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 immunotherapy medicines for different diseases, with the aim of maximizing
the curative impact of these medicines and achieving immunity from treated disease. These investigational drugs are based on an
entire, wholly-owned, family of small molecules called halogenated xanthenes (“HXs”); our lead HX molecule
is named rose bengal disodium (“RBD”).
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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 (“ODD”)
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.
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Pediatric
Oncology: IL PV-10 is also undergoing preclinical study for pediatric solid tumor cancers (including neuroblastoma, Ewing
sarcoma, rhabdomyosarcoma, and osteosarcoma). ODD status has been granted to IL PV-10 by the FDA for neuroblastoma
in 2018.
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Hematology:
Oral formulations of cGMP RBD are undergoing preclinical study for pediatric blood cancers (including leukemia).
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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”).
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Microbiology:
Different formulations of cGMP RBD are undergoing preclinical study as potential treatments for multi-drug resistant (“MDR”)
bacteria, such as Gram-negative bacteria.
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Ophthalmology:
Topical formulations of cGMP RBD are undergoing preclinical study as potential treatments for diseases of the eye, such
as infectious keratitis.
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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).
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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.
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 December 31, 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.
2.
Liquidity and Going Concern
The
Company’s cash and cash equivalents were $97,231 at December 31, 2020, compared with $590,706 at December 31, 2019. 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
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 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 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, 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 2020 Financing or otherwise,
it will not be able to pay its obligations as they become due. Subsequent to December 31, 2020, the Company received an aggregate
$1,200,000 in connection with the 2020 Financing. In addition, holders of 4,500,000 warrants to purchase the common stock of the
Company at $0.0533 per share, have exercised these warrants, resulting in aggregate proceeds to the Company in the amount of $239,850.
See Note 14 – 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 2021 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 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 United States (“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
receivables, the recoverability and useful lives of long-lived assets, stock-based compensation, accrued liabilities and the valuation
allowance related to the Company’s deferred tax assets.
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, 2020 and 2019, 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, 2020 and 2019.
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
patents are fully amortized. Annual amortization of the patents was $228,000 in 2020.
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 7 – Short-term 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.
Leases
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard related to leases to increase
transparency and comparability among organizations by requiring the recognition of operating lease right-of-use (“ROU”)
assets and lease liabilities on the balance sheet (“ASC 842”) with amendments issued in 2018. Most prominent among
the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating
leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess
the amount, timing, and uncertainty of cash flows arising from leases. The Company is also required to recognize and measure new
leases at the adoption date and recognize a cumulative-effect adjustment in the period of adoption using a modified retrospective
approach, with certain practical expedients available.
The
Company adopted ASC 842 effective January 1, 2019 and elected to apply the available practical expedients. The standard had an
impact on the Company’s consolidated balance sheets but did not have a material impact on the Company’s consolidated
statements of operations or cash flows upon adoption. The most significant impact was the recognition of ROU assets and lease
liabilities for operating leases.
Income
Taxes
The
Company accounts for income taxes under the liability method in accordance with 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 2020 or 2019.
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:
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December 31,
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2020
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2019
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Warrants
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87,264,164
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126,109,532
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Options
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4,800,000
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3,000,000
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Convertible preferred stock
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65,663
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65,663
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Total potentially dilutive shares
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92,129,827
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129,175,195
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The
potential dilutive effect of the conversion of the Company’s convertible notes payable has been excluded from this table
since the Company’s Series D Preferred Stock has yet to be designated by the Board.
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, 2020 and 2019. The carrying amounts of
the Company’s financial assets and liabilities, such as cash and cash equivalents, receivables, other current assets, accounts
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
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Inputs
use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
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Level
2
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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.
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Level
3
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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.
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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 ($10,552 and $332,446 at December 31, 2020 and $61,380
and $308,915 at December 31, 2019, respectively), and expense and other income accounts are translated at a weighted average
exchange rate for the years then ended ($44,994 and $53,210 for the years ended December 31, 2020 and 2019, respectively). Equity
is translated at historical rates and the resulting foreign currency translation adjustments are included as a component of accumulated
other comprehensive loss (“AOCL”), which is a separate component of shareholders’ deficit. Therefore, the U.S.
dollar value of the non-equity translated items in the Company’s consolidated financial statements will fluctuate from period
to period, depending on the changing value of the U.S. dollar versus these currencies.
The
Company engages in foreign currency denomination transactions with its Australian subsidiary. At the date that the transaction
is recognized, each asset, liability, revenue, expense, gain or loss arising from the transaction is measured and recorded in
the functional currency of the recording entity using the exchange rate in effect at that date. At each balance sheet date, recorded
monetary balances denominated in a currency other than the functional currency are adjusted using the exchange rate at the balance
sheet date, with gains or losses recorded in other income or other expense.
Stock-Based
Compensation
The
Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award.
The fair value of the award is measured on the grant date and then is recognized over the period during which services are required
to be provided in exchange for the award, usually the vesting period. The Company computes the fair value of equity-classified
warrants and options granted using the Black-Scholes option pricing model. Option valuation models require the input of highly
subjective assumptions including the expected volatility factor of the market price of the Company’s common stock which
is determined by reviewing its historical public market closing prices.
Recently
Issued Accounting Pronouncements
In
December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12
simplify the accounting for income taxes by removing certain exceptions to the general principles in Accounting Standards Codification
(“ASC”) Topic 740, Income Taxes. The amendments also improve consistent application of and simplify GAAP for
other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 will be effective for the Company’s fiscal
year beginning after December 15, 2020, with early adoption permitted. The transition requirements are dependent upon each
amendment within this update and will be applied either prospectively or retrospectively. The Company does not expect this ASU
to have a material impact on its consolidated financial statements.
In
January 2020, the FASB issued ASU 2020-01, “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint
Ventures (Topic 323), and Derivatives and Hedging (Topic 815).” ASU 2020-01 states any equity security transitioning from
the alternative method of accounting under Topic 321 to the equity method, or vice versa, due to an observable transaction will
be remeasured immediately before the transition. In addition, the ASU clarifies the accounting for certain non-derivative forward
contracts or purchased call options to acquire equity securities stating such instruments will be measured using the fair value
principles of Topic 321 before settlement or exercise. The ASU is effective for fiscal years beginning after December 15, 2020,
and will be applied on a prospective basis. Early adoption is permitted. The Company is still evaluating the impact this standard
will have on its consolidated financial statements and related disclosures.
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 consolidated 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 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 an 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
consolidated financial statements and related disclosures.
In
October 2020, the FASB issued ASU 2020-10 “Codification Improvements”, which improves consistency by amending the
Codification to include all disclosure guidance in the appropriate disclosure sections and clarifies application of various provisions
in the Codification by amending and adding new headings, cross referencing to other guidance, and refining or correcting terminology.
The guidance is effective for the Company beginning in the first quarter of fiscal year 2022 with early adoption permitted. The
Company is currently assessing the impact that this pronouncement will have on its consolidated financial statements.
Recent
Adopted Accounting Pronouncements
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 adopted ASU
effective January 1, 2020 and it did not have a material impact on the Company’s consolidated
financial statements.
Reclassifications
Certain prior period amounts have been
reclassified for comparative purposes to conform with the fiscal 2020 presentation. These reclassifications have no impact on
the previously reported net loss.
4.
Convertible Notes Payable
2017
Financing
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 “2017 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, 2020, the Company had received aggregate 1st Loans, as defined below, of $20,067,000 in connection with
the 2017 Financing.
The
2017 Financing is in the form of a secured convertible loan (the “1st Loan”) from the PRH Group or other
investors in the 2017 Financing (the “1st Loan Investors”). The 1st Loan is evidenced by secured
convertible promissory notes (individually a “2017 Note” and collectively, the “2017 Notes”) from the
Company to the PRH Group or the 1st Loan Investors. In addition to the customary provisions, the 2017 Notes contains
the following provisions:
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(i)
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It
is secured by a first priority security interest on the Company’s IP,
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(ii)
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The
1st Loan bears interest at the rate of 8% per annum on the outstanding principal amount of the 2017 Notes that
has been funded to the Company,
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(iii)
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The
1st 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,
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(iv)
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The
2017 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 2017 Notes, (ii) upon a change of control of the Company, or (iii) dates ranging from May 15, 2021
to the 18-month anniversary of the funding of the Final Tranche. In the event there is a change of control of the Company’s
Board as proposed by any person or group other than the 1st Loan Investors,
the term of the 2017 Notes will be accelerated and all amounts due under the 2017 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 1st Loan that has been funded to the Company,
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(v)
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The
outstanding principal amount and interest payable under the 1st Loan will become convertible at the sole discretion
of the 1st Loan 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
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(vi)
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Notwithstanding
(v) above, the principal amount of the 2017 Notes and the interest payable under the 1st Loan will 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.
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Pursuant
to the 2017 Term Sheet, the PRH Group concluded its best-efforts activity to arrange for a financing of $20,000,000, which amounts
were provided in a number of tranches, between the first tranche on April 4, 2017 and the Final Tranche, on December 20, 2019.
As a result, the 2017 Notes under the 1st Loan will convert into shares of Series D Preferred Stock (once designated)
of the Company on or before June 20, 2021, which is the 18-month anniversary of the funding of the Final Tranche of the 2017 Financing,
subject to certain exceptions.
Upon
conversion of the 2017 Notes, the 1st Loan Investors will release their first lien on the Company’s IP.
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 from investors that
will be evidenced by convertible promissory notes (the “2020 Notes”). The 2020 Term Sheet is similar to the 2017 Term
Sheet. 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.
Pursuant
to the 2020 Term Sheet, the 2020 Notes (defined below) will convert into shares of the Company’s Series D Preferred Stock
on or before June 20, 2021, subject to certain exceptions. As of December 31, 2019, and through the date of filing, the Series
D Preferred Stock had not been designated by the Board.
The
2020 Financing will be in the form of a secured convertible loan (the “2nd Loan”) from the Investors (the
“2nd Loan Investors”) that will be evidenced by convertible promissory notes (individually, a “2020
Note” and collectively, the “2020 Notes”) subordinate to the 2017 Notes in right of payment and to the security
interests granted to holders of the 2017 Notes. In addition to customary provisions, the 2020 Notes contains the following provisions:
(i)
It will be secured by a second priority security interest on the Company’s IP subordinate to the first priority security
interest of the 2017 Notes;
(ii)
The 2nd Loan will bear interest at the rate of eight percent (8%) per annum on the outstanding principal amount of
the 2nd Loan that has been funded to the Company;
(iii)
In the event there is a change of control of the Company’s Board, the term of the 2020 Notes will be accelerated and all
amounts due under the 2020 Notes will be immediately due and payable, plus interest at the rate of eight percent (8%) per annum,
plus a penalty in the amount equal to ten times (10x) the outstanding principal amount of the 2nd Loan that has been
funded to the Company;
(iv)
The outstanding principal amount and interest payable under the 2nd Loan will become convertible at the sole discretion
of the 2nd Loan Investors into shares of the Company’s Series D Preferred Stock, a series of preferred stock
to be designated by the Board, at a price per share equal to $2.8620; and
(v)
Notwithstanding (iv) above, the principal amount of the 2020 Notes and the interest payable under the 2nd Loan will
automatically convert into shares of the Company’s Series D Preferred Stock at a price per share equal to $2.8620 effective
on June 20, 2021 subject to certain exceptions.
Upon
conversion of the 2nd Loan, the 2nd Loan Investors will release their second lien on the IP. 2nd
Loan Investors in the 2020 Financing will hold Series D Preferred Stock pari passu with the Series D Preferred Stock of
1st Loan Investors in the 2017 Financing.
Since
the 2020 Financing was launched and through December 31, 2020, the Company had received aggregate 2nd Loans
of $3,325,000.
Convertible
Notes Payable – Related Parties
During
the year ended December 31, 2019, the Company entered into 2017 Notes with related parties in the aggregate principal amount of
$50,000 offset by the application of the 2017 Note in the principal amount of $250,000 that the Company entered into with Timothy
Scott (former President) and Leigh Anne Scott on February 28, 2018 that was applied to Dr. Scott’s Kleba Settlement agreement.
As of December 31, 2020 and 2019, the Company had borrowed $6,670,000 of 2017 Notes from related parties which
were outstanding.
During
the year ended December 31, 2020, the Company entered into 2020 Notes with related parties in the aggregate principal amount of
$100,000. As of December 31, 2020, the Company had borrowed $100,000 of 2020 Notes from related parties which were outstanding.
Convertible
Notes Payable – Non-Related Parties
During
the year ended December 31, 2019, the Company entered into 2017 Notes with accredited investors in the aggregate principal amount
of $6,335,000. As of December 31, 2020 and 2019, the Company had borrowed $13,397,000 under these notes, all of which
were outstanding as of that date. During the year ended December 31, 2019, the Company entered into a 2020 Note with an accredited
investor in the principal amount of $100,000. As of December 31, 2019, the Company had borrowed $100,000 under this note.
During
the year ended December 31, 2020, the Company entered into 2020 Notes with accredited investors in the aggregate principal amount
of $3,125,000. As of December 31, 2020, the Company had borrowed $3,225,000 under these notes, all of which were outstanding
as of that date.
The
Series D Preferred Stock
As
of December 31, 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 December 31, 2020.
5.
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 December 31, 2020, the Company had not applied for forgiveness of the PPP Loan. Once an amount is forgiven under the PPP
Loan, the Company will recognize a gain on forgiveness of note payable in the period in which it obtained forgiveness.
The
Company obtained short-term financing from AFCO Insurance Premium Finance for our commercial insurance policies. As of December
31, 2020 and 2019, the balance of the note payable was $212,790 and $228,424, respectively.
6.
Related Party Transactions
During
the years ended December 31, 2020 and 2019, the Company paid Mr. Bruce Horowitz (Capital Strategists) consulting fees of $254,400
and $277,200, respectively, for services rendered. Accrued director fees for Mr. Horowitz as of December 31, 2020 and 2019 were
$75,000 and $75,000, respectively. Mr. Horowitz serves as both COO and a Director.
See
Note 4 and Note 7 for details of other related party transactions.
Director
fees during the years ended December 31, 2020 and 2019 were $383,065 and $385,000, respectively. Accrued directors’ fees
as of December 31, 2020 and 2019 were $1,175,589 and $792,524, respectively.
7.
Short-term Receivables
The
following table summarizes the receivables at December 31, 2020 and 2019:
|
|
December 31, 2020
|
|
|
|
Tax Credit
|
|
|
Legal Fees
|
|
|
Settlement
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provectus Australia tax credit
|
|
$
|
3,930
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,930
|
|
Gross receivable
|
|
|
-
|
|
|
|
455,500
|
|
|
|
1,649,043
|
|
|
|
2,104,543
|
|
Reserve for uncollectibility
|
|
|
-
|
|
|
|
(455,500
|
)
|
|
|
(1,649,043
|
)
|
|
|
(2,104,543
|
)
|
Net receivable
|
|
$
|
3,930
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,930
|
|
|
|
December 31, 2019
|
|
|
|
Legal Fees
|
|
|
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
|
|
During
the year ended December 31, 2019, officers of the Company offset their settlement amounts owed to the Company against accrued
payroll and other payables totaling $535,361. This offset reduced the amount of the settlement and was approved by the Company’s
Board.
8.
Stockholders’ Deficiency
Authorized
Capital
As
of December 31, 2020, 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 (the “Series B 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 Preferred Stock, par value $0.001 per share. 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.
Common
Stock Issuances
During
the year ended December 31, 2019, the Company issued 229,090 shares of immediately vested restricted common stock as payment of
services, with an aggregate issuance date fair value of $11,538, which was recognized immediately as stock compensation within
general and administrative expenses on the accompanying consolidated statement of operations.
During
the year ended December 31, 2020, the Company issued 1,062,500 shares of immediately vested restricted common stock with an aggregate
issuance date value of $69,088, which was recognized immediately as stock compensation within general and administrative
expenses on the accompanying consolidated statement of operations.
9.
Stock Incentive Plan and Warrants
The
2017 Amendment and Restatement of the Provectus Biopharmaceuticals, Inc. 2014 Equity Compensation Plan (the “2017
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 2017 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, 2020, there
were 15,312,500 shares available for issuance under the 2017 Equity Compensation Plan.
There
were no stock options granted during the year ended December 31, 2019.
During
the year ended December 31, 2020, the Company issued 2,425,000 five-year immediately vested stock options to an officer/director
to purchase an aggregate of 2,425,000 shares of common stock with exercise price of $0.12 per share. The stock options had an
aggregate grant date fair value of $62,880, which was recognized immediately as stock compensation within general and administrative
expenses on the accompanying statement of operations.
During
the year ended December 31, 2020, the Company issued 100,000 five-year immediately vested stock options to a director to purchase
an aggregate of 100,000 shares of common stock with an exercise price of $0.2862 per share. The stock options had an aggregate
grant date fair value of $1,414, which was recognized immediately as stock compensation within general and administrative expenses
on the accompanying statement of operations.
Stock
Options granted during the year ended December 31, 2020 were valued using the Black Scholes Model, with the following assumptions
used:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Expected terms (years)
|
|
|
2.50
|
|
|
|
-
|
|
Expected volatility
|
|
|
93
|
%
|
|
|
-
|
|
Risk-free interest rate
|
|
|
0.23
|
%
|
|
|
-
|
|
Expected dividend
|
|
|
0.00
|
%
|
|
|
-
|
|
The
following table summarizes option activity during the year ended December 31, 2020 and 2019:
|
|
|
|
|
Weighted Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at January 1, 2019
|
|
|
3,200,000
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(200,000
|
)
|
|
|
0.88
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2019
|
|
|
3,000,000
|
|
|
$
|
0.88
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,525,000
|
|
|
|
.20
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(725,000
|
)
|
|
|
0.88
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2020
|
|
|
4,800,000
|
|
|
$
|
0.46
|
|
The
following table summarizes information about stock options outstanding at December 31, 2020.
|
|
|
Number Outstanding
|
|
|
Weighted Average
Remaining Contractual
|
|
|
Number Exercisable
|
|
Exercise Price
|
|
|
at December 31, 2020
|
|
|
Life
|
|
|
at December 31, 2020
|
|
$
|
0.12
|
|
|
|
2,425,000
|
|
|
|
4.90
|
|
|
|
2,425,000
|
|
$
|
0.29
|
|
|
|
100,000
|
|
|
|
4.90
|
|
|
|
100,000
|
|
$
|
0.67
|
|
|
|
200,000
|
|
|
|
2.60
|
|
|
|
200,000
|
|
$
|
0.75
|
|
|
|
950,000
|
|
|
|
3.11
|
|
|
|
950,000
|
|
$
|
0.84
|
|
|
|
150,000
|
|
|
|
1.50
|
|
|
|
150,000
|
|
$
|
0.88
|
|
|
|
150,000
|
|
|
|
3.60
|
|
|
|
150,000
|
|
$
|
0.93
|
|
|
|
575,000
|
|
|
|
0.76
|
|
|
|
575,000
|
|
$
|
0.99
|
|
|
|
50,000
|
|
|
|
0.50
|
|
|
|
50,000
|
|
$
|
1.04
|
|
|
|
200,000
|
|
|
|
0.50
|
|
|
|
200,000
|
|
|
|
|
|
|
4,800,000
|
|
|
|
3.58
|
|
|
|
4,800,000
|
|
As
of December 31, 2020, the intrinsic value of outstanding and exercisable options was $0.
Warrants
During
the year-ended December 31, 2019, holders of warrants exercised warrants to purchase 5,045,857 shares of common stock at a price
of $0.053 per share. In connection with the exercises, the Company received cash proceeds of $268,943 and issued 5,045,857 shares
of common stock.
During
the year ended December 31, 2020, holders of warrants exercised warrants to purchase 7,855,062 shares of common stock at a price
of $0.053 per share. In connection with the exercises, the Company received cash proceeds of $418,676 and issued 7,855,062
shares of common stock.
During
the year ended December 31, 2020, the Company issued 62,500 three-year immediately vested warrants to board members to purchase
an aggregate of 62,500 shares of common stock with an exercise price of $0.2862 per share. The warrants had an aggregate grant
date fair value of $1,372, which was recognized immediately as stock compensation within general and administrative expenses on
the accompanying statement of operations.
In
applying the Black-Scholes option pricing model to warrants granted, the Company used the following assumptions:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Contractual terms (years)
|
|
|
3.00
|
|
|
|
3.00-5.00
|
|
Expected volatility
|
|
|
93%-95
|
%
|
|
|
129%-131
|
%
|
Risk-free interest rate
|
|
|
.011%-0.18
|
%
|
|
|
1.82%-2.33
|
%
|
Expected dividend
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The
following table summarizes warrant activity during the year ended December 31, 2020 and 2019:
|
|
|
|
|
Weighted Average
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at January 1, 2019
|
|
|
136,824,138
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
425,000
|
|
|
|
0.94
|
|
Exercised
|
|
|
(5,045,857
|
)
|
|
|
0.05
|
|
Forfeited
|
|
|
(6,093,749
|
)
|
|
|
1.20
|
|
Outstanding and exercisable at December 31, 2019
|
|
|
126,109,532
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
62,500
|
|
|
|
0.29
|
|
Exercised
|
|
|
(7,855,062
|
)
|
|
|
0.05
|
|
Forfeited
|
|
|
(31,052,806
|
)
|
|
|
1.06
|
|
Outstanding and exercisable at December 31, 2020
|
|
|
87,264,164
|
|
|
$
|
0.02
|
|
The
following table summarizes information about warrants outstanding at December 31, 2020.
|
|
|
Number Outstanding
|
|
|
Weighted Average
|
|
|
Number Exercisable
|
|
|
Intrinsic Value
|
|
|
|
|
at December 31,
|
|
|
Remaining Contractual
|
|
|
at December 31,
|
|
|
at December 31,
|
|
Exercise Price
|
|
|
2020
|
|
|
Life
|
|
|
2020
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.05
|
|
|
|
86,776,664
|
|
|
|
0.66
|
|
|
|
86,776,664
|
|
|
$
|
407,850
|
|
$
|
0.29
|
|
|
|
100,000
|
|
|
|
2.30
|
|
|
|
100,000
|
|
|
$
|
-
|
|
$
|
1.00
|
|
|
|
18,000
|
|
|
|
3.39
|
|
|
|
18,000
|
|
|
$
|
-
|
|
$
|
1.12
|
|
|
|
366,000
|
|
|
|
3.38
|
|
|
|
366,000
|
|
|
$
|
-
|
|
$
|
2.00
|
|
|
|
3,500
|
|
|
|
3.38
|
|
|
|
3,500
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,264,164
|
|
|
|
2.62
|
|
|
|
87,264,164
|
|
|
$
|
407,850
|
|
Holders
of the outstanding warrants are not entitled to vote and the exercise prices of such warrants are subject to customary anti-dilution
provisions.
10.
Income Taxes
The
domestic and foreign components of loss before income taxes from operations for the years ended December 31, 2020 and 2019 are
as follows:
|
|
Year ended December 31
|
|
|
|
2020
|
|
|
2019
|
|
Domestic
|
|
$
|
(6,632,593
|
)
|
|
$
|
(6,975,747
|
)
|
Foreign
|
|
|
(44,994
|
)
|
|
|
53,210
|
|
Net Pre-Tax Loss
|
|
$
|
(6,677,587
|
)
|
|
$
|
(6,922,537
|
)
|
The
income tax provision (benefit) consists of the following:
|
|
|
|
|
Year ended December 31
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
21.00
|
%
|
|
|
221,598
|
|
|
|
(1,361,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
5.14
|
%
|
|
|
54,186
|
|
|
|
(332,939
|
)
|
|
|
|
26.14
|
%
|
|
|
275,784
|
|
|
|
(1,694,521
|
)
|
Change in valuation allowance
|
|
|
|
|
|
|
(275,784
|
)
|
|
|
1,694,521
|
|
Income tax provision (benefit)
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
reconciliations between the statutory federal income tax rate and the Company’s effective tax rate are as follows:
|
|
Year Ended December 31
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Tax benefit at federal statutory rate
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
State income taxes, net of federal benefit
|
|
|
(5.1
|
)%
|
|
|
(5.1
|
)%
|
Permanent differences
|
|
|
(0.7
|
)%
|
|
|
(1.3
|
)%
|
Change in valuation allowance
|
|
|
(4.1
|
)%
|
|
|
24.5
|
%
|
Prior year true-up
|
|
|
23.1
|
%
|
|
|
(0.1
|
)%
|
Expiration of state net operating loss carryforwards
|
|
|
4.5
|
%
|
|
|
3.1
|
%
|
Expiration of warrants and options
|
|
|
3.5
|
%
|
|
|
0.0
|
%
|
Miscellaneous
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
The
components of the Company’s deferred income taxes are summarized below:
|
|
December 31
|
|
|
|
2020
|
|
|
2019
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
42,779,580
|
|
|
$
|
41,959,558
|
|
Stock-based compensation
|
|
|
428,726
|
|
|
|
2,215,928
|
|
Research and development credit carryovers
|
|
|
2,985,215
|
|
|
|
2,917,857
|
|
Contribution carryovers
|
|
|
10,062
|
|
|
|
10,062
|
|
Intangible assets
|
|
|
94,295
|
|
|
|
-
|
|
Accrued liabilities
|
|
|
1,503,190
|
|
|
|
1,041,286
|
|
Gross deferred tax assets
|
|
|
47,801,068
|
|
|
|
48,144,691
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
-
|
|
|
|
(59,616
|
)
|
Prepaid expenses
|
|
|
(82,839
|
)
|
|
|
(91,084
|
)
|
Other
|
|
|
(40,603
|
)
|
|
|
(40,581
|
)
|
Gross deferred tax liabilities
|
|
|
(123,442
|
)
|
|
|
(191,281
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(47,677,626
|
)
|
|
|
(47,953,410
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
$
|
275,784
|
|
|
$
|
(1,694,521
|
)
|
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 federal, state and Australian tax net operating
losses of approximately $166 million, $153 million, and $326 thousand. 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. Federal net
operating losses (“NOL”) totaling $151.4 million expire in various amounts between 2022 and 2037. Federal NOL totaling
$14.5 million do not expire.
Year
Generated
|
|
Year
Expired
|
|
Amount
|
|
2002
|
|
2022
|
|
$
|
5,794,541
|
|
2003
|
|
2023
|
|
|
1,520,649
|
|
2004
|
|
2024
|
|
|
3,571,227
|
|
2005
|
|
2025
|
|
|
5,530,815
|
|
2006
|
|
2026
|
|
|
7,192,407
|
|
2007
|
|
2027
|
|
|
10,218,952
|
|
2008
|
|
2028
|
|
|
7,017,372
|
|
2009
|
|
2029
|
|
|
9,573,948
|
|
2010
|
|
2030
|
|
|
10,344,298
|
|
2011
|
|
2031
|
|
|
11,225,047
|
|
2012
|
|
2032
|
|
|
11,193,882
|
|
2013
|
|
2033
|
|
|
10,273,181
|
|
2014
|
|
2034
|
|
|
9,075,738
|
|
2015
|
|
2035
|
|
|
17,455,417
|
|
2016
|
|
2036
|
|
|
19,710,699
|
|
2017
|
|
2037
|
|
|
11,703,175
|
|
2018
|
|
N/A
|
|
|
6,255,067
|
|
2019
|
|
N/A
|
|
|
4,085,063
|
|
2020
|
|
N/A
|
|
|
4,185,506
|
|
Total
NOL
|
|
|
|
$
|
165,926,984
|
|
State
NOL totaling $153 million expire in various years between 2021 and 2035.
Year
Generated
|
|
Year
Expired
|
|
Amount
|
|
2006
|
|
2021
|
|
$
|
7,358,979
|
|
2007
|
|
2022
|
|
|
10,318,963
|
|
2008
|
|
2023
|
|
|
7,106,425
|
|
2009
|
|
2024
|
|
|
9,680,770
|
|
2010
|
|
2025
|
|
|
10,440,651
|
|
2011
|
|
2026
|
|
|
11,362,120
|
|
2012
|
|
2027
|
|
|
11,311,394
|
|
2013
|
|
2028
|
|
|
10,381,763
|
|
2014
|
|
2029
|
|
|
9,278,510
|
|
2015
|
|
2030
|
|
|
18,547,287
|
|
2016
|
|
2031
|
|
|
20,166,661
|
|
2017
|
|
2032
|
|
|
12,131,850
|
|
2018
|
|
2033
|
|
|
6,455,113
|
|
2019
|
|
2034
|
|
|
4,211,210
|
|
2020
|
|
2035
|
|
|
4,185,506
|
|
Total
NOL
|
|
|
|
$
|
152,937,202
|
|
Australia
NOL totaling $326,000 do not expire.
Year
Generated
|
|
Year
Expired
|
|
Amount
|
|
2017
|
|
N/A
|
|
$
|
-
|
|
2018
|
|
N/A
|
|
|
290,490
|
|
2019
|
|
N/A
|
|
|
35,861
|
|
Total
NOL
|
|
|
|
$
|
326,351
|
|
The
Company has determined that there are no uncertain tax positions as of December 31, 2020 or 2019.
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, 2020, 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.
11.
Commitments
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 are approximately $7,900 per month.
Total
expense for operating leases for the year ended December 31, 2020 was $90,821, of which, $60,547 was included within
research and development and $30,274 was included within general and administrative expenses on the consolidated statement of
operations. Total expense for operating leases for the year ended December 31, 2019 was $102,378, of which, $68,252 was included
within research and development and $34,126 was included within general and administrative expenses on the consolidated statement
of operations.
As
of December 31, 2020, the Company had no leases that were classified as a financing lease. As of December 31, 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 Years Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
Operating cash flows used in operating leases
|
|
$
|
91,605
|
|
|
$
|
89,574
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
-
|
|
|
$
|
265,550
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
1.50 Years
|
|
|
|
2.75
Years
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
8.0
|
%
|
|
|
8.0
|
%
|
Future
minimum payments under non-cancellable lease as of December 31, 2020 were as follows:
Years
|
|
Amount
|
|
|
|
|
|
2021
|
|
|
92,471
|
|
2022
|
|
|
46,687
|
|
Total future minimum lease payments
|
|
|
139,158
|
|
Less: amount representing imputed interest
|
|
|
(9,992
|
)
|
Total
|
|
$
|
129,166
|
|
12.
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 2020 or 2019.
13.
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 December 31, 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.
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 of Tennessee denied Culpepper’s application.
On
November 3, 2020, Culpepper filed a petition for writ of certiorari to the Supreme Court of the United States “SCOTUS”).
The petition for writ of certiorari was denied by the Supreme Court on January 11, 2021. There are no further avenues for
appeal for Culpepper.
14.
Subsequent Events
Convertible
Notes Payable
Subsequent
to December 31, 2020, the Company entered into a 2020 Note with a non-related party accredited investor in the aggregate principal
amount of $1,200,000 in connection with 2nd 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 4,500,000 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 $239,850.