UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ |
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,
2017
| ☐ |
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission file number 001-36457
PROVECTUS BIOPHARMACEUTICALS, INC.
(Exact name of registrant as specified in its
charter)
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| Delaware |
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90-0031917 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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7327 Oak Ridge Highway, Suite A,
Knoxville, Tennessee
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37931 |
| (Address of principal executive
offices) |
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(Zip Code) |
866-594-5999
(Registrant’s telephone number, including area
code)
N/A
Former Name, Former Address and Former Fiscal
Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90
days. ☒ Yes
☐ No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule
12b-2 of the Exchange
Act.
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| Large accelerated filer |
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☐ |
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Accelerated filer |
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☒ |
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| Non-accelerated filer |
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☐ (Do not check if a smaller
reporting company) |
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Smaller reporting company |
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☐ |
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| Emerging growth company |
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☐ |
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2
of the
Act). ☐ Yes ☒ No
The number of shares outstanding of the registrant’s common stock,
par value $0.001 per share, as of May 4, 2017, was
370,354,643.
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking
statements” as defined under U.S. federal securities laws. These
statements reflect management’s current knowledge, assumptions,
beliefs, estimates, and expectations and express management’s
current views of future performance, results, and trends and may be
identified by their use of terms such as “anticipate,” “believe,”
“could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,”
“project,” “will,” and other similar terms. Forward-looking
statements are subject to a number of risks and uncertainties that
could cause our actual results to materially differ from those
described in the forward-looking statements. Readers should not
place undue reliance on forward-looking statements. Such statements
are made as of the date of this Quarterly Report on Form
10-Q, and we undertake no
obligation to update such statements after this date.
Risks and uncertainties that could cause our actual results to
materially differ from those described in forward-looking
statements include those discussed in our filings with the
Securities and Exchange Commission (including those described in
Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2016), and the following:
| |
• |
|
our potential receipt of sales from
PV-10 and PH-10, transaction fees, licensing and
royalty payments; payments in connection with the Company’s
liquidation, dissolution or winding up, or any sale, lease,
conveyance or other disposition of any intellectual property
relating to PV-10 or
PH-10; |
| |
• |
|
our ability to raise additional
capital if we determine to commercialize PV-10 and/or PH-10 on our own; and |
| |
• |
|
our ability to close on additional
traches of the financing from a group of the Company’s stockholders
(the “PRH Group”) pursuant to the Definitive Financing Commitment
Term Sheet we entered into with the PRH Group effective as of
March 19, 2017. |
1
PART I FINANCIAL
INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
PROVECTUS BIOPHARMACEUTICALS,
INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31, |
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December 31, |
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2017 |
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2016 |
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(Unaudited) |
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Assets
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Current Assets:
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Cash and cash equivalents
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$ |
436,952 |
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$ |
1,165,738 |
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Short-term receivable - settlement
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200,000 |
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300,000 |
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Other current assets
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250,515 |
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360,562 |
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Total Current Assets
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887,467 |
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1,826,300 |
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Equipment and furnishings, less accumulated depreciation of
$466,772 and $464,140, respectively
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69,402 |
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72,033 |
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Patents, net of accumulated amortization of $9,641,758 and
$9,473,978, respectively
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2,073,687 |
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2,241,467 |
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Long-term receivable – reimbursable legal fees, net of reserve for
uncollectibility of $455,500
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455,500 |
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455,500 |
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Long-term receivable – settlement, net of discount and reserve for
uncollectibility of $1,549,043
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1,024,345 |
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1,015,710 |
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Total Assets
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$ |
4,510,401 |
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$ |
5,611,010 |
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Liabilities and Stockholders’ (Deficiency) Equity
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Current Liabilities:
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Accounts payable - trade
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$ |
2,770,860 |
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$ |
1,919,870 |
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Other accrued expenses
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159,855 |
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221,956 |
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Convertible note payable - related party
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2,500,000 |
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— |
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Total Liabilities
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5,430,715 |
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2,141,826 |
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Commitments and contingencies
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Stockholders’ (Deficiency) Equity:
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Preferred stock; par value $0.001 per share; 25,000,000 shares
authorized;
Series B Convertible Preferred Stock; 240,000 shares designated;
100 and 8,600 shares issued and outstanding at March 31, 2017
and December 31, 2016, respectively; aggregate liquidation
preference of $3,500 and $301,000 at March 31, 2017 and
December 31, 2016, respectively
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— |
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9 |
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Common stock; par value $0.001 per share; 1,000,000,000 shares
authorized; 370,354,643 and 364,773,297 shares issued and
outstanding, respectively
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370,355 |
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364,773 |
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Additional paid-in
capital
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208,322,249 |
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208,327,822 |
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Accumulated deficit
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(209,612,918 |
) |
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(205,223,420 |
) |
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Total Stockholder’s (Deficiency) Equity
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(920,314 |
) |
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3,469,184 |
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Total Liabilities and Stockholders’ (Deficiency) Equity
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$ |
4,510,401 |
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$ |
5,611,010 |
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See accompanying notes to condensed consolidated
financial statements.
2
PROVECTUS BIOPHARMACEUTICALS,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
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Three Months Ended
March 31, |
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2017 |
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2016 |
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Operating Expenses
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Research and development
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$ |
1,853,573 |
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$ |
2,407,984 |
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General and administrative
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2,544,600 |
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6,099,232 |
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Total Operating Loss
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(4,398,173 |
) |
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(8,507,216 |
) |
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Investment income
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8,675 |
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913 |
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Net Loss
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(4,389,498 |
) |
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(8,506,303 |
) |
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Dividend paid-in kind to
preferred shareholders
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(14,007 |
) |
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— |
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Net Loss Applicable to Common Shareholders
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$ |
(4,403,505 |
) |
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$ |
(8,506,303 |
) |
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Basic and Diluted Loss Per Common Share
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$ |
(0.01 |
) |
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$ |
(0.04 |
) |
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Weighted Average Number of Common Shares Outstanding - Basic and
Diluted
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365,207,402 |
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205,278,509 |
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See accompanying notes to condensed consolidated
financial statements.
3
PROVECTUS BIOPHARMACEUTICALS,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
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Three Months Ended
March 31, |
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2017 |
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2016 |
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Cash Flows From Operating Activities
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Net loss
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$ |
(4,389,498 |
) |
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$ |
(8,506,303 |
) |
|
Adjustments to reconcile net loss to net cash used in operating
activities:
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Depreciation
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2,631 |
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3,496 |
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Amortization of patents
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167,780 |
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167,780 |
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Warrant incentive expense
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— |
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2,718,407 |
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Issuance of stock for services
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— |
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20,163 |
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Changes in operating assets and liabilities
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Settlement receivable
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91,365 |
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127,446 |
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Other current assets
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110,047 |
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(295,699 |
) |
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Accounts payable - trade
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850,990 |
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(489,304 |
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Accrued settlement expense
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— |
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(1,850,000 |
) |
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Other accrued expenses
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(62,101 |
) |
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51,069 |
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Net Cash Used In Operating Activities
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(3,228,786 |
) |
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(8,052,945 |
) |
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Cash Flows From Financing Activities
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Net proceeds from the issuance of common stock and warrants
pursuant to warrant exchange offer
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— |
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3,635,040 |
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Proceeds from issuance of convertible note payable - related
party
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2,500,000 |
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— |
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Net Cash Provided By Financing Activities
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2,500,000 |
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3,635,040 |
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Net Change In Cash and Cash Equivalents
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(728,786 |
) |
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(4,417,905 |
) |
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Cash and Cash Equivalents, Beginning of Period
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1,165,738 |
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14,178,902 |
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Cash and Cash Equivalents, End of Period
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$ |
436,952 |
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$ |
9,760,997 |
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Supplemental Disclosures of Cash Flow Information:
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Cash paid during the period for:
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Interest
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$ |
— |
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$ |
— |
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Taxes
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$ |
— |
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$ |
— |
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|
Non-cash investing and
financing activities:
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Conversion of preferred stock into common stock
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$ |
5,582 |
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|
$ |
— |
|
|
Issuance in-kind of
preferred stock dividends
|
|
$ |
14,007 |
|
|
$ |
— |
|
See accompanying notes to condensed consolidated
financial statements.
4
PROVECTUS BIOPHARMACEUTICALS,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
1. Business Organization, Nature of Operations and Basis of
Presentation
Provectus Biopharmaceuticals, Inc., a Delaware corporation
(together with its subsidiaries, “Provectus” or the “Company”), is
a biopharmaceutical company that is focusing on developing
minimally invasive products for the treatment of psoriasis and
other topical diseases, and certain forms of cancer including
melanoma, breast cancer, and cancers of the liver. 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, or sell or license the Company’s over-the-counter (“OTC”)
products or non-core
technologies.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America
(“GAAP”) for interim financial information pursuant to Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by
GAAP for complete financial statements and should be reviewed in
conjunction with the Company’s audited consolidated financial
statements included in Form 10-K for the year ended
December 31, 2016 filed with the U.S. Securities and Exchange
Commission (“SEC”) on March 31, 2017. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended
March 31, 2017 are not necessarily indicative of the results
that may be expected for the year ending December 31,
2017.
2. Liquidity and Financial Condition
The Company’s cash and cash equivalents were $436,952 at
March 31, 2017, compared with $1,165,738 at December 31,
2016. 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 raise
additional capital.
Term Sheet for 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 “Term Sheet”),
which sets forth the terms on which the PRH Group will 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”), $2,500,000 of
which was funded into Escrow (as defined below) upon the execution
of definitive documents, and the $2,500,000 Wachter Note (as
defined below) was exchanged for a PRH Note (as defined below) on
the terms described below upon the funding of such First Tranche
into Escrow.
The 2017 Financing will be 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 will be 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 shall contain the following provisions:
| |
(i) |
It will be secured by a first
priority security interest on the Company’s intellectual property
(the “IP”); |
| |
(ii) |
The Loan will bear interest at the
rate of eight percent (8%) per annum on the outstanding principal
amount of the Loan that has been funded to the Company; |
| |
(iii) |
The Loan proceeds will be 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) |
In the event there is a change of
control of the Company’s board of directors (“Board”) as proposed
by any person or group other than the Investors, the term of the
PRH Note will be accelerated and all amounts due under the PRH Note
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 Loan that
has been funded to the Company; |
| |
(v) |
The outstanding principal amount and
interest payable under the Loan will 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 to be designated
by the Board, at a price per share equal to $0.2862; and |
5
| |
(vi) |
Notwithstanding (v) above, the
principal amount of the PRH Note and the interest payable under the
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. |
The Series D Preferred Stock shall have a first priority right to
receive proceeds from the sale, liquidation or dissolution of the
Company or any of the Company’s assets (each, a “Company Event”).
If a Company Event occurs within two (2) years of the date of
issuance of the Series D Preferred Stock (the “Date of Issuance”),
the holders of Series D Preferred Stock shall receive a preference
of four times (4x) their respective investment amount. If a Company
Event occurs after the second (2nd) anniversary of the Date of
Issuance, the holders of the Series D Preferred Stock shall receive
a preference of six times (6x) their respective investment
amount.
The Series D Preferred Stock shall be convertible at the option of
the holders thereof into shares of the Company’s common stock based
on a formula to achieve a one-for-one conversion
ratio. The Series D Preferred Stock shall automatically convert
into shares of Common Stock upon the fifth anniversary of the Date
of Issuance. On an as-converted basis, the
Series D Preferred Stock shall carry the right to one (1) vote
per share. The Series D Preferred Stock shall not have any dividend
preference but shall be entitled to receive, on a pari passu basis,
dividends, if any, that are declared and paid on any other class of
the Company’s capital stock. The holders of Series D Preferred
Stock shall not have anti-dilution protection.
Subsequent to March 31, 2017, the Company received an
aggregate of $3,000,000 in the form of secured convertible loans in
connection with the First Tranche and Second Tranche, as described
in the Term Sheet. See Note 7 – Subsequent Events.
The Company plans to access capital resources through possible
public or private equity offerings, including the 2017 Financing,
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.
NYSE Delisting
On October 13, 2016, the Company received notice from NYSE MKT
that NYSE MKT commenced delisting procedures and immediately
suspended trading in the Company’s common stock and class of
warrants that was listed on NYSE MKT (“Listed Warrants”) and on
October 17, 2016, our common stock began trading on the OTCQB
Marketplace. On October 20, 2016, the Company submitted a
request for a review of such delisting determination and on
November 10, 2016, the Company submitted to the Listing
Qualifications Panel its written submission in connection with its
appeal. In addition, on November 23, 2016, the Company
received notice from NYSE MKT stating that the Company is not in
compliance with the Exchange’s continued listing standards.
Specifically, the Company is not in compliance with Section
1003(a)(iii) of the NYSE MKT Company Guide (requiring stockholders’
equity of $6.0 million or more if the Company has reported
losses from continuing operations and/or net losses in its five
most recent fiscal years). As of December 31, 2016, the
Company had stockholders’ equity of approximately
$3.5 million.
The hearing before the Listing Qualifications Panel occurred on
January 25, 2017. On January 31, 2017, the Company
received notice from the Listing Qualifications Panel that it
affirmed NYSE MKT’s original determination to delist the Company’s
common stock and Listed Warrants. On February 14, 2017, the
Company submitted a request for the Committee for Review to
reconsider the Listing Qualification Panel’s decision. The
Committee for Review considered the Company’s request for review on
March 30, 2017. On April 21, 2017, the NYSE MKT filed a
Form 25 with the SEC, notifying the SEC of the NYSE MKT’s intention
to remove the Company’s shares of common stock and Listed Warrants
from listing and registration on the NYSE MKT effective May 1,
2017, pursuant to the provisions of Rule 12d2-2(b) of the Securities Exchange
Act of 1934, as amended. The Company’s common stock and Listed
Warrants continue to trade on the OTCQB following the delisting
from the NYSE MKT under the trading symbols “PVCT” and “PVCTWS,”
respectively. The Company can provide no assurance that its common
stock and Listed Warrants will continue to trade on the OTCQB in
the future, however.
3. Significant Accounting Policies
The Company’s significant accounting policies are disclosed in Note
3 – Significant Accounting Policies in the Company’s Annual Report
on Form 10-K for the year
ended December 31, 2016. Since the date of the Annual Report,
there have been no material changes to the Company’s significant
accounting policies, except as disclosed below.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-03, “Derivatives and
Hedging (Topic 815): Contingent Put and Call Options in Debt
Instruments,” which clarifies the requirements for assessing
whether contingent call or put options that can accelerate the
repayment of principal on debt instruments are clearly and
6
closely related to their debt hosts. This guidance will be
effective for annual reporting periods beginning after
December 15, 2016, including interim periods within those
annual reporting periods, and early adoption is permitted. The
adoption of this ASU did not have a material impact on the
Company’s condensed consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock
Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting.” This ASU makes targeted amendments to the
accounting for employee share-based payments. This guidance is to
be applied using various transition methods such as full
retrospective, modified retrospective, and prospective based on the
criteria for the specific amendments as outlined in the guidance.
The guidance is effective for annual periods, and interim periods
within those annual periods, beginning after December 15,
2016. Early adoption is permitted, as long as all of the amendments
are adopted in the same period. The Company intends to apply this
ASU prospectively and its adoption is not expected to have a
material impact on the Company’s condensed consolidated financial
statements.
In October 2016, the FASB issued ASU No. 2016-17, “Consolidation (Topic
810) – Interests Held through Related Parties That Are under Common
Control” (“ASU 2016-17”).
ASU 2016-17 requires, when
assessing which party is the primary beneficiary in a VIE, that the
decision maker considers interests held by entities under common
control on a proportionate basis instead of treating those
interests as if they were that of the decision maker itself, as
current GAAP requires. The ASU is effective for annual periods, and
interim periods therein, beginning after December 15, 2016.
Early application is permitted in any interim or annual period. The
adoption of this ASU did not have a material impact on the
Company’s condensed consolidated financial statements.
4. Related Party Transactions
Convertible Promissory Note
On February 21, 2017, the Company issued a promissory note in
favor of Eric A. Wachter, the Company’s Chief Technology Officer
(“Lender”), evidencing an unsecured loan from Lender 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.
Pursuant to the terms of the Wachter Note, in the event that, prior
to the repayment in full of the Wachter Note, the Company
consummates a bona fide equity financing conducted with the
principal purpose of raising capital, pursuant to which the Company
sells shares or units of an equity security or preferred equity
approved by the board of directors, which board of directors must
consist of at least a majority of the members on the board of
directors serving as of the date of the Wachter Note (a “Qualified
Equity Financing”), then such amount of the outstanding principal
due under the Wachter Note plus all accrued but unpaid interest
that may be included in the Qualified Equity Financing shall
automatically convert into the equity securities or securities
convertible into equity securities of the Company issued in such
Qualified Equity Financing (“New Securities”) at the price per New
Security at which the Company issues any New Securities in any
public or private offering during the period that the Wachter Note
is outstanding and otherwise on the same terms (including the same
rights, preferences and privileges) as the other investors that
purchase New Securities in such Qualified Equity Financing.
The Wachter Note matures on the earlier of (i) May 22,
2017, (ii) the date upon which the Company defaults under the
Wachter Note or (iii) the date on which the Wachter Note is
converted into New Securities (the earliest of such dates, the
“Maturity Date”). In lieu of repayment on the Maturity Date, Lender
may elect in his sole discretion to apply any and all amounts due
and owing to Lender under the Wachter Note to Lender’s obligations
under that certain Settlement Agreement dated June 6, 2014 by
and between Lender and the Company.
As of March 31, 2017, the Company has borrowed the entire
$2,500,000 principal amount under the Wachter Note. The Company
evaluated the terms of the Wachter Note and determined that since
the conversion price is not yet fixed and will be based upon the
price per New Security issued upon the completion of a future
Qualified Equity Financing, that the measurement of a beneficial
conversion feature cannot be completed. The Wachter Note was
amended and restated on April 3, 2017. See Note 7 – Subsequent
Events.
Further, under the Wachter Note, the Company has agreed to pay to
Lender up to $25,000 for Lender’s reasonable legal fees and
expenses incurred in connection with the transactions contemplated
by the Wachter Note. As of March 31, 2017, the Company has not
paid any of Lender’s legal expenses. The Company may prepay
principal and interest under the Wachter Note at any time, in whole
or in part, without premium or other prepayment charges.
Pursuant to a Waiver of Rights Agreement, Lender further agreed to
waive his rights (A) to foreclose on the assets of the Company
or (B) to initiate, or cause the initiation of, any proceeding
in bankruptcy or the appointment of any custodian, trustee or
liquidator of the Company or of all or a portion of the Company’s
assets in the event of default under the Wachter Note so long as
(i) any shares of Series C Preferred Stock of the Company
issued pursuant to the Rights Offering commenced by the Company on
January 30, 2017 remain outstanding (other than such shares of
Series C Preferred Stock held by Lender) and (ii) a change in
control of the Company has not occurred, which is any transaction
that results in either (a) the shareholders of the Company not
continuing to hold at least 50% of the voting interest in the
Company after such transaction or (b) the directors of the
Company serving on the board of directors as of February 21,
2017 no longer represent a majority of the outstanding board
members.
7
5. Stockholders’ Deficiency
Termination of Rights Offering
On October 5, 2016, the Company filed a registration statement
on Form S-1 with
the SEC, as amended on November 1, 2016, November 22,
2016, December 6, 2016, December 21, 2016,
January 19, 2017 and January 26, 2017 to issue
subscription rights (“Rights”) to the Company’s existing common
stockholders and holders of the Company’s class of warrants with an
exercise price of $0.85 expiring June 19, 2020 (the “Listed
Warrants”) to purchase units (“Units”) consisting of shares of
common stock and Series C Preferred Stock (the “Rights Offering”).
Each share of Series C Preferred Stock was to be convertible into
eight (8) shares of common stock. Each Right would have
entitled holders of the Company’s common stock and Listed Warrants
to purchase one Unit. On March 20, 2017, the Company announced
the termination of the Rights Offering without accepting any funds
from investors. Broadridge Corporate Issuer Solutions, Inc., the
subscription agent for the Rights Offering (“Broadridge”), returned
all subscription payments received by Broadridge to investors,
without interest or penalty. All subscription rights expired upon
termination of the Rights Offering. On March 24, 2017, the
Company filed a Certificate of Elimination to cancel the Series C
Preferred Stock with the Secretary of State of the State of
Delaware.
Conversion of Series B Preferred Stock
During the three months ended March 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, 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 three months ended March 31, 2017. The
Company recorded aggregate dividends paid in kind of $14,007 during
the three months ended March 31, 2017.
6. Litigation
Kleba Shareholder Derivative Lawsuit
On January 2, 2013, Glenn Kleba, derivatively on behalf of the
Company, filed a shareholder derivative complaint in the Circuit
Court for the State of Tennessee, Knox County (the “Court”),
against Dr. Dees, Timothy C. Scott, Eric A. Wachter, and Peter
R. Culpepper (collectively, the “Executives”), Stuart Fuchs, Kelly
M. McMasters, and Alfred E. Smith, IV (collectively, together with
the Executives, the “Individual Defendants”), and against the
Company as a nominal defendant (the “Shareholder Derivative
Lawsuit”). The Shareholder Derivative Lawsuit alleged
(i) breach of fiduciary duties, (ii) waste of corporate
assets, and (iii) unjust enrichment, all three claims based on
Mr. Kleba’s allegations that the defendants authorized and/or
accepted stock option awards in violation of the terms of the
Company’s 2002 Stock Plan (the “Plan”) by issuing stock options in
excess of the amounts authorized under the Plan and delegated to
defendant Dr. Dees the sole authority to grant himself and the
other Executives cash bonuses that Mr. Kleba alleges to be
excessive.
In April 2013, the Company’s Board of Directors appointed a special
litigation committee to investigate the allegations of the
Shareholder Derivative Complaint and make a determination as to how
the matter should be resolved. The special litigation committee
conducted its investigation, and proceedings in the case were
stayed pending the conclusion of the committee’s investigation. At
that time, the Company established a reserve of $100,000 for
potential liabilities because such is the amount of the
self-insured retention of its insurance policy. On
February 21, 2014, an Amended Shareholder Derivative Complaint
was filed which added Don B. Dale (“Mr. Dale”) as a
plaintiff.
On March 6, 2014, the Company filed a Joint Notice of
Settlement (the “Notice of Settlement”) in the Shareholder
Derivative Lawsuit. In addition to the Company, the parties to the
Notice of Settlement are Mr. Kleba, Mr. Dale and the
Individual Defendants.
On June 6, 2014, the Company, in its capacity as a nominal
defendant, entered into a Stipulated Settlement Agreement and
Mutual Release (the “Settlement”) in the Shareholder Derivative
Lawsuit. In addition to the Company and the Individual Defendants,
Plaintiffs Glenn Kleba and Don B. Dale are parties to the
Settlement.
By entering into the Settlement, the settling parties resolved the
derivative claims to their mutual satisfaction. The Individual
Defendants have not admitted the validity of any claims or
allegations and the settling plaintiffs have not admitted that any
claims or allegations lack merit or foundation. Under the terms of
the Settlement, (i) the Executives each agreed (A) to re-pay to the
Company $2.24 million of the cash bonuses they each received
in 2010 and 2011, which amount equals 70% of such bonuses or an
estimate of
8
the after-tax net
proceeds to each Executive; provided, however, that subject to
certain terms and conditions set forth in the Settlement, the
Executives are entitled to a 2:1 credit such that total actual
repayment may be $1.12 million each; (B) to reimburse the
Company for 25% of the actual costs, net of recovery from any other
source, incurred by the Company as a result of the Shareholder
Derivative Lawsuit; and (C) to grant to the Company a first
priority security interest in 1,000,000 shares of the Company’s
common stock owned by each such Executive to serve as collateral
for the amounts due to the Company under the Settlement;
(ii) Drs. Dees and Scott and Mr. Culpepper agreed to
retain incentive stock options for 100,000 shares but shall forfeit
50% of the nonqualified stock options granted to each such
Executive in both 2010 and 2011. The Settlement also requires that
each of the Executives enter into new employment agreements with
the Company, which were entered into on April 28, 2014, and
that the Company adhere to certain corporate governance principles
and processes in the future. Under the Settlement, Messrs. Fuchs
and Smith and Dr. McMasters have each agreed to pay the
Company $25,000 in cash, subject to reduction by such amount that
the Company’s insurance carrier pays to the Company on behalf of
such defendant pursuant to such defendant’s directors and officers
liability insurance policy. The Settlement also provides for an
award to plaintiffs’ counsel of attorneys’ fees and reimbursement
of expenses in connection with their role in this litigation,
subject to Court approval.
On July 24, 2014, the Court approved the terms of the proposed
Settlement and awarded $911,000 to plaintiffs’ counsel for
attorneys’ fees and reimbursement of expenses in connection with
their role in the Shareholder Derivative Lawsuit. The payment to
plaintiff’s counsel was made by the Company during October 2014 and
was recorded as other current assets at December 31, 2014, as
the Company is seeking reimbursement of the full amount from its
insurance carrier. If the full amount is not received from
insurance, the amount remaining will be reimbursed to the Company
from the Individual Defendants. As of March 31, 2017 and
December 31, 2016, the net amount of the receivable of
$455,500 is reported as non-current assets on the
condensed consolidated balance sheets.
On October 3, 2014, the Settlement was effective and stock
options for Dr. Dees, Dr. Scott and Mr. Culpepper
were rescinded, totaling 2,800,000. $900,000 was repaid by the
Executives as of December 31, 2015 and $600,000 was repaid by
the Executives during the year ended December 31, 2016. The
remaining cash settlement amounts will continue to be repaid to the
Company over the next three years with the final payment to be
received by October 3, 2019. The remaining balance due the
Company as of March 31, 2017 is $1,224,345, including a
reserve for uncollectibility of $1,549,043 in connection with the
resignation of Dr. Dees and termination of Mr. Culpepper,
with a present value discount remaining of $57,623. As a result of
his resignation, Dr. Dees is no longer entitled to the 2:1
credit, such that his total repayment obligation of $2,040,000 (the
total $2.24 million owed by Dr. Dees pursuant to the
Settlement less the $200,000 that he repaid) plus Dr. Dees’s
proportionate share of the litigation costs is immediately due and
payable. The Company sent Dr. Dees a notice of default in
March 2016 for the total amount he owes the Company. As a result of
his termination “for cause”, Mr. Culpepper is no longer
entitled to the 2:1 credit, such that his total repayment
obligation of $2,051,083 (the total $2,240,000 owed by
Mr. Culpepper pursuant to the Settlement plus
Mr. Culpepper’s proportionate share of the litigation cost of
$227,750 less the $416,667 that he repaid) is immediately due and
payable. The Company sent Mr. Culpepper a notice of default in
January 2017 for the total amount he owes the Company.
Mr. Culpepper disputes that he was terminated “for cause” and
thus disputes that he owes the full $2,051,083 repayment amount
under the Settlement.
Dees Collection Lawsuit
On May 5, 2016, the Company filed a lawsuit in the United
States District Court for the Eastern District of Tennessee at
Knoxville against Dr. Dees and his wife, Virginia Godfrey
(together with Dr. Dees, the “Defendants”). The Company
alleges that between 2013 and the present, Dr. Dees received
approximately $2.4 million in advanced or reimbursed travel
and entertainment expenses from the Company and that Dr. Dees
did not use these funds for legitimate travel and entertainment
expenses as he requested and the Company intended. Instead, the
Company alleges that Dr. Dees created false receipts and
documentation for the expenses and applied the funds to personal
use. The Company and Dr. Dees are parties to a Stipulated
Settlement Agreement dated June 6, 2014 (the “Kleba Settlement
Agreement”) that was negotiated to resolve certain claims asserted
against Dr. Dees derivatively. Pursuant to the terms of the
Kleba Settlement Agreement, Dr. Dees agreed to repay the
Company compensation that was paid to him along with legal fees and
other expenses incurred by the Company. As of the date of his
resignation, Dr. Dees still owed the Company $2,267,750 under
the Kleba Settlement Agreement. Dr. Dees has failed to make
such payment, and the Company has notified him that he is in
default and demanded payment in full. The Company has established a
reserve of $2,267,750 as of March 31, 2017 and
December 31, 2016, which amount represents the amount the
Company currently believes Dr. Dees owes to the Company, while
the Company pursues collection of this amount. Therefore, the
Company is alleging counts of conversion, fraud, breach of
fiduciary duty, breach of contract, breach of Kleba Settlement
Agreement, unjust enrichment and punitive damages in this lawsuit.
The Company is seeking that the Defendants be prohibited from
disposing of any property that may have been paid for with the
misappropriated funds, the Defendants be disgorged of any funds
shown to be fraudulently misappropriated and that the Company be
awarded compensatory damages in an amount not less than
$5 million. Furthermore, the Company is seeking for the
damages to be joint and several as to the Defendants and that
punitive damages be awarded against Dr. Dees in the Company’s
favor. The Company is also seeking foreclosure of the Company’s
first-priority security interest in the 1,000,000 shares of common
stock granted by Dr. Dees to the Company as collateral
pursuant to that certain Stock Pledge Agreement dated
October 3, 2014, between Dr. Dees and the Company in
order to secure Dr. Dees’ obligations under the Kleba
Settlement Agreement. The United States District Court for the
Eastern District of Tennessee at Knoxville entered a default
judgment against the Defendants on July 20, 2016; however, the
Company cannot predict when these
9
shares will be recovered by the Company. The Court recently issued
a Temporary Restraining Order upon the Company’s application for
same upon notice that Dr. Dees was attempting to sell his
shares of the Company’s common stock. The Temporary Restraining
Order was converted to a Preliminary Injunction on
September 16, 2016, which order will remain in place until the
resolution of the underlying lawsuit absent further court order or
agreement of the parties. On March 15, 2017, the Court granted
Ms. Godfrey’s motion to set aside the default judgment against
her and set a deadline of March 30, 2017 for Ms. Godfrey
to file an answer to the Company’s complaint. Ms. Godfrey
filed her answer on March 28, 2017 demanding that the
complaint against her be dismissed. The Court held a hearing on
April 26, 2017 to determine damages with respect to the motion
for default judgment against Dr. Dees. The Court requested
additional briefing on damages. The Company’s brief is due on
May 26, 2017.
Mr. Culpepper Travel Expenses and Related Collection
Efforts
On December 27, 2016, the Company’s Board of Directors
unanimously voted to terminate Peter R. Culpepper, effective
immediately, from all positions he held with the Company and each
of its subsidiaries, including Interim Chief Executive Officer and
Chief Operating Officer of the Company, for cause, in accordance
with the terms of the Amended and Restated Executive Employment
Agreement entered into by Peter R. Culpepper and the Company on
April 28, 2014 (the “Culpepper Employment Agreement”) based on
the results of the investigation conducted by a Special Committee
of the Board of Directors regarding improper travel expense
advancements and reimbursements to Mr. Culpepper.
The Special Committee retained independent counsel and an advisory
firm with forensic accounting expertise to assist the Special
Committee in conducting the investigation. The Special Committee
found that Mr. Culpepper received $294,255 in travel expense
reimbursements and advances that were unsubstantiated. The Company
seeks to recover from Mr. Culpepper the entire $294,255 in
unsubstantiated travel expense reimbursements and advances, as well
as all attorney’s fees and auditors’/experts’ fees incurred by the
Company in connection with the examination of his travel expense
reimbursements.
Under the terms of the Culpepper Employment Agreement,
Mr. Culpepper is owed no severance payments as a result of his
termination “for cause” as that term is defined in the Culpepper
Employment Agreement. Under section 6 of the Culpepper Employment
Agreement, “Effect of Termination,” a termination “for cause”
terminates any payments due to Mr. Culpepper as of the last
day of his employment. Furthermore, Mr. Culpepper is no longer
entitled to the 2:1 credit under the Kleba Settlement Agreement
(see Note 11 to the financial statements), such that the total
$2,240,000 owed by Mr. Culpepper pursuant to the Kleba
Settlement Agreement plus Mr. 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 Mr. Culpepper a notice of default in
January 2017 for the total amount he owes the Company and intends
to resolve these claims pursuant to the alternative dispute
resolution provision of the Culpepper Employment Agreement. The
Company has established a reserve of $2,051,083 as of
March 31, 2017 and December 31, 2016, which amount
represents the amount the Company currently believes
Mr. Culpepper owes to the Company, while the Company pursues
collection of this amount.
Mr. Culpepper disputes that he was terminated “for cause”
under the Culpepper Employment Agreement and Mr. Culpepper has
demanded this issue be resolved by mediation in accordance with the
Culpepper Employment Agreement. The Company is in the process of
responding to Mr. Culpepper’s demand, and the mediation has
been scheduled for June 28, 2017. Concurrently, the Company is
seeking from Mr. Culpepper immediate payment of amounts due
under the Kleba Settlement Agreement as noted above.
The Bible Harris Smith Lawsuit
On November 17, 2016, the Company filed a lawsuit in the
Circuit Court for Knox County, Tennessee against Bible Harris Smith
PC (“BHS”) for professional negligence, common law negligence and
breach of fiduciary duty arising from accounting services provided
by BHS to the Company. The Company alleges that between 2013 and
the present, Dr. Dees received approximately $2.4 million
in advanced or reimbursed travel and entertainment expenses from
the Company and that Dr. 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
Dr. Dees’s failure to submit back-up documentation
supporting the advanced travel funds at the inception of
Dr. Dees’s 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 have begun discovery.
Other Regulatory Matters
The Company has received a subpoena from the staff of the SEC
related to the travel expense advancements and reimbursements
received by H. Craig Dees, the Company’s former Chief Executive
Officer, and the Company has received a subsequent subpoena from
the staff of the SEC related to the travel expense advancements and
reimbursements received by Peter R. Culpepper, the Company’s former
Interim Chief Executive Officer and Chief Operating Officer and
former Chief Financial Officer. At this time, the staff’s
investigation into these matters remains ongoing. The Company is
cooperating with the staff but cannot predict with any certainty
what the outcome of the foregoing may be.
10
7. Subsequent Events
The Company has evaluated subsequent events through the date of the
filing of these financial statements.
First Tranche of 2017 Financing
In connection with the funding of the First Tranche of the 2017
Financing, as described in the Term Sheet, 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 (the “Rodrigues Note”), in the
principal amount of up to $2.5 million. In addition, the
Wachter Note was amended and restated in order to modify the terms
of the Wachter Note to mirror the PRH Notes. See Note 2 – Liquidity
and Financial Condition for terms of the PRH Notes. On
April 3, 2017, the Company received $500,000 under the
Rodrigues Note.
Second Tranche of 2017 Financing
In connection with the funding of the Second Tranche of the 2017
Financing, as described in the Term Sheet, on April 20, 2017,
the Company entered into a PRH Note with an accredited investor
(the “Second Tranche Note”), in the principal amount of up to
$2.5 million. See Note 2 – Liquidity and Financial Condition
for terms of the PRH Note. As of May 1, 2017, the Company had
received the entire $2,500,000 under the Second Tranche Note.
Director Resignations and Appointments
On April 3, 2017, each of Alfred E. Smith, IV, Timothy C.
Scott and Kelly M. McMasters, MD notified the Company of their
decision to resign from the Board effective immediately, and in
connection therewith, the Board reduced the size of the Board to
four directors. On April 3, 2017, the Board appointed each of
Dominic Rodrigues and Bruce Horowitz to the Board to fill two
vacancies.
NYSE Delisting
See Note 2 - Liquidity and Financial Condition – NYSE Delisting for
details.
11
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion is intended to assist in the understanding
and assessment of significant changes and trends related to our
results of operations and our financial condition together with our
consolidated subsidiaries. This discussion and analysis should be
read in conjunction with the accompanying unaudited financial
statements, our Annual Report on Form 10-K for the year ended
December 31, 2016 (“2016 Form 10-K”), which includes additional
information about our critical accounting policies and practices
and risk factors, and Item 1A of Part II of this report.
Historical results and percentage relationships set forth in the
statement of operations, including trends which might appear, are
not necessarily indicative of future operations.
Plan of Operation
We have implemented our integrated business plan, including
execution of the current and next phases in clinical development of
our pharmaceutical products and continued execution of research
programs for new research initiatives.
We believe that our investigational drugs PV-10 and PH-10 provide us with two products in
multiple indications, which have completed early phase clinical
trials for serious cancers and diseases of the skin, and important
immunologic data has been corroborated and characterized by
institutions such as Moffitt Cancer Center in Tampa, Florida and
the University of Illinois at Chicago. We continue to conduct
clinical trials for these products to show their safety and
efficacy, which we believe will be shown based on data in previous
studies, and which may result in one or more license transactions
with pharmaceutical and/or biotech companies. Together with our
non-core technologies,
which we intend to sell or license in the future, we believe this
combination represents the foundation for maximizing shareholder
value this year and beyond.
Results of Operations
Comparison of Three Months Ended March 31, 2017 and
March 31, 2016
Research and Development
Research and development costs of $1,853,573 for the three months
ended March 31, 2017 included amortization of patents of
$167,780, payroll of $92,949, consulting and contract labor of
$1,379,799, legal of $99,925, insurance of $77,841, lab supplies
and pharmaceutical preparations of $9,877, rent and utilities of
$19,224, depreciation expense of $2,631 and conference expenses of
$3,549. Research and development costs of $2,407,984 for the three
months ended March 31, 2016 included amortization of patents
of $167,780, payroll of $317,053, consulting and contract labor of
$1,736,129, legal of $81,955, insurance of $54,263, lab supplies
and pharmaceutical preparations of $17,867, rent and utilities of
$29,441, and depreciation expense of $3,496.
The overall decrease in research and development costs is due
primarily to the decrease consulting and contract labor of
approximately $356,000 which was primarily due to startup costs for
sites in 2016 as well the decrease in payroll expense of
approximately $224,000 which was primarily due to reduced salary
and other benefits associated with the departure of certain of our
executives in 2016.
General and Administrative
General and administrative expenses decreased by $3,554,632 in the
three months ended March 31, 2017 to $2,544,600 from
$6,099,232 for the three months ended March 31, 2016. The
decrease was primarily attributable to the following:
(i) expense of approximately $2.7 million of warrant
incentive expense which was recognized during the three months
ended March 31, 2016; (ii) an approximate $200,000 decrease in
payroll expense during the three months ended March 31, 2017
due to departure of certain of our executives in 2016; and
(iii) an approximate $717,000 decrease in professional fees
due to the termination and reduction in scope of certain
contracts.
Investment Income
Investment income is immaterial for all periods presented.
Liquidity and Capital Resources
The Company’s cash and cash equivalents were $436,952 at
March 31, 2017, compared with $1,165,738 at December 31,
2016. The condensed consolidated financial statements and notes
thereto included in this Quarterly Report on Form 10-Q have been prepared
on a basis that contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of
business. We have continuing net losses and negative cash flows
from operating activities. In addition, we have an accumulated
deficit of $209,612,918 as of March 31, 2017. These conditions
raise substantial doubt about our ability to continue as a going
concern within one year after the date that the financial
statements included elsewhere in this Quarterly Report on Form
10-Q are issued. Our
12
financial statements do not include any adjustments to the amounts
and classification of assets and liabilities that may be necessary
should we be unable to continue as a going concern. Our ability to
continue as a going concern depends on our ability to obtain
additional financing as may be required to fund current operations.
Management’s plans include selling its equity securities and
obtaining other financing to fund its capital requirement
and on-going operations,
including the 2017 Financing discussed below; however, there can be
no assurance the Company will be successful in these efforts. The
financial statements do not include any adjustment that might be
necessary if the Company is unable to continue as a going concern.
Significant funds will be needed for the Company to continue and
complete its Phase 3 clinical trials.
Convertible Promissory Note
On February 21, 2017, we issued a convertible promissory note
in favor of Eric A. Wachter, the Company’s Chief Technology Officer
(“Lender”), evidencing an unsecured loan from Lender 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.
The Wachter Note matures on the earlier of (i) May 22,
2017, (ii) the date upon which the Company defaults under the
Wachter Note or (iii) the date on which the Wachter Note is
converted into New Securities (the earliest of such dates, the
“Maturity Date”). In lieu of repayment on the Maturity Date, Lender
may elect in his sole discretion to apply any and all amounts due
and owing to Lender under the Wachter Note to Lender’s obligations
under that certain Settlement Agreement dated June 6, 2014 by
and between Lender and the Company in connection with the
settlement of the Kleba shareholder derivative lawsuit (see Note 6
to the financial statements).
As of March 31, 2017, we had borrowed the entire $2,500,000
principal amount under the Wachter Note.
Pursuant to the terms of the Wachter Note, in the event that, prior
to the repayment in full of the Wachter Note, the Company
consummates a bona fide equity financing conducted with the
principal purpose of raising capital, pursuant to which the Company
sells shares or units of an equity security or preferred equity
approved by the board of directors, which board of directors must
consist of at least a majority of the members on the board of
directors serving as of the date of the Wachter Note (a “Qualified
Equity Financing”), then such amount of the outstanding principal
due under the Wachter Note plus all accrued but unpaid interest
that may be included in the Qualified Equity Financing shall
automatically convert into the equity securities or securities
convertible into equity securities of the Company issued in such
Qualified Equity Financing (“New Securities”) at the price per New
Security at which the Company issues any New Securities in any
public or private offering during the period that the Wachter Note
is outstanding and otherwise on the same terms (including the same
rights, preferences and privileges) as the other investors that
purchase New Securities in such Qualified Equity Financing.
Further, under the Wachter Note, we have agreed to pay to Lender up
to $25,000 for Lender’s reasonable legal fees and expenses incurred
in connection with the transactions contemplated by the Wachter
Note. We may prepay principal and interest under the Wachter Note
at any time, in whole or in part, without premium or other
prepayment charges.
Pursuant to a Waiver of Rights Agreement, Lender further agreed to
waive his rights (A) to foreclose on the assets of the Company
or (B) to initiate, or cause the initiation of, any proceeding
in bankruptcy or the appointment of any custodian, trustee or
liquidator of the Company or of all or a portion of the Company’s
assets in the event of default under the Wachter Note so long as
(i) any shares of Series C Preferred Stock of the Company
issued pursuant to the Rights Offering commenced by the Company on
January 30, 2017 remain outstanding (other than such shares of
Series C Preferred Stock held by Lender) and (ii) a change in
control of the Company has not occurred, which is any transaction
that results in either (a) the shareholders of the Company not
continuing to hold at least 50% of the voting interest in the
Company after such transaction or (b) the directors of the
Company serving on the board of directors as of February 21,
2017 no longer represent a majority of the outstanding board
members. On March 24, 2017, the Company filed a Certificate of
Elimination to cancel the Series C Preferred Stock with the
Secretary of State of the State of Delaware since no shares of
Series C Preferred Stock were issued or outstanding after the
Company terminated the Rights Offering without accepting any
subscriptions.
The Wachter Note was amended and restated on April 3, 2017 in
order to match the terms of the Wachter Note to the PRH Notes (as
defined below).
Term Sheet for 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 “Term Sheet”),
which sets forth the terms on which the PRH Group will 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”), $2,500,000 of
which was funded into Escrow (as defined below) upon the execution
of definitive documents, and the $2,500,000 Wachter Note (as
defined below) was exchanged for a PRH Note (as defined below) on
the terms described below upon the funding of such First Tranche
into Escrow.
13
The 2017 Financing will be 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 will be 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 shall contain the following provisions:
| |
(i) |
It will be secured by a first
priority security interest on the Company’s intellectual property
(the “IP”); |
| |
(ii) |
The Loan will bear interest at the
rate of eight percent (8%) per annum on the outstanding principal
amount of the Loan that has been funded to the Company; |
| |
(iii) |
The Loan proceeds will be 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) |
In the event there is a change of
control of the Company’s board of directors (“Board”) as proposed
by any person or group other than the Investors, the term of the
PRH Note will be accelerated and all amounts due under the PRH Note
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 Loan that
has been funded to the Company; |
| |
(v) |
The outstanding principal amount and
interest payable under the Loan will 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 to be designated
by the Board, at a price per share equal to $0.2862; and |
| |
(vi) |
Notwithstanding (v) above, the
principal amount of the PRH Note and the interest payable under the
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. |
The Series D Preferred Stock shall have a first priority right to
receive proceeds from the sale, liquidation or dissolution of the
Company or any of the Company’s assets (each, a “Company Event”).
If a Company Event occurs within two (2) years of the date of
issuance of the Series D Preferred Stock (the “Date of Issuance”),
the holders of Series D Preferred Stock shall receive a preference
of four times (4x) their respective investment amount. If a Company
Event occurs after the second (2nd) anniversary of the Date of
Issuance, the holders of the Series D Preferred Stock shall receive
a preference of six times (6x) their respective investment
amount.
The Series D Preferred Stock shall be convertible at the option of
the holders thereof into shares of the Company’s common stock based
on a formula to achieve a one-for-one conversion
ratio. The Series D Preferred Stock shall automatically convert
into shares of Common Stock upon the fifth anniversary of the Date
of Issuance. On an as-converted basis, the
Series D Preferred Stock shall carry the right to one (1) vote
per share. The Series D Preferred Stock shall not have any dividend
preference but shall be entitled to receive, on a pari passu basis,
dividends, if any, that are declared and paid on any other class of
the Company’s capital stock. The holders of Series D Preferred
Stock shall not have anti-dilution protection.
First Tranche of 2017 Financing
In connection with the funding of the First Tranche of the 2017
Financing, as described in the Term Sheet, 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 (the “Rodrigues Note”), in the
principal amount of up to $2.5 million. In addition, the
Wachter Note was amended and restated in order to match the terms
of the Wachter Note to the PRH Notes. See Note 2 – Liquidity and
Financial Condition for terms of the PRH Notes. On April 17,
2017, the Company received $500,000 under the Rodrigues Note.
Second Tranche of 2017 Financing
In connection with the funding of the Second Tranche of the 2017
Financing, as described in the Term Sheet, on April 20, 2017,
the Company entered into a PRH Note with an accredited investor
(the “Second Tranche Note ”), in the principal amount of up to
$2.5 million. See Note 2 – Liquidity and Financial Condition
for terms of the PRH Note. As of May 1, 2017, the Company had
received the entire $2,500,000 under the Second Tranche Note.
NYSE Delisting
On October 13, 2016, the Company received notice from NYSE MKT
that NYSE MKT commenced delisting procedures and immediately
suspended trading in the Company’s common stock and class of
warrants that was listed on NYSE MKT (“Listed Warrants”) and on
October 17, 2016, our common stock began trading on the OTCQB
Marketplace. On October 20, 2016, the Company submitted a
request for a review of such delisting determination and on
November 10, 2016, the Company submitted to the Listing
Qualifications Panel its written submission in connection with its
appeal. In addition, on November 23, 2016, the Company
received notice from NYSE MKT stating that the Company is not in
compliance with the Exchange’s continued listing standards.
Specifically, the Company is not in compliance with Section
1003(a)(iii) of the NYSE MKT Company Guide (requiring
stockholders’
14
equity of $6.0 million or more if the Company has reported
losses from continuing operations and/or net losses in its five
most recent fiscal years). As of December 31, 2016, the
Company had stockholders’ equity of approximately
$3.5 million.
The hearing before the Listing Qualifications Panel occurred on
January 25, 2017. On January 31, 2017, the Company
received notice from the Listing Qualifications Panel that it
affirmed NYSE MKT’s original determination to delist the Company’s
common stock and Listed Warrants. On February 14, 2017, the
Company submitted a request for the Committee for Review to
reconsider the Listing Qualification Panel’s decision. The
Committee for Review considered the Company’s request for review on
March 30, 2017. On April 21, 2017, the NYSE MKT filed a
Form 25 with the SEC, notifying the SEC of the NYSE MKT’s intention
to remove the Company’s shares of common stock and Listed Warrants
from listing and registration on the NYSE MKT effective May 1,
2017, pursuant to the provisions of Rule 12d2-2(b) of the Securities Exchange
Act of 1934, as amended. The Company’s common stock and Listed
Warrants continue to trade on the OTCQB following the delisting
from the NYSE MKT under the trading symbols “PVCT” and “PVCTWS,”
respectively. The Company can provide no assurance that its common
stock and Listed Warrants will continue to trade on the OTCQB in
the future, however.
Termination of Rights Offering
On October 5, 2016, the Company filed a registration statement
on Form S-1 with
the SEC, as amended on November 1, 2016, November 22,
2016, December 6, 2016, December 21, 2016,
January 19, 2017 and January 26, 2017 to issue
subscription rights (“Rights”) to the Company’s existing common
stockholders and holders of the Company’s class of warrants with an
exercise price of $0.85 expiring June 19, 2020 (the “Listed
Warrants”) to purchase units (“Units”) consisting of shares of
common stock and Series C Preferred Stock (the “Rights Offering”).
Each share of Series C Preferred Stock was to be convertible into
eight (8) shares of common stock. Each Right would have
entitled holders of the Company’s common stock and Listed Warrants
to purchase one Unit. On March 20, 2017, the Company announced
the termination of the Rights Offering without accepting any funds
from investors. Broadridge Corporate Issuer Solutions, Inc., the
subscription agent for the Rights Offering (“Broadridge”), returned
all subscription payments received by Broadridge to investors,
without interest or penalty. All subscription rights expired upon
termination of the Rights Offering. On March 24, 2017, the
Company filed a Certificate of Elimination to cancel the Series C
Preferred Stock with the Secretary of State of the State of
Delaware.
Access to Capital
Management plans to access capital resources through possible
public or private equity offerings, including the 2017 Financing,
exchange offers, debt financings, corporate collaborations or other
means. We expect that the existing and forthcoming clinical and
nonclinical mechanism of action data for both PV-10 and PH-10 will
further aid in both regulatory clarity and transactions with
potential partners. In addition, the Company continues to explore
opportunities to strategically monetize its lead drug candidate, PV-10, through
potential licensing transactions, although there can be no
assurance provided that the Company will be successful with such
plans. The Company has historically been able to raise capital
through equity offerings, although no assurance can be provided
that it will continue to be successful in the future. If the
Company is unable to raise sufficient capital through the 2017
Financing or otherwise, it will not be able to pay its obligations
as they become due.
The primary financial objective of our company is to strategically
monetize the core value of PV-10 and PH-10 through
the various transactions discussed elsewhere in this report.
However, we cannot assure you that we will be successful in
licensing either PV-10 or PH-10, entering
into any equity transaction, or selling a majority stake of the OTC
and other non-core assets via
a spin-out transaction and
licensing our existing non-core products.
Moreover, even if we are successful in improving our current cash
flow position, we nonetheless plan to seek additional funds to
meet our long-term requirements in 2017 and beyond. We anticipate
that these funds will otherwise come from the proceeds of private
placements, the exercise of existing warrants and outstanding stock
options, or public offerings of debt or equity securities,
including the 2017 Financing. While we believe that we have a
reasonable basis for our expectation that we will be able to raise
additional funds, we cannot assure you that we will be able to
complete additional financing in a timely manner. In addition, any
such financing may result in significant dilution to
stockholders.
Critical Accounting Policies
Management’s discussion and analysis of financial condition and
results of operations is based upon our condensed consolidated
financial statements, which have been prepared in accordance with
GAAP. The preparation of these condensed consolidated financial
statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses. Management bases its estimates on historical experience
and assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions. We believe there have been no material changes to the
items that we disclosed as our critical accounting policies under
Part II, Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” in our 2016 Form 10-K.
15
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We had no holdings of financial or commodity instruments as of
March 31, 2017, other than cash and cash equivalents,
short-term deposits, money market funds, and interest bearing
investments in U.S. governmental debt securities. We have accounted
for certain warrants issued in March and April 2010, January 2011,
February 2013 and August 2016 as liabilities at their fair value
upon issuance, which were remeasured at each period end with the
change in fair value recorded in the statement of operations. All
such warrants were valued at $0 as of March 31, 2017.
All of our business is transacted in U.S. dollars and, accordingly,
foreign exchange rate fluctuations have not had a significant
impact on us, and they are not expected to have a significant
impact on us in the foreseeable future. The formation of our
Australian subsidiary is initially for the purpose of enabling
lower clinical developments costs in Australia and will not impact
our financial statements.
ITEM 4. CONTROLS AND
PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. Our president
(principal executive officer) and interim chief financial officer
have evaluated the effectiveness of the design and operation of our
“disclosure controls and procedures” (as that term is defined in
Rule 13a-15(e) under
the Exchange Act) as of March 31, 2017, the end of the fiscal
quarter covered by this Quarterly Report on Form 10-Q. Based on that
evaluation, our president (principal executive officer) and interim
chief financial officer have concluded that our disclosure controls
and procedures are not effective.
(b) Changes in Internal Controls. There has been no change in our
internal control over financial reporting that occurred during the
fiscal quarter covered by this Quarterly Report on Form
10-Q that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our principal executive
officer and principal financial officer, carried out an evaluation
of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act at
December 31, 2016. Based on that evaluation, our principal
executive officer and principal financial officer concluded that
our disclosure controls and procedures along with the related
internal controls over financial reporting were not effective to
provide reasonable assurance that the information required to be
disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in SEC rules and forms, and is
accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required
disclosure. Our remediation plan is still in process and as such,
these material weaknesses continued to exist at March 31,
2017.
Inherent Limitations on Effectiveness of Controls
Even assuming the effectiveness of our controls and procedures, our
management, including our principal executive officer and principal
financial officer, does not expect that our disclosure controls or
our internal control over financial reporting will prevent or
detect all error or all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute,
assurance that the control system’s objectives will be met. In
general, our controls and procedures are designed to provide
reasonable assurance that our control system’s objective will be
met, and our principal executive officer and principal financial
officer has concluded that our disclosure controls and procedures
are not effective at the reasonable assurance level. The design of
a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered
relative to their costs. Further, because of the inherent
limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud
will not occur or that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple error
or mistake. Controls can also be circumvented by the individual
acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of
controls is based in part on certain assumptions about the
likelihood of future events and there can be no assurance that any
design will succeed in achieving its stated goals under all
potential future conditions. Projections of any evaluation of the
effectiveness of controls in future periods are subject to risks.
Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with
policies or procedures.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in
Rule 13a-15(f) and
15d-15(f) under the
Exchange Act). Our internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of our
financial statements for external purposes in accordance with GAAP.
Our internal control over financial reporting includes those
policies and procedures that: (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our
16
assets; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that receipts and
expenditures by us are being made only in accordance with
authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition
of our assets that could have a material effect on the consolidated
financial statements.
Material Weakness
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of the company’s annual or interim financial statements will not be
prevented or detected on a timely basis. Management’s review of the
year’s activities in combination with its assessment of internal
controls at December 31, 2016 identified the below-described
material weaknesses:
| |
1) |
Our former executives failed to set
an appropriate “Tone at the Top.” Specifically, our former
executives failed to act in accordance with our Code of Ethics and
Conduct as well as our travel and entertainment expense
reimbursement policy. |
| |
2) |
Inadequate design of controls over
period end financial reporting and disclosure processes. |
| |
3) |
Certain control procedures were not
in place while others were unable to be verified due to performance
of the procedure not being sufficiently documented. As an example,
some procedures requiring review of certain reports could not be
verified due to there being no written documentation of such
review. |
| |
4) |
The Company did not maintain adequate
segregation of duties related to the approval and execution of
certain transactions impacting our financial reporting. Management
believes that all transactions have been duly authorized, however
there was a lack of written evidence of such authorization, review
and approval. |
| |
5) |
The Company failed to maintain
general control activities over its Information Technology (“IT”)
environment to support its objectives. Specifically, the Company
has not properly completed an IT risk or security assessment,
resulting in deficiencies in data protection, vendor management,
completeness, accuracy and availability of technology
processing. |
Our 2015 internal control testing identified inadequate supporting
documentation and lack of adequate review for travel advances and
expense reimbursements. The Audit Committee conducted a review of
Company procedures, policies and practices, including travel
expense advancements and reimbursements to H. Craig Dees, our
former Chief Executive Officer. The Audit Committee retained
independent counsel and an advisory firm with forensic accounting
expertise to assist the Audit Committee in conducting the
investigation. As part of the investigation, the Audit Committee
reviewed our financial policies and procedures, including
management expenses. The Audit Committee concluded that
Dr. Dees did not produce receipts for most of the travel
expense advances he received from 2013 to 2015, and some receipts
produced by Dr. Dees during this period appear to have been
altered.
A subsequent investigation conducted by a special committee of the
Board of Directors regarding Mr. Culpepper’s travel expenses
concluded that Mr. Culpepper, our Interim Chief Executive
Officer and former Chief Financial Officer, did not produce
receipts and/or proof of travel for certain travel expense advances
he received.
Remediation
Our remediation plan is still in process and, as such, most of
these material weaknesses continued to exist at March 31, 2017
and as of the date of this filing. We have put in place more
clearly defined, tighter controls, including a clear process for
limiting, approving and documenting travel advances and expenses
and appropriately managing them. Specifically, we have:
| |
• |
|
Adopted a control enhancement to
require the provision of all invoice copies along with the check
register for appropriate approval, including all travel
reimbursements separately approved; |
| |
• |
|
Established a policy so travel
advances are no longer permitted; and |
| |
• |
|
Implemented a more formal and
detailed travel and expense reimbursement policy. |
| |
• |
|
Rolled out a quarterly financial
close checklist. |
In addition, we have replaced the independent consulting group
previously utilized by management to aid in our documentation and
testing of internal controls over financial reporting and appointed
John Glass as our Interim Chief Financial Officer to assist in the
organization and strategic operation of the Company as to its
procedures and daily operations of the Company. We are also in the
process of implementing many of the other recommendations made by
counsel to the Audit Committee to remediate these issues, including
the identification and recruitment of a permanent Chief Executive
Officer and any other positions necessary. We believe the foregoing
actions will continue to improve our internal control over
financial reporting as well as our disclosure controls and
17
procedures. We will continue to monitor the effectiveness of our
internal control over financial reporting in the areas affected by
the material weaknesses discussed above, and will perform any
additional procedures, as well as implement any new resources and
policies, deemed necessary by our management to remediate the
material weaknesses.
18
PART II OTHER
INFORMATION
ITEM 1. LEGAL
PROCEEDINGS.
Except as described below, we are not involved in any legal
proceedings nor are we party to any pending claims that we believe
could reasonably be expected to have a material adverse effect on
our business, financial condition, or results of operations.
Dees Collection Lawsuit
On May 5, 2016, the Company filed a lawsuit in the United
States District Court for the Eastern District of Tennessee at
Knoxville against Dr. Dees and his wife, Virginia Godfrey
(together with Dr. Dees, the “Defendants”). The Company
alleges that between 2013 and the present, Dr. Dees received
approximately $2.4 million in advanced or reimbursed travel
and entertainment expenses from the Company and that Dr. Dees
did not use these funds for legitimate travel and entertainment
expenses as he requested and the Company intended. Instead, the
Company alleges that Dr. Dees created false receipts and
documentation for the expenses and applied the funds to personal
use. The Company and Dr. Dees are parties to a Stipulated
Settlement Agreement dated June 6, 2014 (the “Kleba Settlement
Agreement”) that was negotiated to resolve certain claims asserted
against Dr. Dees derivatively. Pursuant to the terms of the
Kleba Settlement Agreement, Dr. Dees agreed to repay the
Company compensation that was paid to him along with legal fees and
other expenses incurred by the Company. As of the date of his
resignation, Dr. Dees still owed the Company $2,267,750 under
the Kleba Settlement Agreement. Dr. Dees has failed to make
such payment, and the Company has notified him that he is in
default and demanded payment in full. Therefore, the Company is
alleging counts of conversion, fraud, breach of fiduciary duty,
breach of contract, breach of Kleba Settlement Agreement, unjust
enrichment and punitive damages in this lawsuit. The Company is
seeking that the Defendants be prohibited from disposing of any
property that may have been paid for with the misappropriated
funds, the Defendants be disgorged of any funds shown to be
fraudulently misappropriated and that the Company be awarded
compensatory damages in an amount not less than $5 million.
Furthermore, the Company is seeking for the damages to be joint and
several as to the Defendants and that punitive damages be awarded
against Dr. Dees in the Company’s favor. The Company is also
seeking foreclosure of the Company’s first-priority security
interest in the 1,000,000 shares of common stock granted by
Dr. Dees to the Company as collateral pursuant to that certain
Stock Pledge Agreement dated October 3, 2014, between
Dr. Dees and the Company in order to secure Dr. Dees’
obligations under the Kleba Settlement Agreement. The United States
District Court for the Eastern District of Tennessee at Knoxville
entered a default judgment against the Defendants on July 20,
2016; however, the Company cannot predict when these shares will be
recovered by the Company. The Court recently issued a Temporary
Restraining Order upon the Company’s application for same upon
notice that Dr. Dees was attempting to sell his shares of the
Company’s common stock. The Temporary Restraining Order was
converted to a Preliminary Injunction on September 16, 2016,
which order will remain in place until the resolution of the
underlying lawsuit absent further court order or agreement of the
parties. On March 15, 2017, the Court granted
Ms. Godfrey’s motion to set aside the default judgment against
her and set a deadline of March 30, 2017 for Ms. Godfrey
to file an answer to the Company’s complaint. Ms. Godfrey
filed her answer on March 28, 2017 demanding that the
complaint against her be dismissed. The Court held a hearing on
April 26, 2017 to determine damages with respect to the motion
for default judgment against Dr. Dees for April 26, 2017.
The Court requested additional briefing on damages. The Company’s
brief is due on May 26, 2017.
Mr. Culpepper Travel Expenses and Related Collection
Efforts
On December 27, 2016, the Company’s Board of Directors
unanimously voted to terminate Peter R. Culpepper, effective
immediately, from all positions he held with the Company and each
of its subsidiaries, including Interim Chief Executive Officer and
Chief Operating Officer of the Company, for cause, in accordance
with the terms of the Amended and Restated Executive Employment
Agreement entered into by Peter R. Culpepper and the Company on
April 28, 2014 (the “Culpepper Employment Agreement”) based on
the results of the investigation conducted by a Special Committee
of the Board of Directors regarding improper travel expense
advancements and reimbursements to Mr. Culpepper.
The Special Committee retained independent counsel and an advisory
firm with forensic accounting expertise to assist the Special
Committee in conducting the investigation. The Special Committee
found that Mr. Culpepper received $294,255 in travel expense
reimbursements and advances that were unsubstantiated. The Company
seeks to recover from Mr. Culpepper the entire $294,255 in
unsubstantiated travel expense reimbursements and advances, as well
as all attorney’s fees and auditors’/experts’ fees incurred by the
Company in connection with the examination of his travel expense
reimbursements.
Under the terms of the Culpepper Employment Agreement,
Mr. Culpepper is owed no severance payments as a result of his
termination “for cause” as that term is defined in the Culpepper
Employment Agreement. Under section 6 of the Culpepper Employment
Agreement, “Effect of Termination,” a termination “for cause”
terminates any payments due to Mr. Culpepper as of the last
day of his employment. Furthermore, Mr. Culpepper is no longer
entitled to the 2:1 credit under the Kleba Settlement Agreement
(see Note 11 to the financial statements), such that the total
$2,240,000 owed by Mr. Culpepper pursuant to the Kleba
Settlement Agreement plus Mr. 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 Mr. Culpepper a notice of default in
January 2017 for the total amount he owes the Company and intends
to resolve these claims pursuant to the alternative dispute
resolution provision of the
19
Culpepper Employment Agreement. The Company has established a
reserve of $2,051,083 as of March 31, 2017, which amount
represents the amount the Company currently believes
Mr. Culpepper owes to the Company, while the Company pursues
collection of this amount.
Mr. Culpepper disputes that he was terminated “for cause”
under the Culpepper Employment Agreement and Mr. Culpepper has
demanded this issue be resolved by mediation in accordance with the
Culpepper Employment Agreement. The Company is in the process of
responding to Mr. Culpepper’s demand, and the mediation has
been scheduled for June 28, 2017. Concurrently, the Company is
seeking from Mr. Culpepper immediate payment of amounts due
under the Kleba Settlement Agreement as noted above.
The Bible Harris Smith Lawsuit
On November 17, 2016, the Company filed a lawsuit in the
Circuit Court for Knox County, Tennessee against Bible Harris Smith
PC (BHS) for professional negligence, common law negligence and
breach of fiduciary duty arising from accounting services provided
by BHS to the Company. The Company alleges that between 2013 and
the present, Dr. Dees received approximately $2.4 million
in advanced or reimbursed travel and entertainment expenses from
the Company and that Dr. 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
Dr. Dees’s failure to submit back-up documentation
supporting the advanced travel funds at the inception of
Dr. Dees’s 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 have begun discovery.
Other Regulatory Matters
From time to time the Company receives subpoenas and/or requests
for information from governmental agencies with respect to our
business. We have received a subpoena from the staff of the SEC
related to the travel expense advancements and reimbursements
received by H. Craig Dees, our former Chief Executive Officer, and
we have received a subsequent subpoena from the staff of the SEC
related to the travel expense advancements and reimbursements
received by Peter R. Culpepper, our former Interim Chief Executive
Officer and Chief Operating Officer and former Chief Financial
Officer. At this time, the staff’s investigation into these matters
remains ongoing. The Company is cooperating with the staff but
cannot predict with any certainty what the outcome of the foregoing
may be.
ITEM 1A. RISK
FACTORS
There have been no material changes to the risk factors disclosed
in our Annual Report on Form 10-K for the year ended
December 31, 2016.
ITEM 2. UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON
SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY
DISCLOSURES.
Not applicable.
ITEM 5. OTHER
INFORMATION.
None.
20
ITEM 6. EXHIBITS
|
|
|
|
Exhibit
No.
|
|
Description |
|
|
| 10.1 |
|
Convertible Promissory Note dated
February 21, 2017 (incorporated by reference to Exhibit 10.1
of the Company’s current report on Form 8-K filed on February 21,
2017). |
|
|
| 10.2** |
|
Definitive Financing Commitment Term Sheet dated
March 19, 2017. |
|
|
| 31.1** |
|
Certification of Principal Executive Officer
Pursuant to Rule 13a-14(a)
(Section 302 Certification). |
|
|
| 31.2** |
|
Certification of Interim Chief Financial Officer
Pursuant to Rule 13a-14(a)
(Section 302 Certification). |
|
|
| 32** |
|
Certification of Principal Executive Officer and
Interim Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 (Section 906 Certification). |
|
|
| 101** |
|
Interactive Data Files. |
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
PROVECTUS BIOPHARMACEUTICALS,
INC. |
|
|
|
|
| May 10, 2017 |
|
|
|
By: |
|
/s/ Timothy C. Scott, Ph.D.
|
|
|
|
|
|
|
Timothy C. Scott, Ph.D. |
|
|
|
|
|
|
On behalf of the registrant and as President
(Principal Executive Officer) |
22
EXHIBIT INDEX
|
|
|
|
Exhibit
No.
|
|
Description |
|
|
| 10.1 |
|
Convertible Promissory Note dated
February 21, 2017 (incorporated by reference to Exhibit 10.1
of the Company’s current report on Form 8-K filed on February 21,
2017). |
|
|
| 10.2** |
|
Definitive Financing Commitment Term Sheet dated
March 19, 2017. |
|
|
| 31.1** |
|
Certification of Principal Executive Officer
Pursuant to Rule 13a-14(a)
(Section 302 Certification). |
|
|
| 31.2** |
|
Certification of Interim Chief Financial Officer
Pursuant to Rule 13a-14(a)
(Section 302 Certification). |
|
|
| 32** |
|
Certification of Principal Executive Officer and
Interim Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 (Section 906 Certification). |
|
|
| 101** |
|
Interactive Data Files. |
23
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