United States Securities And Exchange Commission
Washington, DC 20549
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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 September 30, 2004
OR
[ ] 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7327 Oak Ridge Highway Suite A, Knoxville, TN 37931
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(Address of Principal Executive Offices) (Zip Code)
865/769-4011
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(Issuer's Telephone Number, Including Area Code)
N/A
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(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 September 30, 2004 was 15,341,324.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2004 2003
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(Unaudited) (Audited)
Restated
(Note 9)
Assets
Current Assets
Cash $ 5,640 $ 164,145
Stock subscription receivable - 87,875
Deferred loan costs, net of amortization of $5,178 and $19,569 84,822 150,961
Inventory 68,455 72,578
Prepaid expenses and other current assets 20,370 26,227
Prepaid consulting expense 320,542 420,817
Prepaid commitment fee 310,866 -
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Total Current Assets 810,695 922,603
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Equipment and Furnishings, less accumulated depreciation of
$361,868 and $244,760 4,703 121,415
Patents, net of amortization of $1,252,757 and $749,417 10,462,688 10,966,028
Other Assets 27,000 27,000
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$ 11,305,086 $ 12,037,046
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Liabilities and Stockholders' Deficit
Current Liabilities
Accounts payable - trade $ 158,070 $ 100,640
Accrued compensation 174,439 352,500
Accrued expenses 86,666 57,549
Accrued interest 166,564 100,021
Short-term convertible debt, net of debt discount of
$442,623 at December 31, 2003 - 57,377
Current maturities of long-term convertible debt, net of debt
discount of $9,582 and $57,052 1,016,376 968,907
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Total Current Liabilities 1,602,115 1,636,994
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Loan From Stockholder 149,000 149,000
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Long-term convertible debt, net of debt discount of $239,392
at September 30, 2004 135,608 -
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Stockholders' Equity
Common stock; par value $.001 per share; 100,000,000 shares
authorized; 15,341,324 and 10,867,509 shares issued and
outstanding, respectively 15,341 10,868
Paid-in capital 23,134,877 20,461,632
Deficit accumulated during the development stage (13,731,855) (10,221,448)
----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 9,418,363 10,251,052
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$ 11,305,086 $ 12,037,046
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-2-
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
Amounts from
January 17,
2002
Three Three Nine Nine (Inception)
Months Ended Months Ended Months Ended Months Ended Through
September 30, September 30, September 30, September 30, September 30,
2004 2003 2004 2003 2004
------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Restated Restated
(Note 9) (Note 9)
Operating Income
Net OTC Product Revenue $ 439 $ - $ 1,380 $ - $ 1,380
Net Medical Device Revenue - - 13,125 - 13,125
Operating Expenses
Research and development 379,113 95,084 813,252 331,370 1,588,890
General and administrative 537,417 570,697 1,353,635 1,518,039 9,858,831
Amortization 167,780 167,780 503,340 503,340 1,252,757
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Total operating loss (1,083,871) (833,561) (2,655,722) (2,352,749) (12,685,973)
Gain on sale of fixed assets - - - 55,000 55,000
Loss on extinguishment of debt - - (100,519) - (100,519)
Net interest (expense) income (64,651) (38,507) (754,166) (114,759) (1,000,363)
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Net Loss Applicable to Common
Stockholders $ 1,148,522) $ (872,062) $ (3,510,407) $ (2,412,508) $ (13,731,855)
-------------------------------------------------------------------------------------------------------------------------------
Basic and Diluted Loss Per
Common Share (.08) (0.09) (0.26) ( 0.25)
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Weighted Average Number of
Common Shares
Outstanding -
Basic and Diluted 15,080,661 9,721,022 13,606,164 9,553,591
-------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
-3-
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
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Common Stock
-----------------------------------
Number Paid-in Accumulated
of Shares Par Value Capital 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, 2004 - - - (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 693,040 693 421,038 - 421,731
Issuance of warrants for services - - 347,800 - 347,800
Exercise of warrants 10,000 10 4,990 - 5,000
Employee compensation from stock options - - 11,709 - 11,709
Issuance of stock pursuant to Regulation S 2,437,443 2,437 790,701 - 793,138
Issuance of stock pursuant to Regulation D 1,333,332 1,333 843,001 - 844,334
Beneficial conversion related to
convertible debt - - 254,006 - 254,006
Net loss for the nine months ended
September 30, 2004 - - - (3,510,407) (3,510,407)
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Balance, at September 30, 2004 15,341,324 $ 15,341 $ 23,134,877 $ (13,731,855) $ 9,418,363
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See accompanying notes to financial statements.
-4-
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative
Amounts from
January 17,
2002
Nine Nine (Inception)
Months Ended Months Ended through
September 30, September 30, September 30,
2004 2003 2004
-----------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
Restated
(Note 9)
Cash Flows From Operating Activities
Net loss $ (3,510,407) $ (2,412,508) $ (13,731,855)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 117,107 187,293 384,868
Amortization of patents 503,340 503,340 1,252,757
Amortization of original issue discount 504,706 47,229 631,618
Amortization of prepaid consultant expense 491,773 - 491,773
Amortization of deferred loan costs 156,139 - 175,708
Compensation through issuance of stock options 11,709 33,853 46,368
Compensation through issuance of stock - - 932,000
Issuance of stock for services 48,368 40,884 5,697,018
Issuance of warrants for services 18,800 87,812 120,112
Gain on sale of fixed asset - (55,000) (55,000)
Increase (decrease) in assets
Prepaid expenses 5,857 26,332 (20,370)
Inventory 4,123 (72,578) (68,455)
Increase (decrease) in liabilities
Accounts payable 57,430 205,199 154,425
Accrued expenses (169,067) 459,846 341,003
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Net cash used in operating activities (1,760,122) (948,298) (3,648,030)
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Cash Flows From Investing Activities
Proceeds from sale of fixed asset - 180,000 180,000
Capital expenditures (395) (3,301) (3,696)
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Net cash (used in) provided by investing activities (395) 176,699 176,304
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Cash Flows From Financing Activities
Proceeds from loans from stockholder - 40,000 149,000
Proceeds from convertible debt 375,000 25,959 1,900,959
Proceeds from sale of common stock 1,812,012 - 2,129,484
Proceeds from exercise of warrants 5,000 - 5,453
Cash paid to retire convertible debt (500,000) - (500,000)
Cash paid for deferred loan costs (90,000) - (159,530)
Purchase and retirement of common stock - - (48,000)
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Net cash provided by financing activities 1,602,012 65,959 3,477,366
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-5-
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
Cumulative
Amounts from
January 17,
2002
Nine Nine (Inception)
Months Ended Months Ended through
September 30, September 30, September 30,
2004 2003 (Inception)
--------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
Restated
(Note 9)
NET CHANGE IN CASH $ (158,505) $ (705,640) $ 5,640
Cash, at beginning of period $ 164,145 $ 717,833 $ -
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Cash, at end of period $ 5,640 $ 12,193 $ 5,640
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Supplemental Disclosure of Noncash Investing and
Financing Activities
September 30, 2004
Issuance of stock in exchange for standby
equity commitment of $310,866
Issuance of warrants in exchange for
prepaid services of $329,000
Issuance of stock in exchange for prepaid
services of $62,500
Discounts on convertible debt of $254,006
Accrual of $86,666 for stock issuance
costs off-set against gross proceeds
from sale of common stock
September 30, 2003
Stock and warrants issued to consultants
for prepaid services of $235,583
See accompanying notes to financial statements.
-6-
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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 and nine months ended September 30, 2004 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2004.
2. GOING CONCERN
At December 31, 2003, there was doubt regarding the Company's ability to
continue as a going concern considering the lack of working capital required to
develop its products and develop sales and distribution channels for its
products. The accompanying financial statements as of December 31, 2003 have
been prepared assuming the Company will continue as a going concern. The
December 31, 2003 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 any
outcome different from this expectation.
At September 30, 2004, as a result of the financing transaction described
in Note 5(e), there is no longer doubt regarding the Company's ability to
continue as a going concern.
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 or 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 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. 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-pro rata 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.
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 September 30, 2004 are
2,478,333
-7-
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
warrants, 1,725,000 options and 2,168,069 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 189,274 shares committed to be issued but not outstanding at
September 30, 2004.
5. EQUITY TRANSACTIONS
(a) At December 31, 2003, the Company was committed to issue 416,606 shares
to consultants in exchange for services rendered. In January 2004, 341,606 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. 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. 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 $11,665.
(b) 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. At September 30, 2004, $41,125 of
these costs have been charged to operations with the remaining $287,875 recorded
as prepaid consulting expense as it represents payments for future services and
the warrants are fully-vested and non-forfeitable.
(c) 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 of
$155,666 have been off-set against the proceeds received of which $86,666 was
accrued at September 30, 2004 as it relates to 66,667 shares of common stock not
issued as of September 30, 2004. 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 expires six months after the last
installment date.
(d) In conjunction with the June 25, 2004 transaction, 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 noted in Note 5(c). As a result, the debt discount previously
recorded on the convertible debt and the deferred loan costs were fully
amortized and recorded as additional interest expense of $127,378 as of June 30,
2004. 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 loss on extinguishment of debt as of June 30, 2004. At
September 30, 2004, there were no amounts outstanding related to the short-term
convertible debt.
(e) Pursuant to a Standby Equity Distribution Agreement ("SEDA") dated July
28, 2004 between the Company and Cornell Capital Partners, L.P. ("Cornell"), the
Company may, at its discretion, issue shares of common stock to Cornell at any
time until June 28, 2006. As of September 30, 2004 there were no shares issued
pursuant to the SEDA. The maximum aggregate amount of the equity placements
pursuant to the SEDA is $20 million, and the Company may 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 is being amortized over the term of the
commitment period which is one year.
(f) On July 28, 2004, the Company entered into an agreement to issue 8%
convertible debentures to Cornell Capital Partners in the amount of $375,000
which is due together with interest on July 28, 2007. This debt has a
subordinated security interest in the assets of the Company. The debentures are
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 (July 28, 2004) or (b) an amount equal to
80% of the lowest daily VWAP of
-8-
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
the Company's common stock during the 5 trading days immediately preceding the
conversion date. There is a floor conversion price of $.75 until December 1,
2004. Emerging Issues Task Force Issue 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" ("EITF 98-5") requires the issuer to assume that the holder
will not convert the instrument until the time of the most beneficial
conversion. EITF 98-5 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. 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 which resulted in a beneficial conversion amount of $254,006. The
beneficial conversion amount is being amortized over the term of the debt which
is three years. At September 30, 2004, $14,614 has been amortized.
(g) In 2004, the Company sold 2,437,443 shares of restricted common stock
under this offering of which 1,867,490 shares were issued in the first quarter
2004 and 569,953 were issued in the second quarter 2004. Shares were sold during
2004 at an average gross price of $0.98 per share with net proceeds of $793,138.
Costs related to the placement agent for proceeds received in 2004 of $1,588,302
have been off-set against gross proceeds of $2,381,439. The transaction is a
Regulations 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.
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 September 30, 2004.
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, and all options were
outstanding at September 30, 2004. 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, and all options were outstanding at September 30,
2004.
There were no stock options granted by the Company during the third quarter
of 2004.
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, $11,709 of expense was recorded for the nine months ended
September 30, 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 Nine Months
Ended Ended
Three Months September 30, Nine Months September 30,
Ended 2003 Ended 2003
September 30, Restated September 30, Restated
2004 (Note 9) 2004 (Note 9)
---------------------------------------- ----------------- ---------------- ---------------- -----------------
Net loss, as reported $ (1,148,522) $ (872,068) $ (3,510,407) $ (2,412,508)
Add stock-based employee compensation
expense included in reported net
loss 3,903 6,347 11,709 33,853
Less total stock-based employee
compensation expense determined
under the fair value based method
for all awards (90,938) (13,200) (591,563) (70,400)
---------------------------------------- ----------------- ---------------- ---------------- -----------------
Pro forma net loss $ (1,235,557) $ (878,921) $ (4,090,261) $ (2,449,055)
---------------------------------------- ----------------- ---------------- ---------------- -----------------
Basic and diluted loss per common
share, as reported $ (0.08) $ (0.09) $ (0.26) $ (0.25)
Basic and diluted loss per common
share, pro forma $ (0.08) $ (0.09) $ (0.30) $ (0.26)
-9-
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
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.
8. SUBSEQUENT EVENTS
(a) Pursuant to a Standby Equity Distribution Agreement ("SEDA") dated July
28, 2004 between the Company and Cornell Capital Partners, L.P. ("Cornell"), the
Company may, at its discretion, issue shares of common stock to Cornell at any
time over the next two years. The facility is subject to having in effect an
effective registration statement covering the shares. A registration statement
covering 2,023,552 shares has been filed with the Securities and Exchange
Commission.
(b) Pursuant to a Securities Purchase Agreement between the Company and
Cornell dated July 28, 2004 (the "Debenture SPA"), the Company issued a second
secured convertible debenture on October 7, 2004 which has the same conversion
terms as the debenture described in Note 5(f). The Company filed a registration
statement with the Securities and Exchange Commission for the shares underlying
both debentures. This debt is due together with interest on October 7, 2007 and
has a subordinated security interest in the assets of the Company.
9. RESTATEMENT
During 2004, the Company restated its historical financial statements to
revise the value of its patents acquired from Valley Pharmaceuticals, Inc. on
November 19, 2002. During a detailed review of the accounting literature
applicable to the valuation of the patents upon acquisition, the Company
determined that the guidance under Accounting Principles Board Opinion No. 29,
"Accounting for Nonmonetary Transactions" ("APB 29") was more appropriate than
the guidance under Statement of Financial Accounting Standard No. 141, "Business
Combinations"("SFAS 141"), which had originally been used by the Company. Under
SFAS 141, the Company used the date that the transaction was entered into to
value the shares given up in exchange for the assets acquired compared to using
the date the transaction was completed as required under APB 29. Under APB 29,
the restated value of the patents upon acquisition is $11,715,445 compared to
the $20,037,560 value initially used by the Company. The accompanying financial
statements and notes reflect the restated amounts. The following tables detail
the effects of the restatement:
-10-
At
December 31, 2003
As
Previously As
Reported Restated
----------------- -----------------
Balance Sheet Data:
Patents, net of amortization $ 18,755,791 $ 10,966,028
------------------------------------------------------------------------
Total Assets 19,826,809 12,037,046
------------------------------------------------------------------------
Stockholders' Equity 18,040,815 10,251,052
------------------------------------------------------------------------
For The Three Months Ended, For The Nine Months Ended,
September 30, September 30,
2003 2003
As As
Previously As Previously As
Reported Restated Reported Restated
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------------------------------------------------------------------
Income Statement Data:
Amortization $ 286,964 $ 167,780 $ 860,891 $ 503,340
Total Operating Loss (952,745) (833,561) (2,710,300) (2,352,749)
Net Loss (991,252) (872,068) (2,770,058) (2,412,508)
Basic and Diluted Loss
Per Common Share (0.10) (0.09) (0.29) (0.25)
-11-
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.
CAPITAL STRUCTURE
Our ability to continue as a going concern has become reasonably assured
due to our financing in June and July 2004. However, our ongoing operations
continue to be dependent upon our ability to raise capital.
We plan to 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.
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
further 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 become profitable due to revenues from
OTC product sales, 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 anticipate adding some part-time employees
during the next year. Our current plans also include minimal purchases of new
property, plant and equipment, and significantly increased 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 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 schedule for completing these development projects,
there are no defined consequences if they are not completed timely. Research and
development costs comprising the total of $379,113 for the three months ending
September 30, 2004 include consulting of $147,711, insurance of $30,416, legal
of $44,113, payroll of $151,271, and rent and utilities of $5,602. R&D costs
comprising the total of $813,252 for the nine months ending September 30, 2004
include consulting of $289,079, lab expense of $10,958, insurance of $66,591,
legal of $91,047, office and other expense of $3,751, payroll of $326,895, rent
and utilities of $14,935, and taxes and fees of $9,996. Research and development
costs comprising the total of $95,084 for the three months ending September 30,
2003 included depreciation expense of $49,636, insurance of $5,197, payroll of
$30,194, and rent and utilities of $10,057. Research and development costs
comprising the total of $331,370 for the nine months ending September 30, 2003
included depreciation expense of $187,292, consulting of $26,423, insurance of
$10,153, office and other expense of $828, payroll of $78,629, rent and
utilities of $26,857, and taxes and fees of $1,188.
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CASH FLOW
As of November 12, 2004, we held approximately $250,000 in cash. At our
current cash expenditure rate, this amount in addition to proceeds expected from
our third and fourth quarter 2004 financings will be sufficient to meet our
needs. We already have begun to increase our expenditure rate by accelerating
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 in increasing sales of OTC
products. Moreover, even if we are successful in improving our current cash flow
position, we nonetheless will require additional funds to meet our long-term
needs. We anticipate these funds will come from the proceeds of private
placements 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 for initial production and distribution of OTC
products in order to achieve meaningful sales volumes. Excess cash will be used
to finance 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. 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. For further information on funding
sources, please see Notes 5(b), 5(c) and 8 of the notes to our financial
statements included in this report.
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, 2003. 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.
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-15(e) under the
Exchange Act) as of September 30, 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.
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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. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
Pursuant to a Securities Purchase Agreement between us and A.I.
International Corporate Holdings, Ltd. ("A.I."), American Equity Consulting
Services, Inc. ("American Equity") and Castlerigg Master Investments, Ltd.
("Castlerigg") dated June 25, 2004 (the "Common Stock SPA"), we have issued
1,333,333 shares of common stock at a purchase price of $.75 per share, for an
aggregate purchase price of $1 million. In addition, we have issued warrants on
the following terms:
Number of Exercise Issue Termination
Investor Shares Price Date Date
-------- ----------- ----------- ---------- --------------
A.I. 222,222 $1.00 June 25, 2004 June 25, 2009
Castlerigg 222,222 $1.00 June 25, 2004 June 25, 2009
A.I. 148,148 $1.00 July 16, 2004 July 16, 2009
Castlerigg 148,148 $1.00 July 16, 2004 July 16, 2009
Castlerigg 148,148 $1.00 August 5, 2004 August 5, 2009
Castlerigg 444,444 $1.00 August 9, 2004 August 9, 2009
A.I. and Castlerigg have an option to purchase an additional 1,333,333
shares of common stock on the same terms and conditions described above,
including the attachment of warrants. We have paid $50,000 and we will issue
66,667 shares of restricted common stock to Baker Consulting, Inc. as
compensation for its broker services and as placement agent. We believe that
this offering was exempt from the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act") by reason of Section 4(2) of the
Securities Act, based upon the fact that the offer and sale of the securities
was made to a limited number of purchasers in a transaction not involving any
general solicitation or general advertising. Proceeds will be used for general
corporate purposes.
Pursuant to a Standby Equity Distribution Agreement ("SEDA") dated July 28,
2004 between us and Cornell Capital Partners, L.P. ("Cornell"), we may, at our
discretion, issue shares of common stock to Cornell at any time over the next
two years. The facility is subject to having in effect a registration statement
covering the shares. A registration statement covering 2,023,552 shares has been
filed with the Securities and Exchange Commission. The maximum aggregate amount
of the equity placements pursuant to the SEDA is $20 million, and we may draw
down up to $1 million per month. Pursuant to the SEDA, on July 28, 2004, we
issued 190,084 shares of common stock to Cornell as commitment shares. In
addition, we issued 7,920 shares of common stock to Newbridge Securities
Corporation ("Newbridge") as compensation for its services as placement agent.
We also paid $10,000 in structuring fees to Cornell. We believe that this
offering was exempt from the registration requirements of the Securities Act by
reason of Rule 506 of Regulation D and Section 4(2) of the Securities Act, based
upon the fact that the offer and issuance of the securities satisfied all the
terms and conditions of Rules 501 and 502 of the Securities Act, Cornell and
Newbridge are financially sophisticated and had access to complete information
concerning us and acquired the securities for investment and not with a view to
the distribution thereof.
Pursuant to a Securities Purchase Agreement between us and Cornell dated
July 28, 2004 (the "Debenture SPA"), we issued a Secured Convertible Debenture
(the "Debenture") to Cornell at an original principal amount of $375,000. The
Debenture bears interest at 8% per annum. The Debenture is due and payable in
full on July 28, 2007.
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At our option, the entire principal amount and all accrued interest may be paid
in either cash or in shares of common stock, at a price per share equal to the
lesser of (a) $1.88 (the "Fixed Price") or (b) an amount equal to 80% of the
lowest daily volume weighted average price of the common stock, as quoted by
Bloomberg, L.P., during the 5 trading days immediately preceding the conversion
date. There is a $.75 floor conversion price until December 1, 2004. We may
redeem a portion or all of the outstanding Debenture at any time with 3 business
days advance written notice, at a price that is 110% of the amount redeemed plus
accrued interest; provided that if on the date that we provide notice of
redemption the price of the common stock is greater than the Fixed Price, the
redemption price will be 120% of the amount redeemed plus accrued interest.
Pursuant to the Debenture SPA, the Company issued a second secured convertible
debenture on the same terms as the Debenture on October 7, 2004 which is the
date that the Company filed a registration statement for the shares underlying
both debentures. The Debenture is due and payable in full on October 7, 2007. We
believe that this offering was exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act") by reason of Rule 506
of Regulation D and Section 4(2) of the Securities Act, based upon the fact that
the offer and issuance of the Debenture satisfied all the terms and conditions
of Rules 501 and 502 of the Securities Act, Cornell is financially sophisticated
and had access to complete information concerning us and acquired the securities
for investment and not with a view to the distribution thereof. Proceeds will be
used for general corporate purposes.
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.
31.1 Certification Pursuant to Rule 13a-14(a) (Section 302
Certification), dated November 12, 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 November 12, 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 November 12, 2004, executed by H. Craig
Dees, Ph.D., Chief Executive Officer of the Company, and Peter R.
Culpepper, Chief Financial Officer of the Company.
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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, Ph.D.
--------------------------------------------
H. Craig Dees, Ph.D.
Chief Executive Officer
Date: November 12, 2004
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EXHIBIT INDEX
Exhibit No. Description
---------------- --------------------------------------------------------------
31.1 Certification Pursuant to Rule 13a-14(a) (Section 302
Certification), dated November 12, 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 November 12, 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 November 12, 2004, executed by H.
Craig Dees, Ph.D., Chief Executive Officer of the Company,
and Peter R. Culpepper, Chief Financial Officer of the
Company.
---------------- --------------------------------------------------------------
X-1