NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Business Organization and Nature of Operations
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.
2.
Liquidity and Going Concern
The
Company’s cash and cash equivalents were $50,986 at December 31, 2018, compared with $105,504 at December 31, 2017. The
Company continues to incur significant operating losses and 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 the
financial statements are issued. Implementation of the Company’s plans and its ability to continue as a going concern will
depend upon the Company’s ability to develop PV-10 and PH-10 and raise additional capital.
The
Company plans to access capital resources through possible public or private equity offerings, including the 2017 Financing (as
defined in Note 4), exchange offers, debt financings, corporate collaborations or other means. In addition, the Company continues
to explore opportunities to strategically monetize its lead drug candidates, PV-10 and PH-10, through potential co-development
and licensing transactions, although there can be no assurance that the Company will be successful with such plans. The Company
has historically been able to raise capital through equity offerings, although no assurance can be provided that it will continue
to be successful in the future. If the Company is unable to raise sufficient capital through the 2017 Financing or otherwise,
it will not be able to pay its obligations as they become due. Subsequent to December 31, 2018, the Company received aggregate
Loans of $3,475,000 in connection with the 2017 Financing. See Note 13 – Subsequent Events.
The
primary business objective of management is to build the Company into a commercial-stage biotechnology company; however, the Company
cannot assure that it will be successful in co-developing, licensing, and/or commercializing PV-10, PH-10, and/or any other halogenated
xanthene-based drug candidate developed by the Company, or entering into any financial transaction. Moreover, even if the Company
is successful in improving its current cash flow position, the Company nonetheless plans to seek additional funds to meet its
long-term requirements in 2019 and beyond. The Company anticipates that these funds will otherwise come from the proceeds
of private placement transactions, including the 2017 Financing, the exercise of existing warrants and outstanding stock options,
or public offerings of debt or equity securities. While the Company believes that it has a reasonable basis for its expectation
that it will be able to raise additional funds, the Company cannot provide assurance that it will be able to complete additional
financing in a timely manner. In addition, any such financing may result in significant dilution to stockholders.
3.
Significant Accounting Policies
Principles
of Consolidation
Intercompany
balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”)
requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company’s significant estimates and assumptions include the collectability of
long-term receivables, the recoverability and useful lives of long-lived assets, stock-based compensation, liabilities and the
valuation allowance related to the Company’s deferred tax assets. Certain of the Company’s estimates, including the
carrying amount of the intangible assets, could be affected by external conditions, including those unique to the Company and
general economic conditions. It is reasonably possible that these external factors could have an effect on the Company’s
estimates and could cause actual results to differ from those estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
As of December 31, 2018, and 2017, the Company’s cash equivalent consists of Treasury bills.
Cash
Concentrations
Cash
and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits of $250,000,
although the Company seeks to minimize this through treasury management. The Company has never experienced any losses related
to these balances although no assurance can be provided that it will not experience any losses in the future.
Equipment
and Furnishings, net
Equipment
and furnishings are stated at cost less accumulated depreciation. Depreciation of equipment is provided for using the straight-line
method over the estimated useful lives of the assets. Computers, leasehold improvements and office equipment are being depreciated
over five years; furniture and fixtures are being depreciated over ten years. Maintenance and repairs are charged to operations
as incurred. The Company capitalizes cost attributable to the betterment of property and equipment when such betterment extends
the useful life of the assets.
Long-Lived
Assets
The
Company reviews the carrying values of its long-lived assets for possible impairment whenever an event or change in circumstances
indicates that the carrying amount of the assets may not be recoverable. Any long-lived assets held for disposal are reported
at the lower of their carrying amounts or fair value less cost to sell. Management has determined there to be no impairment during
the years ended December 31, 2018 and 2017.
Patent
Costs, net
Internal
patent costs are expensed in the period incurred. Patents purchased are capitalized and amortized over the remaining estimated
useful life of the patent.
The
Company’s patents were acquired as a result of the merger with Valley Pharmaceuticals, Inc. “Valley”
on November 19, 2002. At the time of the merger, the majority stockholders of Provectus also owned all of the shares of Valley
and therefore the assets acquired from Valley were recorded at their carry-over basis. The patents are being amortized over the
remaining estimated useful lives of the patents, which range from 1 to 2 years. Annual amortization of the patents is expected
to approximate $671,000 in 2019 and $228,000 in 2020. Since 2003, the Company no longer amortizes the patent cost on newly
acquired patents but expenses as costs are incurred.
Related
Party Receivables
Management
estimates the reserve for uncollectibility based on existing economic conditions, the financial conditions of the current and
former employees, and the amount and age of past due receivables. Receivables are considered past due if full payment is not received
by the contractual due date. Past due amounts are generally written off against the reserve for uncollectibility only after all
collection attempts have been exhausted. See Note 6 - Receivables.
Research
and Development
Research
and development costs are charged to expense when incurred. An allocation of payroll expenses to research and development is made
based on a percentage estimate of time spent. The research and development costs include the following: payroll, consulting and
contract labor, lab supplies and pharmaceutical preparations, insurance, rent and utilities, and depreciation and amortization.
Income
Taxes
The
Company accounts for income taxes under the liability method in accordance with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 740 “Income Taxes”. Under this method, deferred income tax assets
and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation
allowance is established if it is more likely than not that all, or some portion, of deferred income tax assets will not be realized.
The Company has recorded a full valuation allowance to reduce its net deferred income tax assets to zero. In the event the Company
were to determine that it would be able to realize some or all its deferred income tax assets in the future, an adjustment to
the deferred income tax asset would increase income in the period such determination was made.
The
Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained upon
an examination. Any recognized income tax positions would be measured at the largest amount that is greater than 50% likely of
being realized. Changes in recognition or measurement would be reflected in the period in which the change in judgment occurs.
The Company would recognize any corresponding interest and penalties associated with its income tax positions in income tax expense.
There were no income taxes, interest or penalties incurred in 2018 or 2017.
Basic
and Diluted Loss Per Common Share
Basic
loss per common share is computed by dividing net loss by the weighted average number of vested common shares outstanding during
the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other instruments to
issue common stock were exercised or converted into common stock. The following securities are excluded from the calculation of
weighted average dilutive common shares because their inclusion would have been anti-dilutive:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Warrants
|
|
|
136,824,138
|
|
|
|
186,873,032
|
|
Options
|
|
|
3,200,000
|
|
|
|
3,350,000
|
|
Convertible
preferred stock
|
|
|
65,663
|
|
|
|
65,663
|
|
|
|
|
|
|
|
|
|
|
Total
potentially dilutive shares
|
|
|
140,089,801
|
|
|
|
190,288,695
|
|
Fair
Value of Financial Instruments
The
Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements
and Disclosures” (“ASC 820”) which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The Company determines the estimated fair value of amounts presented in these
consolidated financial statements using available market information and appropriate methodologies. However, considerable judgment
is required in interpreting market data to develop the estimates of fair value. The estimates presented in the financial statements
are not necessarily indicative of the amounts that could be realized in a current exchange between buyer and seller. The use of
different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. These
fair value estimates were based upon pertinent information available as of December 31, 2018 and 2017. The carrying amounts of
the Company’s financial assets and liabilities, such as cash and cash equivalents, settlement receivable, other current
assets, accounts payable, convertible notes payable, and accrued expenses approximate fair values due to the short-term nature
of these instruments.
The
carrying amounts of our credit obligations approximate fair value because the effective yields on these obligations, which include
contractual interest rates are comparable to rates of returns for instruments of similar credit risk.
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may
be used to measure fair value:
Level
1
|
Inputs
use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
|
|
|
Level
2
|
Inputs
use directly or indirectly observable inputs. These inputs include quoted prices for similar assets and liabilities in active
markets as well as other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
|
|
|
Level
3
|
Inputs
are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity
for the related asset or liability.
|
In
instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements
in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment
of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to
each asset or liability.
Both
observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3
category. As a result, the unrealized gains and losses for assets within the Level 3 category may include changes in fair value
that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical
company data) inputs. Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted
cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.
Foreign
Currency Translation
The
Company’s reporting currency is the United States Dollar. The functional currencies of the Company’s operating subsidiaries
are their local currencies (United States Dollar and Australian Dollar). Australian Dollar denominated assets and liabilities
are translated into the United States Dollar at the balance sheet date ($15,049 and $336,031 at December 31, 2018 and $2,245
and $125,013 at December 31, 2017, respectively), and expense accounts are translated at a weighted average exchange rate
for the years then ended ($247,947 and $122,768 for the years ended December 31, 2018 and 2017, respectively).
Resulting
translation adjustments are made directly to other expense and included in net (loss) income. The Company recorded balance
sheet translations through the Statement of Operations since they were immaterial. The Company engages in foreign currency
denomination transactions with its Australian subsidiary.
Stock-Based
Compensation
The
Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award.
For employees, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is
measured on the measurement date and re-measured on vesting dates and interim financial reporting dates until the service period
is complete. The fair value amount is then recognized over the period during which services are required to be provided in exchange
for the award, usually the vesting period. The Company computes the fair value of equity-classified warrants and options granted
using the Black-Scholes option pricing model. Option valuation models require the input of highly subjective assumptions including
the expected volatility factor of the market price of the Company’s common stock which is determined by reviewing its historical
public market closing prices.
Recent
Accounting Pronouncements
In
February 2016,
the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”)
2016-02, “Leases (Topic 842).” ASU 2016-02 requires that a lessee recognize
the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position
a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying
asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election
by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required
to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This
amendment will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. The FASB issued ASU No. 2018-10 “Codification Improvements to Topic 842, Leases” and ASU No. 2018-11 “Leases
(Topic 842) Targeted Improvements” in July 2018, and ASU No. 2018-20 “Leases (Topic 842) - Narrow Scope Improvements
for Lessors” in December 2018. ASU 2018-10 and ASU 2018-20 provide certain amendments that affect narrow aspects of the
guidance issued in ASU 2016-02. ASU 2018-11 allows all entities adopting ASU 2016-02 to choose an additional (and optional) transition
method of adoption, under which an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect
adjustment to the opening balance of retained earnings in the period of adoption. The Company is required to adopt ASU 2016-02
effective January 1, 2019 and upon adoption it expects to recognize additional assets and corresponding liabilities pertaining
to its operating leases on its consolidated balance sheet. The Company does not expect the adoption of the new standard to have
a significant impact on its consolidated statements of operations and cash flows.
In
May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”
(“ASU 2017-09”). ASU 2017-09 provides clarity on the accounting for modifications of stock-based awards. ASU 2017-09
requires adoption on a prospective basis in the annual and interim periods beginning after December 15, 2017 for share-based payment
awards modified on or after the adoption date. The adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.
In
July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic
480) and Derivatives and Hedging (Topic 815) - Accounting for Certain Financial Instruments with Down Round Features”
(“ASU 2017-11”). Equity-linked instruments, such as warrants and convertible instruments may contain down round features
that result in the strike price being reduced on the basis of the pricing of future equity offerings. Under ASU 2017-11, a down
round feature will no longer require a freestanding equity-linked instrument (or embedded conversion option) to be classified
as a liability that is re-measured at fair value through the income statement (i.e. marked-to-market). However, other features
of the equity-linked instrument (or embedded conversion option) must still be evaluated to determine whether liability or equity
classification is appropriate. Equity classified instruments are not marked-to-market. For earnings per share (“EPS”)
reporting, the ASU requires companies to recognize the effect of the down round feature only when it is triggered by treating
it as a dividend and as a reduction of income available to common shareholders in basic EPS. The amendments in this ASU are effective
for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption
is permitted, including adoption in any interim period.
The adoption of this ASU effective
January 1, 2019 did not have a material impact on the
Company’s
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 had a material impact on the Company’s 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 adoption of this ASU effective January 1, 2019 is not
expected to have a material impact on the
Company’s
consolidated financial
statements.
In
August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to
the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). The amendments in ASU 2018-13
modify the disclosure requirements on fair value measurements based on the concepts in the Concepts Statement, including the consideration
of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant
unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty
should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption.
All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are
effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.
Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating ASU 2018-13 and its
impact on its 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).
As
of December 31, 2018, the Company had received aggregate Loans, as defined below, of $13,932,000 in connection with the 2017 Financing.
Subsequent to December 31, 2018, the Company received aggregate Loans of $3,475,000 in connection with the 2017 Financing.
See Note 13 – Subsequent Events.
The
2017 Financing is in the form of a secured convertible loan (the Loan) from the PRH Group or other investors in the 2017 Financing
(the Investors). The Loan is evidenced by secured convertible promissory notes (individually a PRH Note and collectively, the
PRH Notes) from the Company to the PRH Group or the Investors. In addition to the customary provisions, the PRH Note contains
the following provisions:
|
(i)
|
It
is secured by a first priority security interest on the Company’s intellectual property (the IP),
|
|
|
|
|
(ii)
|
The
Loan bears interest at the rate of 8% per annum on the outstanding principal amount of the Loan that has been funded to the
Company,
|
|
|
|
|
(iii)
|
The
Loan proceeds are held in one or more accounts (the Escrow) pending the funding of the tranches of the 2017 Financing pursuant
to borrowing requests made by the Company,
|
|
|
|
|
(iv)
|
The
PRH Notes, including interest and principal, are due and payable in full on the earlier of: (i) on such date upon which the
Company defaults under the PRH Notes, (ii) upon a change of control of the Company, or (iii) dates ranging from May 18,
2020 to the 24-month anniversary of the funding of the Final Tranche. In the event there is a change of control of the
Company’s board of directors (the Board) as proposed by any person or group other than the Investors, the term of the
PRH Notes will be accelerated and all amounts due under the PRH Notes will be immediately due and payable, plus interest at
the rate of 8% per annum, plus a penalty in the amount equal to 10 times the outstanding principal amount of the Loan that
has been funded to the Company,
|
|
|
|
|
(v)
|
The
outstanding principal amount and interest payable under the Loan would be convertible at the sole discretion of the Investors
into shares of the Company’s Series D Preferred Stock, a new series of preferred stock, that the Company’s Board
may designate in the future, at a price per share equal to $0.2862, and
|
|
|
|
|
(vi)
|
Notwithstanding
(v) above, the principal amount 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 24
th
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 December 31, 2018, and through the date of filing, the Series D Preferred Stock had not been designated by the Board. As a
result, the Company did not analyze the Loan for a potential beneficial conversion feature as the definition of a firm commitment
has not been met since the PRH Notes were not convertible as of their respective dates of issuance or as of December 31, 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. As of December 31, 2017, the Company had borrowed the entire $2,500,000 principal
amount under the Wachter Note. On April 3, 2017, the Wachter Note was amended and restated in order to modify its terms to mirror
the PRH Notes and to convert the Wachter Note into the 2017 Financing. The Company accounted for the amendment as a debt modification.
There was no material impact as a result of applying debt modification accounting.
On
April 3, 2017, the Company entered into a PRH Note with Cal Enterprises LLC, a Nevada limited liability company, an affiliate
of Dominic Rodrigues, a director of the Company, in the principal amount of up to $2,500,000. As of December 31, 2017, the Company
had borrowed the entire $2,500,000 under this note.
During
the year ended December 31, 2018, the Company entered into additional PRH Notes with related parties in the aggregate principal
amount of $1,870,000. As of December 31, 2018, the Company had borrowed $6,870,000 of PRH Notes from related parties which were
outstanding.
Convertible
Notes Payable – Non-Related Parties
During
the year ended December 31, 2017, the Company entered into additional PRH Notes from accredited investors in the aggregate principal
amount of $4,456,000, of which $150,000 was issued in satisfaction of trade debt. As of December 31, 2017, the Company had borrowed
the entire $4,456,000 under these notes.
During
the year ended December 31, 2018, the Company entered into additional PRH Notes with accredited investors in the aggregate principal
amount of $2,606,000. As of December 31, 2018, the Company had borrowed $7,062,000 under these notes.
5.
Related Party Transactions
During
the years ended December 31, 2018 and 2017, the Company paid Bruce Horowitz (Capital Strategists) consulting fees of $190,000
and $180,000 for services rendered, respectively and $75,000 for director fees in 2017. Accrued director fees for Bruce Horowitz
for years ended December 31, 2018 and 2017 were $56,250 and $0, respectively. Bruce Horowitz serves as both Chief Operations Officer
and a Director.
See
Note 4 and Note 6 for details of other related party transactions.
Also,
director fees during the years ended December 31, 2018 and 2017 were $333,357 and $148,333, respectively. Accrued directors’
fees during the years ended December 31, 2018 and 2017 were $407,524 and $92,917, respectively.
6.
Receivables
The
following table summarizes the receivables at December 31, 2018 and 2017:
|
|
December
31, 2018
|
|
|
|
Legal
Fees
|
|
|
Settlement
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Gross receivable
|
|
$
|
911,000
|
|
|
$
|
1,783,795
|
|
|
$
|
2,694,795
|
|
Reserve for
uncollectibility
|
|
|
(455,500
|
)
|
|
|
(1,649,043
|
)
|
|
|
(2,104,543
|
)
|
Net receivable
|
|
|
455,500
|
|
|
|
134,752
|
|
|
|
590,252
|
|
Short-term
receivable
|
|
|
455,500
|
|
|
|
134,752
|
|
|
|
590,252
|
|
Long-term
receivable
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
December
31, 2017
|
|
|
|
Legal
Fees
|
|
|
Settlement
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Gross receivable
|
|
$
|
911,000
|
|
|
$
|
2,214,728
|
|
|
$
|
3,125,728
|
|
Reserve for
uncollectibility
|
|
|
(455,500
|
)
|
|
|
(1,549,043
|
)
|
|
|
(2,004,543
|
)
|
Net receivable
|
|
|
455,500
|
|
|
|
665,685
|
|
|
|
1,121,185
|
|
Short-term
receivable
|
|
|
-
|
|
|
|
300,000
|
|
|
|
300,000
|
|
Long-term
receivable
|
|
$
|
455,500
|
|
|
$
|
365,685
|
|
|
$
|
821,185
|
|
During
the quarter ended December 31, 2017, an officer of the Company offset his receivable and trade payable totaling $280,823. This
offset reduced the amount of the settlement and was approved by the Company’s Board.
In
December 2017, former CFO, Peter Culpepper (“Culpepper”) settled an administrative proceeding with the SEC. As a result
of this settlement, Culpepper was required to disgorge himself of $140,115 along with interest of $12,261 for a total payment
to the Company of $152,376. The Company recorded the settlement as an account receivable at December 2017 and received payment
in January 2018. There was no change to the reserve for 2018.
During
the quarter ended December 31, 2018, an officer of the Company offset his settlement amounts owed to the Company against accrued
payroll owed to him totaling $150,000. This offset reduced the amount of the settlement and was approved by the Company’s
Board.
7.
Stockholders’ Deficiency
Authorized
Capital
As
of December 31, 2018, the Company was authorized to issue 1,000,000,000 shares of common stock, $0.001 par value, and 25,000,000
shares of preferred stock, $0.001 par value. The holders of the Company’s common stock are entitled to one vote per share.
The preferred stock is designated as follows: 240,000 shares to Series B Convertible Preferred Stock and 24,760,000 shares undesignated.
Series
B Convertible Preferred Stock
On
August 25, 2016, the Company filed the Series B Certificate of Designation with the Delaware Secretary of State. The Series B
Certificate of Designation provides for the issuance of the Series B Convertible Preferred Stock, par value $0.001 per share (the
Series B Preferred Stock). In the event of the Company’s liquidation, dissolution, or winding up, holders of Series B Preferred
Stock will be entitled to receive the amount of cash, securities or other property to which such holder would be entitled to receive
with respect to such shares of Series B Preferred Stock if such shares had been converted to common stock immediately prior to
such event (without giving effect for such purposes to any beneficial ownership limitation), subject to the preferential rights
of holders of any class or series of the Company’s capital stock specifically ranking by its terms senior to the Series
B Preferred Stock as to distributions of assets upon such event, whether voluntarily or involuntarily. The Series B Preferred
Stock has no voting rights.
The
holders of Series B Preferred Stock will be entitled to receive cumulative dividends at the rate per share of 8% per annum of
the stated value per share, until the fifth anniversary of the date of issuance of the Series B Preferred Stock. The dividends
become payable, at the Company’s option in either cash, out of any funds legally available for such purpose, or in
shares of common stock, (i) upon any conversion of the Series B Preferred Stock, (ii) on each such other date as the Board may
determine, subject to written consent of the holders of Series B Preferred Stock holding a majority of the then issued and outstanding
Series B Preferred Stock, (iii) upon the Company’s liquidation, dissolution or winding up, and (iv) upon occurrence of a
fundamental transaction, which includes any merger or consolidation, sale of all or substantially all of the Company’s assets,
exchange or conversion of all of the common stock by tender offer, exchange offer or reclassification; provided, however, that
if Series B Preferred Stock is converted into shares of common stock at any time prior to the fifth anniversary of the date of
issuance of the Series B Preferred Stock, the holder will receive a make-whole payment in an amount equal to all of the dividends
that, but for the early conversion, would have otherwise accrued on the applicable shares of Series B Preferred Stock being converted
for the period commencing on the conversion date and ending on the fifth anniversary of the date of issuance, less the amount
of all prior dividends paid on such converted Series B Preferred Stock before the date of conversion. Make-whole payments are
payable at the Company’s option in either cash, out of any funds legally available for such purpose, or in shares
of common stock. With respect to any dividend payments and make-whole payments paid in shares of common stock, the number of shares
of common stock to be issued to a holder of Series B Preferred Stock will be an amount equal to the quotient of (a) the amount
of the dividend payable to such holder divided by (b) the conversion price then in effect.
Other
Common Stock Issuances
During
the year ended December 31, 2017, the Company issued 372,500 shares of common stock as payment of trade payables, with a grant
date fair value of $17,301.
During
the year ended December 31, 2018, the Company issued 1,000,000 shares of common stock as payment of services, with a grant date
fair value of $80,000.
As
the fair market of these services was not readily determinable, these services were valued based on the fair market value of stock
at grant date.
Preferred
Stock Conversions
During
the year ended December 31, 2017, holders converted 8,500 shares of Series B Preferred Stock into 3,986,676 shares of common stock
such that they were entitled to dividends, including a make-whole payment, of $14,107 that the Company elected to pay in shares
of common stock. As a result, the Company issued 1,594,670 shares of common stock related to the Series B Preferred Stock dividends
during the year ended December 31, 2017. The Company recorded aggregate dividends paid in kind of $14,107 during the year ended
December 31, 2017.
8.
Stock Incentive Plan and Warrants
The
Provectus Biopharmaceuticals, Inc. 2014 Equity Compensation Plan provides for the issuance of up to 20,000,000 shares of common
stock pursuant to stock options for the benefit of eligible employees and directors of the Company. Options granted under the
2014 Equity Compensation Plan are either “incentive stock options” within the meaning of Section 422 of the Internal
Revenue Code or options which are not incentive stock options. The stock options are exercisable over a period determined by the
Board of Directors (through its Compensation Committee), but generally no longer than 10 years after the date they are granted.
As of December 31, 2018, there were 18,900,000 shares available for issuance under the 2014 Equity Compensation Plan.
There
were no stock options granted to employees during 2018 or 2017.
The
following table summarizes option activity during the year ended December 31, 2018 and 2017:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable
at December 31, 2017
|
|
|
3,350,000
|
|
|
$
|
0.90
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(150,000
|
)
|
|
|
0.89
|
|
|
|
|
`
|
|
|
|
|
|
Outstanding and
exercisable at December 31, 2018
|
|
|
3,200,000
|
|
|
$
|
0.89
|
|
The
following table summarizes information about stock options outstanding at December 31, 2018.
|
|
|
Number Outstanding
|
|
|
Weighted Average Remaining
Contractual
|
|
|
Number Exercisable
|
|
Exercise
Price
|
|
|
at
December 31, 2018
|
|
|
Life
|
|
|
at
December 31, 2018
|
|
$
|
0.67
|
|
|
|
200,000
|
|
|
|
4.60
|
|
|
|
200,000
|
|
$
|
0.75
|
|
|
|
950,000
|
|
|
|
5.11
|
|
|
|
950,000
|
|
$
|
0.84
|
|
|
|
150,000
|
|
|
|
3.50
|
|
|
|
150,000
|
|
$
|
0.88
|
|
|
|
150,000
|
|
|
|
5.60
|
|
|
|
150,000
|
|
$
|
0.93
|
|
|
|
575,000
|
|
|
|
2.76
|
|
|
|
575,000
|
|
$
|
0.99
|
|
|
|
50,000
|
|
|
|
2.50
|
|
|
|
50,000
|
|
$
|
1.00
|
|
|
|
525,000
|
|
|
|
1.60
|
|
|
|
525,000
|
|
$
|
1.04
|
|
|
|
400,000
|
|
|
|
1.50
|
|
|
|
400,000
|
|
$
|
1.16
|
|
|
|
200,000
|
|
|
|
1.50
|
|
|
|
200,000
|
|
|
|
|
|
|
3,200,000
|
|
|
|
3.31
|
|
|
|
3,200,000
|
|
As
of December 31, 2018, there was no intrinsic value of outstanding and exercisable options.
Warrants
During
the year-ended December 31, 2018, holders of warrants exercised warrants to purchase 12,653,077 shares of common stock at a price
of $0.053 per share. In connection with the exercises, the Company received cash proceeds of $674,409 and issued 12,653,077 shares
of common stock.
The
following table summarizes warrant activity during the year ended December 31, 2018 and 2017:
|
|
|
|
|
Weighted Average
|
|
|
|
Warrants
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable
at January 1, 2017
|
|
|
189,991,541
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(234,308
|
)
|
|
|
0.05
|
|
Forfeited
|
|
|
(2,884,201
|
)
|
|
|
1.04
|
|
Outstanding and exercisable at December
31, 2017
|
|
|
186,873,032
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(12,653,077
|
)
|
|
|
0.05
|
|
Forfeited
|
|
|
(37,395,817
|
)
|
|
|
1.00
|
|
Outstanding and
exercisable at December 31, 2018
|
|
|
136,824,138
|
|
|
$
|
0.27
|
|
The
following table summarizes information about warrants outstanding at December 31, 2018.
|
|
|
Number Outstanding
|
|
|
Weighted Average Remaining
Contractual
|
|
|
Number Exercisable
|
|
Exercise
Price
|
|
|
at
December 31, 2018
|
|
|
Life
|
|
|
at
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.053
|
|
|
|
99,677,583
|
|
|
|
2.66
|
|
|
|
99,677,583
|
|
$
|
0.85
|
|
|
|
28,482,344
|
|
|
|
1.48
|
|
|
|
28,482,344
|
|
$
|
1.00
|
|
|
|
2,875,115
|
|
|
|
1.38
|
|
|
|
2,875,115
|
|
$
|
1.25
|
|
|
|
4,474,520
|
|
|
|
0.93
|
|
|
|
4,474,520
|
|
$
|
2.00
|
|
|
|
100,000
|
|
|
|
0.00
|
|
|
|
100,000
|
|
$
|
2.50
|
|
|
|
280,276
|
|
|
|
0.33
|
|
|
|
280,276
|
|
$
|
3.00
|
|
|
|
934,300
|
|
|
|
0.33
|
|
|
|
934,300
|
|
|
|
|
|
|
136,824,138
|
|
|
|
1.02
|
|
|
|
136,824,138
|
|
As
of December 31, 2018, there was no intrinsic value of outstanding and exercisable warrants. Holders of the outstanding warrants
are not entitled to vote and the exercise prices of such warrants are subject to customary anti-dilution provisions.
9.
Income Taxes
The
domestic and foreign components of loss before income taxes from operations for the years ended December 31, 2018 and 2017 are
as follows:
|
|
For the Years Ended
December 31
|
|
|
|
2018
|
|
|
2017
|
|
Domestic
|
|
|
(7,954,841
|
)
|
|
|
(13,395,048
|
)
|
Foreign
|
|
|
(198,214
|
)
|
|
|
(122,768
|
)
|
|
|
|
(8,153,055
|
)
|
|
|
(13,517,816
|
)
|
The
income tax provision (benefit) consists of the following:
|
|
Year
ended December 31
|
|
|
|
2018
|
|
|
2017
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
(1,385,438
|
)
|
|
|
13,026,739
|
|
|
|
|
|
|
|
|
|
|
State and local:
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
(338,773
|
)
|
|
|
1,724,127
|
|
|
|
|
(1,724,211
|
)
|
|
|
14,750,866
|
|
Change in
valuation allowance
|
|
|
1,724,211
|
|
|
|
(14,750,866
|
)
|
Income tax
provision (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
The
reconciliations between the statutory federal income tax rate and the Company’s effective tax rate is as follows:
|
|
Year
Ended December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Tax benefit at federal
statutory rate
|
|
|
(21.0
|
)%
|
|
|
(34.0
|
)%
|
State income
taxes, net of federal benefit
|
|
|
(5.1
|
)%
|
|
|
(4.5
|
)%
|
Permanent differences
|
|
|
(1.7
|
)%
|
|
|
(1.9
|
)%
|
Effect of change
in federal income tax rates on deferred taxes
|
|
|
0.0
|
%
|
|
|
147.4
|
%
|
Change in valuation
allowance
|
|
|
20.8
|
%
|
|
|
(109.0
|
)%
|
Prior year true-up
|
|
|
5.8
|
%
|
|
|
0.0
|
%
|
Miscellaneous
|
|
|
1.3
|
%
|
|
|
2.0
|
%
|
Effective
income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The
components of the Company’s deferred income taxes are summarized below:
|
|
December
31
|
|
|
|
2018
|
|
|
2017
|
|
Deferred
Tax Assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
41,114,624
|
|
|
$
|
40,156,864
|
|
Stock-based
compensation
|
|
|
2,207,465
|
|
|
|
2,207,465
|
|
Research
and development credit carryovers
|
|
|
2,791,710
|
|
|
|
2,591,539
|
|
Contribution
carryovers
|
|
|
10,062
|
|
|
|
10,715
|
|
Accrued
liabilities
|
|
|
490,467
|
|
|
|
-
|
|
Gross
deferred tax assets
|
|
|
46,614,328
|
|
|
|
44,966,584
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Liabilities:
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
(235,013
|
)
|
|
|
(410,410
|
)
|
Prepaid
expenses
|
|
|
(90,881
|
)
|
|
|
-
|
|
Other
|
|
|
(29,545
|
)
|
|
|
(21,496
|
)
|
Gross
deferred tax liabilities
|
|
|
(355,439
|
)
|
|
|
(431,906
|
)
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(46,258,889
|
)
|
|
|
(44,534,678
|
)
|
|
|
|
|
|
|
|
|
|
Deferred
tax asset, net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Change
in valuation allowance
|
|
$
|
(1,724,211
|
)
|
|
$
|
14,750,86
6
|
|
Under
ASC 740,
Income Taxes
, the enactment of the Tax Act requires companies to recognize the effects of changes in tax laws
and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the
new legislation is enacted. In 2017, the Company’s gross deferred tax assets were revalued using the new enacted
rate of 21% effective January 1, 2018 with a corresponding offset to the valuation allowance and any potential other taxes arising
due to the Tax Act will result in reductions to its net operating loss carryforward and valuation allowance. Deferred tax assets
of approximately $60,148,509 were revalued to approximately $44,966,584 with a corresponding decrease to the Company’s
valuation allowance. There was no further change to the Company’s assertion on maintaining a full valuation allowance
against its U.S. deferred tax assets.
A
valuation allowance against deferred tax assets is required if, based on the weight of available evidence, it is more likely than
not that some or all of the deferred tax assets may not be realized. The Company is in the early stages of development and realization
of the deferred tax assets is not considered more likely than not. As a result, the Company has recorded a full valuation allowance
for the net deferred tax asset.
Since
inception of the Company on January 17, 2002, the Company has generated tax net operating losses of approximately $158 million.
Under the Tax Cuts and Jobs Act, net operating loss incurred after December 31, 2017 may be carried forward indefinitely.
The tax loss carry-forwards of the Company may be subject to limitation by Section 382 of the Internal Revenue Code with respect
to the amount utilizable each year. This limitation reduces the Company’s ability to utilize net operating loss carry-forwards.
The
Company has determined that there are no uncertain tax positions as of December 31, 2018 or 2017
The
Company files income tax returns in the U.S. federal jurisdiction and the state of Tennessee. The Company intends to permanently
reinvest earnings in its foreign subsidiary.
To
date, the Company’s operations conducted by its Australian subsidiary consist primarily of research and development
activities. As of December 31, 2018, there were no accumulated earnings and profits in the Company’s foreign
subsidiary. At current tax rates, no additional Federal income taxes (net of available tax credits) would be payable if such
earnings were to be repatriated.
10.
Commitments
Leases
The
Company leases office space in Knoxville, Tennessee for a term of five years ending on June 30, 2022. Rent expense was $88,393
and $44,335 for the years ended December 31, 2018 and 2017, respectively. The Company’s lease obligations are as follows:
Period
Ending
|
|
Amount
|
|
December 31, 2019
|
|
$
|
88,884
|
|
December 31, 2020
|
|
$
|
90,666
|
|
December 31, 2021
|
|
$
|
92,471
|
|
December 31,
2022
|
|
$
|
46,687
|
|
|
|
$
|
318,708
|
|
11.
401(K) Profit Sharing Plan
The
Company maintains a retirement plan under Section 401(k) of the Internal Revenue Code, which covers all eligible employees. All
employees with U.S. source income are eligible to participate in the plan immediately upon employment. There was no contribution
made by the Company in 2018 or 2017.
12.
Litigation
Agreement
with Clinical Operations Vendor
On
October 4, 2018, the Company reached a settlement with a former clinical operations vendor whereby, the Company paid
the vendor $350,000 and allowed the vendor to retain a previously paid retainer of approximately $1 million. The Company received
a credit of approximately $1.7 million to be applied against amounts previously owed by the Company for services rendered by the
vendor. Such credit has been included as a reduction in research and development expenses on the Company’s consolidated
statements of operations.
Culpepper
Travel Expenses and Related Collection Efforts
On
December 27, 2016, the Board unanimously voted to terminate Culpepper, effective immediately, from all positions he held with
the Company and each of its subsidiaries, including interim CEO and COO 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 regarding improper expense reimbursements to Culpepper.
The
Audit Committee retained independent counsel and an advisory firm with forensic accounting expertise to assist the Audit Committee
in conducting the investigation. The Audit Committee found that Culpepper received $294,255 in expense reimbursements that were
unsubstantiated or otherwise improper. The Company seeks to recover from Culpepper the entire $294,255 in expense reimbursements,
as well as all attorney’s fees and auditors’/experts’ fees incurred by the Company in connection with the examination
of his expense reimbursements. On December 12, 2017, Culpepper agreed to an order by the SEC to pay disgorgement of $140,115,
and prejudgment interest of $12,261, for a total of $152,376, to the Company within 30 days. The Company received the payment
of $152,376 in January 2018.
The
Company took the position that under the terms of the Culpepper Employment Agreement, Culpepper is owed no severance payments
as a result of his termination “for cause” as that term is defined in the Culpepper Employment Agreement. Furthermore,
Culpepper is no longer entitled to the 2:1 credit under the Stipulated Settlement Agreement and Mutual Release in the Derivative
Lawsuit Settlement such that the total $2,240,000 owed by Culpepper pursuant to the Derivative Lawsuit Settlement plus Culpepper’s
proportionate share of the litigation cost in the amount of $227,750, less the amount that he repaid as of December 31, 2016,
is immediately due and payable. The Company sent Culpepper a notice of default in January 2017 for the total amount he owes the
Company and is in the process of pursuing these claims in accordance with the alternative dispute resolution provision of the
Culpepper Employment Agreement. The Company has established a reserve of $2,051,083 as of December 31, 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
disputed that he was terminated “for cause” under the Culpepper Employment Agreement. Pursuant to the alternative
dispute resolution provisions of that agreement, the Company and Culpepper participated in a mediation of their dispute on June
28, 2017. Having reached no resolution during the mediation, the parties participated in arbitration under the commercial rules
of the American Arbitration Association, arbitrating both Culpepper’s claim for severance against the Company and the Company’s
claims against Culpepper for improper expense reimbursements and amounts Culpepper owes the Company under the Derivative Lawsuit
Settlement (the Culpepper Arbitration). The Culpepper Arbitration hearing was held from May 15 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 was forthcoming. On
September 12, 2018, the arbitrator issued its final award in favor of the Company. On October 4, 2018, the Company filed a
petition with the Chancery Court for Davidson County, Tennessee to confirm the arbitration award. On November 7, 2018, the
Company received Culpepper’s answer to the petition filed on October 4, 2018. This court entered an order confirming
the arbitrator’s award on January 23, 2019. On February 20, 2019, Culpepper filed a motion to alter or amend this
judgment. The parties are working to schedule a hearing for the motion.
The
Bible Harris Smith Lawsuit
On
November 17, 2016, the Company filed a lawsuit in the Circuit Court for Knox County, Tennessee (the “Tennessee Circuit Court”)
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 Tennessee Circuit Court June 21, 2018.
Depositions for the BHS lawsuit were taken on August 16 and 17, 2018.
The
Company and BHS participated in a mediation of their dispute on October 23, 2018. Subsequent to December 31, 2018, this matter
was resolved pursuant to a settlement between the parties, the terms of which are confidential, and proceeds from the settlement
were received.
The
RSM Lawsuit
On
June 9, 2017, the Company filed a lawsuit in the Circuit Court for Mecklenburg County, North Carolina (the “North Carolina
Circuit Court”) 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 was filed by
the Company and RSM moved to dismiss the Complaint. On September 28, 2018, RSM’s motion to dismiss was granted in part for
breach of fiduciary duty and denied in part for negligence, professional malpractice, negligent misrepresentation, gross negligence,
intentional misrepresentation, and fraudulent concealment. The Company was not precluded from seeking consequential or punitive
damages on its claims for gross negligence, intentional misrepresentation, and fraudulent concealment at this stage of the litigation.
The
Company also was not precluded, at this time, from seeking consequential or punitive damages on its claims for breach of contract,
negligence, negligent misrepresentation, or professional malpractice to the extent those claims are premised on the outsourcing
engagement between the Company and RSM or the engagement between the Company and RSM under which RSM was to review the Company’s
financial statements. The North Carolina Circuit Court entered a Case Management Order and the Parties are in the process of beginning
discovery in the case. The Company and RSM participated in a mediation on February 4, 2019, when the matter was resolved
pursuant to a settlement between the parties, the terms of which are confidential. The proceeds from the settlement were received
and recorded during the first quarter of 2019.
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. The proceeds from the settlement were received and recorded during the
third quarter of 2018.
Other
Regulatory Matters
From
time to time, the Company receives subpoenas and/or requests for information from governmental agencies with respect to its business.
The Company received a subpoena from the staff of the SEC related to the travel expense advancements and reimbursement received
by Dees. The Company also received a subsequent subpoena from the staff of the SEC related to the travel expense advancements
and reimbursements received by Culpepper. On December 12, 2017, the Company reached a settlement with the SEC in connection with
these investigations. Under the terms of the SEC settlement, the Company, without admitting or denying the findings of the SEC,
consented to the entry of administrative order that required the Company to cease and desist from committing or causing any violations
and any future violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934 and Rules
12b-20, 13a-1, 14a-3, and 14a-9 thereunder.
13.
Subsequent Events
Convertible
Notes Payable
Subsequent
to December 31, 2018, the Company entered into PRH Notes with non-related party accredited investors in the aggregate principal
amount of $3,475,000 in connection with Loans received by the Company for the same amount. None of the proceeds were
received from a related party.
Exercise
of Warrants
In
addition, holders of 100,000 warrants to purchase the common stock of the Company at $0.0533 per share, have exercised these warrants.
The Company has received proceeds in the aggregate amount of $5,330.