United States Securities And Exchange Commission
Washington, DC 20549
--------------------------------------------------------------------------------
FORM 10-QSB
(Mark One)
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 31, 2004
[ ] Transition Report under 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 Small Business Issuer as Specified in Its Charter)
Nevada 90-0031917
----------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7327 Oak Ridge Highway Suite A, Knoxville, TN 37931
---------------------------------------------- ------------------------------
(Address of Principal Executive Offices) (Zip Code)
865/769-4011
--------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
N/A
--------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [_]
The number of shares outstanding of the issuer's stock, $0.001 par value
per share, as of April 20, 2004 was 13,507,030.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003
(Unaudited) (Audited)
------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash $ 452,229 $ 164,145
Stock subscription receivable 41,192 87,875
Deferred Loan Costs, net of amortization of $62,202 and $19,569 108,328 150,961
Inventory 69,060 72,578
Prepaid expenses and other current assets 28,757 26,227
Prepaid consulting expense 346,141 420,817
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Total Current Assets 1,045,707 922,603
Equipment and furnishings, less accumulated
depreciation of $298,401 and $244,760 68,169 121,415
Patents, net of amortization of $1,568,733 and $1,281,770 18,468,828 18,755,791
Other Assets 27,000 27,000
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$19,609,704 $19,826,809
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Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable - trade $ 142,466 $ 100,640
Accrued compensation 240,000 352,500
Accrued expenses 73,707 57,549
Accrued interest 131,975 100,021
Short-term convertible debt, net of debt discount of
$318,306 and $442,623 181,694 57,377
Current maturities of long-term convertible debt, net of
debt discount of $41,229 and $57,052 984,730 968,907
------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,754,572 1,636,994
Loan From Stockholder 149,000 149,000
Stockholders' Equity
Common stock; par value $.001 per share; 100,000,000 shares
authorized; 13,096,605 and 10,867,509 shares issued and
outstanding, respectively 13,097 10,868
Paid-in capital 29,606,391 28,783,747
Deficit accumulated during the development stage (11,913,356) (10,753,800)
------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 17,706,132 18,040,815
$19,609,704 $19,826,809
------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
2
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Three Cumulative
Months Ended Months Ended Through
March 31, 2004 March 31, 2003 March 31,2004
(Unaudited) (Unaudited) (Unaudited)
--------------------------------------------------------------------------------------------------
Operating Income
Net OTC product revenue $ 640 $ - $ 640
Net medical device revenue 13,125 - 13,125
Operating Expenses
Research and development 187,954 155,783 963,592
General and administrative 483,678 511,917 8,988,874
Amortization 286,963 286,963 1,568,732
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Total operating loss (944,830) (954,663) (11,507,433)
Gain on sale of fixed assets - - 55,000
Interest expense (214,726) (38,021) (460,923)
--------------------------------------------------------------------------------------------------
Net Loss Applicable to Common
Stockholders $(1,159,556) $ (992,684) $(11,913,356)
--------------------------------------------------------------------------------------------------
Basic and Diluted Loss Per Common
Share (0.09) (0.11)
--------------------------------------------------------------------------------
Weighted Average Number of Common
Shares Outstanding - Basic and Diluted 12,241,172 9,451,667
--------------------------------------------------------------------------------
See accompanying notes to financial statements.
3
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
Common Stock
Number Accumulated
of Shares Par Value APIC 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 20,547,935 - 20,548,435
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 - - - (5,805,556) (5,805,556)
--------- -------- ---------- ----------- -----------
Balance, at December 31, 2002 9,423,689 9,424 27,102,406 (7,121,754) 19,990,076
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
Issuance of convertible debt with warrants - - 601,000 - 601,000
Net loss for the year ended December 31, 2003 - - - (3,632,046) (3,632,046)
---------- -------- ----------- ------------ -------------
Balance, at December 31, 2003 10,867,509 10,868 28,783,747 (10,763,800) 18,040,815
Issuance of stock for services 351,606 352 11,148 11,500
Exercise of warrants 10,000 10 4,990 5,000
Stock to be issued for services - - 62,500 - 62,500
Employee compensation from stock options - - 3,903 - 3,903
Issuance of stock pursuant to Regulation S 1,867,490 1,867 740,103 741,970
Net loss for the three months ended
March 31, 2004 - - - (1,159,556) (1,159,556)
---------- -------- ------------ ----------- -------------
Balance, at March 31, 2004 13,096,605 $ 13,097 $29,606,391 $(11,913,356) $17,706,132
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See accompanying notes to financial statements.
4
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative
Three Months Three Months Amounts From
Ended Ended January 17, 2002
March 31, 2004 March 31, 2003 (Inception)
(Unaudited) (Unaudited) (Unaudited)
------------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net loss $ (1,159,556) (992,684) (11,913,356)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 53,641 83,881 321,402
Amortization of patents 286,963 286,963 1,568,732
Amortization of original issue discount 140,140 15,570 267,052
Amortization of prepaid consultant expense 137,176 - 137,176
Amortization of deferred loan costs 42,633 - 62,202
Compensation through issuance of stock options 3,903 - 38,582
Compensation through issuance of stock - - 932,000
Issuance of stock for services 11,500 22,800 5,660,150
Issuance of warrants for services - 19,574 101,312
(Gain)loss on sale of fixed asset - - (55,000)
(Increase) decrease in assets
Prepaid expenses (2,530) 2,499 (28,757)
Inventory 3,518 - (69,060)
Increase (decrease) in liabilities
Accounts payable 41,826 (46,302) 138,821
Accrued expenses (64,388) 7,469 445,682
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Net cash used in operating activities (505,174) (600,230) (2,393,082)
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Cash Flows From Investing Activities
Proceeds from sale of fixed asset - - 180,000
Capital expenditures (395) (3,301) (3,696)
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Net cash (used in) provided by investing activities (395) (3,301) 176,304
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Cash Flows From Financing Activities
Proceeds from loans from stockholder - - 149,000
Proceeds from convertible debt - 25,959 1,525,959
Proceeds from sale of common stock 788,653 - 1,106,125
Proceeds from exercise of warrants 5,000 - 5,453
Cash paid for deferred loan costs - - (69,530)
Purchase and retirement of common stock - - (48,000)
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Net cash provided by financing activities 793,653 25,959 2,669,007
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Net Change in Cash 288,084 (577,572) 452,229
Cash, at beginning of period 164,145 717,833 -
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Cash, at end of period 452,229 140,261 452,229
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Supplemental Disclosure of Noncash Investing and Financing Activities
March 31, 2004
Issuance of stock for services of $11,500
and commitment to issue stock for
prepaid services of $62,500
Stock subscription receivable recorded of $41,192
March 31, 2003
Issuance of stock and warrants for services of $117,291
See accompanying notes to financial statements.
5
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information pursuant to Regulation S-B. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 2004 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2004.
2. GOING CONCERN
The Company will continue to require additional capital to develop its
products and develop sales and distribution channels for its products.
Management believes there are a number of potential alternatives available to
meet the Company's continuing capital requirements, including proceeding as
rapidly as possible with the development of over-the-counter products that can
be sold with a minimum of regulatory compliance and developing revenue sources
through licensing of our existing intellectual property portfolio. In addition,
the Company is pursuing actively additional debt and/or equity capital in order
to support ongoing operations. There can be no assurance that the Company will
be able to obtain sufficient additional working capital on commercially
reasonable terms or conditions, or at all.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. Continuing as a going concern is
dependent upon successfully obtaining additional working capital as described
above. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets and
amounts and classifications of liabilities that might result from the outcome of
this uncertainty.
3. RECAPITALIZATION AND MERGER
Provectus Pharmaceuticals, Inc., 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,
("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,
Provectus Pharmaceuticals, Inc. issued 6,680,000 shares of common stock in
exchange for all 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.
This transaction was recorded as a recapitalization of PPI.
On November 19, 2002, the Company acquired Valley Pharmaceuticals, Inc., a
privately-held Tennessee corporation formerly known as Photogen, Inc., by
merging PPI with and into Valley and naming the surviving corporation "Xantech
Pharmaceuticals, Inc." Photogen, Inc. was separated from Photogen Technologies,
Inc. in a non-prorata split-off to some of its shareholders. The assets of
Photogen, Inc. consisted primarily of the equipment and intangibles related to
its therapeutic activity and were recorded at their fair value. The majority
shareholders of Valley were also the majority shareholders of Provectus. Valley
had no revenues prior to the transaction with the Company. By acquiring Valley,
the Company acquired its intellectual property, including issued U.S. patents
and patentable inventions.
6
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
Prior to the acquisition of Valley, the Company was considered to be, and
continues to be, in the development stage and has not generated any revenues
from the assets acquired.
4. 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, warrants, and convertible debt as they are antidilutive.
Potential common shares excluded from the calculation at March 31, 2004 are
955,000 warrants, 1,525,000 options and 2,274,558 shares issuable upon
conversion of convertible debt and interest. Additionally, the Company is
committed to issue 20,000 warrants. Included in the weighted average number of
common shares outstanding are 111,765 shares committed to be issued but not
outstanding at March 31, 2004.
5. EQUITY TRANSACTIONS
(a) At December 31, 2003, the Company was committed to issue 341,606 shares
to consultants in exchange for services rendered. In January 2004, all of these
shares were issued. In January 2004, the Company also 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. At March 31, 2004 the full value
of these shares of $62,500 has been classified as prepaid consulting expense as
it represents payments for services to be provided in the future. The shares are
fully vested and non-forfeitable.
(b) In December 2003, the Company commenced an offering for sale of
restricted common stock. In the first quarter 2004, the Company sold 1,867,490
shares of restricted common stock under this offering at an average gross price
of $1.18 per share and received net proceeds of $788,653. The Company has also
recorded a stock subscription receivable of $41,192 for stock subscriptions
prior to March 31, 2004 for which payment was received subsequent to March 31,
2004. The Company has engaged a placement agent to assist in the offering. Costs
related to the placement agent for proceeds received in the first quarter 2004
of $1,410,256 have been off-set against the gross proceeds of $2,198,909 and
therefore are reflected as a direct reduction of equity at March 31, 2004. 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
restriction under rule 144 for an additional year.
7
6. Stock-based Compensation
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, and
all options were outstanding at March 31, 2004.
For stock options granted to employees during the first quarter of 2004,
the Company has estimated the fair value of each option granted using the
Black-Scholes option pricing model with the following assumptions:
2004
------------------------------------------------------------------------
Weighted average fair value per options granted $ 1.10
Significant assumptions (weighted average)
Risk-free interest rate at grant date 2.0%
Expected stock price volatility 150%
Expected option life (years) 10
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (SFAS No. 123), but applies the intrinsic value method where
compensation expense, if any, is recorded as the difference between the exercise
price and the market price, as set forth in Accounting Principles Board Opinion
No. 25 for stock options granted to employees and directors. In 2003, the
Company issued stock options to employees in which the exercise price was less
than the market price on the date of grant. These options vest over three years
and accordingly, $3,903 of expense was recorded for the three months ended March
31, 2004. If the Company had elected to recognize compensation expense based on
the fair value at the grant dates, consistent with the method prescribed by SFAS
No. 123, net loss per share would have been changed to the pro forma amount
indicated below:
Three Months Three Months
Ended Ended
March 31, March 31,
2004 2003
------------------------------------------------------------------------------
Net loss, as reported $ (1,159,556) $ (992,684)
Add stock based employee compensation
expense included in reported net loss 3,903 -
Less total stock-based employee (283,438)
compensation expense determined under
the fair value based method for all
awards
-------------------------------------------------------------------------------
Pro forma net loss $ (1,439,091) $ (992,684)
--------------------------------------------------------------------------------
Basic and diluted loss per common
share, as reported (0.09) $ (0.11)
Basic and diluted loss per common
share, pro forma (0.12) $ (0.11)
The following table summarizes the options granted, exercised and outstanding as
of March 31, 2004.
Weighted
Exercise Average
Price Per Exercise
Shares Share Price
---------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2003 356,250 $0.26 - $0.60 $0.40
Granted 1,200,000 $1.10 $1.10
Exercised - - -
Forfeited (31,250) $0.26 - $0.32 $0.30
---------------------------------------------------------------------------------------------------------------
Outstanding at March 31, 2004 1,525,000 $0.32 - $1.10 $0.95
---------------------------------------------------------------------------------------------------------------
Options exercisable at
March 31, 2004 381,250 $0.32 - $1.10 $0.85
---------------------------------------------------------------------------------------------------------------
8
7. REVENUE RECOGNITION
The Company recognizes revenue when product is shipped. When advance payments
are received, these payments are recorded as deferred revenue and recognized
when the product is shipped.
9
Item 2. Management's Discussion and Analysis or Plan of Operation.
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 Quarterly Report on Form 10-QSB. Historical results and percentage
relationships set forth in the statement of operations, including trends which
might appear, are not necessarily indicative of future operations.
GOING CONCERN
In connection with their audit report on our consolidated financial
statements as of December 31, 2003, BDO Seidman LLP, our independent certified
public accountants, expressed substantial doubt about our ability to continue as
a going concern because such continuance is dependent upon our ability to raise
capital.
Our technologies are in early stages of development. We have not generated
material revenues from sales or operations and we do not expect to generate
sufficient revenues to enable us to be profitable for several calendar quarters.
At critical junctures during 2003 we obtained $40,000 in additional funding,
amounting to $149,000 in total, through loans from Eric A. Wachter, our Vice
President - Pharmaceuticals, a member of our Board of Directors, and a major
shareholder. These funds allowed us to complete our planned corporate
reorganization and acquisitions, complete initial production runs for several of
our OTC products, and maintain our facilities and intellectual property
portfolio. We require additional funding to continue initial production and
distribution of OTC products in order to achieve meaningful sales volumes. In
addition, we must raise substantial additional funds in order to fully implement
our integrated business plan, including execution of the next phases in clinical
development of our pharmaceutical products and full resumption of research
programs for new research initiatives that are currently delayed.
Ultimately, we must achieve profitable operations if we are to be a viable
entity. We intend to proceed as rapidly as possible with the development 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. Although we believe that there is a reasonable basis for our
expectation that we will successfully raise the needed funds, we cannot assure
you that we will be able to raise sufficient capital to sustain operations
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.
Our current plans include continuing to operate with our four employees
during the immediate future, but we anticipate adding some part-time employees
during the next year. Our current plans also include minimal purchases of new
property, plant and equipment, and limited research and development.
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 OTC products and core intellectual properties.
This combination represents the foundation for an operating company that we
believe will provide both short-term profitability and long-term growth. In
2004, through careful control of expenditures, increasing sales of OTC products,
and issuance of debt and equity, we plan to build on that foundation to increase
shareholder value.
In the short term, we intend to develop our business by marketing,
manufacturing, and distributing our existing OTC products, principally GloveAid
and Pure-ific. 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 of prescription drugs and medical devices. Additionally, we
intend to restart our research programs that will identify additional conditions
that our intellectual properties may be used to treat and additional treatments
for those and other conditions.
We are in the planning phase for the major research and development
projects, and therefore do not have estimated completion dates, completion costs
and capital requirements for these projects. The reason we do not have this
information available is because we have not completed our planning process.
Since there is no defined
10
schedule for completing these development projects, there are no defined
consequences if they are not completed timely.
Cash Flow
As of March 31, 2004, we held $452,229 in cash. At our current cash
expenditure rate, this amount will be sufficient to meet our needs until the end
of August 2004. We already have begun to reduce our expenditure rate by delaying
some of our research programs for new research initiatives; in addition, we are
seeking to improve our cash flow by increasing sales of OTC products. However,
we cannot assure you that we will be successful either in increasing sales of
OTC products or in reducing expenditures. Moreover, even if we are successful in
improving our current cash flow position, we nonetheless will require additional
funds to meet our short-term and long-term needs. We anticipate these funds will
come from the proceeds of private placements or public offerings of debt or
equity securities, but we cannot assure you that we will be able to obtain such
funds.
Capital Resources
As noted above, our present cash flow is not sufficient to meet our
short-term operating needs for initial production and distribution of OTC
products in order to achieve meaningful sales volumes, much less to meet our
longer-term needs for investment in our business through execution of the next
phases in clinical development of our pharmaceutical products and resumption of
our currently suspended research programs. We anticipate that the majority of
the funds for our operating and development needs in 2004 will come from the
proceeds of private placements or public offerings of debt or equity securities.
We are currently in discussions with multiple funding sources and feel confident
adequate operating funding and development funding will result. While we believe
that we have reasonable basis for our expectation that we will be able to raise
additional funds, we cannot give you any assurance that we will be able to do so
on commercially reasonable terms. In addition, any such financing may result in
significant dilution to shareholders.
Market Outlook
Our products are divided into three classes:
o OTC products addressing the skincare markets;
o Prescription pharmaceuticals addressing the dermatology and oncology
markets; and
o Medical devices
Our estimates of the size of the markets for each of these three
product classes are set forth in the following table:
Approximate Annual Value
of Sales in U.S. Market(1)
Product Area (millions)
------------
OTC Products
Personal hygiene(2)............................ $ 100
Disposable glove care(3)....................... 1,200
Acne (all grades)(4)........................... 1,300
Prescription Pharmaceuticals
Psoriasis(5)................................... 1,500
Liver, breast and prostate cancer(6)........... 2,000
Medical Devices
Medical device systems(7)...................... 1,600
--------------------
(1) Our estimates of market size are based on relevant technical and
scientific literature, published market analyses, and analysis of
publicly-available sales data for products currently directed at these markets.
(2) Company Profile Report: GOJO Industries Inc, D&B, April 22, 2004 and
GOJO Company Facts from GOJO Industries website, April 22, 2004.
(3) "Anxiety Spreads Love of Gloves," USA Today, February 28, 2002; and
"Kimberly-Clark Completes Acquisition of Safeskin Corporation," company press
release dated February 8, 2000.
(4) Abstract in: Berson et al., "Current concepts in the treatment of acne:
report from a clinical roundtable," Cutis. 72 (2003) 5-13; and Figure 1 in: "US
Prescription Dermatology Pharms - Anti-Acne Mkt," Frost & Sullivan, October 31,
1996.
(5) Zanolli, in Principles and Practice of Dermatology, 1996, p. 341; C .
Camisa, Handbook of Psoriasis, 1998, p. 5; and Ho et al., Goldman Sachs Global
Equity Research, "Healthcare: Biotechnology, Industry Overview," January 8,
2004, p. 56.
(6) Cancer Facts & Figures 2004, American Cancer Society, p. 4; Ho et al.,
Goldman Sachs Global Equity Research, "Genentech Inc., Analyst Day Handbook,"
March 10, 2004, pp. 3, 20; Murphy et al., Goldman Sachs Global Equity Research,
"Novartis, R&D Pipeline Analysis," September 8, 2003, p. 39; Ho et al., Goldman
Sachs Global Equity Research, "Genentech Inc., Analyst Day Handbook," March 10,
2004, p. 15; and Form 10-K, Bristol-Myers Squibb, March 15, 2004, p. 5.
(7) Medical Laser Report, Vol. 14, No. 1, January 2000, p. 1; "Skin
Rejuvenation" in Form 10-K, Candela Corporation, September 26, 2003, p. 7; and
Laser Hair Removal Market Study, Medical Insight, Inc. May 2000, p. 24.
11
Skincare
We are developing OTC products for three areas in the skincare market:
1. personal hygiene products;
2. hand care products for workers who use disposable gloves; and
3. products for treatment of acne.
In the future, we expect to develop products for additional areas in the
skincare market, including treatments for psoriasis, eczema, and various fungal
infections such as dandruff and athlete's foot.
Personal Hygiene. Our Pure-ific brand of OTC products includes a number of
topical antibacterial products that address the personal hygiene market,
including a hand sanitizer that immediately kills germs on skin and prevents
regrowth for six hours. We believe that annual retail sales in the United States
of hand sanitizers are approximately $100 million; this figure excludes sales of
antibacterial sprays such as Lysol(R), which we estimate at more than $1.2
billion in annual U.S. sales. We anticipate extending our Pure-ific brand to
include additional products that leverage technologies utilized in our other
skincare products.
Disposable Glove Care. We estimate that annual wholesale sales of
disposable gloves in the U.S. are over $1.2 billion, including $530 million in
sales to the acute care or hospital market, $560 million in sales to the medical
laboratory and non-hospital market, and $100 million in sales to the dental
market. Use of gloves for protection in other areas, including airport security,
food preparation, sanitation, blood banks, research facilities, mail handling,
police and fire personnel, is rapidly growing as concerns over possible exposure
to biological or other hazards increase. We further anticipate that consumers
will spend comparable amounts on hand care products as on the gloves themselves.
Acne. Acne affects an estimated 17 million people in the U.S. at any given
time. 85% of all people aged 12 to 25 will experience acne problems, while 59%
of women aged 25 to 39 suffer from this affliction. 70% percent of adult acne
sufferers, and an even a higher fraction of teenagers, rely on self-medication
to treat their acne. OTC products for treatment of mild- to moderate-grade acne
generally are sold through department stores, supermarkets, and drug stores;
combined sales of these products are believed to have exceeded $800 million in
the year 2000 and were expected to increase by approximately 10% per year. In
addition to these OTC products, Frost & Sullivan have estimated the U.S.
prescription acne care market at $1.3 billion, with over 7.7 million visits to
physicians in 2001 for treatment of severe acne.
Other Skincare. We anticipate that the formulations of our OTC products and
prescription drugs can be used to treat other conditions of the skin, including
psoriasis, eczema, and fungal infections such as dandruff and athlete's foot.
There are approximately 7 million psoriasis patients in the U.S., with between
160,000 and 250,000 new cases diagnosed every year. In the U.S., the total cost
of psoriasis treatment was $2.9 billion in 1995. The numbers are similar for
eczema and fungal infections. We believe these represent extremely large future
opportunities for our skincare products.
Prescription Pharmaceuticals
We are developing prescription drugs for the treatment of certain severe
dermatologic conditions such as psoriasis, and for the treatment of serious
cancers, including those of the liver, breast, and prostate.
Acute Psoriasis. Psoriasis is a chronic skin disease affecting
approximately 5 million Americans, with over 150,000 new cases diagnosed
annually. The cause of psoriasis is unknown and there is no cure. Thus, patients
typically undergo prolonged care over a period of years to decades.
Approximately 2.5 million psoriasis patients are treated annually by U.S.
physicians (primarily dermatologists), comprising an estimated annual
expenditure of $1.5 billion for treatment in the mid-1990s. More recent
estimates project a $1-2 billion market opportunity for new therapies divided
among several multi-hundred-million dollar products.
12
Liver Cancer. Hepatocellular carcinoma, or HCC, accounts for approximately
90% of all liver tumors and is the most common solid-organ tumor worldwide,
causing over 1 million deaths annually. HCC is associated with chronic liver
injury from viral hepatitis (hepatitis B and C), and has attained epidemic
proportions among men aged 25 to 34 in eastern Asia, tropical Africa, and
southern Italy. Although currently of relatively low incidence in the U.S. and
Europe, the rapid rise in hepatitis infection in these regions signifies that
this may soon change. In contrast, the primary form of liver cancer in the U.S.
currently is metastatic colorectal carcinoma (155,000 new cases and 60,000
deaths annually, with a 6% five-year survival rate). The current standard of
care for these forms of liver cancer is ablative therapy (via localized ethanol
injection, cryosurgery, or radiofrequency ablation). A combined five-year
survival rate of 33% for these therapies demonstrates the pressing need for new
therapeutic approaches in a worldwide market estimated at over $500 million.
Breast Cancer. The American Cancer Society estimates that approximately
205,000 new cases of invasive breast cancer, and over 54,000 new cases of in
situ breast cancer, will occur in the U.S. in 2002, leading to approximately
40,000 deaths. Current treatments (lumpectomy, mastectomy, removal of regional
lymph nodes, radiation therapy, chemotherapy, and hormone therapy) are expensive
and associated with unacceptable side effects. While five-year survival rates
are excellent for localized tumors (96%), this rate drops to 21% once distant
metastasis has occurred. This illustrates that surgical excision and standard
adjuvant treatments (such as chemotherapy and radiation) are ineffective at
eliminating metastatic cells that have migrated from the primary treatment site.
New, minimally invasive treatment modalities for breast cancer may have broad
applicability to this therapeutic market estimated at well over $1 billion.
Prostate Cancer. The American Cancer Society estimates that approximately
190,000 U.S. men are afflicted annually with cancer of the prostate, leading to
over 30,000 deaths. 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 new, minimally-invasive modalities - such as direct injection of our
prescription drug Provecta into prostate tumors - may have broad applicability
to this therapeutic market as an adjuvant or primary form of therapy, providing
an entry into a therapeutic market estimated at well over $500 million.
Medical Device Systems
This market area comprises two sectors: cosmetic treatments, such as
non-ablative wrinkle reduction, elimination of spider veins and other cosmetic
blemishes, and laser hair reduction; and therapeutic uses, including activation
of certain of our light-activated drugs. Additional areas include non-surgical
destruction of skin cancers and removal of unwanted moles and other
hyperpigmented features. The U.S. medical laser market exceeded $1.6 billion in
2000, while the market for wrinkle reduction and hair reduction systems alone is
currently in excess of $100 million annually. We believe that we can develop new
markets for laser devices, significantly in addition to the current market for
these devices, as a result of the development of therapies consisting of
photoactivation of the our prescription drug products.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB 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 under the
heading "Risk Factors" and elsewhere in our Annual Report on Form 10-KSB for the
year ended December 31, 2004. 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
Quarterly Report on Form 10-QSB 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.
13
Item 3. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. Our chief executive
officer and chief financial officer have evaluated the effectiveness of the
design and operation of our "disclosure controls and procedures" (as that
term is defined in Rule 13a-14(c) under the Exchange Act) as of March 31,
2004, the end of the fiscal quarter covered by this Quarterly Report on
Form 10-QSB. Based on that evaluation, the chief executive officer and
chief financial officer have concluded that our disclosure controls and
procedures are effective to ensure that material information relating to
the Company and the Company's consolidated subsidiaries is made known to
such officers by others within these entities, particularly during the
period this Quarterly Report on Form 10-QSB was prepared, in order to allow
timely decisions regarding required disclosure.
(b) Changes in Internal Controls. There has been no change in our internal
control over financial reporting that occurred during the fiscal quarter
covered by this Quarterly Report on Form 10-QSB that has materially
affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
14
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company was not involved in any legal proceedings during the fiscal
quarter covered by this Quarterly Report of Form 10-QSB.
Item 2. Changes in Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
During the three months ended March 31, 2004, we did not sell any
securities which were not registered under the Securities Act of 1933, as
amended (the "Securities Act"), other than the following.
In the first quarter of 2004, the Company issued 1,867,490 shares of our
restricted common stock for net proceeds of $788,653. In December 2003, we
commenced an offering for sale up to approximately $1 million of this restricted
common stock. Net proceeds to us were initially expected to be approximately
$400,000 to $600,000. We have since increased this offering amount to $3 million
and have received proceeds of $1,122,317 as of March 31, 2004. If we are
successful in selling the remaining shares, total net proceeds are expected to
be approximately $1.2 million to $1.8 million. 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. We have engaged a placement agent to assist us in the offering.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. Exhibits required by Item 601 of Regulation S-B are incorporated
herein by reference and are listed on the attached Exhibit Index, which
begins on page X-1 of this Quarterly Report on Form 10-QSB.
(b) Reports on Form 8-K.
None.
15
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report 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: May 17, 2004
16
EXHIBIT INDEX
Exhibit No. Description
------------ -----------
3.1 Restated Articles of Incorporation of Provectus Pharmaceuticals,
Inc., a Nevada corporation ("Provectus"), incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended June 30, 2003, as filed
with the SEC on August 14, 2003.
3.2 Bylaws of Provectus, incorporated by reference to Exhibit 3.2 to
the Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended March 31, 2003, as filed with the SEC on May 9,
2003.
4.2.1* Convertible Secured Promissory Note and Warrant Purchase
Agreement dated as of November 26, 2002 between Provectus and
Gryffindor Capital Partners I, L.L.C. ("Gryffindor"),
incorporated herein by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated November 26, 2002, as filed with
the SEC on December 10, 2002.
4.2.2 Letter Agreement dated January 31, 2003 between Provectus and
Gryffindor, incorporated herein by reference to Exhibit 4.2.2 to
the Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended March 31, 2003, as filed with the SEC on May 9,
2003.
4.3 Amended and Restated Convertible Secured Promissory Note of
Provectus dated January 31, 2003, issued to Gryffindor, reference
to Exhibit 4.3 to the Company's Quarterly Report on Form 10-QSB
for the fiscal quarter ended March 31, 2003, as filed with the
SEC on May 9, 2003.
4.6* Stock Pledge Agreement dated as of November 26, 2002 between
Provectus and Gryffindor, incorporated herein by reference to
Exhibit 4.5 to the Company's Current Report on Form 8-K dated
November 26, 2002, as filed with the SEC on December 10, 2002.
4.7 Guaranty dated November 26, 2002 from Xantech Pharmaceuticals,
Inc., a Tennessee corporation and a wholly owned subsidiary of
Provectus ("Xantech"), to Gryffindor, incorporated herein by
reference to Exhibit 4.6 to the Company's Current Report on Form
8-K dated November 26, 2002, as filed with the SEC on December
10, 2002.
4.8 Form of Security Agreement between the Company and Gryffindor,
incorporated herein by reference to Exhibit 4.7 to the Company's
Current Report on Form 8-K dated November 26, 2002, as filed with
the SEC on December 10, 2002.
4.9 Form of Patent and License Security Agreement between the Company
and Gryffindor, incorporated herein by reference to Exhibit 4.8
to the Company's Current Report on Form 8-K dated November 26,
2002, as filed with the SEC on December 10, 2002.
4.10 Form of Trademark Collateral Assignment and Security Agreement
between the Company and Gryffindor, incorporated herein by
reference to Exhibit 4.9 to the Company's Current Report on Form
8-K dated November 26, 2002, as filed with the SEC on December
10, 2002.
4.11 Form of Copyright Security Agreement between the Company and
Gryffindor, incorporated herein by reference to Exhibit 4.10 to
the Company's Current Report on Form 8-K dated November 26, 2002,
as filed with the SEC on December 10, 2002.
4.16* Promissory Note of Provectus dated December 31, 2002, issued to
Eric A. Wachter.
10.2** 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-Q for the fiscal quarter
ended June 30, 2003, filed with the SEC on August 14, 2003.
Exhibit No. Description
------------ -----------
10.14 Settlement Agreement dated as of June 16, 2003 among Kelly Adams,
Justeene Blankenship, Nicholas Julian, and Pacific Management
Services, Inc.; and Provectus and Xantech, incorporated by
reference to Exhibit 10.14 to the Company's Current Report on
Form 8-K dated June 16, 2003, as filed with the SEC on June 26,
2003.
10.15 Material Transfer Agreement dated as of July 31, 2003 between
Schering-Plough Animal Health Corporation, a Delaware
corporation, and Provectus, incorporated herein by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2003, filed with the SEC on
August 14, 2003.
31.1+ Certification Pursuant to Rule 13a-14(a) (Section 302
Certification), dated May 17, 2004, executed by H. Craig Dees,
Ph.D., Chief Executive Officer of the Company.
31.2+ Certification Pursuant to Rule 13a-14(a) (Section 302
Certification), dated May 17, 2004, executed by Peter R.
Culpepper, Chief Financial Officer of the Company.
32.1+ Certification Pursuant to 18 U.S.C.ss. 1350 (Section 906
Certification), dated August 14, 2003, executed by H. Craig Dees,
Ph.D., Chief Executive Officer of the Company, and Peter R.
Culpepper, Chief Financial Officer of the Company.
-------------------------------------
* The Company agrees by this filing to supplementally furnish to
the SEC, upon request, a copy of the exhibits and/or schedules to
this agreement.
** Management compensation contract or plan.
+ Filed herewith.