UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2017March 31, 2019

or

 

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

 

For the transition period from             to             

 

Commission file number 001-36457

 

PROVECTUS BIOPHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware90-0031917

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

  

10025 Investment Drive, Suite 250

Knoxville, Tennessee

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

 

866-594-5999

(Registrant’s telephone number, including area code)

 

7327 Oak Ridge Highway, Suite A

Knoxville, Tennessee 37931Not Applicable

(Former Name, Former Addressname, former address and Former Fiscal Year,former fiscal year, if Changed Since Last Report)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. [X] 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). [X] Yes [  ] No

 

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

 

Large accelerated filer[  ]Accelerated filer[X]  ]
    
Non-accelerated filer[  ] (Do not check if a smaller reporting company)X]Smaller reporting company[X]
  

Emerging growth company

[  ]

 

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

 

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

Securities registered pursuant to Section 12(b) of the Act: None

Title of each classTrading Symbol(s)Name of each exchange on which
registered

 

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of November 7, 2017,May 10, 2019, was 370,737,143.384,714,528. 

 

 

 

 
 

 

TABLE OF CONTENTS

 

 Page
PART I FINANCIAL INFORMATION 
  
Cautionary Note Regarding Forward-Looking Statements1
Item 1. Financial Statements (unaudited)2
Condensed Consolidated Balance Sheets2
Condensed Consolidated Statements of Operations3
Condensed Consolidated Statements of Comprehensive Loss4
Condensed Consolidated Statements of Changes in Stockholders’ Deficiency5
Condensed Consolidated Statements of Cash Flows46
Notes to Condensed Consolidated Financial Statements57
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations12
Item 3. Quantitative and Qualitative Disclosures About Market Risk1614
Item 4. Controls and Procedures1614
  
PART II OTHER INFORMATION 
  
Item 1. Legal Proceedings15
Item 1A. Risk Factors1715
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds1715
Item 3. Defaults Upon Senior Securities1815
Item 4. Mine Safety Disclosures1815
Item 5. Other Information1815
Item 6. Exhibits1815
  
SIGNATURES1916

 

   

 

 

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 andexpectations. These statements also express management’s current views of future performance, results, and trends and may be identified by their use of terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “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, unless otherwise required by law.

 

Risks and uncertainties that could cause our actual results to materially differ from those described in forward-looking statements include those discussed in our filings with the Securities and Exchange Commission (including those described in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2016)2018), and the following:

 

     our potential receipt of sales from investigational drug products PV-10 and PH-10, transaction fees, licensing and royalty payments, and/or 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 our investigational drug products, and/or drug substance Rose Bengal;

     our ability to raise additional capital; and

     our ability to close on additional tranches 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.

our potential receipt of sales from investigational drug products PV-10 and PH-10 (if and when approved), transaction fees, licensing and royalty payments, and/or 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 our investigational drug products, and/or drug substance Rose Bengal (and/or any other halogenated xanthene);
our ability to raise additional capital; and
our ability to close on additional tranches 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

 

 September 30, 2017 December 31, 2016  March 31,2019  December 31,2018 
 (Unaudited)     (Unaudited)    
Assets                
                
Current Assets:                
Cash and cash equivalents $208,281  $1,165,738  $1,767,900  $50,986 
Short-term receivable - settlement  -   300,000 
Short-term receivables - legal fees, settlement and other, net  604,269   595,326 
Prepaid expenses  325,423   360,562   271,984   370,209 
                
Total Current Assets  533,704   1,826,300   2,644,153   1,016,521 
                
Equipment and furnishings, less accumulated depreciation of $33,081 and $464,140, respectively  85,172   72,033 
Patents, net of accumulated amortization of $9,977,317 and $9,473,978, respectively  1,738,127   2,241,467 
Long-term receivable – reimbursable legal fees, net of reserve for uncollectibility of $455,500  455,500   455,500 
Long-term receivable – settlement, net of discount and reserve for uncollectibility of $1,549,043  1,039,769   1,015,710 

Equipment and furnishings, less accumulated depreciation of $54,061 and

$50,538, respectively

  68,953   72,476 
Operating lease right-of-use asset  247,763   - 

Patents, net of accumulated amortization of $10,983,998 and $10,816,218,

respectively

  731,447   899,227 
        
Total Assets $3,852,272  $5,611,010  $3,692,316  $1,988,224 
                
Liabilities and Stockholders’ (Deficiency) Equity        
Liabilities and Stockholders’ Deficiency        
                
Current Liabilities:                
Accounts payable - trade��$3,551,979  $1,919,870  $1,459,117  $3,312,049 
Other accrued expenses  509,086   221,956   1,338,632   790,358 
Current portion of operating lease liability  73,437   - 
                
Total Current Liabilities $4,061,065  $2,141,826   2,871,186   4,102,407 
                
Accrued interest  856,131   659,379 
Accrued interest - related parties  849,749   711,927 
Convertible notes payable  3,100,000   -   10,837,000   7,062,000 
Convertible notes payable - related parties  4,000,000   -   6,895,000   6,870,000 
Non-current portion of operating lease liability  187,602   - 
                
Total Liabilities  11,161,065   2,141,826   22,496,668   19,405,713 
Commitments and contingencies        
Stockholders' (Deficiency) Equity:        
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 September 30, 2017 and December 31, 2016, respectively; aggregate liquidation preference of $3,500 and $301,000 at September 30, 2017 and December 31, 2016, respectively  -   9 
Common stock; par value $0.001 per share; 1,000,000,000 shares authorized; 370,737,143 and 364,773,297 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively  370,737   364,773 
        
Commitments and contingencies (Note 7)        
        
Stockholders’ Deficiency:        

Preferred stock; par value $0.001 per share; 25,000,000 shares authorized;

Series B Convertible Preferred Stock; 240,000 shares designated; 100 shares

issued and outstanding at March 31, 2019 and December 31, 2018; aggregate liquidation preference of $3,500 at March 31, 2019 and December 31, 2018

  -   - 

Common stock; par value $0.001 per share; 1,000,000,000 shares authorized;

384,714,528 and 384,614,528 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

  384,715   384,615 
Additional paid-in capital  208,339,700   208,327,822   209,097,417   209,092,187 
Accumulated other comprehensive loss  (22,363)  -
Accumulated deficit  (216,019,230)  (205,223,420)  (228,264,121)  (226,894,291)
Total Stockholder's (Deficiency) Equity  (7,308,793)  3,469,184 
Total Liabilities and Stockholders' (Deficiency) Equity $3,852,272  $5,611,010 
        
Total Stockholders’ Deficiency  (18,804,352)  (17,417,489)
        
Total Liabilities and Stockholders’ Deficiency $3,692,316  $1,988,224 

 

See accompanying notes to condensed consolidated financial statements.

 

 2 

 

 

PROVECTUS BIOPHARMACEUTICALS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  2017  2016  2017  2016 
             
Operating Expenses:                
Research and development $2,390,061  $2,461,407  $6,622,382  $6,874,353 
General and administrative  728,943   3,315,555   4,197,689   12,454,661 
                 
Total Operating Loss  (3,119,004)  (5,776,962)  (10,820,071)  (19,329,014)
                 
Investment income  7,511   318   24,261   1,985 
Public offering issuance expense  -   (436,248)  -   (436,248)
Gain on change in fair value of warrant liability  -   336,649   -   336,649 
                 
Net Loss  (3,111,493)  (5,876,243)  (10,795,810)  (19,426,628)
                 
Dividend paid-in kind to preferred shareholders  (50)  (2,257,432)  (14,107)  (2,257,432)
Deemed dividend  -   (726,989)  -   (726,989)
                 
Net Loss Applicable to Common Shareholders $(3,111,543) $(8,860,664) $(10,809,917) $(22,411,049)
                 
Basic and Diluted Loss Per Common Share $(0.01) $(0.04) $(0.03) $(0.10)
                

Weighted Average Number of Common

Shares Outstanding - Basic and Diluted

  370,546,735   222,959,570   368,722,485   213,722,977 

  For the Three Months Ended 
  March 31, 
  2019  2018 
       
Operating Expenses:        
Research and development $1,037,331  $1,943,063 
General and administrative  759,253   756,151 
Total Operating Expenses  1,796,584   2,699,214 
         
Total Operating Loss  (1,796,584)  (2,699,214)
Other Income/(Expense):        
Gain on settlement of lawsuits  675,000   - 
Research and development tax credit  84,072   - 
Investment and interest income  2,255   6,169 
Interest expense  (334,573)  (206,567)
         
Net Loss $(1,369,830) $(2,899,612)
         
Basic and Diluted Loss Per Common Share $(0.00) $(0.01)
         
Weighted Average Number of CommonShares Outstanding - Basic and Diluted  384,705,639   377,369,385 

 

See accompanying notes to condensed consolidated financial statements.

 

 3 

 

 

PROVECTUS BIOPHARMACEUTICALS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCOMPREHENSIVE LOSS

(Unaudited)

 

  Nine Months Ended September 30, 
  2017  2016 
       
Cash Flows From Operating Activities        
Net loss $(10,795,810) $(19,426,628)

Adjustments to reconcile net loss to net cash

used in operating activities:

        
Depreciation  12,500   9,926 
Amortization of patents  503,340   503,340 
Warrant incentive expense  -   2,718,407 
Issuance of stock for services  -   20,163 
Public offering issuance expense  -   436,248 
Gain on change in fair value of warrant liability  -   (336,649)
Changes in operating assets and liabilities        
Settlement receivable  275,941   386,226 
Other current assets  35,139   (146,030)
Accounts payable - trade  1,799,409   (400,931)
Accrued settlement expense  -   (1,850,000)
Other accrued expenses  287,130   161,532 
         
Net Cash Used In Operating Activities  (7,882,351)  (17,924,396)
         
Cash Flows From Investing Activities        
Purchase of fixed assets  (25,639)  - 
Net Cash Used In Operating Activities  (25,639)  - 
         
Cash Flows From Financing Activities        
Gross proceeds from sales of convertible preferred stock and warrants  -   6,000,000 
Payment of offering costs in connection with August 2016 financing  -   (711,470)
Net proceeds from the issuance of common stock and warrants pursuant to warrant exchange offer  -   3,635,040 
Proceeds from issuance of convertible notes payable  2,950,000   - 
Proceeds from issuance of convertible notes payable - related party  4,000,000   - 
Proceeds from exercise of warrants  533   - 
Net Cash Provided By Financing Activities  6,950,533   8,923,570 
         
Net Change In Cash and Cash Equivalents  (957,457)  (9,000,826)
         
Cash and Cash Equivalents, Beginning of Period  1,165,738   14,178,902 
         
Cash and Cash Equivalents, End of Period $208,281  $5,178,076 
         
Supplemental Disclosures of Cash Flow Information:        
Cash paid during the period for:        
Interest $-  $- 
Taxes $-  $- 
         
Non-cash investing and financing activities:        
Conversion of preferred stock into common stock $3,987  $31,066 
Dividend paid-in kind to preferred shareholders $1,595  $- 
Contractual dividends on preferred stock $-  $729,989 
Issuance in-kind of preferred stock dividends $14,107  $2,257,432 
Common stock issued in satisfaction of trade debt $17,300  $- 
Notes payable issued in satisfaction of trade debt $150,000  $- 
  For the Three Months Ended 
  March 31, 
  2019  2018 
       
Net Loss $(1,369,830) $(2,899,612)
Other Comprehensive Loss:        
Foreign currency translation adjustments  (22,363)  - 
Total Comprehensive Loss $(1,392,193) $(2,899,612)

 

See accompanying notes to condensed consolidated financial statements.

 

 4 

 

 

PROVECTUS BIOPHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIENCY

FOR THE THREE MONTHS ENDED MARCH 31, 2019

(Unaudited)

                 Accumulated       
  Preferred Stock        Additional  Other       
  Series B  Common Stock  Paid-In  Comprehensive  Accumulated    
  Shares  Amount  Shares  Amount  Capital  Loss  Deficit  Total 
                         
Balance at January 1, 2019  100  $     -   384,614,528  $384,615  $209,092,187  $-  $(226,894,291) $(17,417,489)
                                 
Common stock issued upon exercise of warrants  -   -   100,000   100   5,230   -   -   5,330 
Comprehensive loss:                                
Net loss  -   -   -   -   -   -   (1,369,830)  (1,369,830)
Other comprehensive loss  -   -   -   -   -   (22,363)  -   (22,363)
                                 
Balance at March 31, 2019  100  $-   384,714,528  $384,715  $209,097,417  $(22,363) $(228,264,121) $(18,804,352)

PROVECTUS BIOPHARMACEUTICALS, INC.

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIENCY

FOR THE THREE MONTHS ENDED MARCH 31, 2018

(Unaudited)

  Preferred Stock        Additional       
  Series B  Common Stock  Paid-In  Accumulated    
  Shares  Amount  Shares  Amount  Capital  Deficit  Total 
                      
Balance at January 1, 2018           100  $             -   370,961,451  $370,962  $208,351,431  $(218,741,236) $(10,018,843)
                             
Common stock issued upon exercise of warrants  -   -   7,926,739   7,927   414,568   -   422,495 
Net loss  -   -   -   -   -   (2,899,612)  (2,899,612)
                             
Balance at March 31, 2018  100  $-   378,888,190  $378,889  $208,765,999  $(221,640,848) $(12,495,960)

See accompanying notes to condensed consolidated financial statements.

5

PROVECTUS BIOPHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

  For the Three Months Ended 
  March 31, 
  2019  2018 
    
Cash Flows From Operating Activities:        
Net loss $(1,369,830) $(2,899,612)
Adjustments to reconcile net loss to net cash used in operating activities:        
Stock-based compensation  2,650   - 
Depreciation  21,311   3,524 
Amortization of patents  167,780   167,780 
Changes in operating assets and liabilities        
Settlement receivable  (33,943)  246,284 
Prepaid expenses  98,225   99,747 
Accounts payable - trade  (1,857,444)  411,271 
Other accrued expenses  570,624   24,536 
Accrued interest expense  334,574   206,568 
         
Net Cash Used In Operating Activities  (2,066,053)  (1,739,902)
         
Cash Flows From Financing Activities:        
Proceeds from issuance of convertible notes payable  3,775,000   706,000 
Proceeds from issuance of convertible notes payable - related parties  25,000   750,000 
Proceeds from exercise of warrants  5,330   422,494 
Net Cash Provided By Financing Activities  3,805,330   1,878,494 
         
Effect of Exchange Rate Changes on Cash  (22,363)  - 
         
Net Increase In Cash and Cash Equivalents  1,716,914   138,592 
         
Cash and Cash Equivalents, Beginning of Period  50,986   105,504 
         
Cash and Cash Equivalents, End of Period $1,767,900  $244,096 
         
Supplemental Disclosures of Cash Flow Information:        
Cash paid during the period for:        
Interest $-  $- 
Taxes $-  $- 
         
Non-cash investing and financing activities:        
Offset of related party receivable and payable $25,000  $- 

See accompanying notes to condensed consolidated financial statements.

6

PROVECTUS BIOPHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Business Organization, Nature of Operations and Basis of Presentation

 

Provectus Biopharmaceuticals, Inc., a Delaware corporation together(together with its subsidiaries, (“Provectus”“Provectus” or the “Company”), is a clinical-stage biotechnology company developing pharmaceutical drug productsa new class of drugs for oncology and dermatology based on chemical small molecules called halogenated xanthenes, such as Rose Bengal,xanthenes. Intralesional PV-10 is undergoing clinical study for the treatment ofadult solid tumor cancers, in adults as well as pediatriclike melanoma and gastrointestinal cancers, and preclinical study for pediatric cancers. Topical PH-10 is undergoing clinical study for inflammatory dermatoses, for dermatology in both adultslike psoriasis and children.atopic dermatitis. To date, the Company has not generated any revenues from planned principal operations. The Company’s activities are subject to significant risks and uncertainties, including failing to successfully develop and license and/or commercialize the Company’s investigationalprescription drug products.candidates.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information pursuant to Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be reviewed in conjunction with the Company’s audited consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 20162018 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 31, 2017.7, 2019. 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 ninethree months ended September 30, 2017March 31, 2019 are not necessarily indicative of the results that may be expected for the twelve monthsyear ending December 31, 2017.2019.

 

2. Liquidity and Financial ConditionGoing Concern

 

The Company’s cash and cash equivalents were $208,281$1,767,900 at September 30, 2017, compared with $1,165,738 at DecemberMarch 31, 2016.2019, The Company continues to incur significant operating losses. Management expects that significant on-going operating expenditures will be necessary to successfully implement the Company’s business plan of developing, licensing and/or commercializingand develop and market its investigational drug products. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that thethese 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 license and/or commercialize its investigational drug products, and/orPV-10 and PH-10 and to raise additional capital.

The 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”) that set forth the terms on which the PRH Group would use their best efforts to arrange for a financing of a minimum of $10,000,000 and maximum of $20,000,000 (the “2017 Financing”).

As of September 30, 2017, the Company had received aggregate Loans (as defined below) of $7,100,000 in connection with the 2017 Financing. See Note 4 – Convertible Notes Payable. Subsequent to September 30, 2017, the Company received aggregate Loans of $2,150,000 in connection with the 2017 Financing. See Note 7 – Subsequent Events.

The 2017 Financing is in the form of a secured convertible loan (the “Loan”) from the PRH Group or other investors in the 2017 Financing (the “Investors”). The Loan is evidenced by secured convertible promissory notes (individually a “PRH Note” and collectively, the “PRH Notes”) from the Company to the PRH Group or the Investors. In addition to the customary provisions, the PRH Note contains the following provisions:

(i)It is secured by a first priority security interest on the Company’s intellectual property (the “IP”);
(ii)The Loan bears interest at the rate of eight percent (8%) per annum on the outstanding principal amount of the Loan that has been funded to the Company;
(iii)The Loan proceeds are held in one or more accounts (the “Escrow”) pending the funding of the tranches of the 2017 Financing pursuant to borrowing requests made by the Company;

5

(iv)

The PRH Notes, including interest and principal, are due and payable in full on the earlier of: (i) on such date upon which the Company defaults under the PRH Notes, (ii) upon a change of control of the Company, or (iii) dates ranging from April 2, 2019 to the twenty-four (24) month anniversary of the funding of the Final Tranche, depending on the specific PRH Note. In the event there is a change of control of the Company’s board of directors (the “Board”) as proposed by any person or group other than the Investors, the term of the PRH Notes will be accelerated and all amounts due under the PRH Notes will be immediately due and payable, plus interest at the rate of 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 amounts of the PRH Notes 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 24-month anniversary of the funding of the Final Tranche of the 2017 Financing subject to certain exceptions.

As of September 30, 2017, and through the date of filing, the Series D Preferred Stock had not been designated by the Board. As a result, the PRH Notes were not convertible as of their respective dates of issuance or as of September 30, 2017.

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 such that one share of Series D Preferred Stock would convert into one share of common stock. 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 apari 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.

 

The Company plans to access capital resources through possible public or private equity offerings, including the 2017 Financing (as defined in Note 4), exchange offers, debt financings, corporate collaborations or other means. In addition, the Company continues to explore opportunities to strategically monetize its lead drug candidates, PV-10 and PH-10, through potential co-development and licensing transactions, although there can be no assurance that the Company will be successful with such plans. The Company has historically been able to raise capital through equity offerings, although no assurance can be provided that it will continue to be successful in the future. If the Company is unable to raise sufficient capital through the 2017 Financing or otherwise, it will not be able to pay its obligations as they become due.

 

7

The primary business objective of Managementmanagement is to build the Company into a fully integrated globalcommercial-stage biotechnology company. However,company; however, the Company cannot assure you that theyit will be successful in co-developing, licensing, and/or licensingcommercializing PV-10, PH-10, and/or any other halogenated xanthene-based drug candidate developed by the Company, or entering into any equityfinancial transaction. Moreover, even if the Company is successful in improving its current cash flow position, the Company nonetheless plans to seek additional funds to meet its long-term requirements in 20172019 and beyond. The Company anticipates that these funds will otherwise come from the proceeds of private placement transactions, including the 2017 Financing, the exercise of existing warrants and outstanding stock options, or public offerings of debt or equity securities. While the Company believes that it has a reasonable basis for its expectation that it will be able to raise additional funds, the Company cannot provide assurance that it will be able to complete additional financing in a timely manner. In addition, any such financing may result in significant dilution to stockholders.

 

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, the Company’s 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 was 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.

6

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. However, the Company can provide no assurance that its common stock and Listed Warrants will continue to trade on the OTCQB in the future.

3. SignificantCritical 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 Company’s December 31, 2018 consolidated financial statements were issued in its 2018 Annual Report, there have been no material changes to the Company’s significant accounting policies, except as disclosed below.

 

Recent Accounting PronouncementsLeases

 

In OctoberFebruary 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU No. 2016-17, “Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control”a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of operating lease right-of-use (“ASU 2016-17”ROU”). ASU 2016-17 requires, when assessing which party assets and lease liabilities on the balance sheet (“ASC 842”) with amendments issued in 2018. Most prominent among the changes in the standard is the primary beneficiaryrecognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company is also required to recognize and measure new leases at the adoption date and recognize a cumulative-effect adjustment in the period of adoption using a variable interest entity (VIE), thatmodified retrospective approach, with certain practical expedients available.

The Company adopted ASC 842 effective January 1, 2019 and elected to apply the decision maker considers interests held by entities under common controlavailable practical expedients. The standard had an impact 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 ASUCompany’s condensed consolidated balance sheets but did not have a material impact on the Company’s condensed consolidated financial statements.

In May 2017,statements of operations or condensed consolidated statements of cash flows upon adoption. The most significant impact was the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scoperecognition of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 provides clarity onROU assets and lease liabilities for operating leases, while the Company’s accounting for modificationsfinance leases remained substantially unchanged. The adoption of stock-based awards. ASU 2017-09 requires adoption onASC 842 did not have a prospective basismaterial impact in the annualcurrent year and interimprior year comparative periods beginning after December 15, 2017 for share-based payment awards modified on or after the adoption date. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its condensed consolidated financial statements and related disclosures.

In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260) and Derivatives and Hedging (Topic 815) - Accounting for Certain Financial Instruments with Down Round Features” (“ASU 2017-11”). Equity-linked instruments, such as warrants and convertible instruments may contain down round features that result in the strike price being reduced on the basis of the pricing of future equity offerings. Under ASU 2017-11, a down round feature will no longer require a freestanding equity-linked instrument (or embedded conversion option) to be classified as a liability that is re-measured at fair value through the income statement (i.e. marked-to-market). However, other features of the equity-linked instrument (or embedded conversion option) must still be evaluated to determine whether liability or equity classification is appropriate. Equity classified instruments are not marked-to-market. For earnings per share ("EPS") reporting, the ASU requires companies to recognize the effect of the down round feature only when it is triggered by treating it as a dividend and as a reductionresult, a cumulative-effect adjustment was not required.

Reclassifications

Certain prior year balances have been reclassified in order to conform to current year presentation. These reclassifications have no effect on previously reported results of income available to common shareholders in basic EPS. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The Company is currently evaluating ASU 2017-11 and its impact on its condensed consolidated financial statements.operations or loss per share.

4. Convertible Notes Payable

 

Convertible Notes Payable – Related Parties

On February 21,March 23, 2017, the Company issuedentered into an exclusive Definitive Financing Commitment Term Sheet with a promissory note in favorgroup of Eric A. Wachter, Ph.D., the Company’s Chief Technology Officer (“Wachter”stockholders (the “PRH Group”), evidencing an unsecured loan from Wachterwhich was amended and restated effective as of March 19, 2017 (the “Term Sheet”) that set forth the terms on which the PRH Group would use their best efforts to the Company in the original principal amountarrange for a financing of up to $2,500,000a minimum of $10,000,000 and maximum of $20,000,000 (the “Wachter Note”“2017 Financing”). Interest accrues on the outstanding balance of the Wachter Note at six percent (6%) per annum calculated on a 360-day basis.

As of March 31, 2017,2019, the Company had borrowed the entire $2,500,000 principal amount under the Wachter Note. The Company evaluated the termsreceived aggregate loans 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 (as defined$17,732,000 in the Wachter Note) issued upon the completion of a future Qualified Equity Financing (as defined in the Wachter Note), that the measurement of a beneficial conversion feature cannot be completed. On April 3, 2017, the Wachter Note was amended and restated in order to modify its terms to mirror the PRH Notes and to convert the Wachter Note intoconnection with the 2017 Financing. The Company accounted for the amendment as a debt modification. There was no material impact as a result of applying debt modification accounting.

 

 78 

 

 

On April 3, 2017, the Company entered into a PRH Note with Cal Enterprises LLC, a Nevada limited liability company, an affiliate of Dominic Rodrigues, a director of the Company, in the principal amount of up to $2,500,000.

As of September 30, 2017, the Company had borrowed $1,500,000 under this note.

Convertible Notes Payable – Non-Related Parties

During the three months ended September 30, 2017, the Company entered into additional PRH Notes with accredited investors in the aggregate principal amount of $550,000, of which, $150,000 was issued in satisfaction of trade debt. As of September 30, 2017, the Company had borrowed $3,100,000 under these notes.

See Note 2 – Liquidity and Financial Condition for the terms of the PRH Notes. As of September 30, 2017,March 31, 2019, and through the date of filing, the Series D Preferred Stock had not been designated by the Board.Company’s Board of Directors (the “Board”). As a result, the Company did not analyze the loan for a potential beneficial conversion feature as the definition of a firm commitment has not been met since the PRH Notes were not convertible as of their respective dates of issuance or as of September 30, 2017.March 31, 2019.

Convertible Notes Payable – Related Parties

During the three months ended March 31, 2019, the Company entered into additional PRH Notes with a related party in the aggregate principal amount of $25,000.

As of March 31, 2019, the Company had borrowed $6,895,000 of PRH Notes from related parties which were outstanding.

Convertible Notes Payable – Non-Related Parties

During the three months ended March 31, 2019, the Company entered into additional PRH Notes with accredited investors in the aggregate principal amount of $3,775,000.

As of March 31, 2019, the Company had borrowed $10,837,000 of PRH Notes from non-related parties which were outstanding.

 

5. Stockholders’ Deficiency

 

Conversion of Series B Preferred Stock

During the nine months ended September 30, 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 nine months ended September 30, 2017. The Company recorded aggregate dividends paid in kind of $14,107 during the nine months ended September 30, 2017.

Exercise of Warrants

During the three months ended September 30, 2017, aMarch 31, 2019, warrant holderholders exercised a warrantwarrants to purchase 10,000an aggregate of 100,000 shares of common stock at a price of $0.053$0.0533 per share. In connection with the exercise,these exercises, the Company received $533.aggregate cash proceeds of $5,330 and issued 100,000 shares of common stock to the warrant holders.

 

Issuance6. Leases

The Company currently leases 4,500 square feet of Common Stockcorporate office space in Knoxville, Tennessee through an operating lease agreement for a term of five years ending on June 30, 2022. Payments range from approximately $7,300 to $7,800 per month.

DuringTotal rent expense for the three months ended September 30, 2017, the Company issued an aggregateMarch 31, 2019 was $34,806, of 372,500 shares of restricted unregistered common stock at an average price of $0.046 per share in satisfaction of accounts payable of $17,300.

6. Litigation

Kleba Shareholder Derivative Lawsuit

On June 6, 2014, the Company, in its capacity as a nominal defendant, entered into a Stipulated Settlement Agreementwhich, $23,204 was included within research and Mutual Release (the “Derivative Lawsuit Settlement”) in the shareholder derivative lawsuit filed by Glenn Kleba, derivatively on behalf of the Company,development and later amended to include Don B. Dale as a plaintiff, in the Circuit Court for the State of Tennessee, Knox County (the “Court”), against H. Craig Dees, Ph.D., Timothy C. Scott, Ph.D., Eric A. Wachter, Ph.D.,$11,602 was included within general 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”), which alleged (i) breach of fiduciary duties; (ii) waste of corporate assets; and (iii) unjust enrichment. Under the terms of the Derivative Lawsuit Settlement, among other things, 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 the after-tax net proceeds to each Executive; provided, however, that subject to certain terms and conditions set forth in the Derivative Lawsuit 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 Derivative Lawsuit Settlement. Under the Derivative Lawsuit 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.

8

On July 24, 2014, the Court approved the terms of the Derivative Lawsuit Settlement and awarded $911,000 to plaintiffs’ counsel for attorneys’ fees and reimbursement ofadministrative 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 September 30, 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.statement of operations. Total rent expense for the three months ended March 31, 2018 was $22,153, of which, $14,768 was included within research and development and $7,385 was included within general and administrative expenses on the condensed consolidated statement of operations.

 

On October 3, 2014, the Derivative Lawsuit Settlement was effective and an aggregateAs of 2,800,000 stock options for Dr. Dees, Dr. Scott and Mr. Culpepper were rescinded. A total of $1,816,667 had been repaid by the Executives as of September 30, 2017. The remaining cash settlement amounts will continue to be repaid toMarch 31, 2019, the Company with the final payment to be received by October 3, 2019. The remaining balancehad no leases that were classified as a financing lease. As of the Executives’ repayment dueMarch 31, 2019, the Company as of September 30, 2017 is $1,039,770, including a reserve for uncollectibility of $1,549,043 in connection with the resignation of Dr. Dees, the Company’s former Chairman and Chief Executive Officer, and termination of Mr. Culpepper, the Company’s former Chief Financial Officer and Chief Operating Officer, and former interim Chief Executive Officer following Dr. Dees’ resignation, 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 Derivative Lawsuit Settlement less the $200,000 that he repaid), plus Dr. Dees’ 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. On July 25, 2017, the United States District Court for the Eastern District of Tennessee at Knoxville issued a Memorandum Opinion finding, among other findings, that the Company is entitled to receive total damages in the amount of $6,027,652, including $2,494,525 for Dr. Dees’ breach of the Derivative Lawsuit Settlement. See Dees Collection Lawsuit below. 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 $2.24 million owed by Mr. Culpepper pursuant to the Derivative Lawsuit 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 Derivative Lawsuit Settlement. See Culpepper Travel Expenses and Related Collection Efforts below.

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 (the “Court”) against Dr. Dees and his wife, Virginia Godfrey (together with Dr. Dees, the “Defendants”). The Company alleged that between 2013 and 2015, 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 travelhave additional operating and entertainment expenses as he requested and the Company intended. Instead, the Company allegedfinancing leases 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 the Derivative Lawsuit Settlement that was negotiated to resolve certain claims asserted against Dr. Dees derivatively. Pursuant to the terms of the Derivative Lawsuit Settlement, 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 Derivative Lawsuit Settlement. 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 established a reserve of $2,267,750 as of September 30, 2017 and December 31, 2016, which amount represents the amount the Company believed Dr. Dees owed to the Company as of those dates. Therefore, the Company alleged counts of conversion, fraud, breach of fiduciary duty, breach of contract, breach of the Derivative Lawsuit Settlement, unjust enrichment and punitive damages in this lawsuit. The Company sought an order 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 sought 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 also sought 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 Derivative Lawsuit Settlement. The Court entered a default judgment against the Defendants on July 20, 2016. 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. On July 25, 2017, the Court issued a Memorandum Opinion finding that the Company is entitled to receive total damages in the amount of $6,027,652, comprising compensatory damages for misappropriation of travel and expense funds, compensatory damages for Dr. Dees’ breach of the Derivative Lawsuit Settlement, and punitive damages, plus costs. There can be no assurance, however, that the Company will be able to recover any or all of the damages awarded to the Company. The Court also entered a permanent injunction enjoining Dr. Dees from selling or dissipating assets until the judgment against him is satisfied. On September 1, 2017, the Company filed a motion with the Court to appoint a receiver to sell 1,000,000 shares of the Company’s common stock held by Dr. Dees and pledged as security pursuant to the Derivative Lawsuit Settlement, and to remit the proceeds of this sale to the Company.yet commenced. 

 

 9 

 

A summary of the Company’s right-of-use assets and liabilities is as follows:

Three Months Ended
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$22,001
Right-of-use assets obtained in exchange for lease obligations:
Operating leases$265,550
Weighted Average Remaining Lease Term
Operating leases3.25 years
Weighted Average Discount Rate
Operating leases8.0%

Future minimum payments under non-cancellable lease as of March 31, 2019 were as follows:

For the Years Ending December 31, Amount 
    
2019 $66,883 
2020  90,666 
2021  92,471 
2022  46,687 
Total future minimum lease payments  296,707 
Less: amount representing imputed interest  (35,668)
Total $261,039 

7. Commitments, Contingencies and Litigation

 

Culpepper Travel Expenses and Related Collection Efforts

 

On December 27, 2016, the Company’s Boardthen-Board of Directors (the “then-Board”) unanimously voted to terminate Mr.then-interim Chief Executive Officer and Chief Operating Officer, and former Chief Financial Officer, Peter Culpepper (“Culpepper”), effective immediately, from all positions he held with the Company and each of its subsidiaries, 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 Mr. Culpepper and the Company on April 28, 2014 (the “Culpepper Employment Agreement”) based on the results of the investigation conducted by a Specialthe Audit Committee of the Board of Directorsthen-Board regarding improper travel expense advancements and reimbursements to Mr. Culpepper.

 

The SpecialAudit Committee retained independent counsel and an advisory firm with forensic accounting expertise to assist the SpecialAudit Committee in conducting the investigation. The SpecialAudit Committee found that Mr. Culpepper received $294,255 in travel expense reimbursements and advances that were unsubstantiated.unsubstantiated or otherwise improper. 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. On December 12, 2017, Culpepper agreed to an order by the SEC to pay disgorgement of $140,115, and prejudgment interest of $12,261, for a total of $152,376, to the Company within 30 days. The Company received the payment of $152,376 in January 2018.

10

 

UnderThe Company took the position that 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. Furthermore, Mr. Culpepper is no longer entitled to the 2:1 credit under the Stipulated Settlement Agreement and Mutual Release in the Derivative Lawsuit Settlement such that the total $2,240,000 owed by Mr. Culpepper pursuant to the Derivative Lawsuit Settlement 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 is in the process of resolvingpursuing these claims pursuant toin accordance with the alternative dispute resolution provision of the Culpepper Employment Agreement. The Company has established a reserve of $2,051,083 as of September 30, 2017March 31, 2019 and December 31, 2016,2018, which amount represents the amount the Company currently believes Mr. Culpepper owes to the Company under the Derivative Lawsuit Settlement (excluding the amount of attorneys’ fees incurred in enforcing the terms of the Derivative Lawsuit Settlement), while the Company pursues collection of this amount.

 

Mr. Culpepper disputesdisputed that he was terminated “for cause” under the Culpepper Employment Agreement. Pursuant to the alternative dispute resolution provisions of that agreement, the Company and Mr. Culpepper participated in a mediation of their dispute on June 28, 2017. Having reached no resolution during the mediation, the parties are proceeding toparticipated in arbitration under the commercial rules of the American Arbitration Association, which will include, among other claims,arbitrating both Mr. Culpepper’s claim for severance against Provectusthe Company and Provectus’the Company’s claims against Mr. Culpepper for improper expense reimbursements and amounts Culpepper owes Provectusthe Company under the Derivative Lawsuit Settlement.Settlement (the “Culpepper Arbitration”). The Culpepper Arbitration hearing was held from May 15-18, 2018.

On July 12, 2018, the arbitrator issued an interim award in favor of the Company, the terms of which are confidential pursuant to the Culpepper Employment Agreement and instructed the parties that a final award was forthcoming. On September 12, 2018, the arbitrator issued his final award in favor of the Company. On October 4, 2018, the Company filed a petition with the Chancery Court for Davidson County, Tennessee to confirm the arbitration award. On November 7, 2018, the Company received Culpepper’s answer to the petition filed on October 4, 2018. This court entered an order confirming the arbitrator’s award on January 23, 2019. On February 20, 2019, Culpepper filed a motion to alter or amend this judgment. On March 22, 2019, the Chancery Court upheld the arbitration award in favor of the Company. On April 16, 2019, Culpepper filed a Notice of Appeal with the Tennessee Court of Appeals regarding the judgment confirming the arbitration award and the order denying Culpepper’s motion to alter or amend the judgment.

 

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 the accounting services provided by BHS to the Company. On January 28, 2019, this matter was resolved pursuant to a settlement between the parties, the terms of which are confidential. The Company alleges that between 2013 and 2015, Dr. Dees received approximately $2.4 million in advanced or reimbursed travel and entertainment expensesproceeds 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’ failure to submit back-up documentation supporting the advanced travel funds at the inception of Dr. Dees’ conduct, and prevented the misuse of these and future funds. The Company has made a claim for damages against BHS in an amount in excess of $3 million. The complaint against BHS has been filed and served, an answer has beensettlement were received and recorded during the parties are in the midst of discovery.three months ended March 31, 2019.

 

The RSM USA LLP Lawsuit

 

On June 9, 2017, the Company filed a lawsuit in the Circuit Court offor Mecklenburg County, North Carolina against RSM USA LLP (“RSM”) for professional negligence, common law negligence, gross negligence, intentional misrepresentation, negligent misrepresentation, and breach of fiduciary duty arising from accounting, internal auditing, and consulting services provided by RSM to the Company. On February 27, 2019, the matter was resolved pursuant to a settlement between the parties, the terms of which are confidential. The Company alleges that between 2013 and 2015, Dr. Dees received approximately $2.4 million in advanced or reimbursed travel and entertainment expensesproceeds from the Companysettlement were received and that Dr. Dees did not submit back-up documentation in support of substantially all ofrecorded during the advances he received purportedly for future travel and entertainment expenses. The Company similarly alleges that Mr. Culpepper received $294,255 in travel expense reimbursements and advances that were unsubstantiated. The Company further alleges that had RSM provided competent accounting, internal audit and consulting services, it would have discovered Dr. Dees’ and Mr. Culpepper’s conduct at its inception and prevented the misuse of these and future funds. The Company has made a claim for damages against RSM in an amount in excess of $10 million. The Complaint against RSM has been filed and RSM has moved to dismiss the Complaint. The parties are briefing this motion and expect it to be argued to the Court in the next 60 days.three months ended March 31, 2019.

10

 

Other Regulatory MattersEmployment of Chief Financial Officer

From time to timeOn March 25, 2019, the Company receives subpoenas and/entered into a one-year employment agreement with its Chief Financial Officer (“CFO”) that will be renewed automatically for successive one-year periods, unless the Company or requests for information from governmental agencies with respectCFO provides a notice of non-renewal at least thirty (30) days prior to its business. The Company received a subpoena from the staffend of the SEC related toterm. In the travel expense advancements and reimbursements received by Dr. Dees. The Company also receivedevent that coincident with or following a subsequent subpoena fromChange in Control (as defined in the staff ofagreement), the SEC related to the travel expense advancements and reimbursements received by Mr. Culpepper. At this time, the staff’s investigation into these matters remains ongoing, andCFO’s employment with the Company is cooperatingterminated or the employment agreement is not extended (a) by action of the CFO coincident with or following a Change in Control including the CFO’s death, disability or retirement, or (b) by action of the Company not For Cause (as defined in the agreement) coincident with or following a Change in Control, the Company shall pay the CFO a severance payment equal to 50% of the base salary in the preceding calendar year, payable over six months, as well as certain other specified benefits. In connection with the staff. Theemployment agreement, the CFO was entitled to 50,000 shares of immediately-vested common stock. As of March 31, 2019, and through the date of filing, the Company also has engaged in settlement negotiations withnot issued the staff but no agreementshares and, as a result, has been approved byaccrued approximately $3,000 for this obligation on the Commission at this time, and there can be no assurance that a settlement will be reached.condensed consolidated balance sheet as of March 31, 2019.

 

7.8. Subsequent Events

Convertible Notes PayableReceivables

 

Subsequent to September 30, 2017, the Company entered into PRH Notes with accredited investors in the aggregate principal amountMarch 31, 2019, Dr. Wachter reduced his portion of $1,150,000 in connection with Loans receivedlegal fees and other expenses incurred by the Company forunder the same amount. See Note 2 – LiquidityStipulated Settlement Agreement and Financial Condition forMutual Release in the terms of the PRH Notes.

In addition,Kleba shareholder derivative lawsuit by offsetting accrued payroll owed by the Company received the remaining $1,000,000 in funding available under the Cal Enterprises LLC note, such that $2,500,000 of principal is now outstanding under the note.to him totaling $90,066.

 

 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 and our Annual Report on Form 10-K for the year ended December 31, 20162018 filed with the Securities and Exchange Commission (“2016SEC) on March 7, 2019 (“2018 Form 10-K”), which includes additional information about our critical accounting policies and practices and risk factors. Historical results and percentage relationships set forth in the statement of operations, including trends which might appear, are not necessarily indicative of future operations.

 

Overview of Core Technologies

 

The CompanyProvectus is a biopharmaceuticalclinical-stage biotechnology company developing investigational drug productsa new class of drugs for oncology and dermatology based on halogenated xanthenes, such as Rose Bengal and related halogenated xanthenes for the treatment of solid tumor cancers in adults as well as pediatric cancers (i.e., intralesional PV-10), and inflammatory dermatoses for dermatology in both adults and children (i.e., topical PH-10)(4,5,6,7-tetrachloro-2’,4’,5’,7’-tetraiodofluorescein).

The Company is innovating a different approach to treating cancer by developing Intralesional PV-10, the first small molecule oncolytic immunotherapy. Delivered by intralesional injection (i.e., injection into a cancerous tumor), PV-10immunotherapy, which can act locally, causing oncolytic destruction of injected tumors. The localinduce immunogenic cell death, then has the potential to engage the adaptive immune systemis undergoing clinical study for a systemic, or global, effect. By harnessing the immune system in this way, PV-10 may enable patients to achieve immunity to their cancer.adult solid tumor cancers, like melanoma and gastrointestinal cancers, and preclinical study for pediatric cancers. Topical PH-10 delivered topically to affected skin, shares some similar mechanistic themes.is undergoing clinical study for inflammatory dermatoses, like psoriasis and atopic dermatitis. For psoriasis, pathways significantly improved include published psoriasis transcriptomes and cellular responses mediated by IL-17, IL-22, and interferons.

 

The Company’sOur approach to drug development is centered around designing clinical studies for success based on science and medicine, rather than supporting the broadest possible label at the outset. We have bifurcated our overallcomprises two related, complementary, clinical development program into two complementary and related paths based on the features of our investigational drugs and their clinically rational applicability and relevancy to different patient populations. In cancer,solid tumor cancers for adults, for example, we believe PV-10 has important implications as a single agent for earlier stagesstates of disease (i.e., locally advanced disease, or Stage III or earlier), while the combination of PV-10 with other classes of therapy or therapeutic agent (e.g., chemotherapy, immunotherapy, radiotherapy, targeted therapy) is more appropriate for more advanced stagesdisease states (i.e., widely metastatic disease, or Stage IV). Our ongoing preclinical and clinical work in melanoma, cancers of the liver, pancreatic cancer, and pediatric cancers, follow this approach.

 

Results of Operations

 

Comparison of the Three Months Ended September 30, 2017March 31, 2019 and September 30, 2016March 31, 2018

 

Research and Development

 

Research and Developmentdevelopment expenses decreased by $71,346, or approximately 3%,$905,732 from $2,461,407$1,943,063 for the three months ended September 30, 2016March 31, 2018 to $2,390,061$1,037,331 for the three months ended September 30, 2017. March 31, 2019, a decrease of approximately 47% year-over-year. The decrease was due primarily to lower contractor costs of $896,205, insurance costs of $11,190, travel cost of $18,191, offset by an increase in payroll of $4,272, conference costs of $12,233, and other costs totaling $3,349.

Research and development costs of $2,390,061$1,037,331 for the three months ended September 30, 2017March 31, 2019 included amortization of patents of $167,780, payroll of $215,705,$149,475, conferences of $22,233, consulting and contract labor of $1,790,622, legal of $129,001,$560,468, insurance of $75,073,$64,529, lab supplies and pharmaceutical preparations of $7,820,$17,232, travel cost of $23,379, rent and utilities of $982, and$24,415, depreciation expense of $3,078. $2,162, and other costs of $5,658.

Research and development costs of $2,461,407$1,943,063 for the three months ended September 30, 2016March 31, 2018 included patent amortization expense of $167,780, payroll of $206,563,$139,423, conferences of $10,000, consulting and contract labor of $1,866,360, legal of $109,828,$1,456,673, insurance of $65,772,$75,719, lab supplies and pharmaceutical preparations of $23,975,$21,285, travel of $41,570, rent and utilities of $18,195, and$17,859, depreciation expense of $2,934. The overall decrease was due primarily to lower consulting$2,162, and contract labor of approximately $75,738 and an increase of other costs totaling $4,392.

General and Administrative

General and administrative expenses decreased by $2,586,611, or approximately 78%, from $3,315,555 for the three months ended September 30, 2016 to $728,944 for the three months ended September 30, 2017. The overall decrease was due primarily to (i) decreased legal expenses of approximately $1.2 million due to a decline in investigations and litigation as well as lower negotiated hourly rates, (ii) an approximate $828,034 decrease in professional fees due to the termination and reduction in scope of certain vendor services and contracts, (iii) an approximate $176,430 decrease in payroll expense, which was due primarily to reduced salary and other benefits associated with the departure of certain executives in 2016, (iv) an approximate $155,895 decrease in travel and conference expenses, and (v) an approximate $278,750 decrease in directors fees, and an increase of other costs totaling $34,263.$10,592.

 

 12 

 

Investment Income

Investment income is immaterial for all periods presented.

Public Offering Issuance Expense

 

Public offering expense was $436,248 as a result of a public offering in the three months ended September 30, 2016, as compared to no expense in the 2017 period.

Gain on Change in Fair Value of Warrant Liability

The gain on change in fair value of warrant liability was $336,649 due to a change in the fair value of warrants that were issued in connection with our August 2016 public offering in the three months ended September 30, 2016, as compared to no expense in the 2017 period.

Comparison of the Nine Months Ended September 30, 2017 and September 30, 2016

Research and Development

Research and Development expenses decreased by $251,971, or approximately 4%, from$6,874,353 for the nine months ended September 30, 2016 to$6,622,382 for the nine months ended September 30, 2017.Research and development costs of $6,622,382 for the nine months ended September 30, 2017 included patent amortization expense of $503,340, payroll of $395,192, consulting and contract labor of $5,032,358, legal of $354,783, insurance of $228,961, lab supplies and pharmaceutical preparations of $22,272, rent and utilities of $38,922,conference expenses of $34,054, and depreciation expense of $12,500. Research and development costs of $6,874,353 for the nine months ended September 30, 2016 included patent amortization expense of $503,340, payroll of $737,704, consulting and contract labor of $5,054,234, legal of $256,238, insurance of $177,567, lab supplies and pharmaceutical preparations of $63,718, rent and utilities of $71,626, and depreciation expense of $9,926.

The overall decrease was due primarily to decreased payroll expense of approximately $342,512, which was due to reduced salary and other benefits associated with the departure of an executive in 2016, and $21,876 reduction in contractor labor, offset by increases in legal of $98,545 and $13,872 of other costs.

General and Administrative

 

General and administrative expenses decreasedincreased by $8,256,972, or approximately 66%,$3,101, from $12,454,661$756,151 for the ninethree months ended September 30, 2016March 31, 2018 to $4,197,689$759,252 for the ninethree months ended September 30, 2017.March 31, 2019, an increase of approximately .4% year-over-year. The overall decreaseincrease was due primarily to (i) an approximate $2,718,407 decreasea $40,000 increase in warrant incentive expensedirectors’ fees, which was recorded in the 2016 period,were accrued, (ii) an approximate $2,142,509 decreaseincrease in professionalaccounting fees of $88,806, (iii) an increase in investor relations of $132,599 due to the terminationcredits received in 2018 totaling $144,747, and reduction in scopeother cost increases of certain vendor services and contracts, (iii)$9,609, partially offset by (iv) decreased legal expenses of approximately $1,922,763$179,813 due to a decline in investigations and litigation, as well as lower negotiated hourly rates, (iv) an approximate $684,828 decrease in payroll expense which was due primarily to reduced salary and other benefits associated with the departurewind down of certain executives in 2016,lawsuits, (v) an approximate $496,979 decrease in travel and conference expenses, and (vi) an approximate $242,917 decrease in director’s fees and a decrease of other costs$42,176 in finance expenses, (vi) decreased payroll expense of $48,568.$20,122, and (vii) decreased travel cost of $25,802.

 

Investment IncomeOther Income/(Expense)

 

InvestmentOther income is immaterialincreased by $627,152 from $(200,398) for all periods presented.the three months ended March 31, 2018 to $426,754 for the three months ended March 31, 2019. In the quarter ended March 31, 2019, the matters with BHS and RSM were resolved pursuant to a settlement between these parties and the Company, the terms of which are confidential.

 

Public Offering Issuance Expense

Public offeringInterest expense was $436,248 as a result of a public offering inincreased by $128,006 from $206,567 for the ninethree months ended September 30, 2016, as comparedMarch 31, 2018 to no expense in$334,573 for the 2017 period.

Gain on Change in Fair Value of Warrant Liability

three months ended March 31, 2019. The gain on change in fair value of warrant liabilityincrease was $336,649 due to a change in the fair valueincreased number of warrants that were issued in connection with our August 2016 public offering inconvertible notes payable relating to the nine months ended September 30, 2016, as compared to no expense in the 2017 period.PRH Notes.

13

 

Liquidity and Capital Resources

 

The Company’sOur cash and cash equivalents were $208,281$1,767,900 at September 30, 2017,March 31, 2019, compared with $1,165,738to $50,986 at December 31, 2016.2018. 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 $216,019,230$228,264,121 as of September 30, 2017.March 31, 2019. These conditions raise substantial doubt about our ability to continue as a going concern for a period within one year afterfrom the date that the financial statements included elsewhere in this Quarterly Report on Form 10-Q are issued.

Our 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 obtainadditional financing as may be required to fund current operations.

Management’s plans include selling itsour equity securities negotiating with significant vendors to reduce present and future obligations and obtaining other financing to fund itsour capital requirement and on-going operations, including the 2017 Financing discussed below;Financing; however, there can be no assurance the Companywe will be successful in these efforts. During 2017, we have successfully negotiated reductions, with respect to outstanding obligation, owed to certain of our vendors (who provide research and development services), and we expect to continue to pursue further settlements, in consideration of our cash constraints. We have also successfully negotiated substantial reductions in professional fees to be paid to other service providers. The financial statements do not include any adjustment that might be necessary if the Company iswe are unable to continue as a going concern. Significant funds will be needed for the Company to continue to implement its business plan of developing, licensing and/or commercializing the Company’s investigational drug products.

The 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 $10,000,000complete our ongoing and maximum of $20,000,000 (the “2017 Financing”).planned clinical trials.

As of September 30, 2017, the Company had received aggregate Loans (as defined below) of $7,100,000 in connection with the 2017 Financing. Subsequent to September 30, 2017, the Company received aggregate proceeds of $2,150,000 in connection with the 2017 Financing.

The 2017 Financing is in the form of a secured convertible loan (the “Loan”) from the PRH Group or other investors in the 2017 Financing (the “Investors”). The Loan is evidenced by secured convertible promissory notes (individually a “PRH Note” and collectively, the “PRH Notes”) from the Company to the PRH Group or the Investors. In addition to the customary provisions, the PRH Note contains the following provisions:

(i)It is secured by a first priority security interest on the Company’s intellectual property (the “IP”);
(ii)The Loan bears interest at the rate of eight percent (8%) per annum on the outstanding principal amount of the Loan that has been funded to the Company;
(iii)The Loan proceeds are held in one or more accounts (the “Escrow”) pending the funding of the tranches of the 2017 Financing pursuant to borrowing requests made by the Company;
(iv)The PRH Notes, including interest and principal, shall be due and payable in full on the earlier of: (i) on such date upon which the Company defaults under the PRH Notes, (ii) upon a change of control of the Company, or (iii) dates ranging from April 2, 2019 to the twenty-four (24) month anniversary of the funding of the Final Tranche, depending on the specific PRH Note. In the event there is a change of control of the Company’s board of directors (the “Board”) as proposed by any person or group other than the Investors, the term of the PRH Notes will be accelerated and all amounts due under the PRH Notes will be immediately due and payable, plus interest at the rate of 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

 

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(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 24-month anniversary of the funding of the final tranche of the 2017 Financing subject to certain exceptions.

As of September 30, 2017, and through the date of filing, the Series D Preferred Stock had not been designated by the Board. As a result, the PRH Notes were not convertible as of their respective dates of issuance or as of September 30, 2017.

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 apari 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.

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 was 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 U.S. Securities and Exchange Commission (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 “Exchange Act”). 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.

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. 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 iswe are unable to raise sufficient capital through the 2017 Financing or otherwise, itwe will not be able to pay itsour obligations as they become due.

 

The primary business objective of Managementmanagement is to build the Company into a fully integratedcommercial-stage biotechnology company. However, the Companycompany; however, we cannot assure you that itmanagement will be successful in implementing itsthe Company’s business plan of developing, licensing, and/or commercializing the Company’s investigationalour prescription drug products.candidates. Moreover, even if we are successful in improving our current cash flow position, we nonetheless plan to seek additional funds to meet our current and long-term requirements in 20172019 and beyond. We anticipate that these funds will otherwise come from the proceeds of private placement transactions, including the 2017 Financing, the exercise of existing warrants and outstanding stock options, or public offerings of debt or equity securities. While 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.

 

15

Critical Accounting Policies

 

Management’s discussion and analysisFor a description 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, undersee Note 3 – Significant Accounting Policies in Part II,1, Item 7, “Management’s Discussion and Analysis1 of Financial Condition and Results of Operations,” in our 2016this Quarterly Report on Form 10-K.10-Q.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as special purpose entities (“SPEs”).

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Management,

Our 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 Securities Exchange Act at September 30, 2017.of 1934, as amended (the “Exchange Act”). Based on thatthis evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures 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 the SEC’s 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.

 

Changes in Internal Control Over Financial Reporting

Management’s assessment of

Effective January 1, 2019, we adopted Accounting Standards Codification (“ASC”) 842, “Leases” (“ASC 842”). ASC 842 requires management to make significant judgments and estimates. As a result, we implemented changes to our internal controls related to lease evaluation during the three months ended March 31, 2019. These changes include updated accounting policies affected by ASC 842 as well as redesigned internal controls over financial reporting at December 31, 2016 identified certain material weaknesses, as detailed in our 2016 Form 10-K. As ofrelated to ASC 842 implementation. Additionally, management has expanded data gathering procedures to comply with the filing date of this Quarterly Report, we have completed our remediation of certain deficient internal controls, including:

Our new directors and officers have reestablished an appropriate “tone at the top” that is conducive to the proper designing, and functioning of a system of internal control.
Enhanced the design and functioning of controls over:

-

period-end financial reporting, including the implementation of a quarterly financial close checklist;

-disclosure processes, including the establishment of a Disclosure Committee that meets quarterly in advance of the filing of our Quarterly and Annual Reports;
-the information technology environment; and
-travel and entertainment expenditures.

Added procedures designed to improve the evidencing of (i) transaction approvals; and (ii) certain review functions.

Improved the segregation of duties by adding a controller to the finance function of the Company.

Sincethese remediation measures have not been in placeadditional disclosure requirements and tested for a sufficient period of time, we are not yet in a position to conclude that our disclosure controls and procedures and our internal controls over financial reporting are now effective, but that is our near-term goal.ongoing contract review requirements.

 

ThereExcept as stated above, 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, except the implementation of the controls identified above.reporting.

 

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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, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error or 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. 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 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.

 

PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

The information required by this item is incorporated by reference from Part 1,I, Item 1. Financial Statements, Notes to Condensed Consolidated Financial Statements, Note 6 – Litigation.7.

 

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, 2016.2018.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

2017 Financing

 

During the three months ended March 31, 2019, the Company entered into additional PRH Notes with related parties in the aggregate principal amount of $25,000. As of March 31, 2019, the Company had drawn down the entire $25,000 under these notes.

The information above

During the three months ended March 31, 2019, the Company entered into additional PRH Notes with non-related party accredited investors in the aggregate principal amount of $3,775,000. As of March 31, 2019, the Company had drawn down the entire $3,775,000 under “Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—The 2017 Financing” is incorporated herein by reference.these notes.

 

The Company believes that such transactions were exempt from the registration requirements of the Securities Act of 1933, as amended, (the “Securities Act”), in reliance on Section 4(a)(2) of the Securities Act (or Rule 506 of Regulation D promulgated thereunder) as transactions by an issuer not involving a public offering.

For further details on the terms of the PRH Notes, refer to our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC on March 7, 2019.

 

Incentive Compensation to Chief Financial Officer

On March 25, 2019, the Company entered into an employment agreement (the “Employment Agreement”) with its Chief Financial Officer (“CFO”). The Employment Agreement provides that the CFO shall receive initial incentive compensation of 50,000 shares of common stock. The Company believes that such transaction was exempt from the registration requirements of the Securities Act in reliance on Section 4(a)(2) of the Securities Act (or Rule 506 of Regulation D promulgated thereunder) as a transaction by an issuer not involving a public offering. As of March 31, 2019, and through the date of filing, the Company has not issued the shares to the CFO. 

Exercise of Warrants

During the quarterthree months ended September 30, 2017, aMarch 31, 2019, warrant holderholders exercised a warrantwarrants to purchase 10,000an aggregate of 100,000 shares of common stock at a price of $0.053$0.0533 per share or $533.00.

Issuance of Common Stock in Payment of Trade Debt

Also during the quarter ended September 30, 2017,share. In connection with these exercises, the Company received aggregate cash proceeds of $5,330 and issued 372,500100,000 shares of restricted unregistered common stock at an average price of $0.046 per share or $17,300 to holders in settlement of trade debt.the warrant holders.

17

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

NoneNone.

 

ITEM 4.Mine Safety Disclosures.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS.

 

Exhibit

No.

 Description
   

10.1

Employment Agreement between the Company and Heather Raines, CPA, dated March 25, 2019 (incorporated by reference to Exhibit 10.1 of the Company’s current report on Form 8-K filed on March 25, 2019).

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.
**

** Filed herewith.

*** Furnished herewith.

 

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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.
                                     
November 8, 2017May 13, 2019By:/s/ Timothy C. Scott, Ph.D.Bruce Horowitz
  Timothy C. Scott, Ph.D.Bruce Horowitz
  On behalf of the registrant and as PresidentChief Operating Officer (Principal Executive Officer)
   
 By:/s/ John R. GlassHeather Raines
  John R. GlassHeather Raines, CPA
  Interim Chief Financial Officer (Principal Financial Officer)

 

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