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 that is developing a new class of drugs for oncology, hematology, and dermatology based
on an entire, wholly-owned, family of small molecules called halogenated xanthenes:
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Oncology:
Intralesional (aka intratumoral) PV-10, a cancer immunotherapy, is undergoing clinical study for adult solid tumor cancers,
like melanoma and gastrointestinal (“GI”) tumors (including hepatocellular carcinoma, metastatic colorectal cancer,
metastatic neuroendocrine tumors, and metastatic uveal melanoma, among others). Orphan drug designation status has been granted
to PV-10 by the U.S. Food and Drug Administration (the “FDA”) for the treatments of metastatic melanoma in 2006,
hepatocellular carcinoma in 2011, and ocular melanoma (including uveal melanoma) in 2019.
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PV-10
is also undergoing preclinical study for pediatric solid tumor cancers (including neuroblastoma, Ewing sarcoma, rhabdomyosarcoma,
and osteosarcoma). Orphan drug designation status has been granted to PV-10 by the FDA for neuroblastoma in 2018.
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Hematology.
PV-10 is also undergoing preclinical study for pediatric blood cancers (including leukemia).
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Dermatology:
Topical PH-10, an immuno-dermatology agent, is undergoing clinical study for inflammatory dermatoses, like psoriasis
and atopic dermatitis.
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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 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 and nine months ended September 30, 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 $434,787 at September 30, 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 you that it will be
successful in developing further, co-developing, licensing, and/or commercializing PV-10, PH-10, and/or any other halogenated
xanthene-based drug product candidate of the Company, or entering into any commercial 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 assure you 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.
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.
The fair value of the award is measured on the grant date and then is 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 Company’s common stock which
is determined by reviewing its historical public market closing prices.
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 September 30, 2019, the Company had received aggregate loans of $19,192,000 in connection with the 2017 Financing.
As
of September 30, 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 September 30, 2019.
Convertible
Notes Payable – Related Parties
During
the nine months ended September 30, 2019, the Company entered into additional related party PRH Notes in the aggregate principal
amount of $25,000.
As
of September 30, 2019, the Company had borrowed $6,895,000 of related party PRH Notes that were outstanding.
Convertible
Notes Payable – Non-Related Parties
During
the nine months ended September 30, 2019, the Company entered into additional non-related party PRH Notes in the aggregate principal
amount of $5,235,000.
As
of September 30, 2019, the Company had borrowed $12,297,000 of non-related party PRH Notes that were outstanding.
5.
Receivables
The
following table summarizes the receivables at September 30, 2019 and December 31, 2018:
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September
30, 2019
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Legal
Fees
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Settlement
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Total
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Gross receivable
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$
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683,250
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$
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1,703,405
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$
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2,386,655
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Reserve for uncollectibility
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(455,500
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)
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(1,649,043
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)
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(2,104,543
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)
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Net receivable
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227,750
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54,362
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282,112
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Short-term receivable - Settlement
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-
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54,362
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54,362
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Short-term receivable
- Legal
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227,750
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-
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227,750
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Long-term receivable
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$
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-
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$
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-
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$
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-
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December
31, 2018
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Legal
Fees
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Settlement
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Total
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Gross receivable
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$
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911,000
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$
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1,783,795
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$
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2,694,795
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Reserve for uncollectibility
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(455,500
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)
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(1,649,043
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)
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(2,104,543
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)
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Net receivable
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455,500
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134,752
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590,252
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Short-term receivable
- Settlement
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-
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134,752
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134,752
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Short-term receivable
- Legal
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455,500
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-
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455,500
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Long-term receivable
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$
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-
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$
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-
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$
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-
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During
the nine months ended September 30, 2019, officers of the Company offset their settlement amounts owed to the Company against
accrued payroll and other payables totaling $252,750. This offset reduced the amount of the settlement and was approved by the
Company’s Board.
6.
Stockholders’ Deficiency
Common
Stock
During
the nine months ended September 30, 2019, the Company issued an aggregate of 216,590 shares of immediately vested restricted common
stock to an employee and consultants with an issuance date fair value of $10,712, which was recognized immediately.
Warrants
During
the nine months ended September 30, 2019, the Company issued 387,500 five-year immediately vested warrants to a consultant to
purchase an aggregate of 387,500 shares of common stock with exercise prices ranging from $1.00 to $2.00 per share. The warrants
had an aggregate grant date fair value of $10,113, which was recognized immediately under stock compensation in general and administrative.
During
the nine months ended September 30, 2019, the Company issued 25,000 three-year immediately vested warrants to a consultant to
purchase an aggregate of 25,000 shares of common stock with an exercise price of $0.2862 per share. The warrants had an
aggregate grant date fair value of $915, which was recognized immediately under stock compensation in general and administrative.
In
applying the Black-Scholes option pricing model to warrants issued, the Company used the following assumptions:
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For
the Three Month Ended
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For
the Nine Months Ended
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September
30,
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September
30,
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2019
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2018
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|
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2019
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|
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2018
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Expected terms (years)
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3.00
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n/a
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3.00-5.00
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n/a
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Expected volatility
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131
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%
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n/a
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129-131
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%
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|
|
n/a
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Risk free interest rate
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|
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1.82
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%
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n/a
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1.82-2.23
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%
|
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|
n/a
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Expected dividends
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0.00
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%
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n/a
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0.00
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%
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n/a
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During
the nine months ended September 30, 2019, warrant holders exercised warrants to purchase an aggregate of 3,745,857 shares of common
stock at a price of $0.0533 per share. In connection with these exercises, the Company received aggregate cash proceeds of $199,654
and issued 3,745,857 shares of common stock to the warrant holders.
7.
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 nine months ended September 30, 2019 was $79,756, of which, $53,171 was included within research and development
and $26,585 was included within general and administrative expenses on the condensed consolidated statement of operations. Total
rent expense for the nine months ended September 30, 2018 was $66,313, of which, $44,209 was included within research and development
and $22,104 was included within general and administrative expenses on the condensed consolidated statement of operations. Total
rent expense during the three months ended September 30, 2019 was $22,622, of which, $15,081 was included within research and
development and $7,541 was included within general and administrative expenses on the condensed consolidated statement of operations.
Total rent expense during the three months ended September 30, 2018 was $22,080, of which, $14,720 was included within research
and development and $7,360 was included within general and administrative expenses on the condensed consolidated statement of
operations.
As
of September 30, 2019, the Company had no leases that were classified as a financing lease. As of September 30, 2019, the Company
did not have additional operating and financing leases that have not yet commenced.
A
summary of the Company’s right-of-use assets and liabilities is as follows:
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Nine
Months End September 30, 2019
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Cash paid for amounts included in the
measurement of lease liabilities:
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Operating
cash flows from operating leases
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$
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66,952
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Right-of-use assets obtained in exchange
for lease obligations:
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Operating leases
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$
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265,550
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Weighted Average Remaining Lease Term
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Operating leases
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2.75
Years
|
|
|
|
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Weighted Average Discount Rate
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|
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Operating leases
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8.0
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%
|
Future
minimum payments under non-cancellable lease as of September 30, 2019 were as follows:
For
the Years Ending December 31,
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|
Amount
|
|
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|
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2019
|
|
$
|
24,687
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2020
|
|
|
90,666
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2021
|
|
|
92,471
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2022
|
|
|
46,687
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Total future minimum
lease payments
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254,511
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Less:
amount representing imputed interest
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|
|
(29,444
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)
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Total
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|
$
|
225,067
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|
8.
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, then-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 Kleba Derivative
Lawsuit Settlement (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 $2,104,543 as of September 30, 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 to May 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 “Culpepper Appeal”). The Company and Culpepper have submitted their respective Culpepper Appeal briefs.
9.
Subsequent Events
Convertible
Notes Payable
Subsequent
to September 30, 2019, the Company entered into PRH Notes with non-related parties in the aggregate principal amount of $200,000.
The Company had drawn down the entire $200,000 under these notes.
Scott
Kleba Settlement Agreement Satisfaction
Pursuant
to the terms and conditions of the Stipulated Settlement Agreement and Mutual Release made and entered into by and between the
Company (then-Provectus Pharmaceuticals, Inc.) and Timothy C. Scott, Ph.D. on June 6, 2014, and consented to and approved by Glenn
Kleba and Don B. Dale (the “Plaintiffs”), derivatively on behalf of the Company in the Plaintiffs’ shareholder
derivative lawsuit (the “Kleba Settlement Agreement”), Dr. Scott completed repayment of his Cash Repayment
Obligations (as defined in the Kleba Settlement Agreement) on October 9, 2019. Dr. Scott’s Cash Repayment Obligations equaled
(i) the Reduced Repayment Amount (as defined in the Kleba Settlement Agreement) of $1,199,303, including imputed interest, plus
(ii) Dr. Scott’s pro rata portion of the Company’s Litigation Costs (as defined in the Kleba Settlement Agreement)
of $227,750, for a total payment to the Company of $1,427,053. As part of his prepayment completion, the PRH Note in the principal
amount of $250,000 and accrued interest of $32,111, that the Company entered into with Dr. Scott and Leigh Anne Scott on February
28, 2018 was cancelled. Pursuant to the terms and conditions of the Stock Pledge Agreement related to the Kleba Settlement Agreement,
satisfaction of his Cash Repayment Obligations removed the Company’s first-priority security interest in 1,000,000 shares
of the Company’s common stock beneficially owned by Dr. Scott, which had served as collateral for the Cash Repayment Obligations
owed to the Company.