NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Business Organization, Nature of Operations and Basis of Presentation
Provectus
Biopharmaceuticals, Inc., a Delaware corporation (together with its subsidiaries, “Provectus” or the “Company”),
is a clinical-stage biotechnology company developing a new class of drugs for oncology and dermatology based on halogenated xanthenes.
Intralesional PV-10 is undergoing clinical study for adult solid tumor cancers, like melanoma and gastrointestinal cancers, and
preclinical study for pediatric cancers. Topical PH-10 is undergoing clinical study for inflammatory dermatoses, like psoriasis
and atopic dermatitis. To date, the Company has not generated any revenues from planned principal operations. The Company’s
activities are subject to significant risks and uncertainties, including failing to successfully develop and license or commercialize
the Company’s prescription drug candidates.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial information pursuant to Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements
and should be reviewed in conjunction with the Company’s audited consolidated financial statements included in the Company’s
Form 10-K for the year ended December 31, 2017 filed with the U.S. Securities and Exchange Commission (the “SEC”)
on March 23, 2018. 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 six months ended June 30, 2018 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2018.
2.
Liquidity and Going Concern
The
Company’s cash and cash equivalents were $130,633 at June 30, 2018, compared with $105,504 at December 31, 2017. 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, but 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. Subsequent to June 30, 2018, the Company received aggregate Loans
of $300,000 in connection with the 2017 Financing. See Note 7 – Subsequent Events.
The
primary business objective of management is to build the Company into a fully integrated global biotechnology company. The Company,
however, cannot assure you that it will be successful in co-developing or licensing PV-10, PH-10, or any other halogenated xanthene-based
drug candidate developed by the Company, or entering into any 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 2018 and beyond. The Company anticipates that these funds will otherwise come from the proceeds of private placement transactions,
including the 2017 Financing, the exercise of existing warrants and outstanding stock options, or public offerings of debt or
equity securities. While the Company believes that it has a reasonable basis for its expectation that it will be able to raise
additional funds, the Company cannot provide assurance that it will be able to complete additional financing in a timely manner.
In addition, any such financing may result in significant dilution to stockholders.
3.
Significant Accounting Policies
The
Company’s significant accounting policies are disclosed in Note 3 – Significant Accounting Policies in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2017. Since the date of the Annual Report, there have been no material
changes to the Company’s significant accounting policies, except as disclosed below.
Recent
Accounting Pronouncements
In
May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”).
ASU 2017-09 provides clarity on the accounting for modifications of stock-based awards. ASU 2017-09 requires adoption on a prospective
basis in the annual and interim periods beginning after December 15, 2017 for share-based payment awards modified on or after
the adoption date. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial
statements.
In
March 2018, the FASB issued ASU No. 2018-05, “Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff
Accounting Bulletin No. 118” (“ASU 2018-05”). ASU 2018-05 adds various “SEC” paragraphs pursuant
to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts
and Jobs Act (“SAB 118”), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting
entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and
Jobs Act in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects
from the Tax Cuts and Jobs Act are incomplete by the due date of the financial statements and if possible to provide a reasonable
estimate. The Company has accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118 and does not
believe that the adoption of ASU 2018-05 will have a material impact on the Company’s condensed consolidated financial statements
or disclosures.
In
June 2018, the FASB issued ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718), Improvements to Nonemployee
Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 is intended to reduce cost and complexity and to
improve financial reporting for nonemployee share-based payments. Currently, the accounting requirements for nonemployee and employee
share-based payment transactions are significantly different. ASU 2018-07 expands the scope of Topic 718, Compensation —
Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to
nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be
substantially aligned. This ASU supersedes Subtopic 505-50, Equity — Equity-Based Payments to Nonemployees. The amendments
in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2018. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue
from Contracts with Customers. The Company is currently evaluating ASU 2018-07 and its impact on the Company’s condensed
consolidated financial statements.
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”).
The
2017 Financing is in the form of secured convertible loans (the “Loans”) from the PRH Group or other
investors in the 2017 Financing (the “Investors”). The Loans are evidenced by secured convertible promissory
notes (individually a “PRH Note” and collectively, the “PRH Notes”) from the Company to the PRH Group
or the investors.
The
principal amounts of the PRH Notes and the interest payable under the Loan would automatically convert into shares of the Company’s
Series D Preferred Stock at a price per share equal to $0.2862 effective on the 18-month anniversary of the funding of the final
tranche of the 2017 Financing subject to certain exceptions if the Company’s Board designates such series of preferred stock
in the future.
As
of June 30, 2018, and through the date of filing, the Series D Preferred Stock had not been designated by the Board and, accordingly,
the PRH Notes are not convertible into shares of Series D Preferred Stock. 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 June 30, 2018.
As
of June 30, 2018, the Company had received aggregate Loans of $12,362,000 in connection with the 2017 Financing from both non-related
and related parties. For further details on the terms of the PRH Notes, refer to the Company’s Annual Report on Form 10-K
for the year ended December 31, 2017 as filed with the SEC on March 23, 2018.
Convertible
Notes Payable – Related Parties
On
February 21, 2017, the Company issued a promissory note in favor of Eric A. Wachter, Ph.D., the Company’s Chief Technology
Officer (“Wachter”), evidencing an unsecured loan from Wachter to the Company in the original principal amount of
up to $2,500,000 (the “Wachter Note”). Interest accrues on the outstanding balance of the Wachter Note at six percent
(6%) per annum calculated on a 360-day basis.
On
April 3, 2017, the Company entered into a PRH Note with Cal Enterprises LLC, a Nevada limited liability company, an affiliate
of Dominic Rodrigues, a director of the Company, in the principal amount of up to $2,500,000. As of June 30, 2018,
the Company had borrowed the entire $2,500,000 under this note.
During
the six months ended June 30, 2018, the Company amended the above notes to modify the maturity date from 24 months to 18
months in order to be consistent with the other outstanding PRH Notes. The actual maturity dates will be determined after the
completion of the 2017 Financing.
During
the six months ended June 30, 2018, the Company entered into additional PRH Notes with related parties in the aggregate principal
amount of $950,000. As of June 30, 2018, the Company had drawn down the entire $950,000 under these notes.
Convertible
Notes Payable – Non-Related Parties
During
the six months ended June 30, 2018, the Company entered into additional PRH Notes with accredited investors in the aggregate principal
amount of $1,956,000. As of June 30, 2018, the Company had drawn down the entire $1,956,000 under these notes. Included in the
$1,956,000 is one PRH note totaling $500,000 with terms of principal and interest due twenty-four (24) months from date
of signing. This note will mature in June 2020.
5.
Stockholders’ Deficiency
Exercise
of Warrants
During
the six months ended June 30,2018, warrant holders exercised warrants to purchase an aggregate of 11,149,577 shares of commons
stock at a price of $0.0533 per share. In connection with these exercises, the Company received aggregate cash proceeds of $594,273
and issued 11,149,577 shares of common stock to the warrant holders.
Other
Common Stock Issuances
During
the six months ended June 30, 2018, the Company issued 1,000,000 shares of common stock in payment of services with a grant date
fair value of $80,000.
As
the fair market value of the service was not readily determinable, the service was valued based on the fair market value
of the stock at grant date.
6.
Litigation
Culpepper
Travel Expenses and Related Collection Efforts
On
December 27, 2016, the Company’s Board of Directors unanimously voted to terminate Culpepper, effective immediately, from
all positions he held with the Company and each of its subsidiaries, including interim Chief Executive Officer and Chief Operating
Officer of the Company, “for cause”, in accordance with the terms of the Amended and Restated Executive Employment
Agreement entered into by 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 Board of Directors 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 takes 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 Derivative Lawsuit Settlement such that the total $2,240,000 owed
by Culpepper pursuant to the Derivative Lawsuit Settlement plus Culpepper’s proportionate share of the litigation cost in
the amount of $227,750, less the amount that he repaid as of December 31, 2016, is immediately due and payable. The Company sent
Culpepper a notice of default in January 2017 for the total amount he owes the Company and is in the process of pursuing these
claims in accordance with the alternative dispute resolution provision of the Culpepper Employment Agreement. The Company has
established a reserve of $2,051,083 as of June 30, 2018 and December 31, 2017, 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
disputes that he was terminated “for cause” under the Culpepper Employment Agreement. Pursuant to the alternative
dispute resolution provisions of that agreement, the Company and 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 Provectus and Provectus’
claims against Culpepper for improper expense reimbursements and amounts Culpepper owes Provectus under the Derivative Lawsuit
Settlement (the “Culpepper Arbitration”). The Culpepper Arbitration hearing was held from May 15, 2018 through 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 terms of the Culpepper Employment Agreement and instructed the parties that a final award is forthcoming.
The
Bible Harris Smith Lawsuit
On
November 17, 2016, the Company filed a lawsuit in the Circuit Court for Knox County, Tennessee against Bible Harris Smith PC (“BHS”)
for professional negligence, common law negligence and breach of fiduciary duty arising from accounting services provided by BHS
to the Company. The Company alleges that between 2013 and 2015, Dees received approximately $2.4 million in advanced or reimbursed
travel and entertainment expenses from the Company and that Dees did not submit back-up documentation in support of substantially
all of the advances he received purportedly for future travel and entertainment expenses. The Company further alleges that had
BHS provided competent accounting and tax preparation services, it would have discovered Dees’ failure to submit back-up
documentation supporting the advanced travel funds at the inception of Dees’ conduct, and prevented the misuse of these
and future funds. The Company has made a claim for damages against BHS in an amount in excess of $3 million. The complaint against
BHS has been filed and served, an answer has been received, and the parties are in the midst of discovery. BHS filed a Motion
for Summary Judgment, which was denied in full by the Court on June 21, 2018.
The
RSM Lawsuit
On
June 9, 2017, the Company filed a lawsuit in the Circuit Court of Mecklenburg County, North Carolina against RSM USA LLP (“RSM”)
for professional negligence, common law negligence, gross negligence, intentional misrepresentation, negligent misrepresentation
and breach of fiduciary duty arising from accounting, internal auditing and consulting services provided by RSM to the Company.
The Company alleges that between 2013 and 2015, Dees received approximately $2.4 million in advanced or reimbursed travel and
entertainment expenses from the Company and that Dees did not submit back-up documentation in support of substantially all of
the advances he received purportedly for future travel and entertainment expenses. The Company similarly alleges that Culpepper
received $294,255 in travel expense reimbursements and advances that were unsubstantiated. The Company further alleges that had
RSM provided competent accounting, internal audit and consulting services, it would have discovered Dees’ and Culpepper’s
conduct at its inception and prevented the misuse of these and future funds. The Company has made a claim for damages against
RSM in an amount in excess of $10 million. The Complaint against RSM has been filed and RSM has moved to dismiss the Complaint.
The motion to dismiss has been briefed and argued and the parties are awaiting a ruling.
The
BDO Matter
On
November 16, 2017, the Company filed a demand for arbitration with the American Arbitration Association that alleged professional
negligence, common law negligence, gross negligence, intentional misrepresentation, negligent misrepresentation, and breach of
fiduciary duty by the Company’s former external audit firm, BDO USA LLP (“BDO”), arising from accounting, external
auditing, and consulting services provided by BDO related to travel and expense advances and reimbursements received by Dees and
former Company executive Culpepper. During the quarter ended June 30, 2018, this matter was resolved pursuant to
a settlement between the parties, the terms of which are confidential.
Subsequent
to June 30, 2018, the proceeds from the settlement were received.
7.
Subsequent Events
Convertible
Notes Payable
Subsequent
to June 30, 2018, the Company entered into a PRH Note with a related party in the principal amount of $200,000 and a PRH Note
with a non-related party in the principal amount of $100,000. The Company has received the proceeds of $300,000 relating to these
notes.