuance or as of March 31, 2019.
Convertible
Notes Payable – Related Parties
During
the three months ended March 31, 2019, the Company entered into additional PRH Notes with a related party in the aggregate principal
amount of $25,000.
As
of March 31, 2019, the Company had borrowed $6,895,000 of PRH Notes from related parties which were outstanding.
Convertible
Notes Payable – Non-Related Parties
During
the three months ended March 31, 2019, the Company entered into additional PRH Notes with accredited investors in the aggregate
principal amount of $3,775,000.
As
of March 31, 2019, the Company had borrowed $10,837,000 of PRH Notes from non-related parties which were outstanding.
5.
Stockholders’ Deficiency
Exercise
of Warrants
During
the three months ended March 31, 2019, warrant holders exercised warrants to purchase an aggregate of 100,000 shares of common
stock at a price of $0.0533 per share. In connection with these exercises, the Company received aggregate cash proceeds of $5,330
and issued 100,000 shares of common stock to the warrant holders.
6.
Leases
The
Company currently leases 4,500 square feet of corporate office space in Knoxville, Tennessee through an operating lease agreement
for a term of five years ending on June 30, 2022. Payments range from approximately $7,300 to $7,800 per month.
Total
rent expense for the three months ended March 31, 2019 was $34,806, of which, $23,204 was included within research and development
and $11,602 was included within general and administrative expenses on the condensed consolidated statement of operations. Total
rent expense for the three months ended March 31, 2018 was $22,153, of which, $14,768 was included within research
and development and $7,385 was included within general and administrative expenses on the condensed consolidated statement of
operations.
As
of March 31, 2019, the Company had no leases that were classified as a financing lease. As of March 31, 2019, the Company did
not have additional operating and financing leases that have not yet commenced.
A
summary of the Company’s right-of-use assets and liabilities is as follows:
|
|
Three
Months Ended
March 31, 2019
|
|
|
|
|
|
Cash paid for amounts included in the
measurement of lease liabilities:
|
|
|
|
|
Operating
cash flows from operating leases
|
|
$
|
22,001
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange
for lease obligations:
|
|
|
|
|
Operating leases
|
|
$
|
265,550
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
Operating leases
|
|
|
3.25
years
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
Operating leases
|
|
|
8.0
|
%
|
Future
minimum payments under non-cancellable lease as of March 31, 2019 were as follows:
For
the Years Ending December 31,
|
|
Amount
|
|
|
|
|
|
2019
|
|
$
|
66,883
|
|
2020
|
|
|
90,666
|
|
2021
|
|
|
92,471
|
|
2022
|
|
|
46,687
|
|
Total
future minimum lease payments
|
|
|
296,707
|
|
Less:
amount representing imputed interest
|
|
|
(35,668
|
)
|
Total
|
|
$
|
261,039
|
|
7.
Commitments, Contingencies and Litigation
Culpepper
Travel Expenses and Related Collection Efforts
On
December 27, 2016, the then-Board of Directors (the “then-Board”) unanimously voted to terminate then-interim Chief
Executive Officer and Chief Operating Officer, and former Chief Financial Officer, Peter Culpepper (“Culpepper”),
effective immediately, from all positions he held with the Company and each of its subsidiaries, “for cause”, in accordance
with the terms of the Amended and Restated Executive Employment Agreement entered into by Culpepper and the Company on April 28,
2014 (the “Culpepper Employment Agreement”) based on the results of the investigation conducted by the Audit Committee
of the then-Board regarding improper expense reimbursements to Culpepper.
The
Audit Committee retained independent counsel and an advisory firm with forensic accounting expertise to assist the Audit Committee
in conducting the investigation. The Audit Committee found that Culpepper received $294,255 in expense reimbursements that were
unsubstantiated or otherwise improper. The Company seeks to recover from Culpepper the entire $294,255 in expense reimbursements,
as well as all attorney’s fees and auditors’/experts’ fees incurred by the Company in connection with the examination
of his expense reimbursements. On December 12, 2017, Culpepper agreed to an order by the SEC to pay disgorgement of $140,115,
and prejudgment interest of $12,261, for a total of $152,376, to the Company within 30 days. The Company received the payment
of $152,376 in January 2018.
The
Company took the position that under the terms of the Culpepper Employment Agreement, 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,
Culpepper is no longer entitled to the 2:1 credit under the Stipulated Settlement Agreement and Mutual Release in the Derivative
Lawsuit Settlement such that the total $2,240,000 owed by Culpepper pursuant to the Derivative Lawsuit Settlement plus 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 Culpepper a notice of default in January 2017 for the total amount he owes the
Company and is in the process of pursuing these claims in accordance with the alternative dispute resolution provision of the
Culpepper Employment Agreement. The Company has established a reserve of $2,051,083 as of March 31, 2019 and December 31, 2018,
which amount represents the amount the Company currently believes Culpepper owes to the Company under the Derivative Lawsuit Settlement
(excluding the amount of attorneys’ fees incurred in enforcing the terms of the Derivative Lawsuit Settlement), while the
Company pursues collection of this amount.
Culpepper
disputed that he was terminated “for cause” under the Culpepper Employment Agreement. Pursuant to the alternative
dispute resolution provisions of that agreement, the Company and Culpepper participated in a mediation of their dispute on June
28, 2017. Having reached no resolution during the mediation, the parties participated in arbitration under the commercial rules
of the American Arbitration Association, arbitrating both Culpepper’s claim for severance against the Company and the Company’s
claims against Culpepper for improper expense reimbursements and amounts Culpepper owes the Company under the Derivative Lawsuit
Settlement (the “Culpepper Arbitration”). The Culpepper Arbitration hearing was held from May 15-18, 2018.
On
July 12, 2018, the arbitrator issued an interim award in favor of the Company, the terms of which are confidential pursuant to
the Culpepper Employment Agreement and instructed the parties that a final award was forthcoming. On September 12, 2018, the arbitrator
issued his final award in favor of the Company. On October 4, 2018, the Company filed a petition with the Chancery Court for Davidson
County, Tennessee to confirm the arbitration award. On November 7, 2018, the Company received Culpepper’s answer to the
petition filed on October 4, 2018. This court entered an order confirming the arbitrator’s award on January 23, 2019. On
February 20, 2019, Culpepper filed a motion to alter or amend this judgment. On March 22, 2019, the Chancery Court upheld the
arbitration award in favor of the Company. On April 16, 2019, Culpepper filed a Notice of Appeal with the Tennessee Court of Appeals
regarding the judgment confirming the arbitration award and the order denying Culpepper’s motion to alter or amend the judgment.
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 the accounting services provided
by BHS to the Company. On January 28, 2019, this matter was resolved pursuant to a settlement between the parties, the terms of
which are confidential. The proceeds from the settlement were received and recorded during the three months ended March 31, 2019.
The
RSM USA LLP Lawsuit
On
June 9, 2017, the Company filed a lawsuit in the Circuit Court for 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.
On February 27, 2019, the matter was resolved pursuant to a settlement between the parties, the terms of which are confidential.
The proceeds from the settlement were received and recorded during the three months ended March 31, 2019.
Employment
of Chief Financial Officer
On March 25, 2019, the Company entered into
a one-year employment agreement with its Chief Financial Officer (“CFO”) that will be renewed automatically for successive
one-year periods, unless the Company or CFO provides a notice of non-renewal at least thirty (30) days prior to the end of the
term. In the event that coincident with or following a Change in Control (as defined in the agreement), the CFO’s employment
with the Company is terminated or the employment agreement is not extended (a) by action of the CFO coincident with or following
a Change in Control including the CFO’s death, disability or retirement, or (b) by action of the Company not For Cause (as
defined in the agreement) coincident with or following a Change in Control, the Company shall pay the CFO a severance payment
equal to 50% of the base salary in the preceding calendar year, payable over six months, as well as certain other specified benefits.
In connection with the employment agreement, the CFO was entitled to 50,000 shares of immediately-vested common stock. As of March
31, 2019, and through the date of filing, the Company has not issued the shares and, as a result, has accrued approximately
$3,000 for this obligation on the condensed consolidated balance sheet as of March 31, 2019.
8.
Subsequent Events
Receivables
Subsequent
to March 31, 2019, Dr. Wachter reduced his portion of legal fees and other expenses incurred by the Company under the Stipulated
Settlement Agreement and Mutual Release in the Kleba shareholder derivative lawsuit by offsetting accrued payroll owed by the
Company to him totaling $90,066.