NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
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 Companys audited consolidated financial statements included in Form 10-K for the year ended December 31, 2015 filed with the U.S. Securities and Exchange Commission (SEC) on March 30, 2016. In the
opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2016 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2016.
2. Liquidity and Financial Condition
The Companys cash and cash equivalents were $5,178,076 at September 30, 2016, compared with $14,178,902 at December 31, 2015. The Company
continues to incur significant operating losses and management expects that significant on-going operating expenditures will be necessary to successfully implement the Companys business plan and develop and market its products. These
circumstances raise substantial doubt about the Companys ability to continue as a going concern. Implementation of the Companys plans and its ability to continue as a going concern will depend upon the Companys ability to develop
PV-10 and raise additional capital.
On October 13, 2016, the Company received notice from NYSE MKT that NYSE MKT commenced delisting procedures and
immediately suspended trading in the Companys common stock and class of warrants that was listed on NYSE MKT. The Company submitted a request for a review of such delisting determination and has until November 11, 2016 to make a written
submission to NYSE MKT in connection with this review. The NYSE Regulation staffs delisting action has been stayed pending the outcome of this review.
Management believes that the Company has access to capital resources through possible public or private equity offerings, 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 planned Rights Offering (see Footnote 8 to the financial statements, Subsequent Events), it may be forced to implement significant cost cutting measures as early as the first quarter of 2017.
3. Nature of Operations and Significant Accounting Policies
Nature of Operations
Provectus Biopharmaceuticals, Inc.,
a Delaware corporation (together with its subsidiaries, the Company), is a biopharmaceutical company that is focusing on developing minimally invasive products for the treatment of psoriasis and other topical diseases, and certain forms
of cancer including melanoma, breast cancer, and cancers of the liver. To date, the Company has not generated any revenues from planned principal operations. The Companys activities are subject to significant risks and uncertainties, including
failing to successfully develop and license or commercialize the Companys prescription drug candidates, or sell or license the Companys over-the-counter (OTC) products or non-core technologies.
Principles of Consolidation
Intercompany balances and
transactions have been eliminated in consolidation.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
5
Research and Development
Research and development costs are charged to expense when incurred. An allocation of payroll expenses to research and development is made based on a
percentage estimate of time spent. The research and development costs include the following: amortization of patents, payroll, consulting and contract labor, lab supplies and pharmaceutical preparations, legal, insurance, rent and utilities, and
depreciation.
Sequencing Policy
As a result of the
issuance of preferred stock and warrants, for which such instruments contained a variable conversion feature with no floor until November 23, 2016, the Company has adopted a sequencing policy in accordance with Accounting Standards Codification
(ASC) 815-40-35-12 whereby all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation issued to employees or directors.
Fair Value of Financial Instruments
The carrying amounts
reported in the condensed consolidated balance sheets for cash and cash equivalents, short-term settlement receivable, other current assets and accounts payable approximate their fair value because of the short-term nature of these items.
The fair value of derivative instruments is determined by management with the assistance of an independent third party valuation specialist. Certain
derivatives with limited market activity are valued using Level 3 inputs with externally developed models that consider unobservable market parameters. See Note 6.
Recent Accounting Pronouncements
In February
2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (ASU 2016-02), which amends the existing accounting standards for lease
accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in the first quarter of 2019. Early adoption of ASU 2016-02 is
permitted. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is
currently evaluating the impact of adopting ASU 2016-02 on our condensed consolidated financial statements.
In March 2016, the FASB issued ASU
No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
. This ASU amends the principal versus agent guidance in ASU No. 2014-09,
Revenue
from Contracts with Customers (Topic 606)
, which was issued in May 2014 (ASU 2014-09). Further, in April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing
. This ASU also amends ASU 2014-09 and is related to the identification of performance obligations and accounting for licenses. The effective date and transition requirements for both of these amendments to ASU 2014-09
are the same as those of ASU 2014-09, which was deferred for one year by ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
. That is, the guidance under these standards is to be
applied using a full retrospective method or a modified retrospective method, as outlined in the guidance, and is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption
is permitted only for annual periods, and interim period within those annual periods, beginning after December 15, 2016. The Company is currently evaluating the provisions of each of these standards and assessing their impact on the
Companys condensed consolidated financial statements and disclosures.
In March 2016, the FASB issued ASU
No. 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This ASU makes targeted amendments to the accounting for employee share-based payments. This guidance is to be
applied using various transition methods such as full retrospective, modified retrospective, and prospective based on the criteria for the specific amendments as outlined in the guidance. The guidance is effective for annual periods, and interim
periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted, as long as all of the amendments are adopted in the same period. The Company is currently evaluating the provisions of this guidance and
assessing its impact on the Companys condensed consolidated financial statements and disclosures.
In March 2016, the FASB issued ASU
2016-03,
Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments
, which clarifies the requirements for assessing whether contingent call or put options that can accelerate the repayment of principal on
debt instruments are clearly and closely related to their debt hosts. This guidance will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods, and early
adoption is permitted. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Companys condensed consolidated financial statements and disclosures.
In September 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
which
clarifies whether the following items should be categorized as operating, investing or financing in the statement of cash flows: (i) debt prepayments and extinguishment costs, (ii) settlement of zero-coupon debt, (iii) settlement of
contingent consideration, (iv) insurance proceeds, (v) settlement of corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies, (vi) distributions from equity method investees, (vii) beneficial interests
in securitization transactions, and
6
(viii) receipts and payments with aspects of more than one class of cash flows. The new standard takes effect in 2018 for public companies. If an entity elects early adoption, it must adopt all
of the amendments in the same period. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Companys condensed consolidated financial statements and disclosures.
Reclassifications
Certain prior period amounts have been
reclassified for comparative purposes to conform to the fiscal 2016 presentation. These reclassifications have no impact on the previously reported net loss.
Basic and Diluted Loss Per Common Share
Basic loss per
share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share is computed using the weighted average number of common shares and, if dilutive, potential
common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of warrants and stock options (using the treasury stock method). Diluted loss per share excludes the shares
issuable upon the conversion of the exercise of stock options and warrants from the calculation of net loss per share as their effect would be anti-dilutive. Loss per share excludes the impact of outstanding options and warrants as they are
antidilutive. Potential common shares excluded from the calculation at September 30, 2016 and 2015, respectively, relate to 101,821,186 and 78,607,893 from warrants, 5,000,000 and 9,545,214 from options and 1,810,000 and 0 from convertible
preferred stock.
4. Equity Transactions
Common
Stock Issued for Services
During the three months ended March 31, 2016, the Company issued 51,745 shares of common stock to consultants in
exchange for services. Consulting costs charged to operations were $20,163. During the three months ended March 31, 2015, the Company issued 75,000 shares of common stock to consultants in exchange for services. Consulting costs charged to
operations were $64,000.
During the three months ended June 30, 2015, the Company issued 75,000 shares of common stock to consultants in exchange
for services. Consulting costs charged to operations were $63,000.
During the three months ended September 30, 2015, the Company issued 78,877
shares of common stock to consultants in exchange for services. Consulting costs charged to operations were $38,439.
Warrant Activity
During the three months ended March 31, 2016, 1,048,494 warrants expired. During the three months ended March 31, 2015, the Company issued 3,000
fully vested warrants to consultants in exchange for services. Consulting costs charged to operations were $1,632. During the three months ended March 31, 2015, 3,693,898 warrants expired.
During the three months ended June 30, 2016, 1,757,253 warrants expired. During the three months ended June 30, 2016, employees of the Company
forfeited 3,830,000 stock options. During the three months ended June 30, 2015, the Company issued 100,000 fully vested warrants to consultants in exchange for services, and charged to consulting costs $53,582. During the three months ended
June 30, 2015, 1,161,790 warrants expired.
During the three months ended September 30, 2016, 53,500 warrants were forfeited. During the three
months ended September 30, 2015, the Company issued 79,500 fully vested warrants to consultants in exchange for services. Consulting costs charged to operations were $24,262. During the three months ended September 30, 2015, 1,152,135
warrants were forfeited.
Warrant Exchange Programs
As of December 28, 2015, the Company had outstanding warrants to purchase an aggregate of 59,861,601 shares of common stock, which were issued between
January 6, 2011 and November 1, 2015 in transactions exempt from registration under the Securities Act (the Existing Warrants). Each Existing Warrant has an exercise price of between $1.00 and $3.00 per share, and expires
between January 6, 2016 and November 1, 2020. On December 31, 2015, the Company offered pursuant to an Offer Letter/Prospectus 59,861,601 shares of its common stock for issuance upon exercise of the Existing Warrants. The shares
issued upon exercise of the Existing Warrants are unrestricted and freely transferable. The Offer was to temporarily modify the terms of the Existing Warrants so that each holder who tendered Existing Warrants during the Offer Period for early
exercise were able to do so at a discounted exercise price of $0.50 per share. Each Existing Warrant holder who tendered Existing Warrants for early exercise during the Offer Period received, in addition to the shares of Common Stock purchased upon
exercise, an equal number of new warrants to purchase common stock, with an exercise price of $0.85 per share, expiring June 19, 2020 (the Replacement Warrants). The modification of the exercise price of the Existing Warrants and
the Replacement Warrants are treated as an inducement to enter into the exchange offer
7
and were accounted for as of the closing date. The exchange offer expired at 4:00 p.m., Eastern Time, on March 28, 2016. The Company accepted for purchase approximately 7,798,507 Existing
Warrants properly tendered, resulting in the issuance of approximately 7,798,507 shares of common stock upon exercise of Existing Warrants and the issuance of approximately 7,798,507 Replacement Warrants, resulting in gross proceeds of $3,899,254
upon closing of the exchange offer. Maxim Group LLC and Network 1 Financial Securities, Inc. received a total of $264,214 in placement agent fees and 467,910 warrants with a cash exercise price of $0.85 per share which expire on June 19, 2020,
unless sooner exercised. In connection with the exchange offer, a warrant incentive expense totaling $2,718,407 was recorded. The value was determined using the Black-Scholes option-pricing model between the Existing Warrants exchanged and the
common stock and Replacement Warrants received.
On May 13, 2016, the Company offered pursuant to an Offer Letter/Prospectus 51,149,594 shares of its
common stock for issuance upon exercise of the Existing Warrants. The Offer was to temporarily modify the terms of the Existing Warrants so that each holder who tendered Existing Warrants during the Offer Period for early exercise were able to do so
at a discounted exercise price of $0.75 per share. Each Existing Warrant holder who tendered Existing Warrants for early exercise during the Offer Period were to receive, in addition to the shares of Common Stock purchased upon exercise, an equal
number of new warrants to purchase common stock, with an exercise price of $0.85 per share, expiring June 19, 2020 (the Replacement Warrants). The exchange offer expired at 4:00 p.m., Eastern Time, on July 28, 2016 with no
warrants tendered.
August 2016 Public Offering
On
August 25, 2016, the Company filed the Certificate of Designation of Preferences, Rights and Limitations of the Series B Convertible Preferred Stock with the Delaware Secretary of State (the Certificate of Designation). The
Certificate of Designation provides for the issuance of the Series B Convertible Preferred Stock, par value $0.001 per share (the Preferred Stock). In the event of the Companys liquidation, dissolution, or winding up, holders of
Preferred Stock will be entitled to receive the amount of cash, securities or other property to which such holder would be entitled to receive with respect to such shares of Preferred Stock if such shares had been converted to Common Stock
immediately prior to such event (without giving effect for such purposes to any beneficial ownership limitation), subject to the preferential rights of holders of any class or series of the Companys capital stock specifically ranking by its
terms senior to the Preferred Stock as to distributions of assets upon such event, whether voluntarily or involuntarily. The Preferred Stock has no voting rights.
The holders of Preferred Stock will be entitled to receive cumulative dividends at the rate per share of 8% per annum of the stated value per share,
until the fifth anniversary of the date of issuance of the Preferred Stock. The dividends become payable, at the Companys option in either cash or in shares of Common Stock, (i) upon any conversion of the Preferred Stock, (ii) on
each such other date as the Board may determine, subject to written consent of the holders of Preferred Stock holding a majority of the then issued and outstanding Preferred Stock, (iii) upon the Companys liquidation, dissolution or
winding up, and (iv) upon occurrence of a fundamental transaction, which includes any merger or consolidation, sale of all or substantially all of the Companys assets, exchange or conversion of all of the Common Stock by tender offer,
exchange offer or reclassification; provided, however, that if Preferred Stock is converted into shares of Common Stock at any time prior to the fifth anniversary of the date of issuance of the Preferred Stock, the holder will receive a make-whole
payment in an amount equal to all of the dividends that, but for the early conversion, would have otherwise accrued on the applicable shares of Preferred Stock being converted for the period commencing on the conversion date and ending on the fifth
anniversary of the date of issuance, less the amount of all prior dividends paid on such converted Preferred Stock before the date of conversion. Make-whole payments are payable at the Companys option in either cash or in shares of Common
Stock. With respect to any dividend payments and make-whole payments paid in shares of Common Stock, the number of shares of Common Stock to be issued to a holder of Preferred Stock will be an amount equal to the quotient of (i) the amount of
the dividend payable to such holder divided by (ii) the conversion price then in effect. The dividends related to preferred stock that was not converted during the three months ended September 30, 2016 of $38,432 represent an in-kind
dividend.
On August 30, 2016, the Company closed a public offering of 240,000 shares of its Preferred Stock (which are initially convertible into an
aggregate of 24,000,000 shares of the Companys common stock) and warrants initially exercisable to purchase an aggregate of 24,000,000 shares of common stock at an exercise price of $0.275 per share of common stock (the August 2016
Warrants). The Preferred Stock and August 2016 Warrants were sold together at a price of $25.00 for a combination of one share of Preferred Stock and 100 August 2016 Warrants to purchase one share of common stock each, resulting in
aggregate net proceeds of $5,288,530 (gross proceeds of $6,000,000 less issuance costs of $711,470) to the Company. Maxim Group LLC served as placement agent for the transaction.
The conversion feature embedded within the Preferred Stock is subject to anti-dilution price protection upon the issuance of equity or equity-linked
securities within 60 trading days from the date of issuance of the Preferred Stock at an effective common stock purchase price of less than the conversion price of the Preferred Stock then in effect, subject to certain exceptions as provided in the
Certificate of Designation. In addition, if the conversion price in effect on the 60th trading day following the date of issuance of the Preferred Stock exceeds 85% of the average of the 45 lowest volume weighted average trading prices of the common
stock during the period
8
commencing on the date of issuance of the Preferred Stock and ending on the 60th trading day following the date of issuance of the Preferred Stock (as adjusted for stock splits, stock dividends,
recapitalizations, reorganizations, reclassification, combinations, reverse stock splits or other similar events during such period) (the Adjusted Conversion Price), then the conversion price shall be reset to the Adjusted Conversion
Price and shall be further subject to adjustment as provided in the Certificate of Designation. In either case, if a holder of Preferred Stock converts its shares of Preferred Stock prior to any such price reset event, then such holder will receive
additional shares of common stock equal to the number of shares of common stock that would have been issued assuming for such purposes the Adjusted Conversion Price were in effect at such time less the shares issued at the then Conversion Price
(subject to being held in abeyance based on beneficial ownership limitations); provided, however, that only the initial purchaser of Preferred Stock and August 2016 Warrants in the Offering will receive the benefit of such price protection and such
issuance of shares of common stock upon a price reset event. During the three months ended September 30, 2016, investors converted 221,900 shares of Preferred Stock and Preferred Stock dividends (including make-whole payments) into 31,066,000
shares of Common Stock.
The August 2016 Warrants expire on August 30, 2021. The exercise price of the August 2016 Warrants is subject to appropriate
adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the common stock. In addition, if the exercise price in effect on the 60th trading day following
the date of issuance of the August 2016 Warrants exceeds 85% of the average of the 45 lowest volume weighted average trading prices of the common stock during the period commencing on the date of issuance of the August 2016 Warrants and ending on
the 60th trading day following the date of issuance of the August 2016 Warrants (as adjusted for stock splits, stock dividends, recapitalizations, reorganizations, reclassification, combinations, reverse stock splits or other similar events during
such period) (the Adjusted Exercise Price), then (i) the exercise price shall be reset to the Adjusted Exercise Price (and without giving effect to any prior conversions) and shall be further subject to adjustment as provided in the
August 2016 Warrants, and (ii) the number of shares of common stock issuable upon exercise of the August 2016 Warrants will be reset to equal the number of shares of common stock issuable upon conversion of Preferred Stock after giving effect
to the adjusted conversion price or adjusted exercise price, as applicable. If a holder of August 2016 Warrants exercises its August 2016 Warrants prior to such repricing, then such holder will receive shares of common stock equal to the difference
between the exercise price and the Adjusted Exercise Price; provided, however, that only the initial purchaser of Preferred Stock and August 2016 Warrants in the Offering will receive the benefit of such price protection and such issuance of shares
of common stock upon a price reset event.
The Series B Preferred Stock does not contain a redemption provision and an overall analysis of its features
performed by the Company determined that it is more akin to equity and therefore, has been classified within stockholders equity on the condensed consolidated balance sheet. While the embedded conversion option (ECO) is subject to
an anti-dilution price adjustment, since the ECO is clearly and closely related to the equity host, it is not required to be bifurcated and accounted for as a derivative liability under ASC 815. To analyze whether the Preferred Stock included a
beneficial conversion feature (BCF), the Company allocated the $6,000,000 of the gross proceeds between the August 2016 Warrants and the Preferred Stock. The Company allocated the commitment date fair value of $3,678,989 to the August
2016 Warrants (which is allocated at fair value because the August 2016 Warrants were determined to be derivative liabilities as discussed in Note 6) resulting in an amount allocated to the Preferred Stock of $2,321,011. Next, the Company computed
the number of shares of Common Stock issuable at the commitment date to be 24,000,000 in order to arrive at an effective conversion price of $0.097 per share. When compared to the market price of the Companys Common Stock of $0.127 per share
as of the commitment date, it was determined that a BCF did exist and, as a result, the Company recorded a contractual dividend in net loss available to common stockholders of $726,989.
During the three months ended September 30, 2016, a number of investors converted their Preferred 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 8,876,000 shares of Common Stock related to the Preferred Stock dividends during the three months ended September 30,
2016. Since the investors did not pay any additional consideration for such shares (and the impact of the time-based dividend was immaterial due to the majority of conversions occurring on the date of issuance), the Company recognized dividend paid
in kind to preferred shareholders of $2,219,000 associated with the make-whole payment which was equal to the number of shares multiplied by the market price of the Companys Common Stock of $0.127 per share as of the commitment date. The net
carrying value of the Preferred Stock is $2,045,789 (gross proceeds of $6,000,000 less preferred stock discount associated with August 2016 Warrants of $3,678,989 less issuance costs allocated to Preferred Stock of $275,222). Since the Preferred
Stock doesnt contain a redemption provision, it is not probable that the Preferred Stock will become redeemable, therefore the preferred stock discount is not amortized.
On November 23, 2016, when the Preferred Stock conversion price becomes fixed and, as a result, the contingency is resolved, the Company will analyze for
a BCF, however, the maximum cumulative BCF that can be recognized is equal to the carrying value of the Preferred Stock. As of September 30, 2016, the Company had recorded BCFs of $726,989.
9
The August 2016 Warrants were determined to be derivative liabilities due to the presence of an anti-dilution
feature whereby the Company may not have a sufficient number of authorized and unissued shares, which results in the assumption of a cash settlement of the warrant.
Utilizing a Monte Carlo valuation method, a valuation expert determined that the August 2016 Warrants had an issuance date value of $3,678,989 and a value on
September 30, 2016 of $3,342,340, a decrease of $336,649, which will be recognized as a gain on the change in fair value of derivative liabilities. At issuance, the fair value was recognized as a liability (with a corresponding debit to
additional paid-in capital for the preferred stock discount) and that liability will be marked-to-the-market on November 23, 2016, when the exercise price becomes fixed, and that amount will be reclassified to equity because the August 2016
Warrants will no longer be subject to the anti-dilution adjustment.
In connection with the closing of the Offering, the Company incurred $711,470 of cash
issuance costs. $436,248 of the issuance costs were allocated to the August 2016 Warrants (the August 2016 Warrants comprised $3,678,989, or 61%, of the aggregate gross proceeds of $6,000,000; 61% of the aggregate issuance costs of $711,470 is
$436,248), which are classified as a derivative liability and, as a result, were expensed immediately (and included within other expense (non-operating) on the condensed consolidated statement of operations) and $275,222 of the issuance costs were
allocated to the Preferred Stock, which is classified as equity and, as a result, were charged against additional paid-in capital.
5. Related Party
Transactions
Under the terms of the Amended and Restated Executive Employment Agreement entered into by Dr. H. Craig Dees, the Companys
former Chairman and Chief Executive Officer (Former CEO) and the Company on April 28, 2014 (the Agreement), the Former CEO is owed no severance payments as a result of his resignation on February 27, 2016. The
Former CEOs employment terminated with his resignation without Good Reason as that term is defined in the Agreement. Under section 6 of the Agreement, Effect of Termination, a resignation by the Former CEO without
Good Reason terminates any payments due to the Former CEO as of the last day of his employment. As reported in the Companys press release furnished with the Companys Current Report on Form 8-K filed with the Commission on
February 29, 2016, in connection with the resignation of the Former CEO as the Companys Chief Executive Officer and Chairman of the Board of Directors, which was effective February 27, 2016, the Audit Committee conducted a review of
Company procedures, policies and practices, including travel expense advancements and reimbursements. The Audit Committee retained independent counsel and an advisory firm with forensic accounting expertise to assist the Audit Committee in
conducting the investigation. On March 15, 2016, the Audit Committee completed this investigation and made the following findings: (1) in 2015, the Former CEO received $898,430 in travel expense advances but submitted receipts totaling
only $297,170, most of which did not appear to be authentic; (2) in 2014, the Former CEO received $819,000 for travel expense advances, for which no receipts were submitted; and (3) in 2013, the Former CEO received $752,034 for travel
expense advances; no receipts were submitted by the Former CEO for $698,000 of these expenses and $54,034 of submitted receipts did not appear to be authentic. In addition, the Company advanced travel expenses to the Former CEO in the amount of
$56,627 in the first quarter of 2016 prior to his resignation and prior to the completion of the Companys investigation. The Company has filed a lawsuit in the United States District Court for the Eastern District of Tennessee seeking to
collect all of the Former CEOs unsubstantiated travel expenses, including those which did not appear to be authentic. See Note 6, LitigationCollection Lawsuit.
6. Fair Value of Financial Instruments
The FASBs
authoritative guidance on fair value measurements establishes a framework for measuring fair value, and expands disclosure about fair value measurements. This guidance enables the reader of the financial statements to assess the inputs used to
develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. Under this guidance, assets and liabilities carried at fair value must be classified and disclosed in
one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are measured and reported on a fair value
basis. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. The fair value of certain of the Companys financial instruments, including
Cash and cash equivalents and Accounts payable, approximates the carrying value due to the relatively short maturity of such instruments. The fair value of derivative instruments is determined by management with the assistance of an independent
third party valuation specialist. The warrant liability is a derivative instrument and is classified as Level 3. The Company used the Monte-Carlo Simulation model to estimate the fair value of the warrants using the following assumptions: expected
volatility of 107.8%-108.6%, risk-free rate of 0.88%-0.92%, expected term of 4.91-5.00 years, and expected dividends of 0.00%.
10
The warrant liability measured at fair value on a recurring basis is as follows:
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|
|
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Total
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Level 1
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Level 2
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|
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Level 3
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Derivative instruments:
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|
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|
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|
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|
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Warrant liability at September 30, 2016
|
|
$
|
3,342,340
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,342,340
|
|
Warrant liability at December 31, 2015
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
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|
|
A reconciliation of the warranty liability measured at fair value on a recurring basis with the use of significant
unobservable inputs (Level 3) from December 31, 2015 to September 30, 2016 follows:
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Balance at December 31, 2015
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|
$
|
|
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Issuance of warrants
|
|
|
3,678,989
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Gain on change in fair value of warrant liability
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|
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(336,649
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)
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Exercise of warrants
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|
|
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Balance at September 30, 2016
|
|
$
|
3,342,340
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|
|
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|
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7. Litigation
Kleba
Shareholder Derivative Lawsuit
On January 2, 2013, Glenn Kleba, derivatively on behalf of the Company, filed a shareholder derivative complaint
in the Circuit Court for the State of Tennessee, Knox County (the Court), against the Former CEO, Timothy C. Scott, Eric A. Wachter, and Peter R. Culpepper (collectively, the Executives), Stuart Fuchs, Kelly M. McMasters, and
Alfred E. Smith, IV (collectively, together with the Executives, the Individual Defendants), and against the Company as a nominal defendant (the Shareholder Derivative Lawsuit). The Shareholder Derivative Lawsuit alleged
(i) breach of fiduciary duties, (ii) waste of corporate assets, and (iii) unjust enrichment, all three claims based on Mr. Klebas allegations that the defendants authorized and/or accepted stock option awards in violation
of the terms of the Companys 2002 Stock Plan (the Plan) by issuing stock options in excess of the amounts authorized under the Plan and delegated to defendant the Former CEO the sole authority to grant himself and the other
Executives cash bonuses that Mr. Kleba alleges to be excessive.
In April 2013, the Companys Board of Directors appointed a special litigation
committee to investigate the allegations of the Shareholder Derivative Complaint and make a determination as to how the matter should be resolved. The special litigation committee conducted its investigation, and proceedings in the case were stayed
pending the conclusion of the committees investigation. At that time, the Company established a reserve of $100,000 for potential liabilities because such is the amount of the self-insured retention of its insurance policy. On
February 21, 2014, an Amended Shareholder Derivative Complaint was filed which added Don B. Dale (Mr. Dale) as a plaintiff.
On
March 6, 2014, the Company filed a Joint Notice of Settlement (the Notice of Settlement) in the Shareholder Derivative Lawsuit. In addition to the Company, the parties to the Notice of Settlement are Mr. Kleba, Mr. Dale
and the Individual Defendants.
On June 6, 2014, the Company, in its capacity as a nominal defendant, entered into a Stipulated Settlement Agreement
and Mutual Release (the Settlement) in the Shareholder Derivative Lawsuit. In addition to the Company and the Individual Defendants, Plaintiffs Glenn Kleba and Don B. Dale are parties to the Settlement.
By entering into the Settlement, the settling parties resolved the derivative claims to their mutual satisfaction. The Individual Defendants have not admitted
the validity of any claims or allegations and the settling plaintiffs have not admitted that any claims or allegations lack merit or foundation. Under the terms of the Settlement, (i) the Executives each agreed (A) to re-pay to the Company
$2.24 million of the cash bonuses they each received in 2010 and 2011, which amount equals 70% of such bonuses or an estimate of the after-tax net proceeds to each Executive; provided, however, that subject to certain terms and conditions set forth
in the Settlement, the Executives are entitled to a 2:1 credit such that total actual repayment may be $1.12 million each; (B) to reimburse the Company for 25% of the actual costs, net of recovery from any other source, incurred by the Company
as a result of the Shareholder Derivative Lawsuit; and (C) to grant to the Company a first priority security interest in 1,000,000 shares of the Companys common stock owned by each such Executive to serve as collateral for the amounts due
to the Company under the Settlement; (ii) Drs. Dees and Scott and Mr. Culpepper agreed to retain incentive stock options for 100,000 shares but shall forfeit 50% of the nonqualified stock options granted to each such Executive in both 2010
and 2011. The Settlement also requires that each of the Executives enter into new employment agreements with the Company, which were entered into on April 28, 2014, and that the Company adhere to certain corporate governance principles and
processes in the future. Under the Settlement, Messrs. Fuchs and Smith and Dr. McMasters have each agreed to pay the Company $25,000 in cash, subject to reduction by such amount that the Companys insurance carrier pays to
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the Company on behalf of such defendant pursuant to such defendants directors and officers liability insurance policy. The Settlement also provides for an award to plaintiffs counsel
of attorneys fees and reimbursement of expenses in connection with their role in this litigation, subject to Court approval.
On July 24, 2014,
the Court approved the terms of the proposed Settlement and awarded $911,000 to plaintiffs counsel for attorneys fees and reimbursement of expenses in connection with their role in the Shareholder Derivative Lawsuit. The payment to
plaintiffs 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. The amount was reclassed to long-term receivable at December 31, 2015 and is recorded as long-term receivable at September 30,
2016. A reserve for uncollectibility of $227,750 was established at December 31, 2015 in connection with the resignation of the Former CEO. As of September 30, 2016, the Company has the net amount of the receivable of $683,250 included in
long term assets on its condensed balance sheet.
On October 3, 2014, the Settlement was effective and stock options for the Former CEO,
Dr. Scott and Mr. Culpepper were rescinded, totaling 2,800,000. $900,000 was repaid by the Executives as of December 31, 2015. The first year payment due has been paid. The remaining cash settlement amounts will continue to be repaid
to the Company over a period of four years with the second payment due in total by October 2016 and the final payment is expected to be received by October 3, 2019. $150,000 was repaid by the Executives during the three months ended
September 30, 2016, and a total of $450,000 was repaid for the nine months ended September 30, 2016. An additional $19,962 of the settlement discount was amortized as of September 30, 2016, and a total of $63,774 was amortized for the
nine months ended September 30, 2016. $167,743 of the settlement discount was amortized as of September 30, 2016. The remaining balance due the Company as of September 30, 2016 is $2,125,509, including a reserve for uncollectibility
of $870,578 in connection with the resignation of the Former CEO, with a present value discount remaining of $133,912. As a result of his resignation, the Former CEO 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 the Former CEO pursuant to the Settlement less the $200,000 that he repaid as of December 31, 2015) plus the Former CEOs proportionate share of the litigation costs is immediately due and
payable. The Company sent the Former CEO a notice of default in March 2016 for the total amount he owes the Company.
Class Action Lawsuits
On May 27, 2014, Cary Farrah and James H. Harrison, Jr., individually and on behalf of all others similarly situated (the Farrah Case), and on
May 29, 2014, each of Paul Jason Chaney, individually and on behalf of all others similarly situated (the Chaney Case), and Jayson Dauphinee, individually and on behalf of all others similarly situated (the Dauphinee
Case) (the plaintiffs in the Farrah Case, the Chaney Case and the Dauphinee Case collectively referred to as the Plaintiffs), each filed a class action lawsuit in the United States District Court for the Middle District of
Tennessee against the Company, the Former CEO, Timothy C. Scott and Peter R. Culpepper (the Defendants) alleging violations by the Defendants of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder and
seeking monetary damages. Specifically, the Plaintiffs in each of the Farrah Case, the Chaney Case and the Dauphinee Case allege that the Defendants are liable for making false statements and failing to disclose adverse facts known to them about the
Company, in connection with the Companys application to the FDA for Breakthrough Therapy Designation (BTD) of the Companys melanoma drug, PV-10, in the Spring of 2014, and the FDAs subsequent denial of the
Companys application for BTD.
On July 9, 2014, the Plaintiffs and the Defendants filed joint motions in the Farrah Case, the Chaney Case and
the Dauphinee Case to consolidate the cases and transfer them to United States District Court for the Eastern District of Tennessee. By order dated July 16, 2014, the United States District Court for the Middle District of Tennessee entered an
order consolidating the Farrah Case, the Chaney Case and the Dauphinee Case (collectively and, as consolidated, the Securities Litigation) and transferred the Securities Litigation to the United States District Court for the Eastern
District of Tennessee.
On November 26, 2014, the United States District Court for the Eastern District of Tennessee (the Court) entered
an order appointing Fawwaz Hamati as the Lead Plaintiff in the Securities Litigation, with the Law Firm of Glancy Binkow & Goldberg, LLP as counsel to Lead Plaintiff. On February 3, 2015, the Court entered an order compelling the Lead
Plaintiff to file a consolidated amended complaint within 60 days of entry of the order.
On April 6, 2015, the Lead Plaintiff filed a Consolidated
Amended Class Action Complaint (the Consolidated Complaint) in the Securities Litigation, alleging that Provectus and the other individual defendants made knowingly false representations about the likelihood that PV-10 would be approved
as a candidate for BTD, and that such representations caused injury to Lead Plaintiff and other shareholders. The Consolidated Complaint also added Eric Wachter as a named defendant.
On June 5, 2015, Provectus filed its Motion to Dismiss the Consolidated Complaint (the Motion to Dismiss). On July 20, 2015, the Lead
Plaintiff filed his response in opposition to the Motion to Dismiss (the Response). Pursuant to order of the Court, Provectus replied to the Response on September 18, 2015.
On October 1, 2015, the Court entered an order staying a ruling on the Motion to Dismiss pending a mediation to resolve the Securities Litigation in its
entirety. A mediation occurred on October 28, 2015. On January 28, 2016, a settlement terms sheet (the Terms Sheet) was executed by counsel for the Company and counsel for the Lead Plaintiff in the consolidated Securities
Litigation.
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Pursuant to the Terms Sheet, the parties agree, contingent upon the approval of the court in the consolidated
Securities Litigation, that the cases will be settled as a class action on the basis of a class period of December 17, 2013 through May 22, 2014. The Company and its insurance carrier agreed to pay the total amount of $3.5 million (the
Settlement Funds) into an interest bearing escrow account upon preliminary approval by the court in the Consolidated Securities Litigation. The Company has determined that it is probable that the Company will pay $1.85 million of the
total, which has been accrued at December 31, 2015 and was paid in March 2016. The insurance carrier will pay $1.65 million of the total directly to the plaintiffs trust escrow account. Notice will be provided to shareholder members of
the class. Shareholder members of the class will have both the opportunity to file claims to the Settlement Funds and to object to the settlement. If the court enters final approval of the settlement, the Securities Litigation will be dismissed with
full prejudice, the Defendants will be released from any and all claims in the Securities Litigation and the Securities Litigation will be fully concluded. If the court does not give final approval of the settlement, the Settlement Funds, less any
claims administration expenses, will be returned to the Company and its insurance carrier.
A Stipulation of Settlement encompassing the details of the
settlement and procedures for preliminary and final court approval was filed on March 8, 2016. The Stipulation of Settlement incorporates the provisions of the Terms Sheet and includes the procedures for providing notice to stockholders who
bought or sold stock of the Company during the class period. The Stipulation of Settlement further provides for (1) the methodology of administering and calculating claims, final awards to stockholders, and supervision and distribution of the
Settlement Funds and (2) the procedure for preliminary and final approval of the settlement of the Securities Litigation.
On April 7, 2016, the
court in the Securities Litigation held a hearing on preliminary approval of the settlement, entered an order preliminarily approving the settlement, ordered that the class be notified of the settlement as set forth in the Stipulation of Settlement,
and set a hearing on September 26, 2016 to determine whether the proposed settlement is fair, reasonable, and adequate to the class; whether the class should be certified and the plan of allocation of the Settlement Funds approved; whether to
grant Lead Plaintiffs request for expenses and Lead Plaintiffs counsels request for fees and expenses; and whether to enter judgment dismissing the Securities Litigation as provided in the Stipulation of Settlement. On
September 16, 2016, the Lead Plaintiff notified the court that approximately 6,300 stockholders did not receive notification of the proposed settlement until late August 2016 because of the delayed receipt of potential Settlement Class Member
information from a number of brokers. As a result, on September 22, 2016, the parties filed a joint motion requesting that the court extend the deadlines to file a Proof of Claim, request exclusion from the settlement, or file an objection to
the settlement, and that the court schedule a continued settlement hearing. The court granted the motion, cancelling the settlement hearing that had been set for September 26 and re-setting the hearing to take place on December 12, 2016.
The court set a new deadline of November 10, 2016 for objections and requests for exclusion, and November 25, 2016 for submitting proofs of claim. If the settlement is not approved and consummated, the Company intends to defend vigorously
against all claims in the Consolidated Complaint.
2014-2015 Derivative Lawsuits
On June 4, 2014, Karla Hurtado, derivatively on behalf of the Company, filed a shareholder derivative complaint in the United States District Court for
the Middle District of Tennessee against the Former CEO, Timothy C. Scott, Jan E. Koe, Kelly M. McMasters, and Alfred E. Smith, IV (collectively, the Individual Defendants), and against the Company as a nominal defendant (the
Hurtado Shareholder Derivative Lawsuit). The Hurtado Shareholder Derivative Lawsuit alleges (i) breach of fiduciary duties and (ii) abuse of control, both claims based on Ms. Hurtados allegations that the Individual
Defendants (a) recklessly permitted the Company to make false and misleading disclosures and (b) failed to implement adequate controls and procedures to ensure the accuracy of the Companys disclosures. On July 25, 2014, the
United States District Court for the Middle District of Tennessee entered an order transferring the case to the United States District Court for the Eastern District of Tennessee and, in light of the pending Securities Litigation, relieving the
Individual Defendants from responding to the complaint in the Hurtado Shareholder Derivative Lawsuit pending further order from the United States District Court for the Eastern District of Tennessee.
On October 24, 2014, Paul Montiminy brought a shareholder derivative complaint on behalf of the Company in the United States District Court for the
Eastern District of Tennessee (the Montiminy Shareholder Derivative Lawsuit) against the Former CEO, Timothy C. Scott, Jan E. Koe, Kelly M. McMasters, and Alfred E. Smith, IV (collectively, the Individual Defendants). As a
practical matter, the factual allegations and requested relief in the Montiminy Shareholder Derivative Lawsuit are substantively the same as those in the Hurtado Shareholder Derivative Lawsuit. On December 29, 2014, the United States District
Court for the Eastern District of Tennessee (the Court) entered an order consolidating the Hurtado Shareholder Derivative Lawsuit and the Montiminy Derivative Lawsuit. On April 9, 2015, the United States District Court for the
Eastern District of Tennessee entered an Order staying the Hurtado and Montiminy Shareholder Derivative Lawsuits pending a ruling on the Motion to Dismiss filed by the Company in the Securities Litigation.
On October 28, 2014, Chris Foley, derivatively on behalf of the Company, filed a shareholder derivative complaint in the Chancery Court of Knox County,
Tennessee against the Former CEO, Timothy C. Scott, Jan E. Koe, Kelly M. McMasters, and Alfred E. Smith, IV (collectively, the Individual Defendants), and against the Company as a nominal defendant (the Foley Shareholder Derivative
Lawsuit). The Foley Shareholder Derivative Lawsuit was brought by the same attorney as the Montiminy Shareholder Derivative Lawsuit, Paul Kent Bramlett of Bramlett Law Offices. Other than the difference in the named plaintiff, the complaints
in the Foley
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Shareholder Derivative Lawsuit and the Montiminy Shareholder Derivative Lawsuit are identical. On March 6, 2015, the Chancery Court of Knox County, Tennessee entered an Order staying the
Foley Derivative Lawsuit until the United States District Court for the Eastern District of Tennessee issues a ruling on the Motion to Dismiss filed by the Company in the Securities Litigation.
On June 24, 2015, Sean Donato, derivatively on behalf of the Company, filed a shareholder derivative complaint in the Chancery Court of Knox County,
Tennessee against the Former CEO, Timothy C. Scott, Jan. E. Koe, Kelly M. McMasters, and Alfred E. Smith, IV (collectively, the Individual Defendants), and against the Company as a nominal defendant (the Donato Shareholder
Derivative Lawsuit). Other than the difference in the named plaintiff, the Donato Shareholder Derivative Lawsuit is virtually identical to the other pending derivative lawsuits. All of these cases assert claims against the Defendants for
breach of fiduciary duties based on the Companys purportedly misleading statements about the likelihood that PV-10 would be approved by the FDA. We are not in a position at this time to give you an evaluation of the likelihood of an
unfavorable outcome, or an estimate of the amount or range of potential loss to the Company.
As a nominal defendant, no relief is sought against the
Company itself in the Hurtado, Montiminy, Foley, and Donato Shareholder Derivative Lawsuits.
While the parties to the Securities Litigation were
negotiating and documenting the Stipulation of Settlement in the Securities Litigation, the parties to the Hurtado, Montiminy, and Foley Shareholder Derivative Lawsuits, through counsel, engaged in settlement negotiations as well. On or about
April 11, 2016, the parties entered into a Stipulation of Settlement, which was filed with the United States District Court for the Eastern District of Tennessee on April 29, 2016.
Pursuant to the Stipulation of Settlement, the parties agreed to settle the cases, contingent upon the approval of the court. The Company agreed to implement
certain corporate governance changes, including the adoption of a Disclosure Controls and Procedures Policy, and to use its best efforts to replace one of its existing directors with an independent outside director by June 30, 2017. The Company
agreed to pay from insurance proceeds the amount of $300,000 to plaintiffs counsel in the Hurtado, Montiminy, Foley, and Donato Shareholder Derivative Lawsuits. The insurance carrier will pay directly to the plaintiffs trust escrow
account and it will not pass through the Company. Notice of the proposed settlement will be provided to shareholders as set forth in the Stipulation of Settlement. If the court enters final approval of the settlement, the Individual Defendants will
be released from any and all claims in the Hurtado, Montiminy, Foley, and Donato Shareholder Derivative Lawsuits.
The United States District Court for
the Eastern District of Tennessee preliminarily approved the settlement by order dated June 2, 2016. Pursuant to this court order, the notice to the class was filed with the Securities and Exchange Commission, published on the Companys
website, and posted on plaintiffs counsels websites by June 13, 2016. On August 26, 2016, the court held a final hearing on the fairness of the settlement and entered an order approving the settlement and dismissing the action
with prejudice.
Collection Lawsuit
On May 5,
2016, the Company filed a lawsuit in the United States District Court for the Eastern District of Tennessee at Knoxville against the Former CEO and his wife (together with the Former CEO, the Defendants). The Company alleges that between
2013 and the present, the Former CEO received approximately $2.4 million in advanced or reimbursed travel and entertainment expenses from the Company and that the Former CEO did not use these funds for legitimate travel and entertainment expenses as
he requested and the Company intended. Instead, the Company alleges that the Former CEO created false receipts and documentation for the expenses and applied the funds to personal use. The Company and the Former CEO are parties to a Stipulated
Settlement Agreement dated October 3, 2014 (the Kleba Settlement Agreement) that was negotiated to resolve certain claims asserted against the Former CEO derivatively. Pursuant to the terms of the Kleba Settlement Agreement, the
Former CEO 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, the Former CEO still owed the Company $2,267,750 under the Kleba Settlement
Agreement. The Former CEO has failed to make such payment, and the Company has notified him that he is in default and demanded payment in full. Therefore, the Company is alleging counts of conversion, fraud, breach of fiduciary duty, breach of
contract, breach of Kleba Settlement Agreement, unjust enrichment and punitive damages in this lawsuit. The Company is seeking that the Defendants be prohibited from disposing of any property that may have been paid for with the misappropriated
funds, the Defendants be disgorged of any funds shown to be fraudulently misappropriated and that the Company be awarded compensatory damages in an amount not less than $5 million. Furthermore, the Company is seeking for the damages to be joint and
several as to the Defendants and that punitive damages be awarded against the Former CEO in the Companys favor. The Company is also seeking foreclosure of the Companys first-priority security interest in the 1,000,000 shares of common
stock granted by Dr. Dees to the Company as collateral pursuant to that certain Stock Pledge Agreement dated October 3, 2014, between Dr. Dees and the Company in order to secure Dr. Dees obligations under the Kleba
Settlement Agreement. The United States District Court for the Eastern District of Tennessee at Knoxville entered a default judgment against Dr. Dees on July 20, 2016; however, the Company cannot predict when these shares will be recovered
by the Company. The Court recently issued a Temporary Restraining Order upon the Companys application for same upon notice that Dr. Dees was attempting to sell his shares of the Companys common stock. The Temporary Restraining Order
was converted to a Preliminary Injunction on September 16, 2016, which order will remain in place until the trial of the underlying lawsuit absent further court order or agreement of the parties, and the Company is presently engaged in
discovery regarding damages.
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Other Regulatory Matters
From time to time the Company receives subpoenas and/or requests for information from governmental agencies with respect to our business. The Company has
received a subpoena from the staff of the Securities and Exchange Commission related to the travel expense advancements and reimbursements received by our Former CEO. At this time, the staffs investigation into this matter remains ongoing. The
Company is cooperating with the staff but cannot predict with any certainty what the outcome of the foregoing may be.
8. Subsequent Events
The Company has evaluated subsequent events through the date of the filing of these financial statements.
Rights Offering
On October 5, 2016, the Company
filed a registration statement on Form S-1 with the Securities and Exchange Commission, as amended on November 1, 2016, to issue subscription rights (Rights) to the Companys existing common stockholders to purchase units
(Units) consisting of shares of common stock and warrants to purchase shares of common stock (the Rights Offering). Each whole warrant will be exercisable for one share of common stock. Each Right will entitle holders of the
Companys common stock to purchase one Unit. The Rights Offering also contains an over-subscription privilege allowing stockholders who exercise their subscription rights in full to purchase other stockholders unsubscribed Units under
certain circumstances. The Company is seeking to raise $17,500,000 in gross proceeds from the Rights Offering. The Company has the ability to elect to increase the size of the Rights Offering by up to 20%, which, if so increased, would result in
gross proceeds of $21,000,000 from the Rights Offering. The Company intends to use approximately $15 million of the net proceeds from the Rights Offering for clinical development, including approximately $5 million to complete its ongoing phase 3
clinical trial of PV-10 to treat locally advanced cutaneous melanoma, approximately $5 million to complete its phase 1b/2 combination study of PV-10 and Mercks KEYTRUDA in late stage melanoma and approximately $5 million to complete its phase
1b/2 study of PV-10 in liver cancer, and the Company intends to use the remaining net proceeds for working capital and general corporate purposes. If the Company sells all of the Units subject to the Rights Offering, the Company will have sufficient
cash on hand to fund all of its research and development and other capital needs through 2017.
On November 2, the Company filed a definitive proxy
statement on Schedule 14A with the Securities and Exchange Commission, pursuant to which the Company is soliciting stockholders to (i) approve a proposed amendment to the Companys Certificate of Incorporation to authorize an increase in
the number of authorized shares of common stock to an amount that will be sufficient to, in part, allow the Company to issue the shares of common stock that will be contained in the Units (if the maximum amount of Units is sold in the Rights
Offering) and the shares of common stock that will be issuable upon exercise of the warrants (if the maximum amount of Units is sold in the Rights Offering) and (ii) authorize the Companys board of directors to amend the Companys
certificate of incorporation, as amended, to effect a reverse stock split of the Companys common stock at a ratio of between 1-for-10 and 1-for-50, such ratio to be determined by the board of directors in its sole discretion (the Reverse
Stock Split) at a special meeting of stockholders scheduled to be held on November 28, 2016 (the Special Meeting). There is no assurance, however, that either or both proposals will be approved by the Companys
stockholders, that the registration statement with respect to the Rights Offering will be declared effective, that the Rights Offering will be successful or that the Company will issue any Rights, Units, common stock or warrants pursuant to the
Rights Offering.
Series B Convertible Preferred Stock Conversions
On November 3, 2016, a holder of Preferred Stock converted 8,000 shares of Preferred Stock and Preferred Stock dividends (including make-whole payments)
into 1,120,000 shares of common stock pursuant to the terms of the Certificate of Designation for the Preferred Stock.
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