PROVECTUS BIOPHARMACEUTICALS, INC. - Annual Report: 2009 (Form 10-K)
United
States
Securities
And Exchange Commission
Washington,
DC 20549
FORM
10-K
(Mark
One)
x Annual Report Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
For
the fiscal year ended December 31, 2009;
OR
o 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: 0-9410
Provectus
Pharmaceuticals, Inc.
(Exact
Name of Registrant as Specified in its Charter)
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Nevada
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90-0031917
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S.
Employer Identification Number)
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7327 Oak Ridge Highway, Suite A, Knoxville, Tennessee
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37931
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(Address
of Principal Executive Offices)
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(Zip
Code)
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866-594-5999
(Issuer's
Telephone Number, Including Area Code)
Securities
registered under Section 12(b) of the Exchange Act: None
(Title of
Class)
Securities
registered under Section 12(g) of the Exchange Act:
Common shares, par value
$.001 per share
(Title
of Class)
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes o No x
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes o No x
Indicate by check mark whether the
registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x
No o
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 (Section
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files).
Yes o
No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act (Check one):
Large
accelerated filer o Accelerate
filer o Non-accelerated
filer o Smaller
reporting company x
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes
o
No x
The aggregate market value of the
voting and non-voting common equity held by non-affiliates of the registrant as
of June 30, 2009, was $38.2 million (computed on the basis of $1.03 per
share). The number of shares outstanding of the issuer's stock,
$0.001 par value per share, as of March 18, 2010 was 70,215,391.
Documents incorporated by reference
in Part III hereof:
Proxy
Statement for 2010 Annual Meeting of Stockholders.
Provectus
Pharmaceuticals, Inc.
Annual
Report on Form 10-K
Table of
Contents
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Page
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Part
I
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Item
1. Description of Business
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1 |
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Item
1A. Risk Factors
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15 |
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Item
2. Properties
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20 |
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Item
3. Legal Proceedings
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20 |
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Part
II
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Item
4. Market for Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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21 |
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Item
6. Management's Discussion and Analysis of
Financial Condition and Results of Operations
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22 |
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Item
7. Financial Statements.
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27 |
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Forward-Looking Statements
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27 |
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Item
8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
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27 |
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Item
8A(T).Controls and Procedures
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27 |
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Item
8B. Other Information
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28 |
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Part
III
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Item
9. Directors, Executive Officers and Corporate
Governance
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29 |
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Item
10. Executive Compensation
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29 |
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Item
11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
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29 |
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Item
12. Certain Relationships and Related Transactions, and
Director Independence
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29 |
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Item
13. Principal Accountant Fees and
Services
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29 |
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Item
14. Exhibits and Financial Statement
Schedules
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29 |
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Signatures
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30 |
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Financial
Statements
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32 |
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Exhibit
Index
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X-1 |
PART
I
Item 1. Description of
Business.
History
Provectus Pharmaceuticals, Inc. is
currently a development-stage pharmaceutical Company, formerly known as
"Provectus Pharmaceutical, Inc." and "SPM Group, Inc.," was incorporated under
Colorado law on May 1, 1978. SPM Group ceased operations in 1991, and
became a development-stage company effective January 1, 1992, with the new
corporate purpose of seeking out acquisitions of properties, businesses, or
merger candidates, without limitation as to the nature of the business
operations or geographic location of the acquisition candidate.
On April 1, 2002, SPM Group changed its
name to "Provectus Pharmaceutical, Inc."
and reincorporated in Nevada in preparation for
a transaction with Provectus
Pharmaceuticals, Inc., a privately-held Tennessee
corporation, which we refer to as "PPI." On April 23, 2002, an
Agreement and Plan of Reorganization between Provectus Pharmaceutical and PPI
was approved by the written consent of a majority of the outstanding shares of
Provectus Pharmaceutical. As a result,
holders of 6,680,000 shares of common stock of Provectus Pharmaceutical
exchanged their shares for all of the issued
and outstanding shares of PPI. As part of the acquisition,
Provectus Pharmaceutical changed its name to "Provectus Pharmaceuticals, Inc."
and PPI became a wholly-owned subsidiary of Provectus. For accounting purposes,
we treated this transaction as a recapitalization of PPI.
On November 19, 2002, we acquired
Valley Pharmaceuticals, Inc., a privately-held Tennessee corporation formerly
known as Photogen, Inc., by merging our subsidiary PPI with and into Valley and
naming the surviving corporation "Xantech Pharmaceuticals, Inc." Valley had
minimal operations and had no revenues prior to the transaction with
us. By acquiring Valley, we acquired our most important intellectual
property, including issued U.S. patents and patentable inventions, with which we
intend to develop:
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prescription
drugs, medical and other devices (including laser devices) and
over-the-counter pharmaceutical products in the fields of dermatology and
oncology; and
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technologies
for the preparation of human and animal vaccines, diagnosis of infectious
diseases and enhanced production of genetically engineered
drugs.
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Prior to the acquisition of Valley we
were considered to be, and continue to be, in the development stage and have not
generated any revenues from the assets we acquired.
On December 5, 2002, we acquired the
assets of Pure-ific L.L.C., a Utah limited liability company, and
created a wholly-owned subsidiary, Pure-ific Corporation, to operate
that business. We acquired the product formulations for Pure-ific personal
sanitizing sprays, along with the "Pure-ific" trademarks.
Overview
Provectus,
and its seven wholly-owned subsidiaries:
· Xantech
Pharmaceuticals, Inc.;
· Pure-ific
Corporation;
· Provectus
Biotech, Inc.;
· Provectus
Devicetech, Inc.;
· Provectus
Imaging, Inc.;
· IP Tech,
Inc.; and
· Provectus
Pharmatech, Inc.,
1
which we
refer to as our subsidiaries, develop, license, market and plan to sell products
in three sectors of the healthcare industry:
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Over-the-counter
products, which we refer to in this report as “OTC
products;”
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Prescription
drugs; and
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Medical
device systems.
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Provectus
has designated all of its subsidiaries as non-core except for Provectus
Pharmatech, Inc., which owns the patented technologies for its prescription drug
product candidates for the treatment of cancer and serious skin
diseases. The non-core subsidiaries own patented technologies for a
range of other products that are intended to be further developed and
licensed. The potential further development and licensure would
likely be facilitated via the Company's selling a majority stake of the
underlying assets of each non-core subsidiary. This transaction would
likely be accomplished through a non-core spin-out process which would enable
each non-core subsidiary to become a separate publicly
held company. Each new public entity could then raise funds
without diluting the ownership of the then current shareholders of the
Company.
We
manage Provectus and our subsidiaries on an integrated basis and when we refer
to “we” or “us” or “the Company” in this Prospectus, we refer to all eight
corporations considered as a single unit. Our principal executive offices are
located at 7327 Oak Ridge Highway, Suite A, Knoxville, Tennessee 37931,
telephone (866) 594-5999.
Through
discovery and use of state-of-the-art scientific and medical technologies, the
founders of our pharmaceutical business have developed a portfolio of patented,
patentable, and proprietary technologies that support multiple products in the
prescription drug, medical device and OTC products categories. These
patented technologies are for:
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treatment
of cancer and serious skin
diseases,
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novel
therapeutic medical devices,
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enhancing
contrast in medical imaging,
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improving
signal processing during biomedical imaging,
and
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enhancing
production of biotechnology
products.
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Our prescription drug products
encompass the areas of dermatology and oncology and involve several types of
small molecule-based drugs. Our medical device systems include therapeutic and
cosmetic lasers, while our OTC products address markets primarily involving
skincare applications. Because our prescription drug candidates and medical
device systems are in the early stages of development, they are not yet on the
market and there is no assurance that they will advance to the point of
commercialization.
Our first
commercially available products are directed into the OTC market, as these
products pose minimal or no regulatory compliance barriers to market
introduction. For example, the active pharmaceutical ingredient (API) in our
ethical products is already approved for other medical uses by the FDA and has a
long history of safety for use in humans. This use of known APIs for novel uses
and in novel formulations minimizes potential adverse concerns from the FDA,
since considerable safety data on the API is available (either in the public
domain or via licenses or other agreements with third parties holding such
information). In similar fashion, our OTC products are based on established APIs
and, when possible, utilize formulations (such as aerosol or cream formulations)
that have an established precedent (for more information on compliance issues,
see “Federal Regulation of Therapeutic Products,” below). In this fashion, we
believe that we can diminish the risk of regulatory bars to the introduction of
safe, consumer-friendly products and minimize the time required to begin
generating revenues from product sales. At the same time, we continue to develop
higher-margin prescription pharmaceuticals and medical devices, which have
longer development and regulatory approval cycles.
2
Over-the-Counter
Pharmaceuticals
Our OTC
products are designed to be safer and more specific than competing products. Our
technologies offer practical solutions for a number of intractable maladies,
using ingredients that have limited or no side effects compared with existing
products. To develop our OTC products, we typically use compounds with potent
antibacterial and antifungal activity as building blocks and combine these
building blocks with anti-inflammatory and moisture-absorbing agents. Products
with these properties can be used for treatment of a large number of skin
afflictions, including:
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hand
irritation associated with use of disposable
gloves,
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eczema,
and
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mild
to moderate acne.
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Where
appropriate, we have filed or will file patent applications and will seek other
intellectual property protection to protect our unique formulations for relevant
applications.
GloveAid
Personnel
in many occupations and industries now use disposable gloves daily in the
performance of their jobs, including:
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Airport
security personnel;
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Food
handling and preparation personnel;
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Health
care workers such as hospital and blood bank personnel;
and
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Laboratory
researchers;
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Police,
fire and emergency response
personnel;
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Postal
and package delivery handlers and sorters;
and
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Sanitation
workers.
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Accompanying
the increased use of disposable gloves is a mounting incidence of chronic skin
irritation. To address this market, we have developed GloveAid, a hand cream
with both antiperspirant and antibacterial properties, to increase the comfort
of users’ hands during and after the wearing of disposable gloves. During 2003,
we ran a pilot scale run at the manufacturer of GloveAid. The Company now
intends to license this product to a third party with experience in the
institutional sales market. The Company has been discussing this strategy
with interested groups. Additionally, the Company also intends to sell a
majority stake in the underlying assets via a non-core spin-out
transaction.
Pure-ific
Our
Pure-ific line of products includes two quick-drying sprays, Pure-ific and
Pure-ific Kids, that immediately kill up to 99.9% of germs on skin and prevent
regrowth for six hours. We have determined the effectiveness of Pure-ific based
on our internal testing and testing performed by Paratus Laboratories H.B., an
independent research lab. Pure-ific products help prevent the spread of germs
and thus complement our other OTC products designed to treat irritated skin or
skin conditions such as acne, eczema, dandruff and fungal infections. Our
Pure-ific sprays have been designed with convenience in mind and are targeted
towards mothers, travelers, and anyone concerned about the spread of
sickness-causing germs. During 2003 and 2004, we identified and engaged sales
and brokerage forces for Pure-ific. We emphasized getting sales in independent
pharmacies and mass (chain stores) markets. The supply chain for Pure-ific was
established with the ability to support large-scale sales and a starting
inventory was manufactured and stored in a contract warehouse/fulfillment
center. In addition, a website for Pure-ific was developed with the ability for
supporting online sales of the antibacterial hand spray. During 2005 and 2006,
most of our sales were generated from customers accessing our website for
Pure-ific and making purchases online. We discontinued our proof-of-concept
program in November 2006 and have, therefore, ceased selling our OTC
products. The Company now intends to license the Pure-ific
product. The Company has been discussing this strategy with interested
groups. Additionally, the Company also intends to sell a majority
stake in the underlying assets via a non-core spin-out
transaction.
3
Acne
A number
of dermatological conditions, including acne and other blemishes result from a
superficial infection which triggers an overwhelming immune response. We
anticipate developing OTC products similar to the GloveAid line for the
treatment of mild to moderate cases of acne and other blemishes. Wherever
possible, we intend to formulate these products to minimize or avoid significant
regulatory bars that might adversely impact the time to market.
Prescription
Drugs
We are
developing a number of prescription drugs which we expect will provide minimally
invasive treatment of chronic severe skin afflictions such as psoriasis, eczema,
and acne; and several life-threatening cancers such as those of the liver,
breast and prostate. We believe that our products will be safer and more
specific than currently existing products. Use of topical or other direct
delivery formulations allows these potent products to be conveniently and
effectively delivered only to diseased tissues, thereby enhancing both safety
and effectiveness. The ease of use and superior performance of these products
may eventually lead to extension into OTC applications currently serviced by
less safe, more expensive alternatives. All of these products are in either the
pre-clinical or clinical trial stage.
Dermatology
Our most
advanced prescription drug candidate for treatment of topical diseases on the
skin is PH-10, a topical gel. Rose Bengal, the active ingredient in PH-10, is
“photoactive” in that it reacts to light of certain wavelengths thereby
increasing its therapeutic effects. PH-10 also concentrates in diseased or
damaged tissue but quickly dissipates from healthy tissue. By developing a
“photodynamic” treatment regimen (one which combines a photoactive substance
with activation by a source emitting a particular wavelength of light) around
these two properties of PH-10, we can deliver a higher therapeutic effect at
lower dosages of active ingredient, thus minimizing potential side effects
including damage to nearby healthy tissues. PH-10 is especially responsive to
green light, which is strongly absorbed by the skin and thus only penetrates the
body to a depth of about three to five millimeters. For this reason, we have
developed PH-10, combined with green-light activation, for topical use in
surface applications where serious damage could result if medicinal effects were
to occur in deeper tissues.
Psoriasis and Atopic
Dermatitis. Psoriasis is a common chronic disorder of the skin
characterized by dry scaling patches, called “plaques,” for which current
treatments are few and those that are available have potentially serious side
effects. There is no known cure for the disease at this time. According to the
National Institutes of Health, as many as 7.5 million Americans, or
approximately 2.2 percent of the U.S. population, have psoriasis. The National
Psoriasis Foundation reports that approximately 125 million people worldwide, 2
to 3 percent of the total population, have psoriasis. It also reports that total
direct and indirect health care costs of psoriasis for patients exceed $11
billion annually. Additionally, the National Eczema Association estimates that
atopic dermatitis affects more than 30 million Americans.
According
to the National Psoriasis Foundation, the majority of psoriasis sufferers, those
with mild to moderate cases, are treated with topical steroids that can have
unpleasant side effects. None of the other treatments for moderate cases of
psoriasis have proven completely effective. The 25-30% of psoriasis patients who
suffer from more severe cases generally are treated with more intensive drug
therapies or PUVA, a light-based therapy that combines the drug Psoralen with
exposure to ultraviolet A light. While PUVA is one of the more effective
treatments, it increases a patient’s risk of skin cancer.
We
believe that PH-10 activated with green light offers a superior treatment for
psoriasis and atopic dermatitis, otherwise know as eczema, because it
selectively treats diseased tissue with negligible potential for side effects in
healthy tissue; moreover, the therapy has shown promise in comprehensive Phase 1
clinical trials. The objective of a Phase 1 clinical trial is to determine if
there are safety concerns with the therapy. In these studies, involving more
than 50 test subjects, PH-10 was applied topically to psoriatic plaques and then
illuminated with green light. In our first study, a single-dose treatment
yielded an average reduction in plaque thickness of 59% after 30 days, with
further response noted at the final follow-up examination 90 days later.
Further, no pain, significant side effects, or evidence of “rebound” (increased
severity of a psoriatic plaque after the initial reduction in thickness) were
observed in any treated areas. This degree of positive therapeutic response is
comparable to that achieved with potent steroids and other anti-inflammatory
agents, but without the serious side effects associated with such
agents.
4
We have
continued the required FDA reporting to support the active “Investigational New
Drug” application for PH-10’s Phase 2 clinical trials on psoriasis and atopic
dermatitis. We were originally allowed by the FDA to study the use of
our drug PH-10 for psoriasis in clinical trials and we have also now been
allowed to study the use of our drug PH-10 for atopic dermatitis in a Phase 2
clinical trial. The required reporting includes the publication of results
regarding the multiple treatment scenario of the active ingredient in PH-10. The
objective of our initial and recently completed Phase 2 studies is to assess the
potential for remission of the disease using a regimen of treatments that we are
seeking to optimize. Our recent two studies were designed to further clarify the
optimal amount of treatments on a daily basis.
Actinic Keratosis.
According to Schwartz and Stoll (Fitzpatrick’s Dermatology in General Medicine,
1999), actinic keratosis, or “AK” (also called solar keratosis or senile
keratosis), is the most common pre-cancerous skin lesion among fair-skinned
people and is estimated to occur in over 50% of elderly fair-skinned persons
living in sunny climates. These experts note that nearly half of the
approximately five million cases of skin cancer in the U.S. may have begun as
AK. The standard treatments for AK (primarily comprising excision, cryotherapy,
and ablation with topical 5-fluorouracil) are often painful and frequently yield
unacceptable cosmetic outcomes due to scarring. Building on our experience with
psoriasis, we are assessing the use of PH-10 with green-light activation as a
possible improvement in treatment of early and more advanced stages of AK. We
completed an initial Phase 1 clinical trial of the therapy for this indication
in 2001. This study, involving 24 subjects, examined the safety profile of a
single treatment using topical PH-10 with green light photoactivation and no
significant safety concerns were identified. We have decided to prioritize
further clinical development of PH-10 for treatment of psoriasis and eczema
rather than AK at this time since the market is much larger for psoriasis and
eczema.
Severe Acne.
According to Berson et al. (Cutis. 72 (2003) 5-13), acne vulgaris affects
approximately 17 million individuals in the U.S., causing pain, disfigurement,
and social isolation. Moderate to severe forms of the disease have proven
responsive to several photodynamic regimens, and we anticipate that PH-10 can be
used as an advanced treatment for this disease. Pre-clinical studies show that
the active ingredient in PH-10 readily kills bacteria associated with acne. This
finding, coupled with our clinical experience in psoriasis and actinic
keratosis, suggests that therapy with PH-10 will exhibit no significant side
effects and will afford improved performance relative to other therapeutic
alternatives. If correct, this would be a major advance over currently available
products for severe acne.
As noted
above, we are researching multiple uses for PH-10 with green-light activation.
Multiple-indication use by a common pool of physicians - dermatologists, in this
case - should reduce market resistance to this new therapy.
Oncology
Oncology
is another major market where our planned products may afford competitive
advantage compared to currently available options. We are developing PV-10, a
sterile injectible form of Rose Bengal, for direct injection into tumors.
Because PV-10 is retained in diseased or damaged tissue but quickly dissipates
from healthy tissue, we believe we can develop therapies that confine treatment
to cancerous tissue and reduce collateral impact on healthy tissue. During 2003
and 2004, we worked toward completion of the extensive scientific and medical
materials necessary for filing an “Investigational New Drug” (IND) application
for PV-10 in anticipation of beginning Phase 1 clinical trials for various solid
tumors. This IND was filed and allowed by the FDA in 2004 setting the stage for
two Phase 1 clinical trials; namely, treating metastatic melanoma and recurrent
breast carcinoma. We started both of these Phase 1 clinical trials in 2005 and
completed the initial Phase 1 objectives for both in 2006. We
completed the expanded Phase 1 objectives for the metastatic melanoma study in
2007, and then commenced a Phase 2 study which was significantly completed in
2008 and was fully enrolled in May 2009. The follow-up for the study
will be completed in May 2010. During the first quarter of 2010 we plan to meet
with the FDA to discuss the steps needed to both achieve registration of PV-10
for our lead indication (metastatic melanoma) and receive Fast Track
status.
Liver Cancer. The
current standard of care for liver cancer is ablative therapy (which seeks to
reduce a tumor by poisoning, freezing, heating, or irradiating it) using either
a localized injection of ethanol (alcohol), cryosurgery, radiofrequency
ablation, or ionizing radiation such as X-rays. Where effective, these therapies
have many side effects and selecting therapies with fewer side effects tends to
reduce overall effectiveness. Combined, ablative therapies have a five-year
survival rate of 33% - meaning that only 33% of those liver cancer patients
whose cancers are treated using these therapies survive for five years after
their initial diagnoses. In pre-clinical studies we have found that direct
injection of PV-10 into liver tumors quickly ablates treated tumors, and can
trigger an anti-tumor immune response leading to eradication of residual tumor
tissue and distant tumors. Because of the natural regenerative properties of the
liver and the highly localized nature of the treatment, this approach appears to
produce no significant side effects. Based on these encouraging preclinical
results, we assessed strategies for initiation of clinical trials of PV-10 for
treatment of liver cancer. We commenced a Phase 1 liver cancer trial in October
2009 and expect to complete it in 2010.
5
Breast Cancer. Breast
cancer afflicts over 200,000 U.S. citizens annually, leading to over 40,000
deaths per year. Surgical resection, chemotherapy, radiation therapy, and
immunotherapy comprise the standard treatments for the majority of cases,
resulting in serious side effects that in many cases are permanent. Moreover,
current treatments are relatively ineffective against metastases, which in many
cases are the eventual cause of patient mortality. Pre-clinical studies using
human breast tumors implanted in mice have shown that direct injection of PV-10
into these tumors ablates the tumors, and, as in the case of liver tumors, may
elicit an anti-tumor immune response that eradicates distant metastases. Since
fine-needle biopsy is a routine procedure for diagnosis of breast cancer, and
since the needle used to conduct the biopsy also could be used to direct an
injection of PV-10 into the tumor, localized destruction of suspected tumors
through direct injection of PV-10 clearly has the potential of becoming a
primary treatment. We are evaluating options for expanding clinical studies of
direct injection of PV-10 into breast tumors and have completed the expanded
Phase 1 clinical studies of our indication for PV-10 in recurrent breast
carcinoma in 2008.
Prostate Cancer.
Cancer of the prostate afflicts approximately 190,000 U.S. men annually, leading
to about 30,000 deaths a year. As with breast cancer, surgical resection,
chemotherapy, radiation therapy, and immunotherapy comprise the standard
treatments for the majority of cases, and can result in serious, permanent side
effects. We believe that direct injection of PV-10 into prostate tumors may
selectively ablate such tumors, and, as in the case of liver and breast tumors,
may also elicit an anti-tumor immune response capable of eradicating distant
metastases. Since trans-urethral ultrasound, guided fine-needle biopsy and
immunotherapy, along with brachytherapy implantation, are becoming routine
procedures for diagnosis and treatment of these cancers, we believe that
localized destruction of suspected tumors through direct injection of PV-10 can
become a primary treatment. We are evaluating options for initiating clinical
studies of direct injection of PV-10 into prostate tumors, and expect to
formulate final plans based on results from clinical studies of our indications
for PV-10 in the treatment of liver and breast cancer, as well as metastatic
melanoma.
Metastatic Melanoma.
According to the American Cancer Society, in 2008 there were approximately
62,000 new cases of melanoma in the U.S., leading to more than 8,000 deaths.
Further, the World Health Organization has projected that 48,000 patients
globally died from melanoma in 2008. The
incidence of melanoma in Australia is up to five times that of the U.S. There
have been no significant advances in the treatment of melanoma for approximately
30 years. We are continuing Phase 2 clinical studies in both Australia and the
U.S. of direct injection of PV-10 into melanoma lesions which was significantly
completed in 2008 and was fully enrolled in May 2009. This Phase 2
study was commenced after we completed the expanded Phase 1 clinical studies of
our indication for PV-10 in Stage 3 and Stage 4 metastatic
melanoma.
Based
upon requests from physicians, we initiated two expanded access programs
(“compassionate use”) for PV-10 in Australia and the U.S. These are active at
five of our Phase 2 study centers. A total of 20 melanoma patients, 8 of whom
have crossed over from the Phase 2 study to receive further treatment, have
commenced treatment with PV-10 under the program as of December 2009. A majority
of these patients are in long-term follow-up for up to two years.
Medical
Devices
We have
medical device technologies to address two major markets:
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cosmetic
treatments, such as reduction of wrinkles and elimination of spider veins
and other cosmetic blemishes; and
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therapeutic
uses, including photoactivation of PH-10 other prescription drugs and
non-surgical destruction of certain skin
cancers.
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6
We expect
to further develop medical devices through partnerships with, or selling our
assets to, third-party device manufacturers or, if appropriate opportunities
arise, through acquisition of one or more device manufacturers.
Photoactivation. Our
clinical tests of PH-10 for dermatology have, up to the present, utilized a
number of commercially available lasers for activation of the drug. This
approach has several advantages, including the leveraging of an extensive base
of installed devices present throughout the pool of potential physician-adopters
for PH-10. Access to such a base could play an integral role in early
market capture. However, since the use of such lasers, which were designed for
occasional use in other types of dermatological treatment, is potentially too
cumbersome and costly for routine treatment of the large population of patients
with psoriasis, we have begun investigating potential use of other types of
photoactivation hardware, such as light booths. The use of such booths is
consistent with current care standards in the dermatology field, and may provide
a cost-effective means for addressing the needs of patients and physicians
alike. We anticipate that such photoactivation hardware would be developed,
manufactured, and supported in conjunction with one or more third-party device
manufacturer.
Melanoma. A high
priority in our medical devices field is the development of a laser-based
product for treatment of melanoma. We have conducted extensive research on
ocular melanoma at the Massachusetts Eye and Ear Infirmary (a teaching affiliate
of Harvard Medical School) using a new laser treatment that may offer
significant advantage over current treatment options. A single quick
non-invasive treatment of ocular melanoma tumors in a rabbit model resulted in
elimination of over 90% of tumors, and may afford significant advantage over
invasive alternatives, such as surgical excision, enucleation, or radiotherapy
implantation. Ocular melanoma is rare, with approximately 2,000 new cases
annually in the U.S. However, we believe that our extremely successful results
could be extrapolated to treatment of primary melanomas of the skin, which have
an incidence of over 60,000 new cases annually in the U.S. and a 6% five-year
survival rate after metastasis of the tumor. We have performed similar laser
treatments on large (averaging approximately 3 millimeters thick) cutaneous
melanoma tumors implanted in mice, and have been able to eradicate over 90% of
these pigmented skin tumors with a single treatment. Moreover, we have shown
that this treatment stimulates an anti-tumor immune response that may lead to
improved outcome at both the treatment site and at sites of distant metastasis.
From these results, we believe that a device for laser treatment of primary
melanomas of the skin and eye is nearly ready for human studies. We anticipate
partnering with, or selling our assets to, a medical device manufacturer to
bring it to market in reliance on a 510(k) notification. For more information
about the 510(k) notification process, see “Federal Regulation of Therapeutic
Products” below.
Research
and Development
We
continue to actively develop projects that are product-directed and are
attempting to conserve available capital and achieve full capitalization of our
company through equity and convertible debt offerings, generation of product
revenues, and other means. All ongoing research and development activities are
directed toward maximizing shareholder value and advancing our corporate
objectives in conjunction with our OTC product licensure, our current product
development and maintaining our intellectual property portfolio.
Research
and development costs totaling $4,909,414 for 2009 included payroll of
$2,860,116, consulting and contract labor of $1,367,422, lab supplies and
pharmaceutical preparations of $281,833, legal of $209,709, insurance of
$125,295, rent and utilities of $55,685, and depreciation expense of
$9,354. Research and development costs totaling $4,425,616 for 2008
included payroll of $2,561,845, consulting and contract labor of $1,256,032, lab
supplies and pharmaceutical preparations of $116,762, legal of $297,363,
insurance of $108,905, rent and utilities of $75,453, and depreciation expense
of $9,256.
Production
We have
determined that the most efficient use of our capital in further developing our
OTC products is to license the products. The Company has been discussing
this strategy with interested groups. Additionally, the Company also
intends to sell a majority stake in the underlying assets via a non-core
spin-out transaction.
Sales
Our first
commercially available products are directed into the OTC market, as these
products pose minimal or no regulatory compliance barriers to market
introduction. In this fashion, we believe that we can diminish the risk of
regulatory bars to the introduction of products and minimize the time required
to begin generating revenues from product sales. At the same time, we continue
to develop higher-margin prescription pharmaceuticals and medical devices, which
have longer development and regulatory approval cycles.
7
We have
commenced limited sales of Pure-ific, our antibacterial hand spray. We sold
small amounts of this product during 2004, 2005 and 2006. We
discontinued our proof-of-concept program in November 2006 and have, therefore,
ceased selling our OTC products. We will continue to seek additional
markets for our products through existing distributorships that market and
distribute medical products, ethical pharmaceuticals, and OTC products for the
professional and consumer marketplaces through licensure, partnership and asset
sale arrangements, and through potential merger and acquisition
candidates.
In
addition to developing and selling products ourselves on a limited basis, we are
negotiating actively with a number of potential licensees for several of our
intellectual properties, including patents and related technologies. To date, we
have not yet entered into any licensing agreements; however, we anticipate
consummating one or more such licenses in the future.
Intellectual
Property
Patents
We hold a
number of U.S. patents covering the technologies we have developed and are
continuing to develop for the production of prescription drugs, medical devices
and OTC pharmaceuticals. All patents material to an understanding of
the Company are included and a cross reference to a discussion that explains the
patent technologies and products is identified for each patent in the following
table:
|
U.S.
Patent No
|
Title
and Cross Reference
|
Issue
Date
|
Expiration
Date
|
|
5,829,448
|
Method
for improved selectivity in activation of molecular agents; see discussion
under Medical Devices in Description of Business
|
November
3, 1998
|
October
30, 2016
|
|
5,832,931
|
Method
for improved selectivity in photo-activation and detection of diagnostic
agents; see discussion under Medical Devices in Description of
Business
|
November
10, 1998
|
October
30, 2016
|
|
5,998,597
|
Method
for improved selectivity in activation of molecular agents; see discussion
under Medical Devices in Description of Business
|
December
7, 1999
|
October
30, 2016
|
|
6,042,603
|
Method
for improved selectivity in photo-activation of molecular agents; see
discussion under Medical Devices in Description of
Business
|
March
28, 2000
|
October
30, 2016
|
|
6,331,286
|
Methods
for high energy phototherapeutics; see discussion under Oncology in
Description of Business
|
December
18, 2001
|
December
21, 2018
|
|
6,451,597
|
Method
for enhanced protein stabilization and for production of cell lines useful
production of such stabilized proteins; see discussion under Material
Transfer Agreement in Description of Business
|
September
17, 2002
|
April
6, 2020
|
|
6,468,777
|
Method
for enhanced protein stabilization and for production of cell lines useful
production of such stabilized proteins; see discussion under Material
Transfer Agreement in Description of Business
|
October
22, 2002
|
April
6, 2020
|
|
6,493,570
|
Method
for improved imaging and photodynamic therapy; see discussion under
Oncology in Description of Business
|
December
10, 2002
|
December
10, 2019
|
|
6,495,360
|
Method
for enhanced protein stabilization for production of cell lines useful
production of such stabilized proteins; see discussion under Material
Transfer Agreement in Description of Business
|
December
17, 2002
|
April
6, 2020
|
8
|
6,519,076
|
Methods
and apparatus for optical imaging; see discussion under Medical Devices in
Description of Business
|
February
11, 2003
|
October
30, 2016
|
|
6,525,862
|
Methods
and apparatus for optical imaging; see discussion under Medical Devices in
Description of Business
|
February
25, 2003
|
October
30, 2016
|
|
6,541,223
|
Method
for enhanced protein stabilization and for production of cell lines useful
production of such stabilized proteins; see discussion under Material
Transfer Agreement in Description of Business
|
April
1, 2003
|
April
6, 2020
|
|
6,986,740
|
Ultrasound
contrast using halogenated xanthenes; see discussion under Oncology in
Description of Business
|
January
17, 2006
|
September
9, 2023
|
|
6,991,776
|
Improved
intracorporeal medicaments for high energy phototherapeutic treatment of
disease; see discussion under Oncology in Description of
Business
|
January
31, 2006
|
May
5, 2023
|
|
7,036,516
|
Treatment
of pigmented tissues using optical energy; see discussion under
Over-the-Counter Pharmaceuticals in Description of
Business
|
May
2, 2006
|
January
28, 2020
|
|
7,201,914
|
Combination
antiperspirant and antimicrobial compositions; see discussion under
Material Transfer Agreement in Description of Business
|
April
10, 2007
|
May
15, 2024
|
|
7,338,652
|
Diagnostic
Agents for Positron Emission Imaging; see discussion under Oncology in
Description of Business
|
March
4, 2008
|
September
25, 2025
|
|
7,346,387
|
Improved
Selectivity in Photo-Activation and Detection of Molecular Diagnostic
Agents; see discussion under Medical Devices in Description of
Business
|
March
18, 2008
|
October
30, 2016
|
|
7,353,829
|
Improved
Methods and Apparatus For Multi-Photon Photo-Activation of Therapeutic
Agents; see discussion under Medical Devices in Description of
Business
|
April
8, 2008
|
April
23, 2020
|
|
7,384,623
|
A
Radiosensitizer Agent comprising Tetrabromoerythrosin; see discussion
under Oncology in Description of Business
|
June
10, 2008
|
August
25, 2019
|
|
7,390,668
|
Intracorporeal
photodynamic medicaments for photodynamic treatment containing a
halogenated xanthene or derivative; see discussion under Dermatology in
Description of Business
|
June
24, 2008
|
March
6, 2021
|
|
7,402,299
|
Intracorporeal
photodynamic medicaments for photodynamic treatment containing a
halogenated xanthene or derivative; see discussion under Dermatology in
Description of Business
|
July
22, 2008
|
October
2, 2025
|
|
7,427,389
|
Diagnostic
Agents for Positron Emission Imaging; see discussion under Oncology in
Description of Business
|
September
23, 2008
|
July
7, 2026
|
|
7,648,695
|
Improved
Medicaments for chemotherapeutic treatment of disease; see discussion
under Oncology in Description of Business
|
January
19, 2010
|
July
6, 2021
|
We
continue to pursue patent applications on numerous other developments we believe
to be patentable. We consider our issued patents, our pending patent
applications and any patentable inventions which we may develop to be extremely
valuable assets of our business.
Trademarks
We own
the following trademarks used in this document: GloveAid(TM) and
Pure-ific(TM) (including Pure-ific(TM) and Pure-ific(TM) Kids). We also own the
registered trademark PulseView®. Trademark rights are perpetual provided that we
continue to keep the mark in use. We consider these marks, and the associated
name recognition, to be valuable to our business.
9
Material
Transfer Agreement
We have
entered into a “Material Transfer Agreement” dated as of July 31, 2003 with
Schering-Plough Animal Health Corporation, which we refer to as “SPAH”, the
animal-health subsidiary of Schering-Plough Corporation, a major international
pharmaceutical company which is still in effect. Under the Material
Transfer Agreement, we will provide SPAH with access to some of our patented
technologies to permit SPAH to evaluate those technologies for use in
animal-health applications. If SPAH determines that it can commercialize our
technologies, then the Material Transfer Agreement obligates us and SPAH to
enter into a license agreement providing for us to license those technologies to
SPAH in exchange for progress payments upon the achievement of goals. The
Material Transfer Agreement covers four U.S. patents that cover biological
material manufacturing technologies (i.e., biotech related). The Material
Transfer Agreement continues indefinitely, unless SPAH terminates it by giving
us notice or determines that it does not wish to secure from us a license for
our technologies. The Material Transfer Agreement can also be terminated by
either of us in the event the other party breaches the agreement and does not
cure the breach within 30 days of notice from the other party. We cannot assure
you that SPAH will determine that it can commercialize our technologies or that
the goals required for us to obtain progress payments from SPAH will be
achieved.
The
Company has received no “progress payments” in relation to its Material Transfer
Agreement with SPAH. Progress payments could potentially total $50,000 for the
first cell line for which SPAH uses our technology and $25,000 for each use of
the same technology thereafter. We do not know how many cell lines SPAH
may have and we currently have no indication from SPAH that it intends to use
any of our technologies in the foreseeable future.
Competition
In
general, the pharmaceutical industry is intensely competitive, characterized by
rapid advances in products and technology. A number of companies have developed
and continue to develop products that address the areas we have targeted. Some
of these companies are major pharmaceutical companies that are international in
scope and very large in size, while others are niche players that may be less
familiar but have been successful in one or more areas we are targeting.
Existing or future pharmaceutical, device, or other competitors may develop
products that accomplish similar functions to our technologies in ways that are
less expensive, receive faster regulatory approval, or receive greater market
acceptance than our products. Many of our competitors have been in existence for
considerably longer than we have, have greater capital resources, broader
internal structure for research, development, manufacturing and marketing, and
are in many ways further along in their respective product cycles.
At
present, our most direct competitors are smaller companies that are exploiting
niches similar to ours. In the field of photodynamic therapy, one competitor,
QLT, Inc., has received FDA approval for use of its agent Photofrin® for
treatment of several niche cancer indications, and has a second product,
Visudyne®, approved for treatment of certain forms of macular degeneration.
Another competitor in this field, Dusa Pharmaceuticals, Inc. received FDA
approval of its photodynamic product Levulan® Kerastik® for treatment of actinic
keratosis. We believe that QLT and Dusa, among other competitors, have
established a working commercial model in dermatology and oncology, and that we
can benefit from this model by offering products that, when compared to our
competitors’ products, afford superior safety and performance, greatly reduced
side effects, improved ease of use, and lower cost compared to those of our
competitors.
While it
is possible that eventually we may compete directly with major pharmaceutical
companies, we believe it is more likely that we will enter into joint
development, marketing, or other licensure arrangements with such competitors.
Eventually, we believe that we will be acquired.
We also
have a number of market areas in common with traditional skincare cosmetics
companies, but in contrast to these companies, our products are based on unique,
proprietary formulations and approaches. For example, we are unaware of any
products in our targeted OTC skincare markets that are similar to our Pure-ific
products. Further, proprietary protection of our products may help limit or
prevent market erosion until our patents expire.
10
Federal
Regulation of Therapeutic Products
All of
the prescription drugs and medical devices we currently contemplate developing
will require approval by the FDA prior to sales within the United States and by
comparable foreign agencies prior to sales outside the United States. The FDA
and comparable regulatory agencies impose substantial requirements on the
manufacturing and marketing of pharmaceutical products and medical devices.
These agencies and other entities extensively regulate, among other things,
research and development activities and the testing, manufacturing, quality
control, safety, effectiveness, labeling, storage, record keeping, approval,
advertising and promotion of our proposed products. While we attempt to minimize
and avoid significant regulatory bars when formulating our products, some degree
of regulation from these regulatory agencies is unavoidable. Some of the things
we do to attempt to minimize and avoid significant regulatory bars include the
following:
|
·
|
Using
chemicals and combinations already allowed by the
FDA;
|
|
·
|
Carefully
making product performance claims to avoid the need for regulatory
approval;
|
|
·
|
Using
drugs that have been previously approved by the FDA and that have a long
history of safe use;
|
|
·
|
Using
chemical compounds with known safety profiles;
and
|
|
·
|
In
many cases, developing OTC products which face less regulation than
prescription pharmaceutical
products.
|
The
regulatory process required by the FDA, through which our drug or device
products must pass successfully before they may be marketed in the U.S.,
generally involves the following:
|
·
|
Preclinical
laboratory and animal testing;
|
|
·
|
Submission
of an application that must become effective before clinical trials may
begin;
|
|
·
|
Adequate
and well-controlled human clinical trials to establish the safety and
efficacy of the product for its intended indication;
and
|
|
·
|
FDA
approval of the application to market a given product for a given
indication.
|
For
pharmaceutical products, preclinical tests include laboratory evaluation of the
product, its chemistry, formulation and stability, as well as animal studies to
assess the potential safety and efficacy of the product. Where appropriate (for
example, for human disease indications for which there exist inadequate animal
models), we will attempt to obtain preliminary data concerning safety and
efficacy of proposed products using carefully designed human pilot studies. We
will require sponsored work to be conducted in compliance with pertinent local
and international regulatory requirements, including those providing for
Institutional Review Board approval, national governing agency approval and
patient informed consent, using protocols consistent with ethical principles
stated in the Declaration of Helsinki and other internationally recognized
standards. We expect any pilot studies to be conducted outside the United
States; but if any are conducted in the United States, they will comply with
applicable FDA regulations. Data obtained through pilot studies will allow us to
make more informed decisions concerning possible expansion into traditional
FDA-regulated clinical trials.
If the
FDA is satisfied with the results and data from preclinical tests, it will
authorize human clinical trials. Human clinical trials typically are conducted
in three sequential phases which may overlap. Each of the three phases involves
testing and study of specific aspects of the effects of the pharmaceutical on
human subjects, including testing for safety, dosage tolerance, side effects,
absorption, metabolism, distribution, excretion and clinical
efficacy.
Phase 1
clinical trials include the initial introduction of an investigational new drug
into humans. These studies are closely monitored and may be conducted in
patients, but are usually conducted in healthy volunteer subjects. These studies
are designed to determine the metabolic and pharmacologic actions of the drug in
humans, the side effects associated with increasing doses, and, if possible, to
gain early evidence on effectiveness. While the FDA can cause us to end clinical
trials at any phase due to safety concerns, Phase 1 clinical trials are
primarily concerned with safety issues. We also attempt to obtain sufficient
information about the drug’s pharmacokinetics and pharmacological effects during
Phase 1 clinical trial to permit the design of well-controlled, scientifically
valid, Phase 2 studies.
11
Phase 1
studies also evaluate drug metabolism, structure-activity relationships, and the
mechanism of action in humans. These studies also determine which
investigational drugs are used as research tools to explore biological phenomena
or disease processes. The total number of subjects included in Phase 1 studies
varies with the drug, but is generally in the range of twenty to
eighty.
Phase 2
clinical trials include the early controlled clinical studies conducted to
obtain some preliminary data on the effectiveness of the drug for a particular
indication or indications in patients with the disease or condition. This phase
of testing also helps determine the common short-term side effects and risks
associated with the drug. Phase 2 studies are typically well-controlled, closely
monitored, and conducted in a relatively small number of patients, usually
involving several hundred people.
Phase 3
studies are expanded controlled and uncontrolled trials. They are performed
after preliminary evidence suggesting effectiveness of the drug has been
obtained in Phase 2, and are intended to gather the additional information about
effectiveness and safety that is needed to evaluate the overall benefit-risk
relationship of the drug. Phase 3 studies also provide an adequate basis for
extrapolating the results to the general population and transmitting that
information in the physician labeling. Phase 3 studies usually include several
hundred to several thousand people.
Applicable
medical devices can be cleared for commercial distribution through a
notification to the FDA under Section 510(k) of the applicable statute. The
510(k) notification must demonstrate to the FDA that the device is as safe and
effective and substantially equivalent to a legally marketed or classified
device that is currently in interstate commerce. Such devices may not require
detailed testing. Certain high-risk devices that sustain human life, are of
substantial importance in preventing impairment of human health, or that present
a potential unreasonable risk of illness or injury, are subject to a more
comprehensive FDA approval process initiated by filing a premarket approval,
also known as a “PMA,” application (for devices) or accelerated approval (for
drugs).
We have
established a core clinical development team and have been working with outside
FDA consultants to assist us in developing product-specific development and
approval strategies, preparing the required submittals, guiding us through the
regulatory process, and providing input to the design and site selection of
human clinical studies. Historically, obtaining FDA approval for photodynamic
therapies has been a challenge. Wherever possible, we intend to utilize lasers
or other activating systems that have been previously approved by the FDA to
mitigate the risk that our therapies will not be approved by the FDA. The FDA
has considerable experience with lasers by virtue of having reviewed and acted
upon many 510(k) and premarket approval filings submitted to it for various
photodynamic and non-photodynamic therapy laser applications, including a large
number of cosmetic laser treatment systems used by dermatologists.
The
testing and approval process requires substantial time, effort, and financial
resources, and we may not obtain FDA approval on a timely basis, if at all.
Success in preclinical or early-stage clinical trials does not assure success in
later-stage clinical trials. The FDA or the research institution sponsoring the
trials may suspend clinical trials or may not permit trials to advance from one
phase to another at any time on various grounds, including a finding that the
subjects or patients are being exposed to an unacceptable health risk. Once
issued, the FDA may withdraw a product approval if we do not comply with
pertinent regulatory requirements and standards or if problems occur after the
product reaches the market. If the FDA grants approval of a product, the
approval may impose limitations, including limits on the indicated uses for
which we may market a product. In addition, the FDA may require additional
testing and surveillance programs to monitor the safety and/or effectiveness of
approved products that have been commercialized, and the agency has the power to
prevent or limit further marketing of a product based on the results of these
post-marketing programs. Further, later discovery of previously unknown problems
with a product may result in restrictions on the product, including its
withdrawal from the market.
Marketing
our products abroad will require similar regulatory approvals by equivalent
national authorities and is subject to similar risks. To expedite development,
we may pursue some or all of our initial clinical testing and approval
activities outside the United States, and in particular in those nations where
our products may have substantial medical and commercial relevance. In some such
cases, any resulting products may be brought to the U.S. after substantial
offshore experience is gained. Accordingly, we intend to pursue any such
development in a manner consistent with U.S. standards so that the resultant
development data is maximally applicable for potential FDA
approval.
12
OTC
products are subject to regulation by the FDA and similar regulatory agencies
but the regulations relating to these products are much less stringent than
those relating to prescription drugs and medical devices. The types of OTC
products developed and sold by us only require that we follow cosmetic rules
relating to labeling and the claims that we make about our product. The process
for obtaining approval of prescription drugs with the FDA does not apply to the
OTC products which we sell. The FDA can, however, require us to stop selling our
product if we fail to comply with the rules applicable to our OTC
products.
Employees
We
currently employ four persons, all of whom are full-time
employees. We currently engage four consultants.
Personnel
Our
executive officers and directors are:
H. Craig
Dees, Ph.D., 58, has served as our Chief Executive Officer and as a member of
our board of directors since we acquired PPI, a privately held Tennessee
corporation on April 23, 2002. Before joining us, from 1997 to 2002 he served as
senior member of the management team of Photogen Technologies, Inc., including
serving as a member of the board of directors of Photogen from 1997 to 2000.
Prior to joining Photogen, Dr. Dees served as a Group Leader at the Oak Ridge
National Laboratory and as a senior member of the management teams of LipoGen
Inc., a medical diagnostic company which used genetic engineering technologies
to manufacture and distribute diagnostic assay kits for auto-immune diseases,
and TechAmerica Group Inc., now a part of Boehringer Ingelheim Vetmedica, Inc.,
the U.S. animal health subsidiary of Boehringer Ingelhem GmbH, an international
chemical and pharmaceutical company headquartered in Germany. He earned a Ph.D.
in Molecular Virology from the University of Wisconsin–Madison in
1984.
Timothy
C. Scott, Ph.D., 52, has served as our President and as a member of our board of
directors since we acquired PPI on April 23, 2002. Prior to joining us, Dr.
Scott was a senior member of the Photogen management team from 1997 to 2002,
including serving as Photogen’s Chief Operating Officer from 1999 to 2002, as a
director of Photogen from 1997 to 2000, and as interim CEO for a period in 2000.
Before joining Photogen, he served as senior management of Genase LLC, a
developer of enzymes for fabric treatment and held senior research and
management positions at Oak Ridge National Laboratory. Dr. Scott earned a Ph.D.
in Chemical Engineering from the University of Wisconsin–Madison in
1985.
Eric A.
Wachter, Ph.D., 47, has served as our Executive Vice President – Pharmaceuticals
and as a member of our board of directors since we acquired PPI on April 23,
2002. Prior to joining us, from 1997 to 2002 he was a senior member of the
management team of Photogen, including serving as Secretary and a director of
Photogen since 1997 and as Vice President and Secretary and a director of
Photogen since 1999. Prior to joining Photogen, Dr. Wachter served as a senior
research staff member with Oak Ridge National Laboratory. He earned a Ph.D. in
Chemistry from the University of Wisconsin–Madison in 1988.
Peter R.
Culpepper, 50, was appointed to serve as our Chief Financial Officer in February
2004 and is also our Chief Operating Officer. Previously, Mr. Culpepper served
as Chief Financial Officer for Felix Culpepper International, Inc. from 2001 to
2004; was a Registered Representative with AXA Advisors, LLC from 2002 to 2003;
has served as Chief Accounting Officer and Corporate Controller for Neptec, Inc.
from 2000 to 2001; has served in various Senior Director positions with
Metromedia Affiliated Companies from 1998 to 2000; has served in various Senior
Director and other financial positions with Paging Network, Inc. from 1993 to
1998; and has served in a variety of financial roles in public accounting and
industry from 1982 to 1993. He earned a Masters in Business Administration in
Finance from the University of Maryland–College Park in 1992. He earned an AAS
in Accounting from the Northern Virginia Community College–Annandale, Virginia
in 1985. He earned a B.A. in Philosophy from the College of William and
Mary–Williamsburg, Virginia in 1982. He is a licensed Certified Public
Accountant in both Tennessee and Maryland.
Stuart
Fuchs, 63, has served as a member of our board of directors since January 23,
2003. He is a co-founder and has served as a managing principal of Gryffindor
Capital Partners, LLC, a Chicago-based venture capital firm, since January 2000.
Before joining Gryffindor, he was a founding stockholder of several biotech
companies, including Angiogen LLC (since 1998), which develops combinations of
drugs to stimulate in vivo production of factors that inhibit the growth of
blood vessels in tumors, and Nace Pharma LLC (since 1996), which develops drugs
that employ novel drug delivery technologies. Through Nace Resources Inc., a
Delaware corporation providing strategic and financial advice to companies in
the technology sector, Mr. Fuchs has formed or participated in groups of
investors on behalf of several companies, including Abiant Inc., Celsion Corp.
and Photogen. Before founding Nace Resources Inc., he served for 19
years as an investment banker with Goldman, Sachs & Co., where he co-managed
the firm’s public finance activities for the Midwest region. Before joining
Goldman, Sachs & Co., Mr. Fuchs was a lawyer in private practice with
Barrett Smith Schapiro & Simon in New York. Mr. Fuchs holds an A.B. degree
from Harvard College and a J.D. from Harvard Law School and is a member of the
Association of the Bar of the City of New York.
13
Kelly M. McMasters M.D., Ph.D., 49, has
served as a member of our board of directors since June 9, 2008. Additionally,
Dr. McMasters serves as chairman of our scientific advisory
board. Dr. McMasters received his undergraduate training at
Colgate University prior to completing the MD/PhD program at the University of
Medicine and Dentistry of New Jersey, Robert Wood Johnson Medical School and
Rutgers University. He then completed the residency program in
General Surgery at the University of Louisville, and a fellowship in Surgical
Oncology at M.D. Anderson Cancer Center in Houston. He is currently
the Sam and Lolita Weakley Professor of Surgical Oncology at the University of
Louisville in Kentucky, a position he has held since 1996. Since
2005, he has chaired the Department of Surgery at the University of Louisville
and also has been Chief of Surgery at University of Louisville
Hospital. Since 2000, he has also been Director of the
Multidisciplinary Melanoma Clinic of the James Graham Brown Cancer Center at the
University of Louisville. His is an active member of the surgery
staff at the University of Louisville Hospital, Norton Hospital and Jewish
Hospital in Louisville. He is on the editorial boards of the Annals of Surgical
Oncology, Cancer Therapy and the Journal of Clinical Oncology as well as an ad
hoc reviewer for 9 other publications. He holds several honors, chief among them
is “Physician of the Year” awarded by the Kentucky Chapter of the American
Cancer Society. He is the author and principal investigator (PI) of
the Sunbelt Melanoma Trial, a multi-institutional study involving 3500 patients
from 79 institutions across North America and one of the largest prospective
melanoma studies ever performed. He has been a PI, Co-PI or local PI
in over thirty clinical trials ranging from Phase 1 to Phase 3. For
the past 12 years he has also directed a basic and translational science
laboratory studying adenovirus-mediated cancer gene therapy funded by the
American Cancer Society and the National Institutes of Health
(NIH).
14
Item
1A. Risk Factors.
Our
business is subject to various risks, including those described below. You
should carefully consider these risk factors, together with all of the other
information included in this prospectus. Any of these risks could materially
adversely affect our business, operating results, and financial
condition:
Our technologies are in early stages
of development.
We
generated minimal initial revenues from sales and operations in 2006 and 2005,
and we do not expect to generate revenues to enable us to be profitable for
several calendar quarters unless we sell and/or license our
technologies. We discontinued our proof-of-concept program in
November 2006 and have, therefore, ceased selling our OTC
products. To complete our current planned studies in clinical
development, we expect to spend approximately $123,000 in
2010. We estimate that our existing capital resources will be
sufficient to fund our current operations. We may need to raise
additional funds in 2012 in order to fully implement our integrated business
plan, including potential commercialization of PV-10 to treat metastatic
melanoma and execution of any potential next phases in clinical development of
our pharmaceutical products unless we plan to license and/or co-develop the
further development of our drug product candidates with industry
partners.
Ultimately,
we must achieve profitable operations if we are to be a viable entity, unless we
are acquired by another company. We intend to proceed as rapidly as possible
with the asset sale and licensure of OTC products that can be sold with a
minimum of regulatory compliance and with the development of revenue sources
through licensing of our existing intellectual property portfolio. We cannot
assure you that we will be able to raise sufficient capital to sustain
operations in 2012 and beyond before we can commence revenue generation or that
we will be able to achieve or maintain a level of profitability sufficient to
meet our operating expenses.
We may need additional capital to
conduct our operations and commercialize and/or further develop our products in
2012 and beyond, and our ability to obtain the necessary funding is
uncertain.
We
estimate that our existing capital resources will be sufficient to fund our
current and planned operations until 2012; however, we may need additional
capital in 2012 and beyond if we commercialize PV-10 to treat metastatic
melanoma. We have based this estimate on assumptions that may prove to be wrong,
and we cannot assure that estimates and assumptions will remain unchanged. For
example, we are currently assuming that we will continue to operate without any
significant staff or other resources expansion. We intend to acquire additional
funding through public or private equity financings or other financing sources
that may be available. Additional financing may not be available on acceptable
terms, or at all. As discussed in more detail below, additional equity financing
could result in significant dilution to stockholders. Further, in the event that
additional funds are obtained through licensing or other arrangements, these
arrangements may require us to relinquish rights to some of our technologies,
product candidates or products that we would otherwise seek to develop and
commercialize ourselves. If sufficient capital is not available, we may be
required to delay, reduce the scope of, or eliminate one or more of our
programs, any of which could have a material adverse effect on our business and
may impair the value of our patents and other intangible assets.
Existing stockholders may face
dilution from our financing efforts.
We may
raise additional capital from external sources to execute our business plan in
2012 and beyond. We plan to issue debt securities, capital stock, or a
combination of these securities, if necessary. We may not be able to sell these
securities, particularly under current market conditions. Even if we are
successful in finding buyers for our securities, the buyers could demand high
interest rates or require us to agree to onerous operating covenants, which
could in turn harm our ability to operate our business by reducing our cash flow
and restricting our operating activities. If we were to sell our capital stock,
we might be forced to sell shares at a depressed market price, which could
result in substantial dilution to our existing shareholders. In addition, any
shares of capital stock we may issue may have rights, privileges, and
preferences superior to those of our common shareholders. We may also
raise additional capital at any time if we believe appropriate to take advantage
of market conditions and/or to pursue strategic investors.
15
The
prescription drug and medical device products in our internal pipeline are at an
early stage of development, and they may fail in subsequent development or
commercialization.
We are
continuing to pursue clinical development of our most advanced pharmaceutical
drug products, PH-10 and PV-10, for use as treatments for specific conditions.
These products and other pharmaceutical drug and medical device products that we
are currently developing will require significant additional research,
formulation and manufacture development, and pre-clinical and extensive clinical
testing prior to regulatory licensure and commercialization. Pre-clinical and
clinical studies of our pharmaceutical drug and medical device products under
development may not demonstrate the safety and efficacy necessary to obtain
regulatory approvals. Pharmaceutical and biotechnology companies have suffered
significant setbacks in advanced clinical trials, even after experiencing
promising results in earlier trials. Pharmaceutical drug and medical device
products that appear to be promising at early stages of development may not
reach the market or be marketed successfully for a number of reasons, including
the following:
|
·
|
a
product may be found to be ineffective or have harmful side effects during
subsequent pre-clinical testing or clinical
trials,
|
|
·
|
a
product may fail to receive necessary regulatory
clearance,
|
|
·
|
a
product may be too difficult to manufacture on a large
scale,
|
|
·
|
a
product may be too expensive to manufacture or
market,
|
|
·
|
a
product may not achieve broad market
acceptance,
|
|
·
|
others
may hold proprietary rights that will prevent a product from being
marketed, or
|
|
·
|
others
may market equivalent or superior
products.
|
We do not
expect any pharmaceutical drug products that we are developing to be
commercially available for several years, if at all. Our research and product
development efforts may not be successfully completed and may not result in any
successfully commercialized products. Further, after commercial introduction of
a new product, discovery of problems through adverse event reporting could
result in restrictions on the product, including withdrawal from the market and,
in certain cases, civil or criminal penalties.
Our OTC products are at an early
stage of introduction, and we cannot be sure that they will be sold through a
combination of asset sale and licensure in the marketplace.
We have
previously focused on marketing Pure-ific, one of our OTC products, on a limited
basis to establish proof of concept, which we believe we have accomplished. We
have recognized minimal revenue from this product, as the sales of this product
have not been material. We discontinued our proof-of-concept program
in November 2006 and have, therefore, ceased selling our OTC
products. In order for this product, and our other OTC products, to
become commercially successful, the Company now intends to license the
products. The Company has been discussing this strategy with interested
groups. Additionally, the Company also intends to sell a majority
stake in the underlying assets via a non-core spin-out
transaction.
Competition in the prescription
drug, medical device and OTC pharmaceuticals markets is intense, and we may be
unable to succeed if our competitors have more funding or better
marketing.
The
pharmaceutical and biotechnology industries are intensely competitive. Other
pharmaceutical and biotechnology companies and research organizations currently
engage in or have in the past engaged in research efforts related to treatment
of dermatological conditions or cancers of the skin, liver and breast, which
could lead to the development of products or therapies that could compete
directly with the prescription drug, medical device and OTC products that we are
seeking to develop and market.
Many
companies are also developing alternative therapies to treat cancer and
dermatological conditions and, in this regard, are our competitors. Many of the
pharmaceutical companies developing and marketing these competing products have
significantly greater financial resources and expertise than we do
in:
|
·
|
research
and development,
|
16
|
·
|
manufacturing,
|
|
·
|
preclinical
and clinical testing,
|
|
·
|
obtaining
regulatory approvals, and
|
|
·
|
marketing.
|
Smaller
companies may also prove to be significant competitors, particularly through
collaborative arrangements with large and established companies. Academic
institutions, government agencies, and other public and private research
organizations may also conduct research, seek patent protection, and establish
collaborative arrangements for research, clinical development, and marketing of
products similar to ours. These companies and institutions compete with us in
recruiting and retaining qualified scientific and management personnel as well
as in acquiring technologies complementary to our programs.
In
addition to the above factors, we expect to face competition in the following
areas:
|
·
|
product
efficacy and safety;
|
|
·
|
the
timing and scope of regulatory
consents;
|
|
·
|
availability
of resources;
|
|
·
|
reimbursement
coverage;
|
|
·
|
price;
and
|
|
·
|
patent
position, including potentially dominant patent positions of
others.
|
As a
result of the foregoing, our competitors may develop more effective or more
affordable products or achieve earlier product commercialization than we
do.
Product
Competition. Additionally, since our formerly marketed
products are generally established and commonly sold, they were subject to
competition from products with similar qualities when we marketed
them.
Our OTC
product Pure-ific, when we sold it in the proof-of-concept stage, competed in
the market with other hand sanitizing products, including in particular, the
following hand sanitizers:
|
·
|
Purell
(owned by Johnson & Johnson),
|
|
·
|
Avagard
D (manufactured by 3M), and
|
|
·
|
a
large number of generic and private-label equivalents to these market
leaders.
|
Our OTC
product GloveAid represents a new product category that has no direct
competitors; however, other types of products, such as AloeTouch® disposable
gloves (manufactured by Medline Industries) target the same market
niche.
Since our
prescription products PV-10 and PH-10 have not yet been approved by the United
Stated Food and Drug Administration, which we refer to as the “FDA,” or
introduced to the marketplace, we cannot estimate what competition these
products might face when they are finally introduced, if at all. We cannot
assure you that these products will not face significant competition for other
prescription drugs and generic equivalents.
17
If we are unable to secure or
enforce patent rights, trademarks, trade secrets or other intellectual property
our business could be harmed.
We may
not be successful in securing or maintaining proprietary patent protection for
our products and technologies we develop or license. In addition, our
competitors may develop products similar to ours using methods and technologies
that are beyond the scope of our intellectual property protection, which could
reduce our anticipated sales. While some of our products have proprietary patent
protection, a challenge to these patents can be subject to expensive litigation.
Litigation concerning patents, other forms of intellectual property, and
proprietary technology is becoming more widespread and can be protracted and
expensive and can distract management and other personnel from performing their
duties.
We also
rely upon trade secrets, unpatented proprietary know-how, and continuing
technological innovation to develop a competitive position. We cannot assure you
that others will not independently develop substantially equivalent proprietary
technology and techniques or otherwise gain access to our trade secrets and
technology, or that we can adequately protect our trade secrets and
technology.
If we are
unable to secure or enforce patent rights, trademarks, trade secrets, or other
intellectual property, our business, financial condition, results of operations
and cash flows could be materially adversely affected. If we infringe on the
intellectual property of others, our business could be harmed.
We could
be sued for infringing patents or other intellectual property that purportedly
cover products and/or methods of using such products held by persons other than
us. Litigation arising from an alleged infringement could result in removal from
the market, or a substantial delay in, or prevention of, the introduction of our
products, any of which could have a material adverse effect on our business,
financial condition, results of operations, and cash flows.
If we do not update and enhance our
technologies, they will become obsolete.
The
pharmaceutical market is characterized by rapid technological change, and our
future success will depend on our ability to conduct successful research in our
fields of expertise, to discover new technologies as a result of that research,
to develop products based on our technologies, and to commercialize those
products. While we believe that our current technology is adequate for our
present needs, if we fail to stay at the forefront of technological development,
we will be unable to compete effectively. Our competitors are using substantial
resources to develop new pharmaceutical technologies and to commercialize
products based on those technologies. Accordingly, our technologies may be
rendered obsolete by advances in existing technologies or the development of
different technologies by one or more of our current or future
competitors.
If we lose any of our key personnel,
we may be unable to successfully execute our business plan.
Our
business is presently managed by four key employees:
|
·
|
H.
Craig Dees, Ph.D., our Chief Executive
Officer;
|
|
·
|
Timothy
C. Scott, Ph.D., our President;
|
|
·
|
Eric
A. Wachter, Ph.D. our Executive Vice President - Pharmaceuticals;
and
|
|
·
|
Peter
R. Culpepper, CPA, our Chief Financial Officer and Chief Operating
Officer.
|
In
addition to their responsibilities for management of our overall business
strategy, Drs. Dees, Scott and Wachter are our chief researchers in the fields
in which we are developing and planning to develop prescription drugs, medical
devices and OTC products. The loss of any of these key employees could have a
material adverse effect on our operations, and our ability to execute our
business plan might be negatively impacted. Any of these key employees may leave
their employment with us if they choose to do so, and we cannot assure you that
we would be able to hire similarly qualified employees if any of our key
employees should choose to leave.
Because we have only four employees
in total, our management may be unable to successfully manage our
business.
In order
to successfully execute our business plan, our management must succeed in all of
the following critical areas:
18
|
·
|
Researching
diseases and possible therapies in the areas of dermatology and skin care,
oncology, and biotechnology;
|
|
·
|
Developing
prescription drug, medical device, and OTC products based on our
research;
|
|
·
|
Marketing
and selling developed products;
|
|
·
|
Obtaining
additional capital to finance research, development, production, and
marketing of our products; and
|
|
·
|
Managing
our business as it grows.
|
As
discussed above, we currently have only four employees, all of whom are
full-time employees. The greatest burden of succeeding in the above areas,
therefore, falls on Drs. Dees, Scott, Wachter, and Mr. Culpepper. Focusing on
any one of these areas may divert their attention from our other areas of
concern and could affect our ability to manage other aspects of our business. We
cannot assure you that our management will be able to succeed in all of these
areas or, even if we do so succeed, that our business will be successful as a
result. We anticipate adding an additional regulatory affairs officer on a
consulting basis within several months. While we have not historically had
difficulty in attracting employees, our small size and limited operating history
may make it difficult for us to attract and retain employees in the future,
which could further divert management’s attention from the operation of our
business.
Our common stock price can be
volatile because of several factors, including a limited public float, which has
increased significantly from 2005 to 2009.
During
the year ended December 31, 2009, the sale price of our common stock fluctuated
from $0.84 to $1.28 per share. We believe that our common stock is subject to
wide price fluctuations because of several factors, including:
|
·
|
absence
of meaningful earnings and ongoing need for external
financing;
|
|
·
|
a
relatively thin trading market for our common stock, which causes trades
of small blocks of stock to have a significant impact on our stock
price;
|
|
·
|
general
volatility of the stock market and the market prices of other
publicly-traded companies; and
|
|
·
|
investor
sentiment regarding equity markets generally, including public perception
of corporate ethics and governance and the accuracy and transparency of
financial reporting.
|
Financings
that may be available to us under current market conditions frequently involve
sales at prices below the prices at which our common stock trades on the OTC
Bulletin Board, as well as the issuance of warrants or convertible debt that
require exercise or conversion prices that are calculated in the future at a
discount to the then market price of our common stock. The current economic
downturn has made the financings available to development-stage companies like
us more dilutive in nature than they would otherwise be.
Any
agreement to sell, or convert debt or equity securities into, common stock at a
future date and at a price based on the then current market price will provide
an incentive to the investor or third parties to sell the common stock short to
decrease the price and increase the number of shares they may receive in a
future purchase, whether directly from us or in the market.
Financings that may be available to
us frequently involve high selling costs.
Because
of our limited operating history, low market capitalization, thin trading volume
and other factors, we have historically had to pay high costs to obtain
financing and expect to continue to be required to pay high costs for any future
financings in which we may participate. For example, our past sales of shares
and our sale of the debentures have involved the payment of finder’s fees or
placement agent’s fees. These types of fees are typically higher for small
companies like us. Payment of fees of this type reduces the amount of cash that
we receive from a financing transaction and makes it more difficult for us to
obtain the amount of financing that we need to maintain and expand our
operations.
19
It is our general policy to retain
any earnings for use in our operation.
We have
never declared or paid cash dividends on our common stock. We currently intend
to retain all of our future earnings, if any, for use in our business and
therefore do not anticipate paying any cash dividends on our common stock in the
foreseeable future.
Our stock price is below $5.00 per
share and is treated as a “penny stock”, which places restrictions on
broker-dealers recommending the stock for purchase.
Our
common stock is defined as “penny stock” under the Exchange Act and its rules.
The SEC has adopted regulations that define “penny stock” to include common
stock that has a market price of less than $5.00 per share, subject to certain
exceptions. These rules include the following requirements:
|
·
|
broker-dealers
must deliver, prior to the transaction a disclosure schedule prepared by
the SEC relating to the penny stock
market;
|
|
·
|
broker-dealers
must disclose the commissions payable to the broker-dealer and its
registered representative;
|
|
·
|
broker-dealers
must disclose current quotations for the
securities;
|
|
·
|
if
a broker-dealer is the sole market-maker, the broker-dealer must disclose
this fact and the broker-dealers presumed control over the market;
and
|
|
·
|
a
broker-dealer must furnish its customers with monthly statements
disclosing recent price information for all penny stocks held in the
customer’s account and information on the limited market in penny
stocks.
|
Additional
sales practice requirements are imposed on broker-dealers who sell penny stocks
to persons other than established customers and accredited investors. For these
types of transactions, the broker-dealer must make a special suitability
determination for the purchaser and must have received the purchaser’s written
consent to the transaction prior to sale. If our common stock remains subject to
these penny stock rules these disclosure requirements may have the effect of
reducing the level of trading activity in the secondary market for our common
stock. As a result, fewer broker-dealers may be willing to make a market in our
stock, which could affect a shareholder’s ability to sell their
shares.
Future
sales by our stockholders may adversely affect our stock price and our ability
to raise funds in new stock offerings.
Sales of our common stock in the public
market following any prospective offering could lower the market price of our
common stock. Sales may also make it more difficult for us to sell equity
securities or equity-related securities in the future at a time and price that
our management deems acceptable. The current economic downturn has
made the financings available to development-stage companies like us more
dilutive in nature than they would otherwise be.
Item
2. Properties.
We currently lease approximately 6,000
square feet of space outside of Knoxville, Tennessee for our corporate office
and operations. Our monthly rental charge for these offices is approximately
$4,500 per month, and the lease is renewed on an annual basis. We believe that
these offices generally are adequate for our needs currently and in the
immediate future.
Item 3. Legal
Proceedings.
From time to time, we are party to
litigation or other legal proceedings that we consider to be a part of the
ordinary course of our business. At present, we are not involved in
any legal proceedings nor are we party to any pending claims that we believe
could reasonably be expected to have a material adverse effect on our business,
financial condition, or results of operations.
20
Part
II
Item 4. Market for Common
Equity and Related Stockholder Matters.
Market
Information and Holders
Quotations for our common stock are
reported on the OTC Bulletin Board under the symbol “PVCT." The following table
sets forth the range of high and low bid information for the periods indicated
since January 1, 2008:
|
2008
|
High
|
Low
|
||||||
|
First
Quarter (January 1 to March 31)
|
1.59 | 1.00 | ||||||
|
Second
Quarter (April 1 to June 30)
|
1.30 | 0.90 | ||||||
|
Third
Quarter (July 1 to September 30)
|
1.64 | 0.74 | ||||||
|
Fourth
Quarter (October 1 to December 31)
|
1.56 | 0.82 | ||||||
|
2009
|
||||||||
|
First
Quarter (January 1 to March 31)
|
1.03 | 0.86 | ||||||
|
Second
Quarter (April 1 to June 30)
|
1.28 | 0.93 | ||||||
|
Third
Quarter (July 1 to September 30)
|
1.11 | 0.88 | ||||||
|
Fourth
Quarter (October 1 to December 31)
|
1.07 | 0.84 | ||||||
The closing price for our common stock
on March 18, 2010 was $1.31. High and low quotation information was
obtained from data provided by Yahoo! Inc. Quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not reflect actual transactions.
As of March 18, 2010, we had 1,853
shareholders of record of our common stock in physical certificate
form.
Dividend
Policy
We have never declared or paid any cash
dividends on our capital stock. We currently plan to
retain future earnings, if any, to
finance the growth and development of our business and do
not anticipate paying any cash dividends in
the foreseeable future. We may incur
indebtedness in the future which may prohibit or effectively restrict the
payment of dividends, although we have no current plans to do so. Any future
determination to pay cash dividends will be at the discretion of our board of
directors.
Recent
Sales of Unregistered Securities
In May
and June 2009 the Company completed a private placement transaction with
accredited investors pursuant to which the Company sold a total of 1,750,000
shares of common stock at a purchase price of $0.90 per share, for an aggregate
purchase price of $1,575,000. In connection with the sale of common
stock, the Company also issued warrants to the investors to purchase up to
875,000 shares of common stock at an exercise price of $1.00 per share. The
Company paid $227,250 and issued 175,000 shares of common stock at a fair market
value of $197,750 to Maxim Group, LLC as a placement agent for this
transaction. The cash costs have been off-set against the proceeds
received, which are for general corporate purposes.
During
the three months ended June 30, 2009, the Company completed a private placement
transaction with accredited investors pursuant to which the Company sold a total
of 2,868,994 shares of common stock at a purchase price of $0.75 per share, for
an aggregate purchase price of $2,151,749. 186,667 of the 2,868,994
common shares sold were committed to be issued but not outstanding at June 30,
2009 and which were issued in July 2009. In connection with the sale
of common stock, the Company also issued warrants to the investors to purchase
up to 1,434,510 shares of common stock at an exercise price of $1.50 per share.
The Company paid $255,323, has accrued $24,404 to be paid as of June 30, 2009,
which was paid in July 2009, and was committed to issue 286,900 shares of common
stock at June 30, 2009 at a fair market value of $295,507 to Network 1 Financial
Securities, Inc. as placement agent for this transaction, which were issued in
August 2009. The cash costs have been off-set against the proceeds
received, which are for general corporate purposes.
21
In July
2009 the Company completed a private placement transaction with accredited
investors pursuant to which the Company sold a total of 1,040,570 shares of
common stock at a purchase price of $0.75 per share, for an aggregate purchase
price of $780,427. In connection with the sale of common stock, the
Company also issued warrants to the investors to purchase up to 520,120
shares of common stock at an exercise price of $1.50 per share. The
Company paid $101,485 and issued 100,016 shares of common stock in August 2009
at a fair market value of $95,015 to Network 1 Financial Securities, Inc. as
placement agent for this transaction. The cash costs have been
off-set against the proceeds received, which are for general corporate purposes.
In July and September 2009 the Company completed a private placement
transaction with a total of two accredited investors pursuant to which the
Company sold a total of 309,000 shares of common stock at a purchase price of
$0.75 per share, for an aggregate purchase price of $231,750. The
proceeds received are for general corporate purposes.
In September 2009 the Company completed a private placement
transaction with accredited investors pursuant to which the Company sold a total
of 1,696,733 shares of common stock at a purchase price of $0.75 per share, for
an aggregate purchase price of $1,272,550. In connection with the
sale of common stock, the Company also issued warrants to the investors to
purchase up to 848,366 shares of common stock at an exercise price of $1.00 per
share. The Company paid $180,432 and was committed to issue 169,673 shares of
common stock at a fair market value of $169,673 to Maxim Group, LLC as a
placement agent for this transaction which were issued in November
2009. The cash costs have been off-set against the proceeds received,
which are for general corporate purposes.
During the three months ended December 31, 2009, the Company
completed a private placement transaction with accredited investors pursuant to
which the Company sold a total of 1,486,367 shares of common stock at a purchase
price of $0.75 per share, for an aggregate purchase price of
$1,114,775. 266,600 of the 1,486,367 common shares sold are committed
to be issued but not outstanding at December 31, 2009 and which were issued in
January 2010. In connection with the sale of common stock, the
Company also issued warrants to the investors to purchase up to 743,185 shares
of common stock at an exercise price of $0.95 per share. The Company paid
$118,926, has accrued $25,994 to be paid as of December 31, 2009, which was paid
in January 2010, and is committed to issue 148,637 shares of common stock at
December 31, 2009 at a fair market value of $132,287 to Network 1 Financial
Securities, Inc. as placement agent for this transaction. The cash
costs have been off-set against the proceeds received, which are for general
corporate purposes.
In December 2009 the Company completed a private placement
transaction with an accredited investor pursuant to which the Company sold a
total of 500,000 shares of common stock at a purchase price of $0.75 per share,
for an aggregate purchase price of $375,000. In connection with the
sale of common stock, the Company also issued warrants to the investors to
purchase up to 250,000 shares of common stock at an exercise price of $1.00 per
share. The Company paid $48,750 and is committed to issue 50,000 shares of
common stock at a fair market value of $45,000 to Maxim Group, LLC as a
placement agent for this transaction at December 31, 2009, which were issued in
January 2010. The cash costs have been off-set against the proceeds
received, which are for general corporate purposes.
Item 6. 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 consolidated financial
statements and notes thereto included elsewhere in this prospectus. Historical
results and percentage relationships set forth in the statement of operations,
including trends which might appear, are not necessarily indicative of future
operations.
Critical
Accounting Policies
Long-Lived
Assets
We review
the carrying values of our long-lived assets for possible impairment whenever an
event or change in circumstances indicates that the carrying amount of the
assets may not be recoverable. Any long-lived assets held for
disposal are reported at the lower of their carrying amounts or fair value less
cost to sell. Management has determined there to be no
impairment.
Patent
Costs
Internal
patent costs are expensed in the period incurred. Patents purchased are
capitalized and amortized over their remaining lives, which range from 7-12
years. Annual amortization of the patents is expected to be
approximately $671,000 for the next five years.
Stock-Based
Compensation
The
compensation cost relating to share-based payment transactions is measured based
on the fair value of the equity or liability instruments issued and is expensed
on a straight-line basis. For purposes of estimating the fair value of each
stock option, on the date of grant, we utilized the Black-Scholes option-pricing
model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected volatility factor
of the market price of the company’s common stock (as determined by reviewing
its historical public market closing prices). Because our employee stock options
have characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management’s opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
22
Warrants
to non-employees are generally vested and nonforfeitable upon the date of the
grant. Accordingly fair value is determined on the grant
date.
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: consulting - IT, depreciation, lab equipment repair, lab supplies and
pharmaceutical preparations, insurance, legal - patents, office supplies,
payroll expenses, rental - building, repairs, software, taxes and fees, and
utilities.
Contractual
Obligations - Leases
We lease
office and laboratory space in Knoxville, Tennessee, on an annual basis,
renewable for one year at our option. We are committed to pay a total of $27,000
in lease payments through June 2010, which is the remainder of our current lease
term at December 31, 2009.
Capital
Structure
Our
ability to continue as a going concern is reasonably assured due to our
financing completed during 2009 and thus far in 2010, and warrants exercised in
2009 and thus far in 2010. Given our current rate
of expenditures, we do not need to raise additional capital unless we
commercialize PV-10 on our own to treat metastatic
melanoma. Additionally, our existing funds are sufficient to meet
minimal necessary expenses until 2012.
We have
implemented our integrated business plan, including execution of the current and
next phases in clinical development of our pharmaceutical products and continued
execution of research programs for new research initiatives.
We intend
to proceed as rapidly as possible with a licensure of our dermatology drug
product candidate (PH-10) on the basis of our Phase 2 atopic dermatitis and
psoriasis results, which are in process of being completed. We intend
to also proceed as rapidly as possible with a majority stake asset sale and
subsequent licensure of our OTC products that can be sold with a minimum of
regulatory compliance and with the further development of revenue sources
through a majority stake asset sale and subsequent licensing of our existing
medical device, imaging, and biotech intellectual property portfolio. Although
we believe that there is a reasonable basis for our expectation that we will
become profitable due to both the licensure of PH-10 and the asset sale of a
majority stake via a spin-out transaction of the wholly-owned subsidiaries that
contain the non-core assets and subsequent licensure of our non-core products,
we cannot assure you that we will be able to achieve, or maintain, a level of
profitability sufficient to meet our operating expenses.
Our
current plans include continuing to operate with our four employees during the
immediate future, but we have added two additional consultants to the two we
already had, and anticipate adding two more consultants in the next 12 months.
Our current plans also include minimal purchases of new property, plant and
equipment, and increased research and development for additional clinical
trials.
23
Plan
of Operation
With the
reorganization of Provectus and PPI and the acquisition and integration into the
Company of Valley and Pure-ific, we believe we have obtained a unique
combination of core intellectual properties and OTC and other non-core products.
This combination represents the foundation for an operating company that we
believe will provide both profitability and long-term growth. In 2009
and thus far in 2010, we continued to carefully control expenditures in
preparation for both the licensure of PH-10 and the asset sale and licensure or
spin out of our OTC products, medical device, imaging, and biotech technologies,
and we will issue equity only when it makes sense and primarily for purposes of
attracting strategic investors. In the longer term, we expect to
continue the process of developing, testing and obtaining the approval of the U.
S. Food and Drug Administration (FDA) for prescription drugs in
particular.
We have
continued to make significant progress with the major research and development
projects, most of which have been nearly completed. The Phase 2 trial in
metastatic melanoma has been significantly completed which has cost
approximately $3,018,000 through December 31, 2009 and is not expected to incur
additional cost. Additionally, we planned $675,000 of expenditures in
2007 and 2008 to substantially advance our work with other oncology indications
which included the third group of our expanded Phase 1 breast carcinoma clinical
trial. The third group of our expanded Phase 1 breast carcinoma
clinical trial was completed in September 2008. Our Phase 2 psoriasis
trial commenced in November 2007 and was completed in December
2009. The study was expected to cost approximately $1,725,000, of
which approximately $1,678,000 has been expended which closes out the
study. Our Phase 2 atopic dermatitis trial commenced in May 2008 and
was completed in October 2009. The cost is included in the psoriasis
trial budget and actual figures. Our Phase 1 liver cancer trial
commenced in October 2009 and is expected to cost approximately $629,000, of
which approximately $506,000 has been expended thus far.
We
anticipate expending $123,000 during the remainder of 2010 for direct clinical
trial expense which includes the remaining expenditures for all projects
currently planned unless we determine a Phase 3 trial in metastatic melanoma is
appropriate. If a Phase 3 trial is not necessary per guidance from
the FDA, we will determine if any additional clinical trial expense is
beneficial to further developing our core technologies while we seek to license
both PH-10 and potentially PV-10 depending on the timing for the optimal deal
structure for our stockholders. The table below summarizes our
projects, the actual costs expended to date and costs expected for
2010.
|
Projects
|
Planned
Project Cost
|
Expenditures
through
December
31, 2009
|
Expected
2010
|
|||||||||
| Melanoma | $ | 3,018,000 | $ | 3,018,000 | $ | -0- | ||||||
| Breast/Other | $ | 675,000 | $ | 675,000 | $ | -0- | ||||||
| Psoriasis/AD | $ | 1,678,000 | $ | 1,678,000 | $ | -0- | ||||||
| Liver | $ | 629,000 | $ | 506,000 | $ | 123,000 | ||||||
Comparison
of the Years Ended December 31, 2009 and 2008
Revenues
OTC
Product Revenue was $-0- in both 2009 and 2008. We discontinued our
proof-of-concept program in November 2006 and have, therefore, ceased selling
our OTC products. There was no medical device revenue in 2009 or 2008 as we have
not emphasized sales of medical devices. We have designated the OTC
and medical device products as non-core and are considering the sale of the
underlying assets in conjunction with the planned spin-out of the respective
wholly-owned subsidiaries.
Research
and development
Research
and development costs totaling $4,909,414 for 2009 included payroll of
$2,860,116, consulting and contract labor of $1,367,422, lab supplies and
pharmaceutical preparations of $281,833, legal of $209,709, insurance of
$125,295, rent and utilities of $55,685, and depreciation expense of
$9,354. Research and development costs totaling $4,425,616 for 2008
included payroll of $2,561,845, consulting and contract labor of $1,256,032, lab
supplies and pharmaceutical preparations of $116,762, legal of $297,363,
insurance of $108,905, rent and utilities of $75,453, and depreciation expense
of $9,256.
24
The
approximately $300,000 increase in payroll is primarily the result of higher
bonuses offset partially by the lower impact of stock-based compensation expense
for stock options in 2009 versus 2008. The approximately $111,000
increase in consulting and contract labor is the result of the greater
consulting costs incurred in 2009 to significantly advance Phase 2 clinical
trial programs for both atopic dermatitis and psoriasis versus 2008. The
approximately $165,000 increase in lab supplies and pharmaceutical preparations
is primarily the result of materials necessary to provide for the any additional
clinical trials and/or FDA regulatory requirements that were purchased to a
greater extent in 2009 versus 2008.
General
and administrative
General
and administrative expenses increased by $1,498,748 in 2009 to $6,745,597 from
$5,246,849 in 2008. Expenses in 2009 were generally similar in nature
to expenses in 2008 except consulting and conference expense, primarily for
investor relations, was approximately $1.2 million higher in 2009 than in
2008. Payroll increased approximately $380,000 in 2009 due to higher
bonuses offset partially by the lower impact of stock-based compensation expense
for stock options in 2009 versus 2008.
Investment
income
Investment income decreased by $70,197
in 2009 to $3,817 from $74,014 in 2008. The decrease resulted
primarily due to significantly lower interest rates on cash and cash equivalents
as well as lower balances in 2009 versus 2008.
Cash
Flow
Our cash
and cash equivalents were $3,237,178 at December 31, 2009, compared with
$2,796,020 at December 31, 2008. The increase of approximately
$440,000 was due primarily to cash provided of $9,043,141 from sales of equity
securities and the exercises of warrants and stock options during the year ended
December 31, 2009 which was greater than cash used in operating activities. Our
expenditure rate in 2009 was consistent with 2008 due to our clinical trial
projects and our investor relations efforts to communicate the progress of the
Company.
At our
current cash expenditure rate, our cash and cash equivalents will be sufficient
to meet our current and planned needs in 2010 and until 2012 without additional
cash inflows from the exercise of existing warrants or sales of equity
securities. We have enough cash on hand to fund operations until 2012
with the cash on hand at December 31, 2009 as well as through financing
completed thus far in 2010.
We are
seeking to improve our cash flow through both the licensure of PH-10 on the
basis of our Phase 2 atopic dermatitis and psoriasis results, and the majority
stake asset sale and licensure of our OTC products as well as other non-core
assets. However, we cannot assure you that we will be successful in
either licensing PH-10 or selling a majority stake of the OTC and other non-core
assets via a spin-out transaction and licensing our existing non-core
products. Moreover, even if we are successful in improving our
current cash flow position, we nonetheless plan to seek additional funds to meet
our long-term requirements in 2012 and beyond. We anticipate that
these funds will otherwise come from the proceeds of private placements, the
exercise of existing warrants outstanding, or public offerings of debt or equity
securities.
Capital
Resources
As noted
above, our present cash flow is currently sufficient to meet our short-term
operating needs. Excess cash will be used to finance any additional
phases in clinical development of our pharmaceutical products that we determine
to undertake ourselves versus with a partner. We anticipate that any
required funds for our operating and development needs in 2012 and beyond will
come from the proceeds of private placements, the exercise of existing warrants
outstanding, 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 shareholders.
25
Recent
Accounting Pronouncements
In
April 2008, the FASB issued modifications to ASC 350 (“ASC 350”) “Intangibles – Goodwill and
Other”. The modifications to ASC 350 amended the factors an
entity should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets. This new guidance applies
prospectively to intangible assets that are acquired individually or with a
group of other assets in business combinations and asset acquisitions. On
January 1, 2009, the Company adopted the modifications to ASC 350. The
adoption of this standard did not have a material impact on the Company’s
financial condition, results of operations or cash flows.
In May
2009, the FASB issued ASC 855 (“ASC 855”), “Subsequent
Events”. ASC 855 establishes general standards for accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are available to be issued (“subsequent events”). More
specifically, ASC 855 sets forth the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition in the financial statements, identifies
the circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures that should be made about events or transactions that occur after
the balance sheet date. ASC 855 provides largely the same guidance on subsequent
events, which previously existed only in auditing literature. The
Company has performed an evaluation of subsequent events through the day the
financial statements were issued.
In
June 2009, the FASB issued ASC 105 (“ASC 105”) “Generally Accepted Accounting
Principles”. ASC
105 states that the FASB Accounting Standards Codification (“Codification”) will
become the single source of authoritative U.S. generally accepted accounting
principles (“GAAP”) recognized by the FASB. The Codification and all of its
contents, which changes the referencing of financial standards, will carry the
same level of authority. In other words, the GAAP hierarchy will be modified to
include only two levels of GAAP, authoritative and nonauthoritative. ASC 105 is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009, and was adopted July 1, 2009. Therefore, all
references to GAAP use the new Codification numbering system prescribed by the
FASB. As the Codification is not intended to change or alter existing GAAP, it
did not have an impact on the Company’s financial condition, results of
operations and cash flows.
In
August 2009, the FASB issued Accounting Standards Update
(ASU) No. 2009-05 (“ASU 2009-05”), “Measuring Liabilities at Fair
Value”, which provides clarification for the fair value measurement of
liabilities in circumstances in which a quoted price in an active market for an
identical liability is not available. ASU 2009-05 is effective for the first
interim period ending after December 15, 2009, and was adopted on
October 1, 2009. This standard did not have a material impact on
the Company’s financial condition, results of operations or cash
flows.
September 2009,
the FASB issued ASU No. 2009-12 (“ASU 2009-12”), “Investments in Certain Entities
That Calculate Net Asset Value per Share (or Its Equivalent)”, which
provides guidance on measuring the fair value of certain alternative
investments. ASU 2009-12 amends ASC 820 to offer investors a practical expedient
for measuring the fair value of investments in certain entities that calculate
net asset value per share. ASU 2009-12 is effective for interim and annual
periods ending after December 15, 2009. This standard did not have a
material impact on the Company’s financial condition, results of operations or
cash flows.
In
October 2009, the FASB issued ASU No. 2009-13 (“ASU 2009-13”), “Multiple-Deliverable Revenue
Arrangements”, which amends ASC 605, “Revenue Recognition”. ASU
2009-13 provides guidance related to the determination of when the individual
deliverables included in a multiple-element arrangement may be treated as
separate units of accounting and modifies the manner in which the transaction
consideration is allocated across the individual deliverables. Also, the
standard expands the disclosure requirements for revenue arrangements with
multiple deliverables. ASU 2009-13 is effective for fiscal years beginning on or
after June 15, 2010. This standard is not expected to have a
material impact on the Company’s financial condition, results of operations or
cash flows since it is not effective.
26
Item 7. Financial
Statements.
Our consolidated financial statements,
together with the report thereon of BDO Seidman LLP, independent accountants,
are set forth on the pages of this Annual Report on Form 10-K indicated
below.
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
31 |
|
Consolidated
Balance Sheets as of December 31, 2009 and December 31,
2008
|
32 |
|
Consolidated
Statements of Operations for the years December 31, 2009 and 2008, and
cumulative amounts from January 17, 2002 (Inception) through December 31,
2009
|
33 |
|
Consolidated
Statements of Shareholders' Equity for years ended December 31, 2009 and
2008, and cumulative amounts from January 17, 2002 (Inception) through
December 31, 2009
|
34 |
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009 and 2008,
cumulative amounts from January 17, 2002 (Inception) through December 31,
2009
|
36 |
|
Notes
to Consolidated Financial Statements
|
38 |
Forward-Looking
Statements
This Annual Report on Form 10-K
contains forward-looking statements regarding, among other things, our
anticipated financial and operating results. Forward-looking
statements reflect our management’s current assumptions, beliefs, and
expectations. Words such as "anticipate," "believe, “estimate,"
"expect," "intend," "plan," and similar expressions are intended to identify
forward-looking statements. While we believe that the expectations
reflected in our forward-looking statements are reasonable, we can give no
assurance that such expectations will prove correct. Forward-looking
statements are subject to risks and uncertainties that could cause our actual
results to differ materially from the future results, performance, or
achievements expressed in or implied by any forward-looking statement we
make. Some of the relevant risks and uncertainties that could cause
our actual performance to differ materially from
the forward-looking statements contained in this report
are discussed below under the heading "Risk Factors" and elsewhere in
this Annual Report on Form 10-K. We caution investors that
these discussions of important risks and uncertainties are not exclusive, and
our business may be subject to other risks and uncertainties which are not
detailed there.
Investors are cautioned not to place
undue reliance on our forward-looking statements. We make
forward-looking statements as of the date on which this Annual Report on Form
10-K is filed with the SEC, and we assume no obligation to update the
forward-looking statements after the date hereof whether
as a result of new information or events, changed circumstances, or otherwise,
except as required by law.
Item 8. Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure.
N/A.
Item
8A (T). Controls and Procedures
Evaluation of Disclosure Controls
and Procedures. We have carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer of the effectiveness of the design
and operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures are effective.
Management’s Report on Internal
Control Over Financial Reporting. Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is
defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a
process designated by, or under the supervision of, our principal executive and
principal financial officers and effected by our board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
27
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and disposition of our
assets;
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and
directors; and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detention of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
Our management assessed the
effectiveness of our internal control over financial reporting as of December
31, 2009. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control – Integrated Framework.
Based on our assessment, management
believes that, as of December 31, 2009, our internal control over financial
reporting is effective based on those criteria.
This annual report does not include an
attestation report of our registered public accounting firm regarding internal
control over financial reporting. Management’s report was
not subject to attestation by our registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit us to
provide only management’s report in this annual report.
Changes in Internal Control Over
Financial Reporting. There was no change in our internal
control over financial reporting that occurred during the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Item 8B. Other
Information.
None.
28
Part
III
Item 9. Directors, Executive Officers
and Corporate Governance.
Except as set forth below, the
information called for by this item with respect to our executive officers as of
March 31, 2010 is furnished in Part I of this report under the
heading "Personnel--Executive Officers." The information called for
by this item, to the extent it relates to our directors or to certain filing
obligations of our directors and executive officers under the federal securities
laws, is incorporated herein by reference to the Proxy Statement for our Annual
Meeting of Stockholders to be held on June 17, 2010, which will be filed with
the SEC pursuant to Regulation 14A under the Exchange Act.
Audit
Committee Financial Expert
We do not currently have an "audit
committee financial expert," as defined under the rules of the SEC. Because the
board of directors consists of only five members and our operations remain
amenable to oversight by a limited number of directors, the board has not
delegated any of its functions to committees. The entire board of
directors acts as our audit committee as permitted under Section 3(a)(58)(B) of
the Exchange Act. We believe that all of the members of our board are qualified
to serve as the committee and have the experience and knowledge to perform the
duties required of the committee. We do not have any independent
directors who would qualify as an audit committee financial expert, as defined.
We believe that it has been, and may continue to be, impractical to recruit such
a director unless and until we are significantly larger.
Code
of Ethics
We have adopted a formal Code of
Ethics. The Company’s four employees adhere to high standards of
ethics and have signed a formal policy.
Item 10. Executive
Compensation.
The information called for by this item
is incorporated herein by reference to the Proxy Statement for our Annual
Meeting of Stockholders to be held on June 17, 2010, which will be filed with
the SEC pursuant to Regulation 14A under the Exchange Act.
Item 11. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The information called for by this item
is incorporated herein by reference to the Proxy Statement for our Annual
Meeting of Stockholders to be held on June 17, 2010, which will be filed with
the SEC pursuant to Regulation 14A under the Exchange Act.
Item 12. Certain
Relationships and Related Transactions.
The information called for by this item
is incorporated herein by reference to the Proxy Statement for our Annual
Meeting of Stockholders to be held on June 17, 2010, which will be filed with
the SEC pursuant to Regulation 14A under the Exchange Act.
Item
13. Principal Accountant Fees and Services.
The information called for by this item
is incorporated herein by reference to the Proxy Statement for our Annual
Meeting of Stockholders to be held on June 17, 2010, which will be filed with
the SEC pursuant to Regulation 14A under the Exchange Act.
Item
14. Exhibits
Exhibits required by Item 601 of
Regulation S-K are incorporated herein by reference and are listed on the
attached Exhibit Index, which begins on page X-1 of this Annual Report on Form
10-K.
29
Signatures
In accordance with Section 13 or 15(d)
of the Exchange Act, the Registrant caused this annual report on From 10-K for
the year ended December 31, 2009 to be signed on its behalf by the undersigned,
thereunto duly authorized.
Provectus Pharmaceuticals,
Inc.
By: /s/ H. Craig
Dees
H. Craig Dees, Ph.D. Chief Executive
Officer
Date: March
31, 2010
In
accordance with the requirements of the Securities Exchange Act, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated:
|
Signature
|
Title
|
Date
|
|
/s/ H. Craig Dees
H.
Craig Dees, Ph.D.
|
Chief
Executive Officer (principal executive
officer)
and Chairman of the Board
|
March
31, 2010
|
|
/s/ Peter R.
Culpepper
Peter
R. Culpepper, CPA
|
Chief
FinancialeOfficer (principal financial officer
and
principal accounting officer) and Chief
Operating
Officer
|
March
31, 2010
|
|
/s/ Timothy C.
Scott
Timothy
C. Scott, Ph.D.
|
President
and Director
|
March
31, 2010
|
|
/s/ Eric A. Wachter ,
Ph.D
Eric
A. Wachter, Ph.D.
|
Executive
Vice President - Pharmaceuticals
and
Director
|
March
31, 2010
|
|
/s/ Stuart Fuchs
Stuart
Fuchs
|
Director
|
March
31, 2010
|
|
/s/ Kelly M. McMasters, M.D.,
Ph.D
Kelly
M. McMasters, M.D., Ph.D.
|
Director
|
March
31, 2010
|
30
Report
of Independent Registered Public Accounting Firm
Board
of Directors
Provectus
Pharmaceuticals, Inc.
Knoxville,
Tennessee
We have
audited the accompanying consolidated balance sheets of Provectus
Pharmaceuticals, Inc., a development stage company, as of December 31, 2009 and
2008 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the period from January 17, 2002 (date of inception)
to December 31, 2009 and for each of the two years in the period ended December
31, 2009. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Provectus Pharmaceuticals,
Inc. at December 31, 2009 and 2008, and the results of its operations and its
cash flows for the period from January 17, 2002 (date of inception) to December
31, 2009 and for each of the two years in the period ended December 31, 2009, in
conformity with accounting principles generally accepted in the United States of
America.
/s/BDO
Seidman, LLP
Chicago,
Illinois
March 31,
2010
31
PROVECTUS
PHARMACEUTICALS, INC.
(A
Development-Stage Company)
CONSOLIDATED
BALANCE SHEETS
|
December
31,
2009
|
December
31,
2008
|
|||||||
|
Assets
|
||||||||
|
Current
Assets
|
||||||||
|
Cash and cash
equivalents
|
$ | 3,237,178 | $ | 2,796,020 | ||||
|
Prepaid expenses and other
current assets
|
-- | 50,691 | ||||||
|
Total
Current Assets
|
3,237,178 | 2,846,711 | ||||||
|
Equipment
and Furnishings, less accumulated depreciation of $400,587 and
$391,233
|
30,175 | 33,690 | ||||||
|
Patents,
net of amortization of $4,776,137 and $4,105,017,
respectively
|
6,939,308 | 7,610,428 | ||||||
|
Other
assets
|
27,000 | 27,000 | ||||||
| $ | 10,233,661 | $ | 10,517,829 | |||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Current
Liabilities
|
||||||||
|
Accounts payable –
trade
|
$ | 220,251 | $ | 267,093 | ||||
|
Accrued compensation and payroll
taxes
|
149,836 | 79,955 | ||||||
|
Accrued consulting
expense
|
42,260 | 66,250 | ||||||
|
Pension
liability
|
345,000 | -- | ||||||
|
Other accrued
expenses
|
69,804 | 48,995 | ||||||
|
Total
Current Liabilities
|
827,151 | 462,293 | ||||||
|
Stockholders’
Equity
|
||||||||
|
Preferred
stock; par value $.001 per share; 25,000,000 shares authorized;
no shares issued and outstanding
Common
stock; par value $.001 per share; 100,000,000 shares
authorized;
67,410,226
and 53,017,076 shares issued and outstanding, respectively
|
67,410 | 53,017 | ||||||
|
Paid-in capital
|
77,137,021 | 65,478,126 | ||||||
|
Deficit accumulated during the
development stage
|
(67,797,921 | ) | (55,475,607 | ) | ||||
|
Total
Stockholders’ Equity
|
9,406,510 | 10,055,536 | ||||||
| $ | 10,233,661 | $ | 10,517,829 | |||||
See
accompanying notes to consolidated financial statements.
32
PROVECTUS
PHARMACEUTICALS, INC.
(A
Development-Stage Company)
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Year
Ended
December
31, 2009
|
Year
Ended
December
31, 2008
|
Cumulative
Amounts from January 17, 2002 (Inception) Through
December
31, 2009
|
||||||||
|
Revenues
|
||||||||||
|
OTC
product revenue
|
$ | -- | $ | -- | $ | 25,648 | ||||
|
Medical
device revenue
|
-- | -- | 14,109 | |||||||
|
Total
revenues
|
-- | -- | 39,757 | |||||||
|
Cost
of sales
|
-- | -- | 15,216 | |||||||
|
Gross
profit
|
-- | -- | 24,541 | |||||||
|
Operating
expenses
|
||||||||||
|
Research
and development
|
4,909,414 | 4,425,616 | 20,868,195 | |||||||
|
General
and administrative
|
6,745,597 | 5,246,849 | 33,958,475 | |||||||
|
Amortization
|
671,120 | 671,120 | 4,776,137 | |||||||
|
Total
operating loss
|
(12,326,131 | ) | (10,343,585 | ) | (59,578,266 | ) | ||||
|
Gain
on sale of fixed assets
|
-- | -- | 55,075 | |||||||
|
Loss
on extinguishment of debt
|
-- | -- | (825,867 | ) | ||||||
|
Investment
income
|
3,817 | 74,014 | 649,141 | |||||||
|
Net
interest expense
|
-- | -- | (8,098,004 | ) | ||||||
|
Net
loss
|
$ | (12,322,314 | ) | (10,269,571 | ) | (67,797,921 | ) | |||
|
Basic
and diluted loss per common share
|
$ | (0.21 | ) | (0.20 | ) | |||||
|
Weighted
average number of common
shares
outstanding – basic and diluted
|
59,796,632 | 51,320,138 | ||||||||
See
accompanying notes to consolidated financial statements.
33
PROVECTUS
PHARMACEUTICALS, INC.
(A
Development-Stage Company)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
| Common Stock | ||||||||||||||||||||
|
Number
of
Shares
|
Par
Value
|
Paid
in
capital
|
Accumulated
Deficit
|
Total
|
||||||||||||||||
|
Balance,
at January 17 2002
|
-- | $ | -- | $ | -- | $ | -- | $ | -- | |||||||||||
|
Issuance
to founding shareholders
|
6,000,000 | 6,000 | (6,000 | ) | -- | -- | ||||||||||||||
|
Sale
of stock
|
50,000 | 50 | 24,950 | -- | 25,000 | |||||||||||||||
|
Issuance
of stock to employees
|
510,000 | 510 | 931,490 | -- | 932,000 | |||||||||||||||
|
Issuance
of stock for services
|
120,000 | 120 | 359,880 | -- | 360,000 | |||||||||||||||
|
Net
loss for the period from January 17, 2002 (inception) to April 23, 2002
(date of reverse merger)
|
-- | -- | -- | (1,316,198 | (1,316,198 | ) | ||||||||||||||
|
Balance,
at April 23, 2002
|
6,680,000 | $ | 6,680 | $ | 1,310,320 | $ | (1,316,198 | 802 | ||||||||||||
|
Shares
issued in reverse merger
|
265,763 | 266 | (3,911 | ) | -- | (3,645 | ) | |||||||||||||
|
Issuance
of stock for services
|
1,900,000 | 1,900 | 5,142,100 | -- | 5,144,000 | |||||||||||||||
|
Purchase
and retirement of stock
|
(400,000 | (400 | ) | (47,600 | ) | -- | (48,000 | ) | ||||||||||||
|
Stock
issued for acquisition of Valley
Pharmaceuticals
|
500,007 | 500 | 12,225,820 | -- | 12,226,320 | |||||||||||||||
|
Exercise
of warrants
|
452,919 | 453 | -- | -- | 453 | |||||||||||||||
|
Warrants
issued in connection with
convertible
debt
|
-- | -- | 126,587 | -- | 126,587 | |||||||||||||||
|
Stock
and warrants issued for acquisition
of
Pure-ific
|
25,000 | 25 | 26,975 | -- | 27,000 | |||||||||||||||
|
Net
loss for the period from April 23, 2002 (date of reverse merger) to
December 31,2002
|
-- | -- | -- | (5,749,937 | (5,749,937 | ) | ||||||||||||||
|
Balance,
at December 31, 2002
|
9,423,689 | $ | 9,424 | $ | 18,780,291 | $ | (7,066,135 | 11,723,580 | ||||||||||||
|
Issuance
of stock for services
|
764,000 | 764 | 239,036 | -- | 239,800 | |||||||||||||||
|
Issuance
of warrants for services
|
-- | -- | 145,479 | -- | 145,479 | |||||||||||||||
|
Stock
to be issued for services
|
-- | -- | 281,500 | -- | 281,500 | |||||||||||||||
|
Employee
compensation from stock options
|
-- | -- | 34,659 | -- | 34,659 | |||||||||||||||
|
Issuance
of stock pursuant to Regulation S
|
679,820 | 680 | 379,667 | -- | 380,347 | |||||||||||||||
|
Beneficial
conversion related to convertible
Debt
|
-- | -- | 601,000 | -- | 601,000 | |||||||||||||||
|
Net
loss for the year ended December 31, 2003
|
-- | -- | -- | (3,155,313 | (3,155,313 | ) | ||||||||||||||
|
Balance,
at December 31, 2003
|
10,867,509 | $ | 10,868 | $ | 20,461,632 | $ | (10,221,448 | (10,251,052 | ) | |||||||||||
|
Issuance
of stock for services
|
733,872 | 734 | 449,190 | -- | 449,923 | |||||||||||||||
|
Issuance
of warrants for services
|
-- | -- | 495,480 | -- | 495,480 | |||||||||||||||
|
Exercise
of warrants
|
132,608 | 133 | 4,867 | -- | 5,000 | |||||||||||||||
|
Employee
compensation from stock options
|
-- | -- | 15,612 | -- | 15,612 | |||||||||||||||
|
Issuance
of stock pursuant to Regulation S
|
2,469,723 | 2,469 | 790,668 | -- | 793,137 | |||||||||||||||
|
Issuance
of stock pursuant to Regulation D
|
1,930,164 | 1,930 | 1,286,930 | -- | 1,288,861 | |||||||||||||||
|
Beneficial
conversion related to convertible
Debt
|
-- | -- | 360,256 | -- | 360,256 | |||||||||||||||
|
Issuance
of convertible debt with warrants
|
-- | -- | 105,250 | -- | 105,250 | |||||||||||||||
|
Repurchase
of beneficial conversion feature
|
-- | -- | (258,345 | ) | -- | (258,345 | ) | |||||||||||||
|
Net
loss for the year ended December 31, 2004
|
-- | -- | -- | (4,344,525 | (4,344,525 | ) | ||||||||||||||
See
accompanying notes to consolidated financial statements.
34
|
Balance,
at December 31, 2004
|
$ | 16,133,876 | $ | 16,134 | $ | 23,711,540 | $ | (14,565,973 | ) | $ | 9,161,701 | |||||||||
|
Issuance
of stock for services
|
226,733 | 227 | 152,058 | -- | 152,285 | |||||||||||||||
|
Issuance
of stock for interest payable
|
263,721 | 264 | 195,767 | -- | 196,031 | |||||||||||||||
|
Issuance
of warrants for services
|
-- | -- | 1,534,405 | -- | 1,534,405 | |||||||||||||||
|
Issuance
of warrants for contractual
obligations
|
-- | -- | 985,010 | -- | 985,010 | |||||||||||||||
|
Exercise
of warrants and stock options
|
1,571,849 | 1,572 | 1,438,223 | -- | 1,439,795 | |||||||||||||||
|
Employee
compensation from stock options
|
-- | -- | 15,752 | -- | 15,752 | |||||||||||||||
|
Issuance
of stock pursuant to Regulation D
|
6,221,257 | 6,221 | 6,506,955 | -- | 6,513,176 | |||||||||||||||
|
Debt
conversion to common stock
|
3,405,541 | 3,405 | 3,045,957 | -- | 3,049,362 | |||||||||||||||
|
Issuance
of warrants with convertible debt
|
-- | -- | 1,574,900 | -- | 1,574,900 | |||||||||||||||
|
Beneficial
conversion related to convertible
debt
|
-- | -- | 1,633,176 | -- | 1,633,176 | |||||||||||||||
|
Beneficial
conversion related to interest
expense
|
-- | -- | 39,529 | -- | ||||||||||||||||
|
Repurchase
of beneficial conversion feature
|
-- | -- | (144,128 | -- | (144,128 | ) | ||||||||||||||
|
Net
loss for the year ended 2005
|
-- | -- | -- | (11,763,853 | ) | (11,763,853 | ) | |||||||||||||
|
Balance,
at December 31, 2005
|
$ | 27,822,977 | $ | 27,823 | $ | 40,689,144 | $ | (26,329,826 | ) | $ | 14,387,141 | |||||||||
|
Issuance
of stock for services
|
719,246 | 719 | 676,024 | -- | 676,743 | |||||||||||||||
|
Issuance
of stock for interest payable
|
194,327 | 195 | 183,401 | -- | 183,596 | |||||||||||||||
|
Issuance
of warrants for services
|
-- | -- | 370,023 | -- | 370,023 | |||||||||||||||
|
Exercise
of warrants and stock options
|
1,245,809 | 1,246 | 1,188,570 | -- | 1,189,816 | |||||||||||||||
|
Employee
compensation from stock options
|
-- | -- | 1,862,456 | -- | 1,862,456 | |||||||||||||||
|
Issuance
of stock pursuant to Regulation D
|
10,092,495 | 10,092 | 4,120,329 | -- | 4,130,421 | |||||||||||||||
|
Debt
conversion to common stock
|
2,377,512 | 2,377 | 1,573,959 | -- | 1,576,336 | |||||||||||||||
|
Beneficial
conversion related to interest
expense
|
-- | -- | 16,447 | -- | 16,447 | |||||||||||||||
|
Net
loss for the year ended 2006
|
-- | -- | -- | (8,870,579 | ) | (8,870,579 | ) | |||||||||||||
|
Balance,
at December 31, 2006
|
$ | 42,452,366 | $ | 42,452 | $ | 50,680,353 | $ | (35,200,405 | ) | $ | 15,522,400 | |||||||||
|
Issuance
of stock for services
|
150,000 | 150 | 298,800 | -- | 298,950 | |||||||||||||||
|
Issuance
of stock for interest payable
|
1,141 | 1 | 1,257 | -- | 1,258 | |||||||||||||||
|
Issuance
of warrants for services
|
-- | -- | 472,635 | -- | 472,635 | |||||||||||||||
|
Exercise
of warrants and stock options
|
3,928,957 | 3,929 | 3,981,712 | -- | 3,985,641 | |||||||||||||||
|
Employee
compensation from stock options
|
-- | -- | 2,340,619 | -- | 2,340,619 | |||||||||||||||
|
Issuance
of stock pursuant to Regulation D
|
2,376,817 | 2,377 | 1,845,761 | -- | 1,848,138 | |||||||||||||||
|
Debt
conversion to common stock
|
490,000 | 490 | 367,010 | -- | 367,500 | |||||||||||||||
|
Net
loss for the year ended 2007
|
-- | -- | -- | (10,005,631 | ) | (10,005,631 | ) | |||||||||||||
|
Balance,
at December 31, 2007
|
$ | 49,399,281 | $ | 49,399 | $ | 59,988,147 | $ | (45,206,036 | ) | $ | 14,831,510 | |||||||||
|
Issuance
of stock for services
|
350,000 | 350 | 389,650 | -- | 390,000 | |||||||||||||||
|
Issuance
of warrants for services
|
-- | -- | 517,820 | -- | 517,820 | |||||||||||||||
|
Exercise
of warrants and stock options
|
3,267,795 | 3,268 | 2,636,443 | -- | 2,639,711 | |||||||||||||||
|
Employee
compensation from stock options
|
-- | -- | 1,946,066 | -- | 1,946,066 | |||||||||||||||
|
Net
loss for the year ended 2008
|
-- | -- | -- | (10,269,571 | ) | (10,269,571 | ) | |||||||||||||
|
Balance,
at December 31, 2008
|
$ | 53,017,076 | $ | 53,017 | $ | 65,478,126 | $ | (55,475,607 | ) | $ | 10,055,536 | |||||||||
| Issuance of stock for services | 796,012 | 796 | 694,204 | -- | 695,000 | |||||||||||||||
| Issuance of warrants for services | -- | -- | 1,064,210 | -- | 1,064,210 | |||||||||||||||
| Exercise of warrants and stock options | 3,480,485 | 3,480 | 2,520,973 | -- | 2,524,453 | |||||||||||||||
| Employee compensation from stock options | -- | -- | 870,937 | -- | 870,937 | |||||||||||||||
| Issuance of stock pursuant to Regulation D | 10,116,653 | 10,117 | 6,508,571 | -- | 6,518,688 | |||||||||||||||
| Net loss for the year ended 2009 | -- | -- | -- | (12,322,314 | ) | (12,322,314 | ) | |||||||||||||
| Balance, at December 31, 2009 | $ | 67,410,226 | $ | 67,410 | $ | 77,137,021 | $ | (67,797,921 | ) | $ | 9,406,510 |
See
accompanying notes to consolidated financial statements.
35
PROVECTUS
PHARMACEUTICALS, INC.
(A
Development-Stage Company)
CONSOLIDATED
STATEMENTS OF CASH FLOW
|
Year
Ended
December
31, 2009
|
Year
Ended
December
31, 2008
|
Cumulative
Amounts
from
January
17, 2002
(Inception)
through December 31, 2009
|
||||||||
|
Cash
Flows From Operating Activities
|
||||||||||
|
Net
loss
|
$ | (12,322,314 | ) | $ | (10,269,571 | ) | $ | (67,797,921 | ) | |
|
Adjustments
to reconcile net loss to net cash used in
operating
activities
|
||||||||||
|
Depreciation
|
9,354 | 9,256 | 423,588 | |||||||
|
Amortization
of patents
|
671,120 | 671,120 | 4,776,137 | |||||||
|
Amortization
of original issue discount
|
-- | -- | 3,845,721 | |||||||
|
Amortization
of commitment fee
|
-- | -- | 310,866 | |||||||
|
Amortization
of prepaid consultant expense
|
-- | -- | 1,295,226 | |||||||
|
Amortization
of deferred loan costs
|
-- | -- | 2,261,584 | |||||||
|
Accretion
of United States Treasury Bills
|
-- | (16,451 | ) | (373,295 | ) | |||||
|
Loss
on extinguishment of debt
|
-- | -- | 825,867 | |||||||
|
Loss
on exercise of warrants
|
-- | -- | 236,146 | |||||||
|
Beneficial
conversion of convertible interest
|
-- | -- | 55,976 | |||||||
|
Convertible
interest
|
-- | -- | 389,950 | |||||||
|
Compensation
through issuance of stock options
|
870,937 | 1,946,066 | 7,086,101 | |||||||
|
Compensation
through issuance of stock
|
-- | -- | 932,000 | |||||||
|
Issuance
of stock for services
|
695,000 | 390,000 | 7,407,648 | |||||||
|
Issuance
of warrants for services
|
1,064,210 | 517,820 | 2,597,834 | |||||||
|
Issuance
of warrants for contractual obligations
|
-- | -- | 985,010 | |||||||
|
Gain
on sale of equipment
|
-- | -- | (55,075 | ) | ||||||
|
(Increase)
decrease in assets
|
||||||||||
|
Prepaid
expenses and other current assets
|
50,691 | 48,769 | -- | |||||||
|
Increase
(decrease) in liabilities
|
||||||||||
|
Accounts
payable
|
(46,842 | ) | (188,099 | ) | 216,606 | |||||
|
Accrued
expenses
|
411,700 | (229,278 | ) | 756,530 | ||||||
|
Net
cash used in operating activities
|
(8,596,144 | ) | (7,120,368 | ) | (33,823,501 | ) | ||||
|
Cash
Flows From Investing Activities
|
||||||||||
|
Proceeds
from sale of fixed assets
|
-- | -- | 180,075 | |||||||
|
Capital
expenditures
|
(5,839 | ) | -- | (67,888 | ) | |||||
|
Proceeds
from investments
|
-- | 8,000,000 | 37,010,481 | |||||||
|
Purchases
of investments
|
-- | (3,985,869 | ) | (36,637,186 | ) | |||||
|
Net
cash (used in) provided by investing activities
|
(5,839 | ) | 4,014,131 | 485,482 | ||||||
|
Cash
Flows From Financing Activities
|
||||||||||
|
Net
proceeds from loans from stockholder
|
-- | -- | 174,000 | |||||||
|
Proceeds
from convertible debt
|
-- | -- | 6,706,795 | |||||||
|
Net
proceeds from sales of common stock
|
6,518,688 | -- | 21,497,769 | |||||||
|
Proceeds
from exercises of warrants and stock options
|
2,524,453 | 2,639,711 | 11,548,723 | |||||||
|
Cash
paid to retire convertible debt
|
-- | -- | (2,385,959 | ) | ||||||
|
Cash
paid for deferred loan costs
|
-- | -- | (747,612 | ) | ||||||
|
Premium
paid on extinguishments of debt
|
-- | -- | (170,519 | ) | ||||||
|
Purchase
and retirement of common stock
|
-- | -- | (48,000 | ) | ||||||
|
Net
cash provided by financing activities
|
9,043,141 | 2,639,711 | 36,575,197 | |||||||
36
|
Year
Ended
December
31, 2009
|
Year
Ended
December
31, 2008
|
Cumulative
Amounts
from
January
17, 2002
(Inception)
through December 31, 2009
|
||||||||||
|
Net
change in cash and cash equivalents
|
$ | 441,158 | $ | (466,526 | ) | $ | 3,237,178 | |||||
|
Cash
and cash equivalents, at beginning of period
|
$ | 2,796,020 | $ | 3,262,546 | $ | -- | ||||||
|
Cash
and cash equivalents, at end of period
|
$ | 3,237,178 | $ | 2,796,020 | $ | 3,237,178 | ||||||
See
accompanying notes to consolidated financial statements.
37
PROVECTUS
PHARMACEUTICALS, INC.
(A
Development-Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
and Significant Accounting Policies
Nature of
Operations
Provectus
Pharmaceuticals, Inc. (together with its subsidiaries, the “Company”) is a
development-stage 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 recurrent breast carcinoma,
metastatic melanoma, and liver cancer. The Company intends to license and sell a
majority stake of its laser device and biotech technology assets via a spin-out
transaction. Through a previous acquisition, the Company also intends to license
and sell a majority stake of the underlying assets of its over-the-counter
pharmaceuticals via a spin-out transaction. To date the Company has no material
revenues.
Principles of
Consolidation
Intercompany
balances and transactions have been eliminated in consolidation.
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
Cash and cash
equivalents
The
Company considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
Deferred Loan Costs and Debt
Discounts
Costs
related to the issuance of the convertible debt, including lender fees, legal
fees, due diligence costs, escrow agent fees and commissions, are recorded as
deferred loan costs and amortized over the term of the loan using the effective
interest method. Additionally, the Company recorded debt discounts related to
warrants and beneficial conversion features issued in connection with the debt.
Debt discounts are amortized over the term of the loan using the effective
interest method. All deferred loan costs and debt discounts were
amortized as of December 31, 2007.
Equipment and
Furnishings
Equipment
and furnishings acquired through the acquisition of Valley Pharmaceuticals, Inc.
(Note 2) have been stated at carry-over basis because the majority shareholders
of Provectus also owned all of the shares of Valley. Other equipment
and furnishings are stated at cost. Depreciation of equipment is provided for
using the straight-line method over the estimated useful lives of the assets.
Computers and laboratory equipment are being depreciated over five years,
furniture and fixtures are being depreciated over seven years.
Long-Lived
Assets
The
Company reviews the carrying values of its long-lived assets for possible
impairment whenever an event or change in circumstances indicates that the
carrying amount of the assets may not be recoverable. Any long-lived
assets held for disposal are reported at the lower of their carrying amounts or
fair value less cost to sell. Management has determined there to be
no impairment.
38
Patent
Costs
Internal
patent costs are expensed in the period incurred. Patents purchased are
capitalized and amortized over the remaining life of the patent.
Patents
at December 31, 2009 were acquired as a result of the merger with Valley
Pharmaceuticals, Inc. (“Valley”) (Note 2). The majority shareholders of
Provectus also owned all of the shares of Valley and therefore the assets
acquired from Valley were recorded at their carry-over basis. The patents are
being amortized over the remaining lives of the patents, which range from 7-12
years. Annual amortization of the patents is expected to be approximately
$671,000 for the next five years.
Revenue
Recognition
Prior to
2007, the Company recognized revenue when product was shipped. When advance
payments were received, these payments were recorded as deferred revenue and
recognized when the product was shipped. The Company has not had
revenue in 2009 or 2008.
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: consulting - IT, depreciation, lab equipment repair, lab supplies and
pharmaceutical preparations, insurance, legal - patents, office supplies,
payroll expenses, rental - building, repairs, software, taxes and fees, and
utilities.
Income
Taxes
The
Company accounts for income taxes under the liability method in accordance with
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 740 “Income Taxes”. Under this method, deferred income tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. A valuation allowance is established if it is more likely
than not that all, or some portion, of deferred income tax assets will not be
realized. The Company has recorded a full valuation allowance to reduce its net
deferred income tax assets to zero. In the event the Company were to determine
that it would be able to realize some or all its deferred income tax assets in
the future, an adjustment to the deferred income tax asset would increase income
in the period such determination was made.
The
Company recognizes the effect of income tax positions only if those positions
are more likely than not of being sustained upon an
examination. Recognized income tax positions are measured at the
largest amount that is greater than 50% likely of being
realized. Changes in recognition or measurement are reflected in the
period in which the change in judgment occurs. The Company recognizes any
corresponding interest and penalties associated with its income tax position in
income tax expense. There were no income tax interest or penalties in 2009
or 2008. Tax years going back to 2006 remain open for
examination.
Basic and Diluted Loss Per
Common Share
Basic and
diluted loss per common share is computed based on the weighted average number
of common shares outstanding. Loss per share excludes the impact of
outstanding options and warrants as they are antidilutive. Potential common
shares excluded from the calculation for the years ended December 31, 2009 and
2008 are 22,147,554 and 21,025,172 from warrants, and 8,623,843 and 8,848,427
from options. Included as of December 31, 2009 were 465,237
shares committed to be issued. Subsequent to December 31, 2009, the
Company issued 9,979,992 shares of preferred stock, 997,999 shares of common
stock and 4,989,996 warrants to purchase common stock.
Financial
Instruments
The
carrying amounts reported in the consolidated balance sheets for cash and cash
equivalents, accounts payable and accrued expenses approximate fair value
because of the short-term nature of these amounts.
39
Stock-Based
Compensation
The
compensation cost relating to share-based payment transactions is measured based
on the fair value of the equity or liability instruments issued and is expensed
on a straight-line basis. For purposes of estimating the fair value of each
stock option on the date of grant, the Company utilized the Black-Scholes
option-pricing model. The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
volatility factor of the market price of the Company’s common stock (as
determined by reviewing its historical public market closing prices). Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Warrants
to non-employees are generally vested and nonforfeitable upon the date of the
grant. Accordingly fair value is determined on the grant
date.
Subsequent
Events
Management
assesses subsequent events through the issue date of the financial
statements.
Recent Accounting
Pronouncements
In
April 2008, the FASB issued modifications to ASC 350 (“ASC 350”) “Intangibles – Goodwill and
Other”. The modifications to ASC 350 amended the factors an
entity should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets. This new guidance applies
prospectively to intangible assets that are acquired individually or with a
group of other assets in business combinations and asset acquisitions. On
January 1, 2009, the Company adopted the modifications to ASC 350. The
adoption of this standard did not have a material impact on the Company’s
financial condition, results of operations or cash flows.
In May
2009, the FASB issued ASC 855 (“ASC 855”), “Subsequent
Events”. ASC 855 establishes general standards for accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are available to be issued (“subsequent events”). More
specifically, ASC 855 sets forth the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition in the financial statements, identifies
the circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures that should be made about events or transactions that occur after
the balance sheet date. ASC 855 provides largely the same guidance on subsequent
events, which previously existed only in auditing literature. The
Company has performed an evaluation of subsequent events through the day the
financial statements were issued.
In
June 2009, the FASB issued ASC 105 (“ASC 105”) “Generally Accepted Accounting
Principles”. ASC
105 states that the FASB Accounting Standards Codification (“Codification”) will
become the single source of authoritative U.S. generally accepted accounting
principles (“GAAP”) recognized by the FASB. The Codification and all of its
contents, which changes the referencing of financial standards, will carry the
same level of authority. In other words, the GAAP hierarchy will be modified to
include only two levels of GAAP, authoritative and nonauthoritative. ASC 105 is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009, and was adopted July 1, 2009. Therefore, all
references to GAAP use the new Codification numbering system prescribed by the
FASB. As the Codification is not intended to change or alter existing GAAP, it
did not have an impact on the Company’s financial condition, results of
operations and cash flows.
In
August 2009, the FASB issued Accounting Standards Update
(ASU) No. 2009-05 (“ASU 2009-05”), “Measuring Liabilities at Fair
Value”, which provides clarification for the fair value measurement of
liabilities in circumstances in which a quoted price in an active market for an
identical liability is not available. ASU 2009-05 is effective for the first
interim period ending after December 15, 2009, and was adopted on
October 1, 2009. This standard did not have a material impact on
the Company’s financial condition, results of operations or cash
flows.
September 2009,
the FASB issued ASU No. 2009-12 (“ASU 2009-12”), “Investments in Certain Entities
That Calculate Net Asset Value per Share (or Its Equivalent)”, which
provides guidance on measuring the fair value of certain alternative
investments. ASU 2009-12 amends ASC 820 to offer investors a practical expedient
for measuring the fair value of investments in certain entities that calculate
net asset value per share. ASU 2009-12 is effective for interim and annual
periods ending after December 15, 2009. This standard did not have a
material impact on the Company’s financial condition, results of operations or
cash flows.
40
In
October 2009, the FASB issued ASU No. 2009-13 (“ASU 2009-13”), “Multiple-Deliverable Revenue
Arrangements”, which amends ASC 605, “Revenue Recognition”. ASU
2009-13 provides guidance related to the determination of when the individual
deliverables included in a multiple-element arrangement may be treated as
separate units of accounting and modifies the manner in which the transaction
consideration is allocated across the individual deliverables. Also, the
standard expands the disclosure requirements for revenue arrangements with
multiple deliverables. ASU 2009-13 is effective for fiscal years beginning on or
after June 15, 2010. This standard is not expected to have a
material impact on the Company’s financial condition, results of operations or
cash flows.
2. Recapitalization
and Merger
On April
23, 2002, Provectus Pharmaceutical, Inc., a Nevada corporation and a Merger
“blank check” public company, acquired Provectus Pharmaceuticals, Inc., a
privately-held Tennessee corporation (“PPI”), by issuing 6,680,000 shares of
common stock of Provectus Pharmaceutical to the stockholders of PPI in exchange
for all of the issued and outstanding shares of PPI, as a result of which
Provectus Pharmaceutical changed its name to Provectus Pharmaceuticals, Inc.
(the “Company”) and PPI became a wholly-owned subsidiary of the Company. Prior
to the transaction, PPI had no significant operations and had not generated any
revenues.
For
financial reporting purposes, the transaction has been reflected in the
accompanying financial statements as a recapitalization of PPI and the financial
statements reflect the historical financial information of PPI which was
incorporated on January 17, 2002. Therefore, for accounting purposes, the shares
recorded as issued in the reverse merger are the 265,763 shares owned by
Provectus Pharmaceuticals, Inc. shareholders prior to the reverse
merger.
The
issuance of 6,680,000 shares of common stock of Provectus Pharmaceutical, Inc.
to the stockholders of PPI in exchange for all of the issued and outstanding
shares of PPI was done in anticipation of PPI acquiring Valley Pharmaceuticals,
Inc, which owned the intellectual property to be used in the Company's
operations.
On
November 19, 2002, the Company acquired Valley Pharmaceuticals, Inc, (“Valley”)
a privately-held Tennessee corporation by merging PPI with and into Valley and
naming the surviving company Xantech Pharmaceuticals, Inc. Valley had no
significant operations and had not generated any revenues. Valley was formed to
hold certain intangible assets which were transferred from an entity which was
majority owned by the shareholders of Valley. Those shareholders gave up their
shares of the other company in exchange for the intangible assets in a non-pro-
rata split-off. The intangible assets were valued based on the market price of
the stock given up in the split-off. The shareholders of Valley also owned the
majority of the shares of the Company at the time of the transaction. The
Company issued 500,007 shares of stock in exchange for the net assets of Valley
which were valued at $12,226,320 and included patents of $11,715,445 and
equipment and furnishings of $510,875.
3. Commitments
Leases
The
Company leases office and laboratory space in Knoxville, Tennessee, on an annual
basis, renewable for one year at the option of the Company. The Company is
committed to pay a total of $27,000 in lease payments over six
months. The current lease term ends June 30, 2010. Rent
expense was approximately $54,000 in 2009 and $52,800 in 2008.
Employee
Agreements
On July
1, 2009, the Company entered into executive employment agreements with each of
H. Craig Dees. Ph.D., Timothy C. Scott, Ph.D., Eric A. Wachter, Ph.D., and Peter
R. Culpepper, CPA, to serve as our Chief Executive Officer, President, Executive
Vice President and Chief Financial Officer, respectively. Each agreement
provides that such executive will be employed for a one-year term with automatic
one-year renewals unless previously terminated pursuant to the terms of the
agreement or either party gives notice that the term will not be extended. The
Company is committed to pay a total of $1,000,000 over six months, which is the
remainder of the current employment agreements at December 31, 2009. Executives
are also entitled to participate in any incentive compensation plan or bonus
plan adopted by the Company without diminution of any compensation or payment
under the agreement. Executives are further entitled to reimbursement for all
reasonable out-of-pocket expenses incurred during his performance of services
under the agreement.
41
Each
agreement generally provides that if the executive’s employment is terminated
prior to a change in control (as defined in the agreement) (1) due to expiration
or non-extension of the term by the Company; or (2) by the Company for any
reason other than for cause (as defined in the agreement), then such executive
shall be entitled to receive payments under the agreement as if the agreement
was still in effect through the end of the period in effect as of the date of
such termination. If the executive’s employment (1) is terminated by the Company
at any time for cause, (2) is terminated by executive prior to, and not
coincident with, a change in control or (3) is terminated by executive’s death,
disability or retirement prior to a change in control, the executive (or his
estate, as the case may be) shall be entitled to receive payments under the
agreement through the last date of the month of such termination, a pro-rata
portion of any incentive or bonus payment earned prior to such termination, any
benefits to which he is entitled under the terms and conditions of the pertinent
plans in effect at termination and any reasonable expenses incurred during the
performance of services under the agreement.
In the
event that coincident with or following a change in control, the executive’s
employment is terminated or the agreement is not extended (1) by action of the
executive including his death, disability or retirement or (2) by action of the
Company not for cause, the executive (or his estate, as the case may be) shall
be entitled to receive payments under the agreement through the last day of the
month of such termination, a pro-rata portion of any incentive or bonus payment
earned prior to such termination, any benefits to which he is entitled under the
terms and conditions of the pertinent plans in effect at termination and any
reasonable expenses incurred during the performance of services under the
agreement. In addition, the Company shall pay to the executive (or his estate,
as the case may be), within 30 days following the date of termination or on the
effective date of the change in control (whichever occurs later), a lump sum
payment in cash in an amount equal to 2.90 times the base salary paid in the
preceding calendar year, or scheduled to be paid to such executive during the
year of such termination, whichever is greater, plus an additional amount
sufficient to pay United States income taxes on the lump-sum amount
paid.
4. Equity
Transactions
(a)
During 2002, the Company issued 2,020,000 shares of common stock in exchange for
consulting services. These services were valued based on the fair market value
of the stock exchanged which resulted in consulting costs charged to operations
of $5,504,000.
During
2002, the Company issued 510,000 shares of common stock to employees in exchange
for services rendered. These services were valued based on the fair market value
of the stock exchanged which resulted in compensation costs charged to
operations of $932,000.
In 2003,
the Company issued 764,000 shares to consultants in exchange for services
rendered, consisting of 29,000 shares issued in January valued at $11,600,
35,000 shares issued in March valued at $11,200, and 700,000 shares issued in
October valued at $217,000. The value for these shares was based on the market
value of the shares issued. As all of these amounts represented payments for
services to be provided in the future and the shares were fully vested and
non-forfeitable, a prepaid consulting expense was recorded in 2003 which was
fully amortized as of December 31, 2004.
In
November and December 2003, the Company committed to issue 341,606 shares of
common stock to consultants in exchange for services rendered. The total value
for these shares was $281,500 which was based on the market value of the shares
issued. The shares were issued in January 2004. As these amounts represented
payments for services to be provided in the future and the shares were fully
vested and non-forfeitable, a prepaid consulting expense was recorded in 2003
which was fully amortized as of December 31, 2004.
In
January 2004, the Company issued 10,000 shares to a consultant in exchange for
services rendered. Consulting costs charged to operations were $11,500. In March
2004, the Company committed to issue 36,764 shares to consultants in exchange
for services. These shares were recorded as a prepaid consulting expense and
were fully amortized at December 31, 2004. Consulting costs charged to
operations were $62,500. These 36,764 shares, along with 75,000 shares committed
in 2003 were issued in August 2004. The 75,000 shares committed to be in 2003
were the result of a cashless exercise of 200,000 warrants in 2003, which were
not issued as of December 31, 2003. In August 2004, the Company also issued
15,000 shares to a consultant in exchange for services rendered. Consulting
costs charged to operations were $25,200. In September 2004, the Company issued
16,666 shares to a consultant in exchange for services rendered. Consulting
costs charged to operations were $11,666. In October 2004, the Company issued
16,666 shares to a consultant in exchange for services rendered. Consulting
costs charged to operations were $13,666. In November 2004, the Company issued
16,666 shares to a consultant in exchange for services rendered. Consulting
costs charged to operations were $11,000. In December 2004, the Company issued
7,500 shares to a consultant in exchange for services rendered. Consulting costs
charged to operations were $3,525.
42
In
January 2005, the Company issued 7,500 shares to consultants in exchange for
services rendered. Consulting costs charged to operations were $4,950. In
February 2005, the Company issued 7,500 shares to consultants in exchange for
services. Consulting costs charged to operations were $7,574. In April 2005, the
Company issued 190,733 shares to consultants in exchange for services.
Consulting costs charged to operations were $127,791. In May 2005, the Company
issued 21,000 shares to consultants in exchange for services. Consulting costs
charged to operations were $11,970.
In
December 2005, the Company committed to issue 689,246 shares to consultants in
exchange for services rendered. 655,663 of these shares of were issued in
February 2006 and 33,583 shares were issued in May 2006. The total value for
these shares was $650,643 which was based on the market value of the shares
issued and was recorded as an accrued liability at December 31, 2005. In
February 2006, the Company issued 30,000 shares to consultants in exchange for
services. Consulting costs charged to operations were $26,100.
In May
2007, the Company issued 50,000 shares to consultants in exchange for
services. Consulting costs charged to operations were
$84,000. In August 2007, the Company issued 50,000 shares to
consultants in exchange for services. Consulting costs charged to
operations were $104,950. In November 2007, the Company issued 50,000
shares to consultants in exchange for services. Consulting costs
charged to operations were $110,000. As of December 31, 2007, the
Company is also committed to issue 16,667 shares to consultants in exchange for
services. At December 31, 2007, these shares have a value of $28,667
and have been included in accrued consulting expense.
During
the three months ended March 31, 2008, the Company issued 100,000 shares of
common stock to consultants
in exchange for services. Consulting costs charged to operations were
$122,500. During the three months ended June 30, 2008, the Company
issued 12,500 shares of common stock to consultants in exchange for
services. Consulting costs charged to operations were
$13,000. During the three months ended September 30, 2008, the
Company issued 62,500 shares of common stock to consultants in exchange for
services. Consulting costs charged to operations were
$70,250. During the three months ended December 31, 2008, the Company
issued 175,000 shares of common stock to consultants in exchange for
services. Consulting costs charged to operations were
$184,250.
During
the three months ended March 31, 2009, the Company issued 75,000 shares of
common stock to consultants in exchange for services. Consulting
costs charged to operations were $70,250. During the three months
ended June 30, 2009, the Company issued 275,000 shares of common stock to
consultants in exchange for services. Consulting costs charged to
operations were $317,500. During the three months ended September 30, 2009, the
Company issued 145,000 shares of common stock to consultants in exchange for
services. Consulting costs charged to operations were $145,750.
During the three months ended December 31, 2009, the Company issued 175,000
shares of common stock to consultants in exchange for
services. Consulting costs charged to operations were
$161,500.
(b) In
February 2002, the Company sold 50,000 shares of common stock to a related party
in exchange for proceeds of $25,000.
(c) In
October 2002, the Company purchased 400,000 outstanding shares of stock from one
shareholder for $48,000. These shares were then retired.
(d) On
December 5, 2002, the Company purchased the assets of Pure-ific L.L.C, a Utah
limited liability company, and created a wholly-owned subsidiary called
Pure-ific Corporation, to operate the Pure-ific business which consists of
product formulations for Pure-ific personal sanitizing sprays, along with the
Pure-ific trademarks. The assets of Pure-ific were acquired through the issuance
of 25,000 shares of the Company's stock with a fair market value of $0.50 and
the issuance of various warrants. These warrants included warrants to purchase
10,000 shares of the Company's stock at an exercise price of $0.50 issuable on
the first, second and third anniversary dates of the acquisition. Accordingly,
the fair market value of these warrants of $14,500, determined using the
Black-Scholes option pricing model, was recorded as additional purchase price
for the acquisition of the Pure-ific assets. In 2004, 20,000 warrants were
issued for the first and second anniversary dates. 10,000 of these warrants were
exercised in 2004. In 2005, 10,000 warrants were issued for the third
anniversary date. In January 2006, 10,000 warrants were exercised in a cashless
exercise resulting in 4,505 shares issued. In 2007, the remaining
10,000 warrants were forfeited. In addition, warrants to purchase
80,000 shares of stock at an exercise price of $0.50 will be issued upon the
achievement of certain sales targets of the Pure-ific product. At December 31,
2009 and 2008, none of these targets have been met and accordingly, no costs
have been recorded.
43
(e) In
January 2003, the Company issued 25,000 warrants to a consultant for services
rendered. In February 2003, the Company issued 360,000 warrants to a consultant,
180,000 of which were fully-vested and non-forfeitable at the issuance and
180,000 of which were cancelled in August 2003 due to the termination of the
consulting contract. In September 2003, the Company issued 200,000 warrants to
two consultants in exchange for services rendered. In November 2003, the Company
issued 100,000 warrants to one consultant in exchange for services rendered. As
the fair market value of these services was not readily determinable, these
services were valued based on the fair market value, determined using the
Black-Scholes option-pricing model. Fair market value for the warrants issued in
2003 ranged from $0.20 to $0.24 and totaled $145,479. As these amounts
represented payments for services to be provided in the future and the warrants
were fully vested and non-forfeitable, a prepaid consulting expense was recorded
in 2003 which was fully amortized as of December 31, 2004.
In May
2004, the Company issued 20,000 warrants to consultants in exchange for services
rendered. Consulting costs charged to operations were $18,800. In August 2004,
the Company issued 350,000 warrants to consultants in exchange for services
valued at $329,000. In December 2004, the Company issued 10,000
warrants to consultants in exchange for services valued at $3,680. Fair market
value for the warrants issued in 2004 ranged from $0.37 to $1.22.
In
January 2005, the Company issued 16,000 warrants to consultants in exchange for
services rendered. Consulting costs charged to operations were $6,944. In
February 2005, the Company issued 13,000 warrants to consultants in exchange for
services rendered. Consulting costs charged to operations were $13,130. In March
2005, the Company issued 100,000 warrants to consultants in exchange for
services rendered. Consulting costs charged to operations were $68,910. In April
2005, the Company issued 410,000 warrants to consultants in exchange for
services rendered. Consulting costs charged to operations were $195,900. In May
2005, the Company issued 25,000 warrants to consultants in exchange for services
rendered. Consulting costs charged to operations were $9,250. In
December 2005, the Company issued 33,583 warrants to consultants in exchange for
services. Consulting costs charged to operations were $24,571. The
fair market value for the warrants issued in 2005 ranged from $0.37 to
$1.01.
In May
2006, 350,000 warrants were exercised for $334,000 resulting in 350,000 shares
issued. During April, May and June, the Company issued 60,000 warrants to
consultants in exchange for services. Consulting costs charged to operations
were $58,400. In August and September 2006, 732,534 warrants were exercised for
$693,357 resulting in 732,534 shares issued. During the three months ended
September 30, 2006, the Company issued 335,000 warrants to consultants in
exchange for services. At December 31, 2006, $155,814 of these costs have been
charged to operations with the remaining $84,019 recorded as prepaid consulting
expense as it represents payments for future services and the warrants are fully
vested and non-forfeitable. As of December 31, 2007, the prepaid expense has
been fully recognized. In November 2006, 100,000 warrants were forfeited. During
the three months ended December 31, 2006, the Company issued 85,000 warrants to
consultants in exchange for services. Consulting costs charged to operations
were $71,790. The fair market value for the warrants issued in 2006 ranged from
$0.67 to $1.11.
During
the three months ended March 31, 2007, the Company issued 85,000 warrants to
consultants in exchange for services. Consulting costs charged to
operations were $75,933. During the three months ended June 30, 2007,
the Company issued 85,000 warrants to consultants in exchange for
services. Consulting costs charged to operations were
$98,185. In April and May 2007, 260,000 warrants were exercised for
$196,900 resulting in 260,000 shares being issued. In May 2007,
10,000 warrants were forfeited. During the three months ended
September 30, 2007, the Company issued 135,000 warrants to consultants in
exchange for services. Consulting costs charged to operations were
$250,342. During the three months ended September 30, 2007, 2,305,756
warrants were exercised for $2,219,657 resulting in 2,305,756 shares being
issued. 350,000 of the warrants exercised had an exercise price of
$1.00 that was reduced to $0.90. Additional consulting costs of
$35,000 were charged to operations as a result of the reduction of the exercise
price of the 350,000 warrants. During the three months ended December
31, 2007, 1,502,537 warrants were exercised for $1,327,072 resulting in
1,051,656 shares being issued and 330,881 shares committed to be issued as of
December 31, 2007 and then issued January 2, 2008. 65,874 of the
warrants exercised had an exercise price of $1.00 that was reduced to
$0.80. Additional consulting costs of $13,175 were charged to
operations as a result of the reduction of the exercise price of the 65,874
warrants. In December 2007, 10,000 warrants were forfeited. The fair
market value for the warrants issued in 2007 ranged from $0.80 to
$2.19.
44
During
the three months ended March 31, 2008, the Company issued 60,000 warrants to
consultants in exchange for services. Consulting costs charged to
operations were $40,657. During the three months ended March 31,
2008, 197,013 warrants were exercised for $184,402 resulting in 197,013 shares
being issued. 24,050 of the warrants exercised had an exercise price
of $1.00 that was reduced to $0.80. Additional consulting costs of
$4,810 were charged to operations as a result of the reduction of the exercise
price of the 24,050 warrants. During the three months ended March 31,
2008, 143,999 warrants were forfeited. Additionally, 330,881 shares
committed to be issued as of December 31, 2007 were issued January 2,
2008. During the three months ended June 30, 2008, the Company issued
12,000 warrants to consultants in exchange for services. Consulting
costs charged to operations were $5,254. During the three
months ended June 30, 2008, 1,075,104 warrants were exercised for $980,064
resulting in 1,075,104 shares being issued. 576,012 of the warrants
exercised had an exercise price of $1.00 that was reduced to
$0.90. Additional consulting costs of $57,602 were charged to
operations as a result of the reduction of the exercise price of the 576,012
warrants. 15,050 of the warrants exercised had an exercise price of
$1.00 that was reduced to $0.80. Additional consulting costs of
$3,010 were charged to operations as a result of the reduction of the exercise
price of the 15,050 warrants. During the three months ended September
30, 2008, the Company issued 21,500 warrants to consultants in exchange for
services. Consulting costs charged to operations were
$22,023. During the three months ended September 30, 2008,
1,156,555 warrants were exercised for $1,081,704 resulting in 1,156,555 shares
being issued. During the three months ended December 31, 2008, the
Company issued 708,055 warrants to consultants in exchange for
services. Consulting costs charged to operations were
$384,464. During the three months ended December 31, 2008, 203,500
warrants were exercised for $172,000 resulting in 203,500 shares being
issued. The fair market value for the warrants issued in 2008 ranged
from $0.58 to $1.03.
During
the three months ended March 31, 2009, the Company issued 243,612 warrants to
consultants in exchange for services. Consulting costs charged to
operations were $131,476. During the three months ended March 31,
2009, 292,112 warrants were exercised for $219,084 resulting in 292,112 shares
being issued. 292,112 of the warrants exercised had an exercise price
of $0.935 that was reduced to $0.75. Additional consulting costs of
$17,961 were charged to operations as a result of the reduction of the exercise
price of the 292,112 warrants. During the three months ended June 30,
2009, the Company issued 101,500 warrants to consultants in exchange for
services. Consulting costs charged to operations were
$49,684. During the three months ended June 30, 2009, 1,830,164
warrants were exercised for $1,380,124 resulting in 1,830,164 shares being
issued. 1,800,164 of the warrants exercised had an exercise price of
$0.935 that was reduced to $0.75. Additional consulting costs of
$118,833 were charged to operations as a result of the reduction of the exercise
price of the 1,800,164 warrants. Also, the Company paid $94,508 and
issued 126,012 shares of common stock as a cost of capital at a fair market
value of $151,214 to Chicago Investment Group of Illinois, L.L.C. as a placement
agent for the transaction of exercising 1,800,164 warrants. The cash
costs have been off-set against the proceeds received and the shares of common
stock are classified as stock for services and the fair market value of the
common stock as a cost of capital. During the three months ended June
30, 2009, 1,283,508 warrants were forfeited. During the three months ended
September 30, 2009, the Company issued 167,833 warrants to consultants in
exchange for services. Consulting costs charged to operations were
$110,941. During the three months ended September 30, 2009, 545,625
warrants were exercised for $409,219 resulting in 545,625 shares being
issued. 400,000 of the warrants exercised had an exercise price of
$0.98 that was reduced to $0.75. 145,625 of the warrants exercised had an
exercise price of $0.935 that was reduced to $0.75. Additional
consulting costs of $45,888 were charged to operations as a result of the
reduction of the exercise price of the 545,625 warrants. During the three months
ended September 30, 2009, 150,000 warrants were forfeited. During the three
months ended December 31, 2009, the Company issued 987,667 warrants to
consultants in exchange for services. Consulting costs charged to
operations were $562,780. During the three months ended December 31,
2009, 338,000 warrants were exercised for $253,500 resulting in 338,000 shares
being issued. 101,333 of the warrants exercised had an exercise price
of $0.935 that was reduced to $0.75. 236,667 of the warrants exercised had an
exercise price of $1.00 that was reduced to $0.75. Additional
consulting costs of $26,647 were charged to operations as a result of the
reduction of the exercise price of the 338,000 warrants. During the three months
ended December 31, 2009, 610,000 warrants were forfeited. The fair market value
for the warrants issued in 2009 ranged from $0.48 to $0.63.
There are
no provisions or obligations that would require the Company to cash settle any
of its outstanding warrants. The equity classification of the Company's warrants
is appropriate considering that all warrants provide the counterparties the
right to purchase a fixed number of shares at a fixed price and the terms are
not subject to any potential adjustments.
45
(f) In
December 2003, the Company commenced an offering for sale of restricted common
stock. As of December 31, 2003, the Company had sold 874,871 shares at an
average gross price of $1.18 per share. As of December 31, 2003, the Company had
received net proceeds of $292,472 and recorded a stock subscription receivable
of $87,875 for stock subscriptions prior to December 31, 2003 for which payment
was received subsequent to December 31, 2003. The transaction is a Regulation S
offering to foreign investors as defined by Regulation S of the Securities Act.
The restricted shares cannot be traded for 12 months. After the first 12 months,
sales of the shares are subject to restrictions under rule 144 for an additional
year. The Company used a placement agent to assist with the offering. Costs
related to the placement agent of $651,771 have been off-set against the gross
proceeds of $1,032,118 and therefore are reflected as a direct reduction of
equity at December 31, 2003. At December 31, 2003, 195,051 shares had not yet
been issued. These shares were issued in the first quarter of 2004.
In 2004,
the Company sold 2,274,672 shares of restricted common stock under this offering
of which 1,672,439 shares were issued in the first quarter 2004 and 602,233 were
issued in the second quarter 2004. Shares were sold during 2004 at an average
gross price of $1.05 per share with net proceeds of $793,137. Costs
related to the placement agent for proceeds received in 2004 of $1,588,627 have
been off-set against gross proceeds of $2,381,764. On June 25, 2004, the Company
entered into an agreement to sell 1,333,333 shares of common stock at a purchase
price of $.75 per share for an aggregate purchase price of $1,000,000. Payments
were received in four installments, the last of which was on August 9, 2004.
Stock issuance costs included 66,665 shares of stock valued at $86,666 and cash
costs of $69,000. The cash costs have been off-set against the proceeds
received. In conjunction with the sale of the common stock, the Company issued
1,333,333 warrants with an exercise price of $1.00 and a termination date of
three years from the installment payment dates. In addition, the Company has
given the investors an option to purchase 1,333,333 shares of additional stock
including the attachment of warrants under the same terms as the original
agreement. This option expired February 8, 2005. On November
16, 2004, the Company completed a private placement transaction with fourteen
(14) accredited investors, pursuant to which the Company sold 530,166 shares of
common stock at a purchase price of $0.75 per share, for an aggregate purchase
price of $397,625. In connection with the sale of the common stock, the Company
also issued warrants to the investors to purchase up to 795,249 shares of our
common stock at an exercise price of $1.00 per share. The Company paid $39,764
and issued 198,812 warrants to Venture Catalyst, LLC as placement agent for this
transaction. The cash costs have been off-set against the proceeds
received.
During
the three months ended March 31, 2005, the Company completed a private placement
transaction with eight (8) accredited investors, which were registered effective
June 20, 2005, pursuant to which the Company sold 214,666 shares of common stock
at a purchase price of $0.75 per share, for an aggregate purchase price of
$161,000. In connection with the sale of common stock, the Company also issued
warrants to the investors to purchase up to 322,000 shares of common stock at an
exercise price of $1.00 per share. The Company paid $16,100 and issued 80,500
warrants to Venture Catalyst, LLC as placement agent for this transaction. The
cash costs have been off-set against the proceeds received. During
the three months ended June 30, 2005, the Company completed a private placement
transaction with four (4) accredited investors, which were registered effective
June 20, 2005, pursuant to which the Company sold 230,333 shares of common stock
at a purchase price of $0.75 per share, for an aggregate purchase price of
$172,750. In connection with the sale of common stock, the Company also issued
warrants to the investors to purchase up to 325,500 shares of common stock at an
exercise price of $1.00 per share. The Company paid $16,275 and issued 81,375
warrants to Venture Catalyst, LLC as placement agent for this transaction. The
cash costs have been off-set against the proceeds received. During
the three months ended September 30, 2005, the Company completed a private
placement transaction with twelve (12) accredited investors pursuant to which
the Company sold 899,338 shares of common stock at a purchase price of $0.75 per
share of which 109,333 are committed to be issued at December 31, 2005, for an
aggregate purchase price of $674,500. In connection with the sale of common
stock, the Company also issued warrants to the investors to purchase up to
1,124,167 shares of common stock at an exercise price of $0.935 per share. The
Company paid $87,685 and committed to issue 79,000 shares of common stock at a
fair market value of $70,083 to Network 1 Financial Securities, Inc. as
placement agent for this transaction which is accrued at December 31, 2005. The
cash and common stock costs have been off-set against the proceeds
received. During the three months ended December 31, 2005, the
Company completed a private placement transaction with sixty-two (62) accredited
investors pursuant to which the Company sold 10,065,605 shares of common stock
at a purchase price of $0.75 per share of which 5,126,019 are committed to be
issued at December 31, 2005, for an aggregate purchase price of $7,549,202. In
connection with the sale of common stock, the Company also issued warrants to
the investors to purchase up to 12,582,009 shares of common stock at an exercise
price of $0.935 per share. The Company paid $959,540, issued 46,667 shares of
common stock at a fair market value of $46,467, issued 30,550 warrants, and
committed to issue 950,461 shares of common stock at a fair market value of
$894,593 to a syndicate led by Network 1 Financial Securities, Inc. as placement
agent for this transaction which is accrued at December 31, 2005. The cash and
common stock costs have been off-set against the proceeds received.
46
In
January 2006, the Company issued 5,235,352 shares committed to be issued at
December 31, 2005 for shares sold in 2005. In February 2006, the Company issued
1,029,460 shares committed to be issued at December 31, 2005 for stock issuance
costs related to shares sold in 2005. The total value for these shares was
$964,676 which was based on the market value of the shares issued and was
recorded as an accrued liability at December 31, 2005. During the
three months ended March 31, 2006, the Company completed a private placement
transaction with five (5) accredited investors pursuant to which the Company
sold 466,833 shares of common stock at a purchase price of $0.75 per share for
an aggregate purchase price of $350,125. In connection with the sale of common
stock, the Company also issued warrants to the investors to purchase up to
466,833 shares of common stock at an exercise price of $0.935 per share. The
Company paid $35,013 and issued 46,683 shares of common stock at a fair market
value of $41,815 to Chicago Investment Group, L.L.C. as placement agent for this
transaction. The cash costs have been off-set against the proceeds
received. In May 2006, the Company completed a private placement
transaction with two (2) accredited investors pursuant to which the Company sold
a total of 153,647 shares of common stock at an average purchase price of $1.37
per share, for an aggregate purchase price of $210,000. In connection with the
sale of common stock, the Company also issued warrants to the 2 investors to
purchase up to 76,824 shares of common stock at an average exercise price of
$2.13 per share. In September 2006, the Company completed a private
placement transaction with seven (7) accredited investors pursuant to which the
Company sold a total of 708,200 shares of common stock at a purchase price of
$1.00 per share, for an aggregate purchase price of $708,200. The Company paid
$92,067 and issued 70,820 shares of common stock at a fair market value of
$84,984 to Network 1 Financial Securities, Inc. as placement agent for this
transaction. The cash costs have been off-set against the proceeds
received. In October 2006 the Company completed a private placement
transaction with 15 accredited investors pursuant to which the Company sold a
total of 915,000 shares of common stock at a purchase price of $1.00 per share,
for an aggregate purchase price of $915,000. The Company paid $118,950 and
issued 91,500 shares of common stock at a fair market value of $118,500 to
Network 1 Financial Securities, Inc. as placement agent for this transaction.
The cash costs have been off-set against the proceeds
received. During the three months ended December 31, 2006, the
Company completed a private placement transaction with 10 accredited investors
pursuant to which the Company sold 1,400,000 shares of common stock at a
purchase price of $1.00 per share of which 150,000 are committed to be issued at
December 31, 2006, for an aggregate purchase price of $1,400,000. The Company
paid $137,500, issued 125,000 shares of common stock at a fair market value of
$148,750, and committed to pay $16,500 and to issue 15,000 shares of common
stock at a fair market value of $17,550 to Chicago Investment Group of Illinois,
L.L.C. as a placement agent for this transaction which is accrued at December
31, 2006. The cash and accrued stock costs have been off-set against the
proceeds received.
In
January 2007, the Company issued 150,000 shares committed to be issued at
December 31, 2006 for shares sold in 2006. In January 2007, the
Company also issued 15,000 shares committed to be issued at December 31, 2006
for common stock costs related to shares sold in 2006. The total
value for these shares was $17,550 which was based on the market value of the
shares issued and was recorded as an accrued liability at December 31,
2006. In January and February 2007, the Company completed a private
placement transaction with six accredited investors pursuant to which the
Company sold a total of 265,000 shares of common stock at a purchase price of
$1.00 per share, for an aggregate purchase price of $265,000. The
Company paid $29,150 and issued 26,500 shares of common stock at a fair market
value of $32,130 to Chicago Investment Group of Illinois, L.L.C. as a placement
agent for this transaction. The cash costs have been off-set against
the proceeds received. Also in January and February 2007, the Company
completed a private placement transaction with 13 accredited investors pursuant
to which the Company sold a total of 1,745,743 shares of common stock at a
purchase price of $1.05 per share, for an aggregate purchase price of
$1,833,031. The Company paid $238,293 and issued 174,574 shares of
common stock at a fair market value of $200,760 to Network 1 Financial
Securities, Inc. as placement agent for this transaction. The cash
costs have been off-set against the proceeds received.
In May
and June 2009 the Company completed a private placement transaction with
accredited investors pursuant to which the Company sold a total of 1,750,000
shares of common stock at a purchase price of $0.90 per share, for an aggregate
purchase price of $1,575,000. In connection with the sale of common
stock, the Company also issued warrants to the investors to purchase up to
875,000 shares of common stock at an exercise price of $1.00 per share. The
Company paid $227,250 and issued 175,000 shares of common stock at a fair market
value of $197,750 to Maxim Group, LLC as a placement agent for this
transaction. The cash costs have been off-set against the proceeds
received, which are for general corporate purposes. During the three
months ended June 30, 2009, the Company completed a private placement
transaction with accredited investors pursuant to which the Company
47
sold a total of 2,868,994 shares of common stock at a purchase price of
$0.75 per share, for an aggregate purchase price of
$2,151,749. 186,667 of the 2,868,994 common shares sold were
committed to be issued but not outstanding at June 30, 2009 and which were
issued in July 2009. In connection with the sale of common stock, the
Company also issued warrants to the investors to purchase up to 1,434,510 shares
of common stock at an exercise price of $1.50 per share. The Company paid
$255,323, has accrued $24,404 to be paid as of June 30, 2009, which was paid in
July 2009, and was committed to issue 286,900 shares of common stock at June 30,
2009 at a fair market value of $295,507 to Network 1 Financial Securities, Inc.
as placement agent for this transaction, which were issued in August
2009. The cash costs have been off-set against the proceeds received,
which are for general corporate purposes. In July 2009 the Company
completed a private placement transaction with accredited investors pursuant to
which the Company sold a total of 1,040,570 shares of common stock at a purchase
price of $0.75 per share, for an aggregate purchase price of
$780,427. In connection with the sale of common stock, the Company
also issued warrants to the investors to purchase up to 520,120 shares of common
stock at an exercise price of $1.50 per share. The Company paid
$101,485 and issued 100,016 shares of common stock in August 2009 at a fair
market value of $95,015 to Network 1 Financial Securities, Inc. as placement
agent for this transaction. The cash costs have been off-set against
the proceeds received, which are for general corporate purposes. In July and
September 2009 the Company completed a private placement transaction with a
total of two accredited investors pursuant to which the Company sold a total of
309,000 shares of common stock at a purchase price of $0.75 per share, for an
aggregate purchase price of $231,750. The proceeds received are for
general corporate purposes. In September 2009 the Company completed a
private placement transaction with accredited investors pursuant to which the
Company sold a total of 1,696,733 shares of common stock at a purchase price of
$0.75 per share, for an aggregate purchase price of $1,272,550. In
connection with the sale of common stock, the Company also issued warrants to
the investors to purchase up to 848,366 shares of common stock at an exercise
price of $1.00 per share. The Company paid $180,432 and was committed to issue
169,673 shares of common stock at a fair market value of $169,673 to Maxim
Group, LLC as a placement agent for this transaction which were issued in
November 2009. The cash costs have been off-set against the proceeds
received, which are for general corporate purposes. During the three months
ended December 31, 2009, the Company completed a private placement transaction
with accredited investors pursuant to which the Company sold a total of
1,486,367 shares of common stock at a purchase price of $0.75 per share, for an
aggregate purchase price of $1,114,775. 266,600 of the 1,486,367
common shares sold are committed to be issued but not outstanding at December
31, 2009 and which were issued in January 2010. In connection with
the sale of common stock, the Company also issued warrants to the investors to
purchase up to 743,185 shares of common stock at an exercise price of $0.95 per
share. The Company paid $118,926, has accrued $25,994 to be paid as of December
31, 2009, which was paid in January 2010, and is committed to issue 148,637
shares of common stock at December 31, 2009 at a fair market value of $132,287
to Network 1 Financial Securities, Inc. as placement agent for this
transaction. The cash costs have been off-set against the proceeds
received, which are for general corporate purposes. In December 2009
the Company completed a private placement transaction with an accredited
investor pursuant to which the Company sold a total of 500,000 shares of common
stock at a purchase price of $0.75 per share, for an aggregate purchase price of
$375,000. In connection with the sale of common stock, the Company
also issued warrants to the investors to purchase up to 250,000 shares of common
stock at an exercise price of $1.00 per share. The Company paid $48,750 and is
committed to issue 50,000 shares of common stock at a fair market value of
$45,000 to Maxim Group, LLC as a placement agent for this transaction at
December 31, 2009, which were issued in January 2010. The cash costs
have been off-set against the proceeds received, which are for general corporate
purposes.
(g)
Pursuant to a Standby Equity Distribution Agreement (“SEDA”) dated July 28, 2004
between the Company and Cornell Capital Partners, L.P. (“Cornell”), the Company
could, at its discretion, issue shares of common stock to Cornell at any time
until June 28, 2006. As of December 31, 2006 there were no shares issued
pursuant to the SEDA. The facility is subject to having in effect a registration
statement covering the shares. A registration statement covering 2,023,552
shares was declared effective by the Securities and Exchange Commission on
November 16, 2004. The maximum aggregate amount of the equity placements
pursuant to the SEDA was $20 million, and the Company could draw down up to $1
million per month. Pursuant to the SEDA, on July 28, 2004, the Company issued
190,084 shares of common stock to Cornell and 7,920 shares of common stock to
Newbridge Securities Corporation as commitment shares. These 198,004 shares had
a FMV of $310,866 on July 28, 2004 which was being amortized over the term of
the commitment period which was one year from the date of registration. The full
amount was amortized as of December 31, 2006.
(h) The
Company issued 175,000 warrants each month from March 2005 to November 2005,
resulting in total warrants of 1,575,000, to Gryffindor Capital Partners I,
L.L.C. pursuant to the terms of the Second Amended and Restated Note dated
November 26, 2004. Total interest costs charged to operations were
$985,010.
48
5. Stock
Incentive Plan and Warrants
The
Company maintains one long-term incentive compensation plan, the Provectus
Pharmaceuticals, Inc. 2002 Stock Plan, which provides for the issuance of up to
10,000,000 shares of common stock pursuant to stock options, stock appreciation
rights, stock purchase rights and long-term performance awards granted to key
employees and directors of and consultants to the Company.
Options
granted under the 2002 Stock Plan may be either “incentive stock options” within
the meaning of Section 422 of the Internal Revenue Code or options which are not
incentive stock options. The stock options are exercisable over a period
determined by the Board of Directors (through its Compensation Committee), but
generally no longer than 10 years after the date they are granted.
Included
in the results for the years ended December 31, 2009 and 2008 is $870,937 and
$1,946,066, respectively, of stock-based compensation expense which relates to
the fair value of stock options, net of expected forfeitures, which vested over
the related employees’ requisite service periods as of June 2009 when 100%
vested.
For stock
options granted to employees during 2009 and 2008, the Company has estimated the
fair value of each option granted using the Black-Scholes option pricing model
with the following assumptions:
|
2009
|
2008
|
|||||||
|
Weighted
average fair value per options granted
|
$ | 0.92 | $ | 0.94 | ||||
|
Significant
assumptions (weighted average) risk-free interest rate at grant
date
|
0.25 | % | 0.25% - 4.0 | % | ||||
|
Expected
stock price volatility
|
94% - 100 | % | 100% - 105 | % | ||||
|
Expected
option life (years)
|
10 | 10 | ||||||
On March
1, 2004, the Company issued 1,200,000 stock options to employees. The options
vest over three years with 225,000 options vesting on the date of grant. The
exercise price is the fair market price on the date of issuance. On May 27,
2004, the Company issued 100,000 stock options to the Board of Directors. The
options vested immediately on the date of grant. The exercise price is the fair
market price on the date of issuance. On June 28, 2004, the Company issued
100,000 stock options to an employee. The options vest over four years with
25,000 options vesting on the date of grant. The exercise price is the fair
market price on the date of issuance.
On
January 7, 2005, the Company issued 1,200,000 stock options to employees. The
options vest over four years with no options vesting on the date of grant. The
exercise price is the fair market price on the date of issuance. On May 19,
2005, the Company issued 100,000 stock options to the Board of Directors. The
options vested immediately on the date of grant. The exercise price is the fair
market price on the date of issuance. On May 25, 2005, the Company issued
1,200,000 stock options to employees. The options vest over three years with no
options vesting on the date of grant. The exercise price is $0.75 which is
greater than the fair market price on the date of issuance. On December 9, 2005,
the Company issued 775,000 stock options to employees. The options vest over
three years with no options vesting on the date of grant. The exercise price is
the fair market price on the date of issuance. During 2005, an employee of the
Company exercised 26,516 options at an exercise price of $1.10 per share of
common stock for $29,167.
Two
employees of the Company exercised a total of 114,979 options during the three
months ended March 31, 2006 at an exercise price of $1.10 per share of common
stock for $126,477. On June 23, 2006, the Company issued 4,000,000 stock options
to employees. The options vest over three years with no options vesting on the
date of grant. The exercise price is the fair market price on the date of
issuance. On June 23, 2006, the Company issued 200,000 stock options to its
Members of the Board. The options vested on the date of grant. The exercise
price is the fair market price on the date of issuance. One employee of the
Company exercised a total of 7,166 options during the three months ended June
30, 2006 at an exercise price of $1.10 per share of common stock for $7,882 and
another employee of the Company exercised a total of 12,500 options during the
three months ended June 30, 2006 at an exercise price of $0.32 per share of
common stock for $4,000. One employee of the Company exercised a total of 14,000
options during the three months ended September 30, 2006 at an exercise price of
$1.10 per share of common stock for $15,400 and another employee of the Company
exercised a total of 3,125 options during the three months ended September 30,
2006 at an exercise price of $0.32 per share of common stock for $1,000. One
employee of the Company exercised a total of 7,000 options during the three
months ended December 31, 2006 at an exercise price of $1.10 per share of common
stock for $7,700.
49
One
employee of the Company exercised a total of 120,920 options during the three
months ended March 31, 2007 at an exercise price of $1.10 per share of common
stock for $133,012. Another employee of the Company exercised a total
of 9,375 options during the three months ended March 31, 2007 at an exercise
price of $0.32 per share of common stock for $3,000. One
employee of the Company exercised a total of 100,000 options during the three
months ended September 30, 2007 at an exercise price of $0.64 per share of
common stock for $64,000. Another employee of the Company exercised a
total of 25,000 options during the three months ended September 30, 2007 at an
exercise price of $0.32 per share of common stock for $8,000. One
employee of the Company exercised a total of 50,000 options during the three
months ended December 31, 2007 at an exercise price of $0.64 per share of common
stock for $32,000. Another employee of the Company exercised a total
of 6,250 options during the three months ended December 31, 2007 at an exercise
price of $0.32 per share of common stock for $2,000. On June 21,
2007, the Company issued 200,000 stock options to its Members of the
Board. The options vested on the date of grant. The
exercise price is the fair market price on the date of issuance.
One
employee of the Company exercised a total of 193,281 options during the three
months ended June 30, 2008 at an exercise price of $0.32 to $1.02 per share of
common stock for $109,600. Another employee of the Company exercised
a total of 44,795 options during the three months ended June 30, 2008 at an
exercise price of $1.10 per share of common stock for $49,275. One
employee of the Company exercised a total of 66,666 options during the three
months ended December 31, 2008 at an exercise price of $0.94 per share of common
stock for $62,666. On June 3, 2008, the Company issued 50,000 stock
options to a newly appointed member of the board of directors. The
options vested on the date of grant. The exercise price is the fair
market price on the date of issuance. On June 27, 2008, the Company
issued 200,000 stock options to its re-elected members of the board of
directors. The options vested on the date of grant. The
exercise price is the fair market price on the date of issuance.
One
employee of the Company exercised a total of 156,250 options during the three
months ended June 30, 2009 at an exercise price of $0.64 per share of common
stock for $100,000. Another employee of the Company exercised a total
of 150,000 options during the three months ended June 30, 2008 at an exercise
price of $0.64 per share of common stock for $96,000. On June 19,
2009, the Company issued 250,000 stock options to its re-elected Members of the
Board. The options vested on the date of grant. The
exercise price is the fair market price on the date of issuance, and all options
were outstanding at June 30, 2009. One employee of the Company exercised options
during the three months ended September 30, 2009 at an exercise price of $1.02
per share of common stock for $20,400 for 20,000 options and an exercise price
of $0.94 per share of common stock for $47,000 for 50,000 options. One employee
of the Company exercised options during the three months ended December 31, 2009
at an exercise price of $1.02 per share of common stock for $15,300 for 15,000
options and an exercise price of $0.94 per share of common stock for $78,334 for
83,334 options.
The
following table summarizes the options granted, exercised and outstanding as of
December 31, 2008 and 2009:
|
|
Shares
|
Exercise
Price
Per
Share
|
Weighted
Average Exercise Price
|
|||||||||
|
Outstanding
at January 1, 2008
|
8,903,169 | $ | 0.32 – 1.50 | $ | 0.93 | |||||||
|
Granted
|
250,000 | $ | 1.00 – 1.16 | $ | 1.03 | |||||||
|
Exercised
|
(304,742 | ) | $ | 0.32 – 1.10 | $ | 0.73 | ||||||
|
Forfeited
|
-- | -- | -- | |||||||||
|
Outstanding
at December 31, 2008
|
8,848,427 | $ | 0.32 – 1.50 | $ | 0.94 | |||||||
|
Options
exercisable at December 31, 2008
|
7,215,091 | $ | 0.32 – 1.50 | $ | 0.94 | |||||||
|
Outstanding
at January 1, 2009
|
8,848,427 | $ | 0.32 – 1.50 | $ | 0.94 | |||||||
|
Granted
|
250,000 | $ | 1.04 | $ | 1.04 | |||||||
|
Exercised
|
(474,584 | ) | $ | 0.64 – 1.02 | $ | 0.75 | ||||||
|
Forfeited
|
-- | -- | -- | |||||||||
|
Outstanding
at December 31, 2009
|
8,623,843 | $ | 0.32 – 1.50 | $ | 0.95 | |||||||
|
Options
exercisable at December 31, 2009
|
8,623,843 | $ | 0.32 – 1.50 | $ | 0.95 | |||||||
50
The
following table summarizes information about stock options outstanding at
December 31, 2009.
|
Exercise
Price
|
Number
Outstanding at December 31, 2009
|
Weighted
Average Remaining contractual Life
|
Outstanding
Weighted Average Exercise price
|
Number
Exercisable at December 31, 2009
|
Exercisable
Weighted Average Exercise Price
|
||||||||||||||
| $ | 0.32 | 93,750 |
3.58
years
|
$ | 0.32 | 93,750 | $ | 0.32 | |||||||||||
| $ | 0.60 | 75,000 |
3.58
years
|
$ | 0.60 | 75,000 | $ | 0.60 | |||||||||||
| $ | 1.10 | 864,624 |
4.17
years
|
$ | 1.10 | 864,624 | $ | 1.10 | |||||||||||
| $ | 0.95 | 100,000 |
4.42
years
|
$ | 0.95 | 100,000 | $ | 0.95 | |||||||||||
| $ | 1.25 | 100,000 |
4.50
years
|
$ | 1.25 | 100,000 | $ | 1.25 | |||||||||||
| $ | 0.64 | 705,469 |
5.00
years
|
$ | 0.64 | 705,469 | $ | 0.64 | |||||||||||
| $ | 0.75 | 1,275,000 |
5.42
years
|
$ | 0.75 | 1,275,000 | $ | 0.75 | |||||||||||
| $ | 0.94 | 575,000 |
5.92
years
|
$ | 0.94 | 575,000 | $ | 0.94 | |||||||||||
| $ | 1.02 | 4,135,000 |
6.50
years
|
$ | 1.02 | 4,135,000 | $ | 1.02 | |||||||||||
| $ | 1.50 | 200,000 |
7.50
years
|
$ | 1.50 | 200,000 | $ | 1.50 | |||||||||||
| $ | 1.16 | 50,000 |
8.42
years
|
$ | 1.16 | 50,000 | $ | 1.16 | |||||||||||
| $ | 1.00 | 200,000 |
8.50
years
|
$ | 1.00 | 200,000 | $ | 1.00 | |||||||||||
| $ | 1.04 | 250,000 |
9.50
years
|
$ | 1.04 | 250,000 | $ | 1.00 | |||||||||||
| 8,623,843 |
6.01
years
|
$ | 0.95 | 8,623,843 | $ | 0.95 | |||||||||||||
The
weighted-average grant-date fair value of options granted during 2009 was $0.92.
The total intrinsic value of options exercised during the year ended December
31, 2009 which were in the money was $126,719.
The
weighted-average grant-date fair value of options granted during 2008 was $0.94.
The total intrinsic value of options exercised during the year ended December
31, 2008 was $109,430.
The
following is a summary of nonvested stock option activity for the year ended
December 31, 2009:
|
Weighted
Average
|
||||||||
|
Number
of Shares
|
Grant-Date
Fair Value
|
|||||||
|
Nonvested
at December 31, 2008
|
1,633,336 | $ | 0.90 | |||||
|
Granted
|
250,000 | $ | 0.92 | |||||
|
Vested
|
(1,883,336 | ) | $ | 0.90 | ||||
|
Canceled
|
-- | -- | ||||||
|
Nonvested
at December 31, 2009
|
-- | $ | -- | |||||
As of
December 31, 2009, there was no unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the
Plan. The total fair value of shares vested during the year ended
December 31, 2009 was $1,693,003.
The
following is a summary of the aggregate intrinsic value of shares outstanding
and exercisable at December 31, 2009. The aggregate intrinsic value of stock
options outstanding and exercisable is defined as the difference between the
market value of the Company’s stock as of the end of the period and the exercise
price of the stock options which are in the money.
51
|
Number
of Shares
|
Aggregate
Intrinsic Value
|
|||||||
|
Outstanding
and Exercisable at December 31, 2009
|
8,623,843 | $ | -- | |||||
The
following table summarizes the warrants granted, exercised and outstanding as of
December 31, 2008 and 2009.
|
Warrants
|
Exercise
Price
Per
Warrant
|
Weighted
Average Exercise Price
|
||||||||||
|
Outstanding
at January 1, 2008
|
22,999,788 | $ | 0.75 – 2.16 | $ | 0.96 | |||||||
|
Granted
|
801,555 | $ | 0.90 – 2.00 | $ | 1.11 | |||||||
|
Exercised
|
(2,632,172 | ) | $ | 0.75 – 1.00 | $ | 0.94 | ||||||
|
Forfeited
|
(143,999 | ) | 1.00 | $ | 1.00 | |||||||
|
Outstanding
at December 31, 2008
|
21,025,172 | $ | 0.75 – 2.16 | $ | 0.97 | |||||||
|
Warrants
exercisable at December 31, 2008
|
21,025,172 | $ | 0.75 – 2.16 | $ | 0.97 | |||||||
|
Outstanding
at January 1, 2009
|
21,025,172 | $ | 0.75 – 2.16 | $ | 0.97 | |||||||
|
Granted
|
6,171,791 | $ | 0.91 – 1.50 | $ | 1.16 | |||||||
|
Exercised
|
(3,005,901 | ) | $ | 0.94 – 1.00 | $ | 0.95 | ||||||
|
Forfeited
|
(2,043,508 | ) | 1.01 | $ | 1.01 | |||||||
|
Outstanding
at December 31, 2009
|
22,147,554 | $ | 0.75 – 2.16 | $ | 1.02 | |||||||
|
Warrants
exercisable at December 31, 2009
|
22,147,554 | $ | 0.75 – 2.16 | $ | 1.02 | |||||||
The
following table summarizes information about warrants outstanding at December
31, 2009.
|
Exercise
Price
|
Number
Outstanding and Exercisable at December 31, 2008
|
Weighted
Average Remaining Contractual Life
|
Weighted
Average Exercise Price
|
|||||||||||
| $ | 0.75 | 65,000 | 1.75 | $ | 0.75 | |||||||||
| $ | 0.90 | 2,000 | 1.50 | $ | 0.90 | |||||||||
| $ | 0.91 | 1,000 | 3.00 | $ | 0.91 | |||||||||
| $ | 0.92 | 1,500 | 2.00 | $ | 0.92 | |||||||||
| $ | 0.935 | 12,670,325 | 0.91 | $ | 0.935 | |||||||||
| $ | 0.95 | 746,183 | 4.82 | $ | 0.95 | |||||||||
| $ | 1.00 | 4,798,916 | 2.74 | $ | 1.00 | |||||||||
| $ | 1.03 | 1,500 | 2.50 | $ | 1.03 | |||||||||
| $ | 1.05 | 1,000,000 | 2.05 | $ | 1.05 | |||||||||
| $ | 1.12 | 10,000 | 1.17 | $ | 1.12 | |||||||||
| $ | 1.16 | 10,000 | 0.42 | $ | 1.16 | |||||||||
| $ | 1.25 | 725,000 | 0.69 | $ | 1.25 | |||||||||
| $ | 1.50 | 2,004,630 | 2.33 | $ | 1.50 | |||||||||
| $ | 1.59 | 1,500 | 1.75 | $ | 1.59 | |||||||||
| $ | 1.75 | 60,000 | 2.03 | $ | 1.75 | |||||||||
| $ | 2.00 | 50,000 | 1.17 | $ | 2.00 | |||||||||
| 22,147,554 | 1.62 | $ | 1.02 | |||||||||||
52
6.
Convertible Debt.
(a) Pursuant
to a Convertible Secured Promissory Note and Warrant Purchase Agreement dated
November 26, 2002 (the “Purchase Agreement”) between the Company and Gryffindor
Capital Partners I, L.L.C., a Delaware limited liability company (“Gryffindor”),
Gryffindor purchased the Company's $1 million Convertible Secured Promissory
Note dated November 26, 2002 (the “Note”). The Note bore interest at 8% per
annum, payable quarterly in arrears, and was due and payable in full on November
26, 2004. Subject to certain exceptions, the Note was convertible into shares of
the Company's common stock on or after November 26, 2003, at which time the
principal amount of the Note was convertible into common stock at the rate of
one share for each $0.737 of principal so converted and any accrued but unpaid
interest on the Note was convertible at the rate of one share for each $0.55 of
accrued but unpaid interest so converted. The Company's obligations under the
Note were secured by a first priority security interest in all of the Company's
assets, including the capital stock of the Company's wholly owned subsidiary
Xantech Pharmaceuticals, Inc., a Tennessee corporation (“Xantech”). In addition,
the Company's obligations to Gryffindor were guaranteed by Xantech, and
Xantech's guarantee was secured by a first priority security interest in all of
Xantech's assets.
Pursuant
to the Purchase Agreement, the Company also issued to Gryffindor and to another
individual Common Stock Purchase Warrants dated November 26, 2002 (the
“Warrants”), entitling these parties to purchase, in the aggregate, up to
452,919 shares of common stock at a price of $0.001 per share. Simultaneously
with the completion of the transactions described in the Purchase Agreement, the
Warrants were exercised in their entirety. The $1,000,000 in proceeds received
in 2002 was allocated between the long-term debt and the warrants on a pro-rata
basis. The value of the warrants was determined using a Black-Scholes option
pricing model. The allocated fair value of these warrants was $126,587 and was
recorded as a discount on the related debt and amortized over the life of the
debt using the effective interest method.
In 2003,
an additional $25,959 of principal was added to the 2002 convertible debt
outstanding.
Pursuant
to an agreement dated November 26, 2004 between the Company and Gryffindor, the
Company issued Gryffindor a Second Amended and Restated Senior Secured
Convertible Note dated November 26, 2004 in the amended principal amount of
$1,185,959 which included the original note principal plus accrued interest. The
second amended note bore interest at 8% per annum, payable quarterly in arrears,
was due and payable in full on November 26, 2005, and amended and restated the
amended note in its entirety. Subject to certain exceptions, the Note was
convertible into shares of the Company's common stock on or after November 26,
2004, at which time the principal amount of the Note was convertible into common
stock at the rate of one share for each $0.737 of principal so converted and any
accrued but unpaid interest on the Note was convertible at the rate of one share
for each $0.55 of accrued but unpaid interest so converted. The Company issued
warrants to Gryffindor to purchase up to 525,000 shares of the Company's common
stock at an exercise price of $1.00 per share in satisfaction of issuing
Gryffindor the Second Amended and Restated Senior Secured Convertible Note dated
November 26, 2004. The value of these warrants was determined to be $105,250
using a Black-Scholes option-pricing model and was recorded as a discount on the
related debt and was amortized over the life of the debt using the effective
interest method. Amortization of $95,157 has been recorded as additional
interest expense as of December 31, 2005. The Company recorded
additional expense of $36,945 related to the beneficial conversion feature of
the interest on the Gryffindor convertible debt as of December 31,
2005.
On
November 26, 2005 the Company entered into a redemption agreement with
Gryffindor to pay $1,185,959 of the Gryffindor convertible debt and accrued
interest of $94,877. Also on November 26, 2005 the Company issued a legal
assignment attached to and made a part of that certain Second Amended and
Restated Senior Secured Convertible Note dated November 26, 2004 in the original
principal amount of $1,185,959 together with interest of $94,877 paid to the
order of eight investors dated November 26, 2005 for a total of $1,280,836. The
Company subsequently entered into debt conversion agreements with seven of the
investors for an aggregate of $812,000 of convertible debt which was converted
into 1,101,764 shares of common stock at $0.737 per share. As of December 31,
2005, the Company had $468,836 in principal and $3,647 in accrued interest owed
to holders of the convertible debentures due on November 26, 2006. At December
31, 2005, the Company recorded additional interest expense of $2,584 related to
the beneficial conversion feature of the interest on the November 2005
convertible debt. The $1,280,836 in principal was issued when the conversion
price was lower than the market value of the Company's common stock on the date
of issue. As a result, a discount of $404,932 was recorded for this beneficial
conversion feature. The debt discount of $404,932 is being amortized over the
life of the debt using the effective interest method. At December 31, 2005,
$270,924 of the debt discount has been amortized which includes $256,711 of the
unamortized portion of the debt discount related to the debt which was
converted. In conjunction with the November 26, 2005 financing, the
Company incurred debt issuance costs consisting of cash of $128,082, 356,335
shares of common stock valued at $345,645 and 1,000,000 warrants valued at
$789,000. The warrants are exercisable over five years, have an exercise price
of $1.00, a fair market value of $0.79 and were valued using the Black-Scholes
option-pricing model. The total debt issuance costs of $1,262,727 were recorded
as an asset and amortized over the term of the debt. At December 31, 2005,
$835,294 of the debt issuance costs have been amortized which includes $800,520
related to the debt that was converted as of December 31, 2005. The 356,335
shares of common stock were not issued as of December 31, 2005 and therefore
have been recorded as an accrued liability at December 31, 2005.
53
In May
2006, the Company entered into a debt conversion agreement with one of the
November 2005 accredited investors for $86,586 of its convertible debt which was
converted into 117,483 shares of common stock at $0.737 per share. In addition,
accrued interest expense of $3,078 due at the time of the debt conversion was
paid in 5,597 shares of common stock. In June 2006, the Company entered into a
debt conversion agreement with one of the November 2005 accredited investors for
$382,250 of convertible debt which was converted into 518,657 shares of common
stock at $0.737 per share. In addition, accrued interest expense of $15,800 due
at the time of the debt conversion was paid in 28,727 shares of common
stock. As of December 31, 2006, all principal and accrued interest
owed to holders of the November 2005 convertible debentures had been converted.
At March 31, 2006, the Company recorded additional interest expense of $8,354
related to the beneficial conversion feature of the interest on the November
2005 convertible debt. At June 30, 2006, the Company recorded additional
interest expense of $8,093 related to the beneficial conversion feature of the
interest on the November 2005 convertible debt. In 2006 the remaining $417,886
of debt issuance costs have been amortized which includes $189,948 of the
unamortized portion of the deferred loan costs related to the converted debt at
the time of conversion. In 2006 the remaining debt discount of $134,008 has been
amortized.
(b) On
November 19, 2003, the Company completed a short-term unsecured debt financing
in the aggregate amount of $500,000. The notes bear interest of 8% and were due
in full on November 19, 2004. The notes were convertible into common shares at a
conversion rate equal to the lower of (i) 75% of the average market price for
the 20 trading days ending on the 20th trading day subsequent to the effective
date or (ii) $0.75 per share. Pursuant to the note agreements, the Company also
issued warrants to purchase up to 500,000 shares of the Company's common stock
at an exercise price of $1.00 per share. During 2005, 52,000 of the warrants
were exercised and the remaining warrants expired on November 19,
2005.
The
$500,000 proceeds received was allocated between the debt and the warrants on a
pro-rata basis. The value of the warrants was determined using a Black-Scholes
option-pricing model. The allocated fair value of these warrants was $241,655
and was recorded as a discount to the related debt. In addition, the conversion
price was lower than the market value of the Company's common stock on the date
of issue. As a result, an additional discount of $258,345 was recorded for this
beneficial conversion feature. The combined debt discount of $500,000 was being
amortized over the term of the debt using the effective interest
method.
In
conjunction with the debt financing, the Company issued warrants to purchase up
to 100,000 shares of the Company's common stock at an exercise price of $1.25
per share in satisfaction of a finder's fee. The value of these warrants was
determined to be $101,000 using a Black-Scholes option-pricing model. In
addition, the Company incurred debt issuance costs of $69,530 which were payable
in cash. Total debt issuance costs of $170,530 were recorded as an asset and
amortized over the term of the debt. In 2004, in conjunction with the June 25,
2004 transaction (Note 4(1)), the Company entered into a redemption agreement
for its $500,000 of short-term convertible debt. Payments on the convertible
debt corresponded to payments received from the sale of common stock. As a
result, the unamortized portion of the debt discount at the date of
extinguishment of $193,308 and the unamortized portion of the deferred loan
costs of $65,930 were recorded as a loss on extinguishment of debt. In addition
to principal payments, the redemption payments included accrued interest and a
premium payment of $100,519. This premium payment has been recorded as a loss on
extinguishment. As part of this redemption, the Company repurchased the
beneficial conversion feature amount of $258,345 in 2004.
(c) On
July 28, 2004, the Company entered into an agreement to issue 8% convertible
debentures to Cornell in the amount of $375,000 which was due together with
interest on July 28, 2007. This debt had a subordinated security interest in the
assets of the Company. The Company issued a second secured convertible debenture
on October 7, 2004 which had the same conversion terms as the prior debenture
and was issued on the date the Company filed a registration statement for the
shares underlying both debentures. This was due together with interest on
October 7, 2007 and had a subordinated security interest in the assets of the
Company. The debentures were convertible into common stock at a price per share
equal to the lesser of (a) an amount equal to 120% of the closing Volume Weighed
Average Price (VWAP) of the common stock as of the Closing Date ($1.88 on
Closing Date) or (b) an amount equal to 80% of the lowest daily VWAP of the
Company's common stock during the 5 trading days immediately preceding the
conversion date. There was a floor conversion price of $.75 until December 1,
2004.
54
The
accounting guidance requires the issuer to assume that the holder will not
convert the instrument until the time of the most beneficial conversion. The
accounting guidance also requires that if the conversion terms are based on an
unknown future amount, which is the case in item (b) above, the calculation
should be performed using the commitment date which in this case is July 28,
2004 and October 7, 2004, respectively. As a result, the beneficial conversion
amount was computed using 80% of the lowest fair market value for the stock for
the five days preceding July 28, 2004 and October 7, 2004, respectively, which
resulted in a beneficial conversion amount of $254,006 and $106,250,
respectively. The beneficial conversion amount was being amortized over the term
of the debt which was three years.
In
conjunction with the debt financing, the Company issued warrants to purchase up
to 150,000 shares of the Company's common stock at an exercise price of $1.00
per share in satisfaction of a finder's fee. The value of warrants was
determined to be $144,000 using a Black-Scholes option-pricing model. In
addition, the Company incurred debt issuance costs of $162,500 which were
payable in cash. Total debt issuance costs of $306,500 were recorded as an asset
and amortized over the term of the debt.
In
February 2005, the Company entered into a redemption agreement with Cornell
Capital Partners to pay $50,000 of the Cornell convertible debt. As a result,
the unamortized portion of the debt discount of $27,715 and deferred loan costs
of $20,702, which related to this amount at the date of extinguishments, were
recorded as a loss on extinguishment of debt. The Company also paid a $5,000
prepayment penalty which has been recorded as loss on extinguishment of debt. As
part of this redemption, the Company has repurchased the beneficial conversion
feature related to the redeemed amount of $16,449.
In March
2005, the Company entered into a debt conversion agreement with Cornell Capital
Partners for $50,000 of its convertible debt which was converted into 66,667
shares of common stock at $0.75 per share. As a result of this conversion, the
unamortized portion of the debt discount of $24,890 and deferred loan costs of
$18,779, which related to this amount at the date of conversion, have been
recorded as additional interest expense.
In April
2005, the Company entered into a redemption agreement with Cornell Capital
Partners to pay $650,000 of the Cornell convertible debt. As a result, the
unamortized portion of the debt discount of $233,425 and deferred loan costs of
$205,741, which related to this amount at the date of extinguishments, were
recorded as a loss on extinguishment of debt. The Company also paid a $65,000
prepayment penalty which has been recorded as loss on extinguishment of debt. As
part of this redemption, the Company has repurchased the beneficial conversion
feature related to the redeemed amount of $127,679.
(d) In
March 2005, the Company entered into agreements to issue Senior Convertible
Debentures to two (2) accredited investors with Network 1 Financial Securities,
Inc. in the aggregate amount of $450,000. This debt has a security interest in
the assets of the Company, a maturity date of March 30, 2007, and is convertible
into shares of the Company's common stock at a per share conversion price of
$0.75. In April 2005, the Company entered into agreements to issue Senior
Convertible Debentures to five (5) accredited investors in the aggregate amount
of $2,700,000. This debt has a security interest in the assets of the Company, a
maturity date of March 30, 2007, and is convertible into shares of the Company's
common stock at a per share conversion price of $0.75.
The
Company was obligated to pay the principal of the Senior Convertible Debentures
in installments as follows: Twelve (12) equal monthly payments of principal (the
“Monthly Amount”) plus, to the extent not otherwise paid, accrued but unpaid
interest plus any other obligations of the Company to the Investor under this
Debenture, the Purchase Agreement, or the Registration Rights Agreement, or
otherwise. The first such installment payment was due and payable on March 30,
2006, and subsequent installments shall be due and payable on the thirtieth
(30th) day of each succeeding month thereafter (each a “Payment Date”) until the
Company’s obligations under this Debenture is satisfied in full. The Company
shall have the option to pay all or any portion of any Monthly Amount in newly
issued, fully paid and nonassessable shares of Common Stock, with each share of
Common Stock having a value equal to (i) eighty-five percent (85%) multiplied by
(ii) the Market Price as of the third (3rd) Trading Day immediately preceding
the Payment Date (the “Payment Calculation Date”).
55
Interest
at the greater of (i) the prime rate (adjust monthly), plus 4% and (ii) 8% was
due on a quarterly basis. At the time the interest was payable, upon certain
conditions, the Company had the option to pay all or any portion of accrued
interest in either cash or shares of the Company's common stock valued at 85%
multiplied by the market price as of the third trading date immediately
preceding the interest payment date.
The
Company could prepay the Senior Convertible Debentures in full by paying the
holders the greater of (i) 125% multiplied by the sum of the total outstanding
principal, plus accrued and unpaid interest, plus default interest, if any or
(ii) the highest number of shares of common stock issuable upon conversion of
the total amount calculated pursuant to (i) multiplied by the highest market
price for the common stock during the period beginning on the date until
prepayment.
On or
after any event or series of events which constitutes a fundamental change, the
holder could, in its sole discretion, require the Company to purchase the
debentures, from time to time, in whole or in part, at a purchase price equal to
110% multiplied by the sum of the total outstanding principal, plus accrued and
unpaid interest, plus any other obligations otherwise due under the debenture.
Under the senior convertible debentures, fundamental change means (i) any person
becomes a beneficial owner of securities representing 50% or more of the (a)
outstanding shares of common stock or (b) the combined voting power of the then
outstanding securities; (ii) a merger or consolidation whereby the voting
securities outstanding immediately prior thereto fail to continue to represent
at least 50% of the combined voting power of the voting securities immediately
after such merger or consolidation; (iii) the sale or other disposition of all
or substantially all or the Company's assets; (iv) a change in the composition
of the Board within two years which results in fewer than a majority of
directors are directors as of the date of the debenture; (v) the dissolution or
liquidation of the Company; or (vi) any transaction or series of transactions
that has the substantial effect of any of the foregoing.
The
Purchasers of the $3,150,000 in Senior Convertible Debentures also purchased
Class A Warrants and Class B Warrants under the Securities Purchase Agreement.
Class A Warrants are exercisable at any time between March 10, 2005 through and
including March 30, 2010 depending on the particular Purchaser. Class B Warrants
were exercisable for a period through and including 175 days after an effective
registration of the common stock underlying the warrants, which began June 20,
2005 and ended December 12, 2005. The range of the per share exercise price of a
Class A Warrant is $0.93 to $0.99 and the range of the per share exercise price
of the Class B Warrant was $0.8925 to $0.945.
The
Purchasers of the Senior Convertible Debentures received a total of 4,200,000
Class A Warrants and a total of 2,940,000 Class B Warrants. 1,493,333 of the
Class B Warrants were exercised in December, 2005 for proceeds of $1,122,481.
The warrant holders were given an incentive to exercise their warrants due to
the lowering of the exercise price to $0.75. Interest expense of $236,147 was
recorded to recognize expense related to this conversion incentive. The
remaining Class B Warrants were forfeited in December, 2005 at the expiration of
their exercise period.
The
$3,150,000 proceeds received in March and April 2005 was allocated between the
debt and the warrants on a pro-rata basis. The value of the warrants was
determined using a Black-Scholes option-pricing model. The allocated fair value
of these warrants was $1,574,900 and was recorded as a discount to the related
debt. In addition, the conversion prices were lower than the market value of the
Company's common stock on the date of issue. As a result, an additional discount
of $1,228,244 was recorded for this beneficial conversion feature. The combined
debt discount of $2,803,144 was being amortized over the life of the debt using
the effective interest method.
In June
2005, the Company entered into a debt conversion agreement with one of the April
accredited investors for $150,000 of its convertible debt which was converted
into 200,000 shares of common stock at $0.75 per share, and $2,833 of accrued
interest was converted into 3,777 shares of common stock at $0.75 per share. In
July 2005, the Company entered into a debt conversion agreement with two of the
April accredited investors for an aggregate of $350,000 of convertible debt
which was converted into 466,666 shares of common stock at $0.75 per share. In
September 2005, the Company entered into a debt conversion agreement with one of
the March accredited investors for $400,000 of its convertible debt which was
converted into 533,333 shares of common stock at $0.75 per share. In October
2005, the Company entered into a debt conversion agreement with two of the March
accredited investors for an aggregate of $100,000 of convertible debt which was
converted into 133,334 shares of common stock at $0.75 per share. In November
2005, the Company entered into a debt conversion agreement with three of the
April accredited investors for an aggregate of $675,000 of convertible debt
which was converted into 900,000 shares of common stock at $0.75 per
share.
56
In
conjunction with the financing, the Company incurred debt issuance costs
consisting of $387,500 in cash and 980,000 of warrants valued at $426,700. The
warrants are exercisable over five years, have exercise prices ranging from
$0.98 - $1.23, fair market values ranging from $0.42 - $0.44 and were valued
using the Black-Scholes option pricing model. The total debt issuance costs of
$814,200 were recorded as an asset and amortized over the term of the
debt.
The
Company chose to pay the quarterly interest due at June 30, 2005, September 30,
2005 and December 31, 2005 in common stock instead of cash. As a result, accrued
interest at June 30, 2005 of $78,904 was paid in 165,766 shares of common stock
resulting in additional interest expense of $28,843. 159,780 shares were issued
July 11, 2005 and the remaining 5,986 shares were issued November 7, 2005. The
accrued interest due September 30, 2005 of $72,985 was converted into 97,955
shares of common stock resulting in additional interest expense of $15,299.
66,667 of these shares were issued on September 30, 2005 and the remaining
31,288 shares were issued October 20, 2005. The interest due December 31, 2005
of $50,486 was converted into 65,742 shares of common stock resulting in
additional interest expense of $10,922. The 65,742 shares were not issued as of
December 31, 2005 and were recorded in accrued liabilities at December 31, 2005.
The shares were issued January 9, 2006.
In
January 2006, the Company entered into a debt conversion agreement with one of
the March 2005 accredited investors for $250,000 of its convertible debt which
was converted into 333,333 shares of common stock at $0.75 per share. In March
2006, the Company entered into a total of three debt conversion agreements with
two of the March 2005 accredited investors for an aggregate of $500,000 of
convertible debt which was converted into 666,667 shares of common stock at
$0.75 per share. In May 2006, the Company entered into a debt conversion
agreement with one of the March 2005 accredited investors for $25,000 of its
convertible debt which was converted into 33,333 shares of common stock at $0.75
per share. In September 2006, the Company entered into a debt conversion
agreement with one of the March 2005 accredited investors for $112,500 of its
convertible debt which was converted into 150,000 shares of common stock at
$0.75 per share. In November 2006, the Company entered into a debt conversion
agreement with one of the March 2005 accredited investors for $200,000 of its
convertible debt which was converted into 266,666 shares of common stock at
$0.75 per share. In December 2006, the Company entered into a debt conversion
agreement with one of the March 2005 accredited investors for $20,000 of its
convertible debt which was converted into 26,667 shares of common stock at $0.75
per share.
In 2006,
$928,090 of the total debt discount had been amortized which includes $386,451
of the unamortized portion of the debt discount related to the converted debt at
the time of the debt conversions. In 2006, $287,493 of the deferred loan costs
have been amortized which includes $112,256 of the unamortized portion of the
deferred loan costs related to the converted debt at the time of the debt
conversions.
The
Company chose to pay the quarterly interest due at March 31, 2006, June 30,
2006, September 30, 2006 and December 31, 2006 in common stock instead of cash.
As a result, accrued interest due March 31, 2006 of $33,274 was converted into
35,939 shares of common stock resulting in additional interest expense of
$4,975. 7,656 of these shares were issued March 20, 2006 and the remaining
shares of 28,283 were issued March 31, 2006. The accrued interest due June 30,
2006 of $21,305 was converted into 24,674 shares of common stock resulting in
additional interest expense of $3,650. These shares were issued June 30, 2006.
The accrued interest due September 30, 2006 of $21,010 was converted into 18,888
shares of common stock resulting in additional interest expense of $2,167. These
shares were issued September 29, 2006. The accrued interest due December 31,
2006 of $15,086 was converted into 14,760 shares of common stock resulting in
additional interest expense of $1,843. These shares were issued December 29,
2006.
In
January 2007, the Company entered into a separate debt conversion agreement with
two of its March 2005 accredited investors for $245,833 of convertible debt
which was converted into 327,777 shares of common stock at $0.75 per
share. In February 2007, the Company entered into a separate debt
conversion agreement with two of its March 2005 accredited investors for
$121,667 of convertible debt which was converted into 162,223 shares of common
stock at $0.75 per share.
In
February 2007, the remaining total debt discount has been amortized, which is
$2,797. In February 2007, the remaining deferred loan costs have been
amortized, which is $3,713.
At
December 31, 2007 the Company had no remaining principal or accrued interest
owed to holders of the March 2005 convertible debentures due on March 31,
2007.
57
The
Company chose to pay a portion of the quarterly interest due at February 28,
2007 in common stock instead of cash. The accrued interest not paid
in cash that was due February 28, 2007 of $1,109 was converted into 1,141 shares
of common stock resulting in additional interest expense of $149. 358
of these shares were issued on January 25, 2007 and the remaining shares of 783
were issued on February 28, 2007.
7. Related
Party Transactions
During
2002, a shareholder who is also an employee and member of the Company's board of
directors loaned the Company $109,000. During 2003, the same shareholder loaned
the Company an additional $40,000. During 2005, the same shareholder loaned the
Company an additional $25,000.
In
December 2005, the Company approved a request from the shareholder to exchange
the total loan amount of $174,000 plus accrued interest of $24,529 for 264,705
shares of common stock at $0.75 per share which were committed to be issued at
December 31, 2005. These shares were issued on January 3, 2006. In connection
with this transaction which was based on the same terms as the private placement
conducted at the same time, the Company also issued warrants to the shareholder
to purchase up to 330,881 shares of common stock at an exercise price of $0.935
per share. In December 2007, the employee exercised all of these
warrants.
The
Company paid a non-employee Member of the Board $82,500 for consulting services
performed in 2009, and issued 70,000 shares of common stock at a fair market
value of $70,000 in July 2009.
8. Income
Taxes
Reconciliations
between the statutory federal income tax rate and the Company’s effective tax
rate follow:
|
Years
Ended December 31,
|
2009
|
2008
|
||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||
|
Federal
statutory rate
|
$ | (4,190,000 | ) | (34.0 | ) | $ | (3,491,000 | ) | (34.0 | ) | ||||||
|
Adjustment
to valuation allowance
|
4,190,000 | 34.0 | 3,491,000 | 34.0 | ||||||||||||
|
Actual
tax benefit
|
$ | -- | -- | $ | -- | -- | ||||||||||
The
components of the Company’s deferred income taxes are summarized:
|
December
31,
|
2009
|
2008
|
||||||
|
Deferred
tax assets
|
||||||||
|
Net
operating loss carry-forwards
|
$ | 13,744,000 | $ | 10,460,000 | ||||
|
Stock-based
compensation
|
2,387,000 | 2,091,000 | ||||||
|
Warrants
for services
|
2,167,000 | 1,785,000 | ||||||
|
Deferred
tax asset
|
18,298,000 | 14,336,000 | ||||||
|
Deferred
tax liability – patent amortization
|
(2,360,000 | ) | (2,588,000 | ) | ||||
|
Valuation
allowance
|
(15,938,000 | ) | (11,748,000 | ) | ||||
|
Net
deferred taxes
|
$ | -- | $ | -- | ||||
A
valuation allowance against deferred tax assets is required if, based on the
weight of available evidence, it is more likely than not that some or all of the
deferred tax assets may not be realized. The Company is in the development stage
and realization of the deferred tax assets is not considered more likely than
not. As a result, the Company has recorded a valuation allowance for the net
deferred tax asset.
Since
inception of the Company on January 17, 2002, the Company has generated tax net
operating losses of approximately $40.4 million, expiring in 2022 through 2029.
The tax loss carry-forwards of the Company may be subject to limitation by
Section 382 of the Internal Revenue Code with respect to the amount utilizable
each year. This limitation reduces the Company’s ability to utilize net
operating loss carry-forwards. The amount of the limitation has not been
quantified by the Company. In addition, the Company acquired certain net
operating losses in its acquisition of Valley Pharmaceuticals, Inc. (Note
2). However, the amount of these net operating losses has not been
determined and even if recorded, the amount would be fully
reserved. If the Company determines that there were net operating
losses acquired, any realization of a deferred tax asset would be reflected as a
tax benefit.
58
9. Cash
Balance Defined Benefit Plan and Trust
In
January 2007, the Company established the Provectus Pharmaceuticals, Inc. Cash
Balance Defined Benefit Plan and Trust (the “Plan”), effective January 1, 2007,
for the exclusive benefit of its four employees and their
beneficiaries. Per the Plan, each employee has a hypothetical account
which consists of a yearly pay credit based on a defined percentage of the
employee’s current salary and an interest credit defined as 5% of the beginning
or the year hypothetical account balance. Each year, the Company
makes a contribution to fully fund the Plan. The Plan contributions
vest immediately after three years of service. All four employees are
fully vested.
At
December 31, 2009 and 2008, the projected benefit obligation was $1,057,077 and
$669,229, respectively. At December 31, 2009, the Plan investments
and the receivable to the plan of $345,000, which the Company accrued at
December 31, 2009 and paid in March 2010, approximates the projected benefit
obligation. At December 31, 2008 the Plan investments approximates
the projected benefit obligation.
The
components of net periodic pension cost recognized are as follows:
|
Year
ended December 31,
|
2009
|
2008
|
||||||
|
Service
cost
|
$ | 352,800 | $ | 331,200 | ||||
|
Interest
cost
|
33,570 | 14,029 | ||||||
|
Expected
return on assets
|
(33,812 | ) | (26,618 | ) | ||||
|
Net
periodic pension cost
|
$ | 352,558 | $ | 318,611 | ||||
Employer
contributions to the plan were $345,000 in 2009, which is accrued as of December
31, 2009, and 331,200 in 2008, respectively. No benefits were paid in
either year.
The
weighted-average assumptions used to determine the benefit obligation at
December 31, 2009 and 2008 and the pension expense for the years ended December
31, 2009 and 2008 are as follows:
Discount
rate 5.00%
Compensation
increase
4.00%
Long-term
rate of return on
assets 5.00%
The
Plan’s long-term rate of return on assets assumption is based on the types of
investment classes in which the Plan assets are invested and the expected
compounded return the Plan can reasonably be expected to earn over appropriate
time periods. The expected return reflects forward-looking economic
assumptions. The assumptions are also based on the investment returns
the Company can reasonably expect its active investment management program to
achieve in excess of the returns expected if investments were made strictly in
indexed funds.
The
Company’s investment objective is to achieve investment earnings similar to the
5% interest credit defined by the Plan. To achieve this, the
Company’s policy is to only invest in U.S. treasury bills and cash and cash
equivalents. All of the Plan’s assets were invested in cash and cash
equivalents at December 31, 2009 and 2008.
The
Company expects to contribute $367,337 to the Plan in 2010 in addition to the
$345,000 which was paid in 2010 for contributions relating to 2009.
59
The
estimated future benefit payments are as follows:
|
Year
ending December 31,
|
||||
|
2010
|
$ | - | ||
|
2011
|
- | |||
|
2012
|
591,000 | |||
|
2013
|
720,000 | |||
|
2014
|
859,000 | |||
|
Years
2015 – 2019
|
1,343,000 | |||
|
|
||||
10. Subsequent Events
The
Company has evaluated subsequent events. The Company entered into a private
placement transaction with Network 1 Financial Securities, Inc. as placement
agent dated October 20, 2009, which allows for the sale of shares of common
stock at a purchase price of $0.75 per share and fifty percent warrant coverage
to purchase shares of common stock at an exercise price of $0.95 per
share. This ended in January 2010.
On
January 7, 2010, shareholders approved an amendment to our Restated Articles of
Incorporation to increase the number of shares of common stock, par value $.001
per share, that we are authorized to issue from 100,000,000 to 150,000,000
shares.
On March 9, 2010, the
Company entered into a Securities Purchase Agreement (the “Purchase Agreement”)
with certain accredited investors for the issuance and sale in a private
placement of an aggregate of 7,083,324 units (the “Units”), at purchase price of
$0.75 per Unit, each Unit consisting of one share of 8% convertible preferred
stock, par value $.001 per share (the “8% Convertible Preferred Stock”) and a
warrant to purchase one-half share of common stock, par value $.001 per share
(the “Common Stock”), with an exercise price of $1.00 per share of Common Stock
(the “Warrants,” and together with the Units, the 8% Convertible Preferred Stock
and the underlying Common Stock, (the “Securities”), for an aggregate amount of
gross proceeds of $5,312,499.
On March
10, 2009, the Company entered into a Purchase Agreement with an institutional
investor for the issuance and sale in a private placement of an additional
3,500,000 Units for an additional amount of gross proceeds of $2,625,000 on
terms and under agreements identical to the March 9 private
placement.
On March
11, 2010, the Company completed a closing of substantially all of the amounts in
the March 9 and March 10 private placements (the “Private Placement”), pursuant
to which the Company sold and issued an aggregate of 9,979,992 Units for an
aggregate amount of gross proceeds of $7,484,999. The Company will use the
net proceeds of the Private Placement for working capital, FDA trials, securing
licensing partnerships, and general corporate purposes.
Maxim
Group LLC served as the placement agent for the Private Placement. In connection
therewith, the Company paid the placement agent a commission consisting of 10%
of the offering proceeds and a non-accountable expense allowance consisting of
3% of the offering proceeds, for a total of $973,021. Maxim Group LLC
received 997,999 shares of Common Stock, which represents 10% of the total
number of shares of 8% Convertible Preferred Stock issued in the Private
Placement.
60
EXHIBIT
INDEX
|
Exhibit
No
|
Description
|
||
| 3.1(i) |
Restated
Articles of Incorporation of Provectus, incorporated herein by reference
to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2003, as filed with the SEC on August 14,
2003.
|
||
| 3.1 (ii)
|
By-laws, as amended, of Provectus Pharmaceuticals, Inc. | ||
| 4.1 |
Specimen
certificate for the common shares, $.001 par value per share, of Provectus
Pharmaceuticals, Inc., incorporated herein by reference to Exhibit 4.1 to
the Company’s Annual Report on Form 10-KSB for the year ended December 31,
2002, as filed with the SEC on April 15, 2003.
|
||
| 10.1 |
*Provectus
Pharmaceuticals, Inc. amended and Restated 2002 Stock Plan, incorporated
herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-QSB for the quarter ended June 30, 2003, as filed with the SEC on
August 14, 2003.
|
||
| 10.2 |
*Confidentiality,
Inventions and Non-competition Agreement between the Company and H. Craig
Dees, incorporated herein by reference to Exhibit 10.8 to the Company’s
Annual Report on Form 10-KSB for the year ended December 31, 2002, as
filed with the SEC on April 15, 2004.
|
||
| 10.3 |
*Confidentiality,
Inventions and Non-competition Agreement between the Company and Timothy
C. Scott, incorporated herein by reference to Exhibit 10.8 to the
Company’s Annual Report on Form 10-KSB for the year ended December 31,
2002, as filed with the SEC on April 15, 2004.
|
||
| 10.4 |
*Confidentiality,
Inventions and Non-competition Agreement between the Company and Eric A.
Wachter, incorporated herein by reference to Exhibit 10.8 to the Company’s
Annual Report on Form 10-KSB for the year ended December 31, 2002, as
filed with the SEC on April 15, 2004.
|
||
| 10.5 |
Material
Transfer Agreement dated as of July 31, 2003 between Schering-Plough
Animal Health Corporation and Provectus, incorporated hereby by reference
to Exhibit 10.15 to the Company’s Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2003, as filed with the SEC on August 14,
2003.
|
||
| 10.6 |
*Executive
Employment Agreement by and between the Company and H. Craig Dees, Ph.D,
dated January 4, 2005.
|
||
| 10.7 |
*Executive
Employment Agreement by and between the Company and Eric Wachter, Ph.D,
dated January 4, 2005.
|
||
| 10.8 |
*Executive
Employment Agreement by and between the Company and Timothy C. Scott,
Ph.D, dated January 4, 2005.
|
||
| 10.9 |
*Executive
Employment Agreement by and between the Company and Peter Culpepper dated
January 4, 2005.
|
||
| 21.1 |
List
of Subsidiaries
|
||
| 23.1+ |
Consent
of Independent Registered Public Accounting Firm
|
||
| 31.1+ |
Certification
of CEO pursuant to Rules 13a - 14(a) of the Securities Exchange Act of
1934
|
||
| 31.2+ |
Certification
of CFO pursuant to Rules 13a-14(a) of the Securities Exchange Act of
1934.
|
||
| 32.1+ |
Certification
Pursuant to 18 U.S.C. ss. 1350.
|
||
____________________________
*Management
Compensation Plan
+Filed
herewith.
X-1