UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to

 

Commission file number 001-36457

 

PROVECTUS BIOPHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   90-0031917

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

     

10025 Investment Drive, Suite 250

Knoxville, Tennessee

  37932
(Address of principal executive offices)   (Zip Code)

 

866-594-5999

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
None   N/A   N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). [X] Yes [  ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
       
Non-accelerated filer [X] Smaller reporting company [X]
       
    Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [  ] Yes [X] No

 

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of November 12, 2020, was 400,982,037.

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
PART I - FINANCIAL INFORMATION  
   
Cautionary Note Regarding Forward-Looking Statements 1
Item 1. Financial Statements (unaudited) 2
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Statements of Comprehensive Loss 4
Condensed Consolidated Statements of Changes in Stockholders’ Deficiency 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
   
PART II - OTHER INFORMATION  
   
Item 1. Legal Proceedings 23
Item 1A. Risk Factors 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 24
Item 4. Mine Safety Disclosures 24
Item 5. Other Information 24
Item 6. Exhibits 24
   
SIGNATURES 25

 

 

 

 

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined under U.S. federal securities laws. These statements reflect management’s current knowledge, assumptions, beliefs, estimates, and expectations. These statements also express management’s current views of future performance, results, and trends and may be identified by their use of terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “strategy,” “will,” and other similar terms. Forward-looking statements are subject to a number of risks and uncertainties that could cause our actual results to materially differ from those described in the forward-looking statements. Readers should not place undue reliance on forward-looking statements. Such statements are made as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to update such statements after this date, unless otherwise required by law.

 

Risks and uncertainties that could cause our actual results to materially differ from those described in forward-looking statements include those discussed in our filings with the U.S. Securities and Exchange Commission (the “SEC”) (including those described in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2019 and Item 1A of Part II of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020), and:

 

  Our potential profits from the sales of existing and/or prospective investigational drug products if approved; and licensing, milestone, royalty, and/or other payments related to these and/or other investigational drug products and/or the Company’s liquidation, dissolution or winding up, or any sale, lease, conveyance, or other disposition of any of its intellectual property,
     
  Our ability to raise additional capital, including but not limited to our ability to close on additional tranches of the 2020 Financing pursuant to the 2020 Term Sheet that our Board approved effective as of December 31, 2019, and
     
  The widespread outbreak of an illness or communicable/infectious disease, such as severe acute respiratory syndrome coronavirus 2, and/or a public health crisis, could disrupt our business and adversely affect our operations and financial condition.

 

1

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

PROVECTUS BIOPHARMACEUTICALS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    September 30,     December 31,  
    2020     2019  
    (Unaudited)        
Assets                
                 
Current Assets:                
Cash and cash equivalents   $ 986,522     $ 590,706  
Short-term receivables - legal fees, settlement and other, net     5,930       55,058  
Prepaid expenses     165,220       350,249  
                 
Total Current Assets     1,157,672       996,013  
                 
Equipment and furnishings, net of accumulated depreciation of $75,097 and $64,630, respectively     47,917       58,384  
Operating lease right-of-use asset     139,210       194,400  
Patents, net of accumulated amortization of $11,715,445 and $11,487,338, respectively     -       228,107  
                 
Total Assets   $ 1,344,799     $ 1,476,904  
                 
Liabilities and Stockholders’ Deficiency                
                 
Current Liabilities:                
Accounts payable - trade   $ 1,064,693     $ 1,125,890  
Other accrued expenses     1,443,517       1,255,266  
Current portion of accrued interest     2,442,687       65,333  
Current portion of accrued interest - related parties     1,629,757       -  
Current portion of note payable     23,438       -  
Current portion of convertible notes payable     16,497,000       500,000  
Current portion of convertible notes payable - related parties     6,770,000       -  
Current portion of operating lease liability     82,766       76,423  
                 
Total Current Liabilities     29,953,858       3,022,912  
                 
Accrued interest, non-current portion     -       1,501,864  
Accrued interest, non-current portion - related parties     -       1,226,582  
Note payable, non-current portion     39,062       -  
Convertible notes payable, non-current portion     -       12,997,000  
Convertible notes payable, non-current portion - related parties     -       6,670,000  
Operating lease liability, non-current portion     65,879       130,658  
                 
Total Liabilities     30,058,798       25,549,016  
                 
Commitments and contingencies (Note10)                
                 
Stockholders’ Deficiency:                
Preferred stock; par value $0.001 per share; 25,000,000 shares authorized; Series B Convertible Preferred Stock; 240,000 shares designated; 100 shares issued and outstanding at September 30, 2020 and December 31, 2019; aggregate liquidation preference of $3,500 at September 30, 2020 and December 31, 2019     -       -  
Common stock; par value $0.001 per share; 1,000,000,000 shares authorized; 396,857,037 and 389,889,475 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively     396,857       389,889  
Additional paid-in capital     209,744,736       209,378,835  
Accumulated other comprehensive loss     (32,454 )     (24,008 )
Accumulated deficit     (238,823,138 )     (233,816,828 )
                 
Total Stockholders’ Deficiency     (28,713,999 )     (24,072,112 )
                 
Total Liabilities and Stockholders’ Deficiency   $ 1,344,799     $ 1,476,904  

 

See accompanying notes to condensed consolidated financial statements.

 

2

 

 

PROVECTUS BIOPHARMACEUTICALS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2020     2019     2020     2019  
                   
Operating Expenses:                                
Research and development   $ 667,523     $ 1,004,454     $ 2,273,423     $ 3,250,109  
General and administrative     434,355       438,359       1,487,543       1,828,675  
Total Operating Expenses     1,101,878       1,442,813       3,760,966       5,078,784  
                                 
Total Operating Loss     (1,101,878 )     (1,442,813 )     (3,760,966 )     (5,078,784 )
Other Income/(Expense):                                
EIDL grant     -       -       3,000       -  
Gain on settlement of lawsuits     -       -       -       675,000  
Research and development tax credit     1       (826 )     27,187       82,115  
Investment and interest income     823       1,140       3,414       23,045  
Interest expense     (463,390 )     (377,576 )     (1,278,945 )     (1,068,600 )
Total Other Expense     (462,566 )     (377,262 )     (1,245,344 )     (288,440 )
                                 
Net Loss   $ (1,564,444 )   $ (1,820,075 )   $ (5,006,310 )   $ (5,367,224 )
                                 
Basic and Diluted Loss Per Common Share   $ (0.00 )   $ (0.00 )   $ (0.01 )   $ (0.01 )
                                 
Weighted Average Number of Common Shares Outstanding - Basic and Diluted     393,495,431       385,817,485       393,443,141       385,726,721  

  

See accompanying notes to condensed consolidated financial statements.

 

3

 

 

PROVECTUS BIOPHARMACEUTICALS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2020     2019     2020     2019  
                         
Net Loss   $ (1,564,444 )   $ (1,820,075 )   $ (5,006,310 )   $ (5,367,224 )
Other Comprehensive (Loss) Income:                                
Foreign currency translation adjustments     (1,652 )     58       (32,454 )     (24,801 )
Total Comprehensive Loss   $ (1,566,096 )   $ (1,820,017 )   $ (5,038,764 )   $ (5,392,025 )

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

 

PROVECTUS BIOPHARMACEUTICALS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY

(Unaudited)

 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020

 

                                  Accumulated              
    Preferred Stock                 Additional     Other              
    Series B     Common Stock     Paid-In     Comprehensive     Accumulated        
    Shares     Amount     Shares     Amount     Capital     Loss     Deficit     Total  
                                                 
Balance at January 1, 2020     100     $ -       389,889,475     $ 389,889     $ 209,378,835     $ (24,008 )   $ (233,816,828 )   $ (24,072,112 )
                                                                 
Common stock issued upon exercise of warrants     -       -       800,000       800       41,840       -       -       42,640  
Comprehensive loss:                                                              
Net loss     -       -       -       -       -       -       (1,827,061 )     (1,827,061 )
Other comprehensive loss     -       -       -       -       -       (9,027 )     -       (9,027 )
                                                                 
Balance at March 31, 2020     100     $ -       390,689,475     $ 390,689     $ 209,420,675     $ (33,035 )   $ (235,643,889 )   $ (25,865,560 )
                                                                 
Common stock issued for services     -       -       25,000       25       1,125       -       -       1,150  
Comprehensive loss:                                                                
Net loss     -       -       -       -       -       -       (1,614,805 )     (1,614,805 )
Other comprehensive income     -       -       -       -       -       2,233       -       2,233  
                                                                 
Balance at June 30, 2020     100     $ -       390,714,475     $ 390,714     $ 209,421,800     $ (30,802 )   $ (237,258,694 )   $ (27,476,982 )
                                                                 
Common stock issued for services     -       -       37,500       38       2,775       -       -       2,813  
Warrants issued for services     -       -       -       -       865       -       -       865  
Common stock issued upon exercise of warrants     -       -       6,105,062       6,105       319,296       -       -       325,401  
Comprehensive loss:                                                                
Net loss     -       -       -       -       -       -       (1,564,444 )     (1,564,444 )
Other comprehensive loss     -       -       -       -       -       (1,652 )     -       (1,652 )
                                                                 
Balance at September 30, 2020     100     $ -       396,857,037     $ 396,857     $ 209,744,736     $ (32,454 )   $ (238,823,138 )   $ (28,713,999 )

 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

 

                                  Accumulated              
    Preferred Stock                 Additional     Other              
    Series B     Common Stock     Paid-In     Comprehensive     Accumulated        
    Shares     Amount     Shares     Amount     Capital     Loss     Deficit     Total  
                                                 
Balance at January 1, 2019     100     $ -       384,614,528     $ 384,615     $ 209,092,187     $ -     $ (226,894,291 )   $ (17,417,489 )
                                                                 
Common stock issued upon exercise of warrants     -       -       100,000       100       5,230       -       -       5,330  
Comprehensive loss:                                                              
Net loss     -       -       -       -       -       -       (1,369,830 )     (1,369,830 )
Other comprehensive loss     -       -       -       -       -       (22,363 )     -       (22,363 )
                                                                 
Balance at March 31, 2019     100     $ -       384,714,528     $ 384,715     $ 209,097,417     $ (22,363 )   $ (228,264,121 )   $ (18,804,352 )
                                                                 
Common stock issued for services     -       -       191,590       191       8,771       -       -       8,962  
Warrants issued for services     -       -       -       -       10,113       -       -       10,113  
Comprehensive loss:                                                                
Net loss     -       -       -       -       -       -       (2,177,319 )     (2,177,319 )
Other comprehensive loss     -       -       -       -       -       (2,496 )     -       (2,496 )
                                                                 
Balance at June 30, 2019     100     $ -       384,906,118     $ 384,906     $ 209,116,301     $ (24,859 )   $ (230,441,440 )   $ (20,965,092 )
                                                                 
Common stock issued for services     -       -       25,000       25       1,725       -       -       1,750  
Common stock issued upon exercise of warrants     -       -       3,645,857       3,646       190,678       -       -       194,324  
Warrants issued for services     -       -       -       -       915       -       -       915  
Comprehensive loss:                                                                
Net loss     -       -       -       -       -       -       (1,820,075 )     (1,820,075 )
Other comprehensive loss     -       -       -       -       -       58       -       58  
                                                                 
Balance at September 30, 2019     100     $    -       388,576,975     $ 388,577     $ 209,309,619     $ (24,801 )   $ (232,261,515 )   $ (22,588,120 )

 

See accompanying notes to condensed consolidated financial statements.

 

5

 

 

PROVECTUS BIOPHARMACEUTICALS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    For the Nine Months Ended  
    September 30,  
    2020     2019  
       
Cash Flows From Operating Activities:                
Net loss   $ (5,006,310 )   $ (5,367,224 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Stock-based compensation     4,828       21,740  
Noncash lease expense     55,190       -  
Depreciation     10,467       63,492  
Amortization of patents     228,107       503,340  
Changes in operating assets and liabilities                
Short term receivables     47,250       52,500  
Prepaid expenses     185,329       201,096  
Accounts payable - trade     (61,028 )     (1,966,372 )
Other accrued expenses     187,705       371,776  
Operating lease liability     (58,437 )     -  
Accrued interest expense     1,278,665       1,068,600  
                 
Net Cash Used In Operating Activities     (3,128,232 )     (5,051,052 )
                 
Cash Flows From Financing Activities:                
Proceeds from issuance of convertible notes payable     3,000,000       5,235,000  
Proceeds from issuance of convertible notes payable - related parties     100,000       25,000  
Proceeds from note payable     62,500       -  
Proceeds from exercise of warrants     368,040       199,654  
Net Cash Provided By Financing Activities     3,530,540       5,459,654  
                 
Effect of Exchange Rate Changes on Cash     (6,492 )     (24,801 )
                 
Net Increase In Cash and Cash Equivalents     395,816       383,801  
                 
Cash and Cash Equivalents, Beginning of Period     590,706       50,986  
                 
Cash and Cash Equivalents, End of Period   $ 986,522     $ 434,787  
                 
Supplemental Disclosures of Cash Flow Information:                
Cash paid during the period for:                
Interest   $ -     $ -  
Income taxes   $ -     $ -  
                 
Non-cash investing and financing activities:                
Offset of related party receivable and payable   $ -     $ 252,750  

 

See accompanying notes to condensed consolidated financial statements.

 

6

 

 

PROVECTUS BIOPHARMACEUTICALS, INC.

 

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 immunotherapy medicines based on an entire, wholly-owned, family of small molecules called halogenated xanthenes (“HXs”). The Company’s lead HX molecule is proprietary current Good Manufacturing Practice (“cGMP”) rose bengal disodium (“RBD”).

 

 

Oncology: PV-10®, an investigational autolytic cancer immunotherapy administered by intralesional (“IL”) injection and an injectable formulation of cGMP RBD, is undergoing clinical study for adult solid tumor cancers, such as melanoma and gastrointestinal (“GI”) tumors (including hepatocellular carcinoma (“HCC”), colorectal cancer metastatic to the liver (“mCRC”), neuroendocrine tumors (“NET”) metastatic to the liver (“mNET”), and uveal melanoma metastatic to the liver (“mUM”), among others). Orphan drug designation status has been granted to IL PV-10 by the U.S. Food and Drug Administration (the “FDA”) for metastatic melanoma in 2006, HCC in 2011, and ocular melanoma (including uveal melanoma) in 2019.

 

Oral formulations of cGMP RBD are also undergoing preclinical study as prophylactic and therapeutic treatments for high-risk adult solid tumor cancers, such as head and neck, breast, pancreatic, liver, and colorectal cancers.

     
  Pediatric Oncology: IL 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 IL PV-10 by the FDA for neuroblastoma in 2018.
     
  Hematology: Oral formulations of cGMP RBD are undergoing preclinical study for pediatric blood cancers (including leukemia).
     
  Virology: Systemically-administered formulations of cGMP RBD are undergoing preclinical study for the novel strain of coronavirus (“CoV”), severe acute respiratory syndrome (“SARS”) CoV 2 (“SARS-CoV-2”).
     
  Microbiology: Different formulations of cGMP RBD are undergoing preclinical study as potential treatments for multi-drug resistant (“MDR”) bacteria, such as Gram-negative bacteria.
     
  Ophthalmology: Topical formulations of cGMP RBD are undergoing preclinical study as potential treatments for diseases of the eye, such as infectious keratitis.
     
  Dermatology: PH-10®, an investigational immuno-dermatology agent administered as a topical gel and formulation of cGMP RBD, is undergoing clinical study for inflammatory dermatoses (including psoriasis and atopic dermatitis).

 

To date, the Company has not generated any revenues or profits 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, 2019 filed with the SEC on March 5, 2020. 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, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

 

SARS-CoV-2 was reportedly first identified in late-2019 and subsequently declared a global pandemic by the World Health Organization on March 11, 2020. As a result of the SARS-CoV-2 pandemic, many companies have experienced disruptions of their operations and the markets they serve. The Company has taken several temporary precautionary measures intended to help ensure the well-being of its employees and contractors and to minimize business disruption. The Company considered the impact of SARS-CoV-2 pandemic on its business and operational assumptions and estimates, and determined there were no material adverse impacts on the Company’s results of operations and financial position at September 30, 2020.

 

The full extent of the SARS-CoV-2 pandemic impacts on the Company’s operations and financial condition is uncertain. The Company has experienced slower than normal enrollment and treatment of patients, and a prolonged SARS-CoV-2 pandemic could have a material adverse impact on the Company’s business and financial results, including the timing and ability of the Company to raise capital, initiate and/or complete current and/or future preclinical studies and/or clinical trials; disrupt the Company’s regulatory activities; and/or have other adverse effects on the Company’s clinical development.

 

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2. Liquidity and Going Concern

 

The Company’s cash and cash equivalents were $986,522 at September 30, 2020. 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 condensed consolidated 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 IL PV-10, topical PH-10, and/or any other halogenated xanthene-based drug products, and to raise additional capital.

 

During the nine months ended September 30, 2020, the Company entered into additional related party 2020 Notes in the aggregate principal amount of $100,000. Also, during the nine months ended September 30, 2020, the Company entered into additional non-related party 2020 Notes in the aggregate principal amount of $3,000,000. See Note 4 – Convertible Notes Payable.

 

During the nine months ended September 30, 2020, warrant holders exercised warrants to purchase an aggregate of 6,905,062 shares of common stock at an exercise price of $0.0533 per share. In connection with these exercises, the Company received aggregate cash proceeds of $368,041.

 

During the nine months ended September 30, 2020, the Company received a loan of $62,500 under the Paycheck Protection Program (“PPP”) (see Note 4) and received a grant of $3,000 from the Economic Injury Disaster Loan (“EIDL”) under the CARES Act. The grant was recognized as other income during the nine months ended September 30, 2020.

 

Subsequent to September 30, 2020, the Company received an aggregate $37,310 in connection with warrant exercises. See Note 11 – Subsequent Events.

 

The Company plans to access capital resources through possible public or private equity offerings, including the 2020 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, IL PV-10 and topical 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 debt and 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 2020 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 IL PV-10, topical PH-10, and/or any other halogenated xanthene-based drug products 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 2020 and beyond. The Company anticipates that these funds will otherwise come from the proceeds of private placement transactions, including the 2020 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.

 

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3. Critical Accounting Policies

 

Since the date the Company’s December 31, 2019 consolidated financial statements were issued in its 2019 Annual Report, there have been no material changes to the Company’s significant accounting policies, except as disclosed below.

 

Recently Issued Accounting Standards

 

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-03, “Codification Improvements to Financial Instruments” (“ASU 2020-03”). There are seven issues addressed in this update. Issues 1 – 5 were clarifications and codifications of previous updates. Issue 3 relates only to depository and lending institutions and therefore would not be applicable to the Company. Issue 6 was a clarification on determining the contractual term of a net investment in a lease for purposes of measuring expected credit losses, an issue not applicable to the Company. Issue 7 relates to the regaining control of financial assets sold and the recordation of an allowance for credit losses. The amendment related to issues 1, 2, 4 and 5 became effective immediately upon adoption of the update. Issue 3 becomes effective for fiscal years beginning after December 15, 2019. Issues 6 and 7 become effective on varying dates that relate to the dates of adoption of other updates. Management’s initial analysis is that it does not believe the new guidance will substantially impact the Company’s financial statements. The Company adopted certain provisions which have become effective during fiscal 2020 within ASU 2020-03 and its adoption did not have a material impact on the Company’s condensed consolidated financial statements and financial statement disclosures. The Company is currently evaluating the effect that adopting the remaining new accounting guidance will have on its condensed consolidated financial statements and related disclosures.

 

In August 2020, FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in Entity’s Own Equity” (“ASU 2020-06”). Under ASU 2020-06, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted method to be applied for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. Adoption of the standard requires using either a modified retrospective or a full retrospective approach. The Company is currently evaluating the effect of the adoption of ASU 2020-06 will have on its condensed consolidated financial statements and related disclosures.

 

The CARES Act

 

On March 27, 2020, President Trump signed the CARES Act into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. Under ASC 740 of GAAP, the effects of new legislation are recognized upon enactment. Accordingly, the CARES Act is effective beginning in the quarter ended March 31, 2020. The adoption of the CARES Act provisions did not have a material impact on the Company’s condensed consolidated financial statements.

 

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4. Convertible Notes Payable  

 

2020 Financing

 

On December 31, 2019, the Board approved a Definitive Financing Term Sheet (the “2020 Term Sheet”), which sets forth the terms under which the Company will use its best efforts to arrange for financing of a maximum of $20,000,000 (the “2020 Financing”). The 2020 Financing will be in the form of secured convertible loans (“Loans”) from investors that will be evidenced by convertible promissory notes (the “2020 Notes”). Subject to the terms and conditions of the 2020 Term Sheet, the Company will use its best efforts to arrange for the 2020 Financing, which amounts will be obtained in several tranches. The proceeds from the 2020 Financing will be used to fund the Company’s clinical development program, as currently constituted and envisioned, and to fund the Company’s general and administrative expenses.

 

Since the 2020 Financing was launched and through September 30, 2020, the Company had received aggregate Loans of $3,200,000.

 

The Series D Preferred Stock

 

As of September 30, 2020, and through the date of filing, the Series D Preferred Stock had not been designated by the Board. Per the terms of the notes issued in connection with the 2017 and 2020 Financings, if the Company has not designated the Series D Preferred Stock or if an insufficient number of Series D Preferred shares exist upon a conversion by a note holder, then the outstanding loans will continue to accrue interest at a rate of 8% per annum until which time the Company has designated a sufficient number of Series D Preferred shares. As a result, the Company did not analyze the notes for a potential beneficial conversion feature as the definition of a firm commitment has not been met since the notes were not convertible as of their respective dates of issuance or as of September 30, 2020.

 

Convertible Notes Payable – Related Parties

 

During the nine months ended September 30, 2020, the Company entered into additional related party 2020 Notes in the aggregate principal amount of $100,000. As of September 30, 2020, the Company had borrowed $100,000 under these notes.

 

Convertible Notes Payable – Non-Related Parties

 

During the nine months ended September 30, 2020, the Company entered into additional non-related party 2020 Notes in the aggregate principal amount of $3,000,000. As of September 30, 2020, the Company had borrowed $3,100,000 under these notes.

 

5. Notes Payable

 

Notes Payable

 

On April 20, 2020, the Company received a $62,500 loan under the CARES Act PPP (the “PPP Loan”). The PPP provides for loans to qualifying businesses for amounts of up to 2.5 times certain of the borrower’s average monthly payroll expenses. The loan principal and accrued interest are forgivable, as long as the borrower uses loan proceeds for eligible uses during a specified period following disbursement, such as payroll, benefits, rent, and utilities, and maintains specified headcount and payroll thresholds. If any portion of a PPP Loan is not forgiven, the unforgiven portion is payable over two years at an interest rate of 1%, with a deferral of payments for the first seven months. The Company intends to use PPP Loan proceeds in a manner that it believes presently qualifies for full forgiveness. We cannot provide assurance that the PPP Loan will be forgiven in full. As of September 30, 2020, the Company had not applied for forgiveness of the PPP Loan.   Once an amount is forgiven under the PPP Loan, the Company intends to recognize a gain on forgiveness of note payable in the period in which it obtained forgiveness.

 

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6. Related Party Transactions

 

During the three and nine months ended September 30, 2020, the Company paid Capital Strategists (Mr. Bruce Horowitz) consulting fees of $127,200 and $190,800, respectively, for services rendered. During the three and nine months ended September 30, 2019, the Company paid Capital Strategists consulting fees of $63,600 and $234,800, respectively, for services rendered.

 

As of September 30, 2020, and September 30, 2019, accrued director fees for Mr. Horowitz were $187,500 and $112,500, respectively.

 

Mr. Horowitz serves as both COO and as a Director of the Company.

 

See Note 4 and Note 8 for details of other related party transactions.

 

7. Short-term receivables

 

The following table summarizes the receivables at September 30, 2020 and December 31, 2019:

 

    September 30, 2020  
    Tax Credit     Legal Fees     Settlement     Total  
                         
Provectus Australia Tax Credit   $ 5,930     $ -     $ -   $ 5,930  
Gross receivable     -       455,500       1,649,043       2,104,543  
Reserve for uncollectibility     -       (455,500 )     (1,649,043 )     (2,104,543 )
Net receivable   $ 5,930     $ -     $ -     $ 5,930  

  

    December 31, 2019  
    Tax Credit     Legal Fees     Settlement     Total  
                         
Provectus Australia Tax Credit   $ 55,058     $ -     $ -     $ 55,058  
Gross receivable     -       455,500       1,649,043       2,104,543  
Reserve for uncollectibility     -       (455,500 )     (1,649,043 )     (2,104,543 )
Net receivable   $ 55,058     $ -     $ -     $ 55,058  

 

8. Stockholders’ Deficiency

 

Common Stock

 

During the nine months ended September 30, 2020, the Company issued an aggregate of 62,500 shares of immediately vested restricted common stock to a consultant and advisory board members with an issuance date fair value of an aggregate of $3,963, which was recognized immediately. Subsequent to September 30, 2020, the Company issued an aggregate of 1,000,000 shares of immediately vested restricted common stock to an employee, consultant, and directors. See Note 11 – Subsequent Events.

 

Warrants

 

During the nine months ended September 30, 2020, warrant holders exercised warrants to purchase an aggregate of 6,905,062 shares of common stock at an exercise price of $0.0533 per share. In connection with these exercises, the Company received aggregate cash proceeds of $368,041 and issued 6,905,062 shares of common stock to the holders. Subsequent to September 30, 2020, the Company received an aggregate $37,310 in connection with warrant exercises. See Note 11 – Subsequent Events.

 

During the three months ended September 30, 2020, the Company issued three-year immediately vested warrants to purchase an aggregate of 37,500 shares of common stock with an exercise price of $0.2862 per share to advisory board members. The warrants had an issuance date fair value of an aggregate of $865, which was recognized immediately and is included in general and administrative expenses on the condensed consolidated statements of operations.

 

In applying the Black-Scholes option pricing model to warrants issued, the Company used the following assumptions:

 

    For the Three Month Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2020     2019     2020     2019  
Expected terms (years)     3.00       3.00       3.00       3.00-5.00  
Expected volatility     93-95 %     131 %     93-95 %     129-131 %
Risk free interest rate     0.11-0.15 %     1.82 %     0.11-0.15 %     1.82-2.23 %
Expected dividends     0.00 %     0.00 %     0.00 %     0.00 %

 

Subsequent to September 30, 2020, the Company issued three-year immediately vested warrants to purchase an aggregate of 25,000 shares of common stock with an exercise price of $0.2862 per share to a strategic advisory board member.

 

Stock Options

 

Subsequent to September 30, 2020, pursuant to the Company’s 2017 Equity Compensation Plan (the “Compensation Plan”), the Company issued five year immediately vested stock options to purchase an aggregate of 100,000 shares of common stock with an exercise price of $0.2862 per share to a board member. The Company also issued five -year immediately vested stock options to purchase an aggregate of 2,425,000 shares of common stock with an exercise price of $0.12 per share to an officer/board member. See Note 11 – Subsequent Events.

 

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9. 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 operating lease expense for the three months ended September 30, 2020 was $24,446, of which, $16,297 was included within research and development and $8,149 was included within general and administrative expenses on the condensed consolidated statement of operations. Total operating lease expense for 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 operating lease expense for the nine months ended September 30, 2020 was $68,080, of which, $45,387 was included within research and development and $22,693 was included within general and administrative expenses on the condensed consolidated statement of operations. Total operating lease 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.

 

As of September 30, 2020, the Company had no leases that were classified as a financing lease. As of September 30, 2020, 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:

 

    For The Nine Months Ended  
    September 30,  
    2020     2019  
Cash paid for amounts included in the measurement of lease liabilities:                
Operating cash flows used in operating leases   $ 67,774     $ 66,952  
                 
Right-of-use assets obtained in exchange for lease obligations:                
Operating leases   $ -     $ 265,550  
                 
Weighted Average Remaining Lease Term                
Operating leases     1.75 Years       2.75 Years  
                 
Weighted Average Discount Rate                
Operating leases     8.0 %     8.0 %

 

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Future minimum payments under the Company’s non-cancellable lease obligations as of September 30, 2020 were as follows:

 

Years Ending December 31   Amount  
       
2020 (remainder)   $ 22,892  
2021     92,471  
2022     46,687  
Total future minimum lease payments     162,050  
Less: amount representing imputed interest     (13,405 )
Total lease liability   $ 148,645  

 

10. 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 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, 2020 and December 31, 2019, 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. On June 28, 2017, pursuant to the alternative dispute resolution provisions of that agreement, the Company and Culpepper participated in a mediation of their dispute. Having reached no resolution during the mediation, the parties participated in arbitration under the commercial rules of the American Arbitration Association, arbitrating Culpepper’s claim against the Company for severance and the Company’s claims against Culpepper for improper expense reimbursements and amounts Culpepper owed the Company under the Derivative Lawsuit Settlement. On September 12, 2018, the arbitrator issued his final award in favor of the Company.

 

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On October 4, 2018, the Company filed a petition with the Chancery Court for Davidson County, Tennessee to confirm the arbitration award. On January 23, 2019, the Chancery Court entered an order confirming the arbitrator’s award. On February 20, 2019, Culpepper filed a motion to alter or amend the Chancery Court’s 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 Chancery Court’s judgment. The Company and Culpepper submitted their respective court of appeal briefs on November 12, 2019 and December 3, 2019, respectively. Oral arguments were held on January 7, 2020. On April 14, 2020, the Court of Appeals affirmed the Chancery Court’s judgment and awarded court costs to the Company.

 

On June 16, 2020, Culpepper filed an application to the Supreme Court of Tennessee for permission to appeal the Court of Appeals’ final decision. On June 30, 2020, the Company filed an answer to the Supreme Court in opposition to Culpepper’s application for permission to appeal. On August 5, 2020, the Supreme Court denied Culpepper’s application. On November 5, 2020, Culpepper filed a petition for writ of certiorari to the United States Supreme Court which has not been acted upon at this time.

 

11. Subsequent Events

 

Exercise of Warrants

 

Subsequent to September 30, 2020, warrant holders exercised warrants to purchase an aggregate of 700,000 shares of common stock at $0.0533 per share. In connection with this exercise, the Company received aggregate cash proceeds of $37,310.

 

Common Stock 

 

Subsequent to September 30, 2020, the Company issued an aggregate of 1,000,000 shares of immediately vested restricted common stock to an employee, consultant, and board members with an issuance date fair value of an aggregate of $65,125.

 

Warrants 

 

Subsequent to September 30, 2020, the Company issued three-year immediately vested warrants to purchase an aggregate of 25,000 shares of common stock with an exercise price of $0.2862 per share to a board member. The warrants had an issuance date fair value of an aggregate $507.

 

Stock Options

 

Subsequent to September 30, 2020, pursuant to the Compensation Plan, the Company issued five year immediately vested stock options to purchase an aggregate of 100,000 shares of common stock with an exercise price of $0.2862 per share to a board member. The stock options had an issuance date fair value of an aggregate $1,414. The Company also issued five -year immediately vested stock options to purchase an aggregate of 2,425,000 shares of common stock with an exercise price of $0.12 per share to an officer/board member. The stock options had an issuance date fair value of an aggregate $62,880.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion is intended to assist in the understanding and assessment of significant changes and trends related to our results of operations and our financial condition together with our consolidated subsidiaries. This discussion and analysis should be read in conjunction with the accompanying unaudited financial statements and our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 5, 2020 (“2019 Form 10-K”), which includes additional information about our critical accounting policies and practices and risk factors. Historical results and percentage relationships set forth in the statement of operations, including trends which might appear, are not necessarily indicative of future operations.

 

Overview

 

Provectus is a clinical-stage biotechnology company developing immunotherapy medicines based on an entire, wholly-owned, family of small molecules called HXs. The Company’s lead HX molecule is proprietary cGMP RBD. IL PV-10, the first autolytic immunotherapy and an injectable formulation of cGMP RBD, can induce immunogenic cell death (“ICD”), and is undergoing clinical study for adult solid tumor cancers, such as melanoma and GI tumors (e.g., HCC, mCRC, mNET, mUM), and preclinical study for pediatric solid tumor cancers (e.g., neuroblastoma, Ewing sarcoma, rhabdomyosarcoma, osteosarcoma). Topically-administered PH-10, an immune-modulatory agent and formulation of cGMP RBD, is undergoing clinical study for inflammatory dermatoses (e.g., psoriasis, atopic dermatitis). New formulations of and routes of administration for cGMP RBD are being investigated for hematology (e.g., acute myeloid leukemia, acute monocytic leukemia), virology (e.g., SARS-CoV-2), oncology (e.g., high-risk adult solid tumor cancers), microbiology (e.g., MDR bacteria), and ophthalmology (e.g., infectious keratitis).

 

The SARS-CoV-2 pandemic has already caused significant disruptions in the financial markets, and may continue to cause such disruptions, which could impact our ability to raise additional funds and may also impact the volatility of our stock price and trading in our stock. Moreover, the pandemic has also significantly impacted economies worldwide, which could result in adverse effects on our business and operations. We cannot be certain what the overall impact of the SARS-CoV-2 pandemic will be on our business. It has the potential to adversely affect our business, financial condition, results of operations, and prospects. We have taken several temporary precautionary measures intended to help ensure the well-being of our employees and contractors and to minimize disruption to our business. We considered the impact of SARS-CoV-2 pandemic on our business and operational assumptions and estimates, and determined there were no material adverse impacts on our results of operations and financial position at September 30, 2020.

 

Our Science and Technology

 

Oncology. IL PV-10 drug product is Provectus’ cGMP injectable formulation of the Company’s pharmaceutical-grade (cGMP) RBD (4,5,6,7-tetrachloro-2’,4’,5’,7’-tetraiodofluorescein disodium salt) drug substance. RBD selectively accumulates in the lysosomes of cancer cells. Cancer cells, particularly advanced cancer cells, are very dependent on effective lysosomal functioning (Piao et al., Ann N Y Acad Sci 2016). Cancer progression and metastasis are associated with lysosomal compartment changes (Nishimura et al., Pathol Oncol Res 1998; Gocheva et al., Genes Dev 2006), which are closely correlated with, among other things, invasive growth, angiogenesis, and drug resistance (Fahrenbacher et al., Cancer Res 2005).

 

Lysosomes are the central organelles for intracellular degradation of biological macromolecules and organelles. Discovered by Christian de Duve, M.D. in 1955, lysosomes have been linked with a number of biological processes like cell death, inflammasome activation, and immune response. In 1959, Dr. de Duve described lysosomes as “suicide bags,” because their rupture led to cell death and tissue autolysis. Lysosomes have been shown to play a role in each of the primary pathways of cell death, which are apoptosis, autophagy, and necrosis. He was awarded the Nobel Prize in 1974 for discovering and characterizing lysosomes.

 

Provectus showed that RBD selectively accumulates in the lysosomes of cancer cells and disrupts them, causing the cancer cells to die. RBD has also been shown by Provectus and independent researchers to trigger each major, distinct form of lysosomal cell death; that is, apoptosis, autophagy, and necrosis.

 

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RBD’s lysosomal targeting comprises:

 

  Transiting the plasmalemma (i.e., the cell membrane) of cancer cells. RBD penetrates the cell membrane of cancerous cells which normally protects the cancer cell from its surrounding environment. RBD, however, is excluded from normal cells;
     
  Accumulating in the lysosomes of cancer cells. As noted above, the physicochemical properties of lysosomes trap RBD;
     
  Triggering the release of lysosomal contents. Acute autolysis can occur within 60 minutes. Early preclinical work by Provectus on RBD’s lysosomal targeting showed identical responses in different disease models, such as Hepa1-6 murine hepatocellular carcinoma, HTB-133 human breast carcinoma, and H96Ar human multi-drug resistant small cell lung carcinoma;
     
  Inducing the rapid cell death of cancer cells. Early trypan blue exclusion work by Provectus confirmed cell death within hours; and,
     
  Intracellular pH consistency with the release of acidic lysosomal contents. Early seminaphthorhodafluor-1 (“SNARF-1”) staining work by Provectus confirmed lower intracellular pH upon exposure to RBD.

 

Hematology. In primary cells and cell lines derived from pediatric leukemia patients, RBD may lead to stimulator of interferon genes (“STING”) dimerization and the release of interferon gamma, indicating a potential immune activation mechanism of RBD. Heat shock proteins, which chaperone misfolded or abnormally-folded proteins, associated with STING dimerization in RBD-treated cells, indicating a mechanism that may lead to enhanced STING activation following RBD-specific treatment.

 

Virology. The Company’s work in this disease area to identify drug activity and elucidate mechanism(s) of action is ongoing.

 

Microbiology. The Company’s work in this disease area to identify drug activity and elucidate mechanism(s) of action is ongoing.

 

Ophthalmology. The Company’s work in this disease area to identify drug activity is ongoing.

 

Dermatology. For psoriasis, pathways significantly improved by PH-10 drug product treatment include published psoriasis transcriptomes and cellular responses mediated by IL-17, IL-22, and interferons. Clinical work has shown that more than 500 disease-related genes were down-regulated after four weeks of application and a wide-range of central psoriasis-related genes, including IL-23, IL-17, IL-22, S100A7, IL-19, IL-36, and CXCL1, were normalized (i.e., treated lesional skin had values in the same range as baseline non-lesional skin).

 

Our Drug Development Strategy

 

Oncology. The Company’s strategy is to (i) demonstrate the independent action of single-agent IL PV-10; that is, safety and activity in T cell and non-T cell inflamed tumor types, in high and low tumor mutation burden tumor types, and in other tumor type categories, such as gene mutations, (ii) demonstrate the coordinated induction of multiple immune signaling pathways (i.e., functional ICD), (Snyder et al., Sci Immunol 2019) by IL PV-10 treatment, (iii) demonstrate the functional T cell response generated by IL PV-10 treatment, and (iv) contrast and compare IL PV-10 treatment (i.e., safety, activity, and induced immune response) with that of immune checkpoint blockade (“CB”) and other drug classes in single-agent and IL PV-10-based combination therapy settings.

 

This strategy may quicken the advancement of single-agent IL PV-10 along a pathway-to-approval in solid tumor cancer indications where there is high unmet need, limited activity from other therapies, and the opportunity to display the immune response from IL PV-10 treatment, such as mNET (NCT02693067). This strategy may also permit the Company to develop and advance a cancer combination therapy involving one or more CB and/or other drug classes along a pathway-to-approval in a disease indication where there is high unmet need, limited activity from standard of care (“SOC”) treatment, and the opportunity to display how IL PV-10 augments clinical response to existing or emerging SOCs, such as mUM (i.e., combination therapy with an anti-CTLA-4 agent and an anti-PD-1 agent) (NCT00986661).

 

Hematology. The Company and research collaborators are undertaking preclinical work on a potential, systemically-administered, cGMP RBD leukemia treatment and/or cancer vaccine for pediatric patients.

 

Virology. The Company and research collaborators are undertaking preclinical work on a potential, systemically-administered, cGMP RBD therapy for SARS-CoV-2 and other classes of enveloped and non-enveloped viruses.

 

Microbiology. The Company and research collaborators are undertaking preclinical work on cGMP RBD therapy for MDR bacteria.

 

Ophthalmology. The Company and clinical and research collaborators are undertaking preclinical work on potential, topically-administered, cGMP RBD therapy for the treatment of infectious keratitis.

 

Dermatology. The Company’s strategy is to (i) demonstrate 12-week single-agent administration proof-of-concept (“POC”) for topical PH-10 that includes (a) a preclinical safety study of extended 12-week administration (compared to, previously, four weeks), (b) a clinical mechanism of action study in atopic dermatitis, which would be a “book-end” trial to the already completed clinical mechanism study in psoriasis, (c) Phase 2 randomized controlled trials of topical PH-10 for the treatment of psoriasis and atopic dermatitis that may potentially utilize SOC comparators, and (d) end-of-Phase 2 meetings with the FDA upon the completion of the abovementioned Phase 2 trials, and (ii) expand POC topical PH-10 treatment to include dermatology combination therapy. Our goal for this POC work is to achieve Phase 3 trial-ready status for topical PH-10 in both psoriasis and atopic dermatitis.

 

16

 

 

Components of Operating Results

 

Research and Development Expenses

 

A large component of our total operating expenses is the Company’s investment in research and development activities, including the clinical development of our product candidates. Research and development expenses represent costs incurred to conduct research and undertake clinical trials to develop our drug product candidates. These expenses consist primarily of:

 

  Costs of conducting clinical trials, including amounts paid to clinical centers, clinical research organizations and consultants, among others;
  Salaries and related expenses for personnel, including stock-based compensation expense;
  Other outside service costs including cost of contract manufacturing;
  The costs of supplies and reagents; and,
  Occupancy and depreciation charges.

 

We expense research and development costs as incurred.

 

Research and development activities are central to our business model. We expect our research and development expenses to increase in the future as we advance our existing product candidates through clinical trials and pursue their regulatory approval. Undertaking clinical development and pursuing regulatory approval are both costly and time-consuming activities. As a result of known and unknown uncertainties, we are unable to determine the duration and completion costs of our research and development activities, or if, when, and to what extent we will generate revenue from any subsequent commercialization and sale of our drug product candidates.

 

General and Administrative Expenses

 

General and administrative expense consists primarily of salaries, stock-based compensation expense and other related costs for personnel in executive, finance, accounting, business development, legal, information technology and corporate communication functions. Other costs include facility costs not otherwise included in research and development expense, insurance, and professional fees for legal, patent and accounting services.

 

17

 

 

Results of Operations

 

Comparison of the Three Months Ended September 30, 2020 and September 30, 2019

 

Overview

 

Total operating expenses were $1,101,878 for the three months ended September 30, 2020, a decrease of $340,935 or 23.6% compared to the three months ended September 30, 2019. The decrease was driven primarily by our continued transformation and process improvement efforts within the Company, intangible assets being fully amortized, and continued slower enrollments and treatments in our clinical trials due to the SARS-CoV-2 pandemic. Net loss for the three months ended September 30, 2020 was $1,564,444, a decrease of $255,631 or 14.0% which was primarily attributable to lower expenses incurred as a result of the SARS-CoV-2 pandemic.

 

    For the Three Months Ended              
    September 30,              
    2020     2019     Increase/(Decrease)     % Change  
                         
Operating Expenses:                                
Research and development   $ 667,523     $ 1,004,454     $ (336,931 )     -33.5 %
General and administrative     434,355       438,359       (4,004 )     -0.9 %
Total Operating Expenses     1,101,878       1,442,813       (340,935 )     -23.6 %
                                 
Total Operating Loss     (1,101,878 )     (1,442,813 )     340,935       -23.6 %
Other Income/(Expense):                                
Research and development tax credit     -       (826 )     826       0.0 %
Investment and interest income     824       1,140       (316 )     -27.7 %
Interest expense     (463,390 )     (377,576 )     (85,814 )     22.7 %
Total Other Expense     (462,566 )     (377,262 )     (85,304 )     22.6 %
                                 
Net Loss   $ (1,564,444 )   $ (1,820,075 )   $ 255,631       -14.0 %

 

 Research and Development Expenses

 

Research and development expenses were $667,523 for the three months ended September 30, 2020, a decrease of $336,931 or 33.5% compared to the three months ended September 30, 2019. The decrease was primarily due to (i) reduced cost on clinical trials and research expenses due to slow enrollments and treatments in clinical trials due to the SARS-CoV-2 pandemic, and (ii) a decrease in amortization of patents due to patents being fully amortized.

 

The following table summarizes our research and development expenses incurred during the three months ended September 30, 2020 and September 30, 2019:

 

    For the Three Months Ended              
    September 30,              
    2020     2019     Increase/(Decrease)     % Change  
                         
Operating Expenses:                                
Research and development:                                
Clinical trial and research expenses   $ 527,415     $ 689,203     $ (161,788 )     -23.5 %
Depreciation/amortization     2,161       169,941       (167,780 )     -98.7 %
Insurance     53,885       66,762       (12,877 )     -19.3 %
Payroll and taxes     66,583       61,793       4,790       7.8 %
Rent and utilities     17,479       16,755       724       4.3 %
Total research and development   $ 667,523     $ 1,004,454     $ (336,931 )     -33.5 %

 

18

 

 

General and Administrative Expenses

 

General and administrative expenses were $434,355 for the three months ended September 30, 2020, a decrease of $4,004 or less than 1.0% compared to the three months ended September 30, 2019. The decrease was primarily due to (i) a decrease in payroll and related taxes, and (ii) lower professional fees as a result of lower negotiated rates, partially offset by higher legal fees.

 

The following table summarizes our general and administrative expenses incurred during the three months ended September 30, 2020 and September 30, 2019:

 

    For the Three Months Ended              
    September 30,              
     2020      2019     Increase/(Decrease)     % Change  
                         
Operating Expenses:                                
General and administrative:                                
Depreciation   $ 1,259     $ 1,361     $ (102 )     -7.5 %
Directors fees     94,315       96,250       (1,935 )     -2.0 %
Insurance     40,796       39,052       1,744       4.5 %
Legal and litigation     87,122       71,362       15,760       22.1 %
Other general and administrative cost     16,168       23,691       (7,523 )     -31.8 %
Payroll and taxes     45,102       55,162       (10,060 )     -18.2 %
Professional fees     140,732       143,278       (2,546 )     -1.8 %
Rent and utilities     8,746       8,203       543       6.6 %
Foreign currency translation     115       -       115       0.0 %
Total general and administrative   $ 434,355     $ 438,359     $ (4,004 )     -0.9 %

 

Other Income/(Expense)

 

Other income increased by $510 from $314 for the three months ended September 30, 2019 to $824 for the three months ended September 30, 2020. 

 

Interest expense increased by $85,814 from $377,576 for the three months ended September 30, 2019 to $463,390 for the three months ended September 30, 2020. The increase was due to the increased number of convertible notes payable outstanding relating to the PRH Notes from the 2017 and 2020 Financings.

 

Comparison of the Nine Months Ended September 30, 2020 and September 30, 2019

 

Overview

 

Total operating expenses were $3,760,966 for the nine months ended September 30, 2020, a decrease of $1,317,818 or 25.9% compared to the nine months ended September 30, 2019. The decrease was driven primarily by our continued transformation and process improvement efforts within the Company, lower legal fees, and lower amortization cost due to intangible assets being fully amortized, as well as, slower enrollments and treatments in our clinical trials due to the SARS-CoV-2 pandemic. Net loss for the nine months ended September 30, 2020 was $5,006,310, a decrease of $357,914 or 6.7% which was primarily attributable to gains recognized in connection with settlements of lawsuits in 2019.

 

19

 

 

    For the Nine Months Ended              
    September 30,              
    2020     2019     Increase/(Decrease)     % Change  
                   
Operating Expenses:                                
Research and development   $ 2,273,423     $ 3,250,109     $ (976,686 )     -30.1 %
General and administrative     1,487,543       1,828,675       (341,132 )     -18.7 %
Total Operating Expenses     3,760,966       5,078,784       (1,317,818 )     -25.9 %
                                 
Total Operating Loss     (3,760,966 )     (5,078,784 )     (1,317,818 )     25.9 %
Other Income/(Expense):                                
EIDL grant     3,000       -       3,000       0.0 %
Gain on settlement of lawsuits     -       675,000       (675,000 )     -100.0 %
Research and development tax credit     26,364       82,115       (55,751 )     -67.9 %
Investment and interest income     4,237       23,045       (18,808 )     -81.6 %
Interest expense     (1,278,945 )     (1,068,600 )     (210,345 )     19.7 %
Total Other Expense     (1,245,344 )     (288,440 )     (956,904 )     332.8 %
                                 
Net Loss   $ (5,006,310 )   $ (5,367,224 )   $ (360,914 )     6.7 %

 

Research and Development Expenses

 

Research and development expenses were $2,273,423 for the nine months ended September 30, 2020, a decrease of $976,686 or 30.1% compared to the nine months ended September 30, 2019. The decrease was primarily due to (i) reduced cost on clinical trials and research expenses with closure of the phase III trial and slower enrollments and treatments in clinical trials due to the SARS-CoV-2 pandemic, (ii) a decrease in payroll and related taxes due to a lower negotiated employment agreement, and (iii) a decrease in amortization of patents due to patents being fully amortized.

 

The following table summarizes our research and development expenses incurred during the nine months ended September 30, 2020 and September 30, 2019:

 

    For the Nine Months Ended              
    September 30,              
    2020     2019     Increase/(Decrease)     % Change  
                         
Operating Expenses:                                
Research and development:                                
Clinical trial and research expenses   $ 1,588,856     $ 2,227,329     $ (638,473 )     -28.7 %
Depreciation/amortization     234,592       509,825       (275,233 )     -54.0 %
Insurance     200,162       193,774       6,388       3.3 %
Payroll and taxes     201,344       262,200       (60,856 )     -23.2 %
Rent and utilities     48,469       56,981       (8,512 )     -14.9 %
Total research and development   $ 2,273,423     $ 3,250,109     $ (976,686 )     -30.1 %

 

20

 

 

General and Administrative Expenses

 

General and administrative expenses were $1,487,543 for the nine months ended September 30, 2020, a decrease of $341,132 or 18.7% compared to the nine months ended September 30, 2019. The decrease was primarily due to (i) lower legal fees as we concluded the Company’s lawsuits against former accounting vendors, (ii) a decrease in payroll and related taxes, and (iii) lower professional fees as a result of lower negotiated rates.

 

The following table summarizes our general and administrative expenses incurred during the nine months ended September 30, 2020 and September 30, 2019:

 

    For the Nine Months Ended              
    September 30,              
    2020     2019     Increase/(Decrease)     % Change  
                         
Operating Expenses:                                
General and administrative:                                
Depreciation   $ 3,982     $ 4,084     $ (102 )     -2.5 %
Directors fees     286,815       288,750       (1,935 )     -0.7 %
Insurance     136,272       130,894       5,378       4.1 %
Legal and litigation     304,747       418,719       (113,972 )     -27.2 %
Other general and administrative cost     51,941       91,756       (39,815 )     -43.4 %
Payroll and taxes     129,024       253,601       (124,577 )     -49.1 %
Professional fees     549,061       610,755       (61,694 )     -10.1 %
Rent and utilities     24,484       29,290       (4,806 )     -16.4 %
Foreign currency translation     1,217       826       391       47.3 %
Total general and administrative   $ 1,487,543     $ 1,828,675     $ (341,132 )     -18.7 %

 

Other Income/(Expense)

 

Other income decreased by $746,559 from $780,160 for the nine months ended September 30, 2019 to $33,601 for the nine months ended September 30, 2020 which was primarily attributable to gains recognized in connection with settlements of lawsuits in 2019.

 

Interest expense increased by $210,345 from $1,068,600 for the nine months ended September 30, 2019 to $1,278,945 for the nine months ended September 30, 2020. The increase was due to the increased number of convertible notes payable outstanding relating to the PRH Notes from the 2017 and 2020 Financings.

 

Liquidity and Capital Resources

 

Our cash and cash equivalents were $986,522 at September 30, 2020, compared to $590,706 at December 31, 2019. The condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q have been prepared on a basis that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. We have continuing net losses and negative cash flows from operating activities. In addition, we have an accumulated deficit of $238,823,138 as of September 30, 2020. These conditions raise substantial doubt about our ability to continue as a going concern for a period within one year from the date that the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q are issued. Our condensed consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern. Our ability to continue as a going concern depends on our ability to obtain additional financing as may be required to fund current operations.

 

During the nine months ended September 30, 2020, the Company entered into additional related party 2020 Notes in the aggregate principal amount of $100,000. Also, during the nine months ended September 30, 2020, the Company entered into additional non-related party 2020 Notes in the aggregate principal amount of $3,000,000.

 

During the nine months ended September 30, 2020, warrant holders exercised warrants t