United States Securities And Exchange Commission
Washington, DC 20549
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FORM 10-KSB
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2004; OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to _______________
Commission file number: 0-9410
Provectus Pharmaceuticals, Inc.
(Name of Small Business Issuer 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, Tennessee 37931
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(Address of Principal Executive Offices) (Zip Code)
865/769-4011
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
None
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(Title of Class)
Securities registered under Section 12(g) of the Exchange Act:
Common shares, par value $.001 per share
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(Title of Class)
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 [_]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the most recent fiscal year were $21,072. The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of March 17, 2005, was $15,947,003 (computed
on the basis of $0.97 per share).
The number of shares outstanding of the issuer's stock, $0.001 par value
per share, as of March 17, 2005 was 16,440,209.
Documents incorporated by reference in Part III hereof: Proxy Statement for
2005 Annual Meeting of Stockholders
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
Provectus Pharmaceuticals, Inc.
Annual Report on Form 10-KSB
Table of Contents
Page
----
Part I........................................................................1
Item 1. Description of Business.......................................1
History..............................................................1
Description Of Business..............................................1
Intellectual Property................................................7
Competition..........................................................9
Federal Regulation of Therapeutic Products...........................9
Personnel...........................................................12
Available Information...............................................13
Item 2. Description of Property......................................13
Item 3. Legal Proceedings............................................13
Item 4. Submission of Matters to a Vote of Security Holders..........13
Part II......................................................................14
Item 5. Market for Common Equity and Related Stockholder Matters.....14
Item 6. Management's Discussion and Analysis or Plan of Operation....16
Plan of Operation...................................................17
Item 7. Financial Statements.........................................18
Forward-Looking Statements..........................................18
Risk Factors........................................................18
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.....................................25
Item 8A. Controls and Procedures......................................25
Part III.....................................................................26
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act...26
Item 10. Executive Compensation.......................................26
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters...................26
Item 12. Certain Relationships and Related Transactions...............27
Item 13. Exhibits.....................................................27
Item 14. Principal Accountant Fees and Services.......................27
Signatures...................................................................28
PART I
Item 1. Description of Business.
History
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, which
we refer to as "PPI." On April 23, 2002, an Agreement and Plan of Reorganization
between Provectus Pharmaceutical and PPI was approved by the written consent of
a majority of the outstanding shares of Provectus Pharmaceutical. As a result,
holders of 6,680,000 shares of common stock of Provectus Pharmaceutical
exchanged their shares for all of the issued and outstanding shares of PPI. As
part of the acquisition, Provectus Pharmaceutical changed its name to "Provectus
Pharmaceuticals, Inc." and PPI became a wholly owned subsidiary of Provectus.
For accounting purposes, we treat this transaction as a recapitalization of PPI.
On November 19, 2002, we acquired Valley Pharmaceuticals, Inc., a
privately-held Tennessee corporation formerly known as Photogen, Inc., by
merging our subsidiary PPI with and into Valley and naming the surviving
corporation "Xantech Pharmaceuticals, Inc." Valley had minimal operations and
had no revenues prior to the transaction with the Company. By acquiring Valley,
we acquired our most important intellectual property, including issued U.S.
patents and patentable inventions, with which we intend to develop:
o prescription drugs, medical and other devices (including laser
devices) and over-the-counter pharmaceutical products in the fields of
dermatology and oncology; and
o technologies for the preparation of human and animal vaccines,
diagnosis of infectious diseases and enhanced production of
genetically engineered drugs.
Prior to the acquisition of Valley, we were considered to be, and continue
to be, in the development stage and had not generated any revenues from the
assets we acquired.
On December 5, 2002, we acquired the assets of Pure-ific L.L.C., a Utah
limited liability company, and created a wholly owned subsidiary, Pure-ific
Corporation, to operate that business. We acquired the product formulations for
Pure-ific personal sanitizing sprays, along with the "Pure-ific" trademarks. We
intend to continue product development and begin to market a line of personal
sanitizing sprays and related products to be sold over the counter under the
"Pure-ific" brand name.
Description Of Business
Overview
Provectus, and its five wholly owned subsidiaries:
o Xantech Pharmaceuticals, Inc.
o Pure-ific Corporation
o Provectus Biotech, Inc.
o Provectus Devicetech, Inc.
o Provectus Pharmatech, Inc.
(which we refer to as our subsidiaries) develop, license and market and plan to
sell products in three sectors of the healthcare industry:
o Over-the-counter products, which we refer to in this report as "OTC
products;"
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o Prescription drugs; and
o Medical device systems
We manage Provectus and our subsidiaries on an integrated basis and when we
refer to "we" or "us" or "the Company" in this Annual Report on Form 10-KSB, we
refer to all six corporations considered as a single unit. Our principal
executive offices are located at 7327 Oak Ridge Highway, Suite A, Knoxville,
Tennessee 37931, telephone 865/769-4011.
Through discovery and use of state-of-the-art scientific and medical
technologies, the founders of our pharmaceutical business have developed a
portfolio of patented, patentable, and proprietary technologies that support
multiple products in the prescription drug, medical device and OTC products
categories (including patented technologies for: (a) treatment of cancer; (b)
novel therapeutic medical devices; (c) enhancing contrast in medical imaging;
(d) improving signal processing during biomedical imaging; and (e) enhancing
production of biotechnology products). Our prescription drug products encompass
the areas of dermatology and oncology and involve several types of small
molecule-based drugs. Our medical device systems include therapeutic and
cosmetic lasers, while our OTC products address markets primarily involving
skincare applications. Because our prescription drug candidates and medical
device systems are in the early stages of development, they are not yet on the
market and there is no assurance that they will advance to the point of
commercialization.
Our first commercially available products are directed into the OTC market,
as these products pose minimal or no regulatory compliance barriers to market
introduction. For example, the active pharmaceutical ingredient (API) in our
ethical products is already approved for other medical uses by the FDA and has a
long history of safety for use in humans. This use of known APIs for novel uses
and in novel formulations minimizes potential adverse concerns from the FDA,
since considerable safety data on the API is available (either in the public
domain or via license or other agreements with third parties holding such
information). In similar fashion, our OTC products are based on established APIs
and, when possible, utilize formulations (such as aerosol or cream formulations)
that have an established precedent. (For more information on compliance issues,
see "Federal Regulation of Therapeutic Products" below.) In this fashion, we
believe that we can diminish the risk of regulatory bars to the introduction of
safe, consumer-friendly products and minimize the time required to begin
generating revenues from product sales. At the same time, we continue to develop
higher-margin prescription pharmaceuticals and medical devices, which have
longer development and regulatory approval cycles.
Over-the-Counter Pharmaceuticals
Our OTC products are designed to be safer and more specific than competing
products. Our technologies offer practical solutions for a number of intractable
maladies, using ingredients that have limited or no side effects compared with
existing products. To develop our OTC products, we typically use compounds with
potent antibacterial and antifungal activity as building blocks and combine
these building blocks with anti-inflammatory and moisture-absorbing agents.
Products with these properties can be used for treatment of a large number of
skin afflictions, including:
o hand irritation associated with use of disposable gloves
o eczema
o mild to moderate acne
Where appropriate, we have filed or will file patent applications and will
seek other intellectual property protection to protect our unique formulations
for relevant applications.
GloveAid
Personnel in many occupations and industries now use disposable gloves
daily in the performance of their jobs, including:
o Airport security personnel;
o Food handling and preparation personnel;
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o Sanitation workers;
o Postal and package delivery handlers and sorters;
o Laboratory researchers;
o Health care workers such as hospital and blood bank personnel; and
o Police, fire and emergency response personnel.
Accompanying the increased use of disposable gloves is a mounting incidence
of chronic skin irritation. To address this market, we have developed GloveAid,
a hand cream with both antiperspirant and antibacterial properties, to increase
the comfort of users' hands during and after the wearing of disposable gloves.
During 2003, we ran a pilot scale run at the manufacturer of GloveAid.
The chronic skin irritation that accompanies the long-term use of
disposable gloves has been characterized as an allergic-like reaction to the
glove materials. Currently, physicians treat the condition using steroids and
other immunosuppressive therapies. To avoid possible regulatory bars, we are
marketing GloveAid as a means to increase users' comfort, not as a long-term
therapy for treatment of chronic skin irritation. However, as we obtain data
regarding people who have existing chronic skin irritation, we may seek
regulatory approval of GloveAid to permit us to market it as a therapy for
chronic skin problems associated with wearing of disposable gloves. If we decide
to obtain this regulatory approval, we anticipate that our projected sales of
GloveAid would increase significantly. Obtaining this approval would require the
completion of glove viability tests required by the United States Food and Drug
Administration, which we refer to as the "FDA," and responding to the FDA's
comments relating to these tests. We estimate regulatory approval would cost
approximately $300,000 and would take from two to three years to obtain.
Pure-ific
Our Pure-ific line of products includes two quick-drying sprays, Pure-ific
and Pure-ific Kids, that immediately kill up to 99.9% of germs on skin and
prevent regrowth for 6 hours. We have determined the effectiveness of Pure-ific
based on our internal testing and testing performed by Paratus Laboratories
H.B., an independent research lab. Pure-ific products help prevent the spread of
germs and thus complement our other OTC products designed to treat irritated
skin or skin conditions such as acne, eczema, dandruff and fungal infections.
Our Pure-ific sprays have been designed with convenience in mind and are
targeted towards mothers, travelers, and anyone concerned about the spread of
sickness-causing germs. During 2003 and 2004, we identified and engaged sales
and brokerage forces for Pure-ific. We emphasized getting sales in independent
pharmacies and mass (chain store) markets. The supply chain for Pure-ific was
established with the ability to support large-scale sales and a starting
inventory was manufactured and stored in a contract warehouse/fulfillment
center. In addition, a website for Pure-ific was developed with the ability for
supporting on-line sales of the antibacterial hand spray. We intend to continue
developing our distribution network for these products and expect to expand the
Pure-ific product line to include additional applications.
Dermatology
A number of dermatological conditions, including psoriasis, eczema, and
acne, result from a superficial infection which triggers an overwhelming immune
response. We anticipate developing OTC products similar to the GloveAid line for
the treatment of mild to moderate cases of psoriasis, eczema, and acne. Wherever
possible, we intend to formulate these products to minimize or avoid significant
regulatory bars that might adversely impact time to market.
Prescription Drugs
We are developing a number of prescription drugs which we expect will
provide minimally invasive treatment of chronic severe skin afflictions such as
psoriasis, eczema, and acne; and several life-threatening cancers such as those
of the liver, breast and prostate. We believe that our products will be safer
and more specific than currently existing products. Use of topical or other
direct delivery formulations allows these potent products to be conveniently and
effectively delivered only to diseased tissues, thereby enhancing both safety
and effectiveness. The ease of use and superior performance of these products
may eventually lead to extension into OTC applications currently serviced by
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less safe, more expensive alternatives. All of these products are in the
pre-clinical or clinical trial stage.
Dermatology
Our most advanced prescription drug candidate for treatment of topical
diseases on the skin is Xantryl, a topical gel. PV-10, the active ingredient in
Xantryl, is "photoactive": it reacts to light of certain wavelengths, increasing
its therapeutic effects. PV-10 also concentrates in diseased or damaged tissue
but quickly dissipates from healthy tissue. By developing a "photodynamic"
treatment regimen (one which combines a photoactive substance with activation by
a source emitting a particular wavelength of light) around these two properties
of PV-10, we can deliver a higher therapeutic effect at lower dosages of active
ingredient, thus minimizing potential side effects including damage to nearby
healthy tissues. PV-10 is especially responsive to green light, which is
strongly absorbed by the skin and thus only penetrates the body to a depth of
about three to five millimeters. For this reason, we have developed Xantryl
combined with green-light activation for topical use in surface applications
where serious damage could result if medicinal effects were to occur in deeper
tissues.
Acute psoriasis. Psoriasis is a common chronic disorder of the skin
characterized by dry scaling patches, called "plaques," for which current
treatments are few and those that are available have potentially serious side
effects. According to Roenigk and Maibach (Psoriasis, Third Edition, 1998),
there are approximately five million people in the United States who suffer from
psoriasis, with an estimated 160,000 to 250,000 new psoriasis cases each year.
There is no known cure for the disease at this time. According to the National
Psoriasis Foundation, the majority of psoriasis sufferers, those with mild to
moderate cases, are treated with topical steroids that can have unpleasant side
effects; none of the other treatments for moderate cases of psoriasis have
proven completely effective. The 25-30% of psoriasis patients who suffer from
more severe cases generally are treated with more intensive drug therapies or
PUVA, a light-based therapy that combines the drug Psoralen with exposure to
ultraviolet A light. While PUVA is one of the more effective treatments, it
increases a patient's risk of skin cancer.
We believe that Xantryl activated with green light offers a superior
treatment for acute psoriasis because it selectively treats diseased tissue with
negligible potential for side effects in healthy tissue; moreover, the therapy
has shown promise in comprehensive Phase 1 clinical trials. The objective of a
Phase 1 clinical trial is to determine if there are safety concerns with the
therapy. In these studies, involving more than 50 test subjects, Xantryl was
applied topically to psoriatic plaques and then illuminated with green light. In
our first study, a single-dose treatment yielded an average reduction in plaque
thickness of 59% after 30 days, with further response noted at the final
follow-up examination 90 days later. Further, no pain, significant side effects,
or evidence of "rebound" (increased severity of a psoriatic plaque after the
initial reduction in thickness) were observed in any treated areas. This degree
of positive therapeutic response is comparable to that achieved with potent
steroids and other anti-inflammatory agents, but without the serious side
effects associated with such agents. We are continuing the required Food and
Drug Administration reporting to support the active Investigational New Drug
application for Xantryl's Phase 2 clinical trials on psoriasis. The required
reporting includes the publication of results regarding the multiple treatment
scenario of the active ingredient in Xantryl. We expect to conduct Phase 2
studies in the near future, in which we expect to assess the potential for
remission of the disease using a regimen of weekly treatments similar to those
used for PUVA.
Actinic Keratosis. According to Schwartz and Stoll (Fitzpatrick's
Dermatology in General Medicine, 1999), actinic keratosis, or "AK" (also called
solar keratosis or senile keratosis), is the most common pre-cancerous skin
lesion among fair-skinned people and is estimated to occur in over 50% of
elderly fair-skinned persons living in sunny climates. These experts note that
nearly half of the approximately five million cases of skin cancer in the U.S.
may have begun as AK. The standard treatments for AK (primarily comprising
excision, cryotherapy, and ablation with topical 5-fluorouracil) are often
painful and frequently yield unacceptable cosmetic outcomes due to scarring.
Building on our experience with psoriasis, we are assessing use of Xantryl with
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green-light activation as a possible improvement in treatment of early and more
advanced stages of AK. We completed an initial Phase 1 clinical trial of the
therapy for this indication in 2001 with the predecessor company that was
acquired in 2002. This study, involving 24 subjects, examined the safety profile
of a single treatment using topical Xantryl with green light photoactivation; no
significant safety concerns were identified. We are assessing the data from the
study as a possible basis for further clinical development of Xantryl for AK.
Severe Acne. According to Berson et al. (Cutis. 72 (2003) 5-13), acne
vulgaris affects approximately 17 million individuals in the U.S., causing pain,
disfigurement, and social isolation. Moderate to severe forms of the disease
have proven responsive to several photodynamic regimens, and we anticipate that
Xantryl can be used as an advanced treatment for this disease. Pre-clinical
studies show that the active ingredient in Xantryl readily kills bacteria
associated with acne. This finding, coupled with our clinical experience in
psoriasis and actinic keratosis, suggests that therapy with Xantryl will exhibit
no significant side effects and will afford improved performance relative to
other therapeutic alternatives. If correct, this would be a major advance over
currently available products for severe acne.
As noted above, we are researching multiple uses for Xantryl with
green-light activation. Multiple-indication use by a common pool of physicians -
dermatologists, in this case - should reduce market resistance to this new
therapy.
Oncology
Oncology is another major market where our planned products may afford
competitive advantage compared to currently available options. We are developing
Provecta, a sterile injectible form of PV-10, for direct injection into tumors.
Because PV-10 is retained in diseased or damaged tissue but quickly dissipates
from healthy tissue, we believe we can develop therapies that confine treatment
to cancerous tissue and reduce collateral impact on healthy tissue. During 2003
and 2004, we have been working toward completion of the extensive scientific and
medical materials necessary for filing an Investigational New Drug (IND)
application for Provecta in anticipation of beginning Phase 1 clinical trials
for breast and liver cancer. This IND was filed and cleared by the RDA in 2004
and sets the stage for Phase 1 clinical trials.
Liver Cancer. The current standard of care for liver cancer is ablative
therapy (which seeks to reduce a tumor by poisoning, freezing, heating, or
irradiating it) using either a localized injection of ethanol (alcohol),
cryosurgery, radiofrequency ablation, or ionizing radiation such as X-rays.
Where effective, these therapies have many side effects; selecting therapies
with fewer side effects tends to reduce overall effectiveness. Combined,
ablative therapies have a five-year survival rate of 33% - meaning that only 33%
of those liver cancer patients whose cancers are treated using these therapies
survive for five years after their initial diagnoses. In pre-clinical studies we
have found that direct injection of Provecta into liver tumors quickly ablates
treated tumors, and can trigger an anti-tumor immune response leading to
eradication of residual tumor tissue and distant tumors. Because of the natural
regenerative properties of the liver and the highly localized nature of the
treatment, this approach appears to produce no significant side effects. Based
on these encouraging preclinical results, we are assessing strategies for
initiation of clinical trials of Provecta for treatment of liver cancer.
Breast Cancer. Breast cancer afflicts over 200,000 U.S. citizens annually,
leading to over 40,000 deaths. Surgical resection, chemotherapy, radiation
therapy, and immunotherapy comprise the standard treatments for the majority of
cases, resulting in serious side effects that in many cases are permanent.
Moreover, current treatments are relatively ineffective against metastases,
which in many cases are the eventual cause of patient mortality. Pre-clinical
studies using human breast tumors implanted in mice have shown that direct
injection of Provecta into these tumors ablates the tumors, and, as in the case
of liver tumors, may elicit an anti-tumor immune response that eradicates
distant metastases. Since fine-needle biopsy is a routine procedure for
diagnosis of breast cancer, and since the needle used to conduct the biopsy also
could be used to direct an injection of Provecta into the tumor, localized
destruction of suspected tumors through direct injection of Provecta clearly has
the potential of becoming a primary treatment. We are evaluating options for
initiating clinical studies of direct injection of Provecta into breast tumors,
and expect to formulate final plans based on results from clinical studies of
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our indication for Provecta in liver cancer.
Prostate Cancer. Cancer of the prostate afflicts approximately 190,000 U.S.
men annually, 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 direct injection of Provecta into
prostate tumors may selectively ablate such tumors, and, as in the case of liver
and breast tumors, may also elicit an anti-tumor immune response capable of
eradicating distant metastases. Since trans-urethral ultrasound, guided
fine-needle biopsy and immunotherapy, along with brachytherapy implantation, are
becoming routine procedures for diagnosis and treatment of these cancers, we
believe that localized destruction of suspected tumors through direct injection
of Provecta can become a primary treatment. We are evaluating options for
initiating clinical studies of direct injection of Provecta into prostate
tumors, and expect to formulate final plans based on results from clinical
studies of our indications for Provecta in the treatment of liver and breast
cancer.
Medical Devices
We are developing medical devices to address two major markets:
o cosmetic treatments, such as reduction of wrinkles and elimination of
spider veins and other cosmetic blemishes; and
o therapeutic uses, including photoactivation of Xantryl other
prescription drugs and non-surgical destruction of certain skin
cancers.
We expect to develop medical devices through partnerships with third-party
device manufacturers or, if appropriate opportunities arise, through acquisition
of one or more device manufacturers.
Photoactivation. Our clinical tests of Xantryl for dermatology have, up to
the present, utilized a number of commercially available lasers for activation
of the drug. This approach has several advantages, including the leveraging of
an extensive base of installed devices present throughout the pool of potential
physician-adopters for Xantryl; access to such a base could play an integral
role in early market capture. However, since the use of such lasers, which were
designed for occasional use in other types of dermatologic treatment, is
potentially too cumbersome and costly for routine treatment of the large
population of patients with psoriasis, we have begun investigating potential use
of other types of photoactivation hardware, such as light booths. The use of
such booths is consistent with current care standards in the dermatology field,
and may provide a cost-effective means for addressing the needs of patients and
physicians alike. We anticipate that such photoactivation hardware would be
developed, manufactured, and supported in conjunction with one or more
third-party device manufacturer.
Melanoma. A high priority in our medical devices field is the development
of a laser-based product for treatment of melanoma. We continue to conduct
extensive research on ocular melanoma at the Massachusetts Eye and Ear Infirmary
(a teaching affiliate of Harvard Medical School) using a new laser treatment
that may offer significant advantage over current treatment options. A single
quick non-invasive treatment of ocular melanoma tumors in a rabbit model
resulted in elimination of over 90% of tumors, and may afford significant
advantage over invasive alternatives, such as surgical excision, enucleation, or
radiotherapy implantation. Ocular melanoma is rare, with approximately 2,000 new
cases annually in the U.S. However, we believed that our extremely successful
results could be extrapolated to treatment of primary melanomas of the skin,
which have an incidence of over 52,000 new cases annually in the U.S. and a 13%
five-year survival rate after metastasis of the tumor. We have performed similar
laser treatments on large (averaging approximately 3 millimeters thick)
cutaneous melanoma tumors implanted in mice, and have been able to eradicate
over 90% of these pigmented skin tumors with a single treatment. Moreover, we
have shown that this treatment stimulates an anti-tumor immune response that may
lead to improved outcome at both the treatment site and at sites of distant
metastasis. From these results, we believe that a device for laser treatment of
primary melanomas of the skin and eye is nearly ready for human studies. We
anticipate partnering with a medical device manufacturer to bring it to market
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in reliance on a 510(k) notification. For more information about the 510(k)
notification process, see "Federal Regulation of Therapeutic Products" below.
Research and Development
We continue to actively develop projects that are product directed and are
attempting to conserve available capital and achieve full capitalization of our
company through equity and convertible debt offerings, generation of product
revenues, and other means. All ongoing research and development activities are
directed toward supporting our OTC product launches, our current product
development and maintaining our intellectual property portfolio.
Production
We have determined that the most efficient use of our capital in producing
OTC products is to contract production with experienced entities having previous
success in economically producing such products. We have ongoing relationships
with two OTC product manufacturers, EXAL, Inc. and 220 Laboratories, Inc., and
several other OTC service vendors that will manufacture, package, warehouse and
ship our OTC products. We do not have written agreements with any of our
manufacturers or vendors.
Sales
Our first commercially available products are directed into the OTC market,
as these products pose minimal or no regulatory compliance barriers to market
introduction. In this fashion, we believe that we can diminish the risk of
regulatory bars to the introduction of products and minimize the time required
to begin generating revenues from product sales. At the same time, we continue
to develop higher-margin prescription pharmaceuticals and medical devices, which
have longer development and regulatory approval cycles.
We are commencing limited sales of Pure-ific, our antibacterial hand spray.
We sold small amounts of this product during 2004. We will continue to seek
additional markets for our products through existing distributorships that
market and distribute medical products, ethical pharmaceuticals, and OTC
products for the professional and consumer marketplaces.
In addition to developing and selling products ourselves, we are
negotiating actively with a number of potential licensees for several of our
intellectual properties, including patents and related technologies. To date, we
have not yet entered into any licensing agreements; however, we anticipate
consummating one or more such licenses in the future.
Intellectual Property
Patents
We hold a number of U.S. patents covering the technologies we have
developed and are continuing to develop for the production of prescription
drugs, medical devices and OTC pharmaceuticals, including those identified in
the following table:
U.S. Patent No. Title Issue Date Expiration Date
--------------- ----- ---------- ---------------
5,829,448 Method for improved selectivity in November 3, 1998 October 30, 2016
photo-activation of molecular agents
5,832,931 Method for improved selectivity in November 10, 1998 October 30, 2016
photo-activation and detection of
molecular diagnostic agents
5,998,597 Method for improved selectivity in December 7, 1999 October 30, 2016
photo-activation of molecular agents
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U.S. Patent No. Title Issue Date Expiration Date
--------------- ----- ---------- ---------------
6,042,603 Method for improved selectivity in March 28, 2000 October 30, 2016
photo-activation of molecular agents
6,331,286 Methods for high energy phototherapeutics December 18, 2001 December 21, 2018
6,451,597 Method for enhanced protein stabilization September 17, 2002 April 6, 2020
and for production of cell lines useful
for production of such stabilized proteins
6,468,777 Method for enhanced protein stabilization October 22, 2002 April 6, 2020
and for production of cell lines useful
for production of such stabilized proteins
6,493,570 Method for improved imaging and December 10, 2002 December 10, 2019
photodynamic therapy
6,495,360 Method for enhanced protein stabilization December 17, 2002 April 6, 2020
and for production of cell lines useful
for production of such stabilized proteins
6,519,076 Methods and apparatus for optical imaging February 11, 2003 October 30, 2016
6,525,862 Methods and apparatus for optical imaging February 25, 2003 October 30, 2016
6,541,223 Method for enhanced protein stabilization April 1, 2003 April 6, 2020
and for production of cell lines useful
for production of such stabilized proteins
We continue to pursue patent applications on numerous other developments we
believe to be patentable. We consider our issued patents, our pending patent
applications and any patentable inventions which we may develop to be extremely
valuable assets of our business.
Trademarks
We own the following trademarks used in this document: Xantryl(TM),
Provecta(TM), GloveAid(TM), and Pure-ific(TM) (including Pure-ific(TM) and
Pure-ific(TM) Kids). We also own the registered trademark PulseView(R).
Trademark rights are perpetual provided that we continue to keep the mark in
use. We consider these marks, and the associated name recognition, to be
valuable to our business.
Material Transfer Agreement
We have entered into a Material Transfer Agreement dated as of July 31,
2003 with Schering-Plough Animal Health Corporation, which we refer to as
"SPAH", the animal-health subsidiary of Schering-Plough Corporation, a major
international pharmaceutical company. We refer to this agreement in this report
as the "Material Transfer Agreement." Under the Material Transfer Agreement, we
will provide SPAH with access to some of our patented technologies to permit
SPAH to evaluate those technologies for use in animal-health applications. If
SPAH determines that it can commercialize our technologies, then the Material
Transfer Agreement obligates us and SPAH to enter into a license agreement
providing for us to license those technologies to SPAH in exchange for progress
payments upon the achievement of goals. The Material Transfer Agreement covers
four U.S. patents that cover biological material manufacturing technologies
(i.e., biotech related). The Material Transfer Agreement continues indefinitely,
unless SPAH terminates it by giving us notice or determines that it does not
wish to secure from us a license for our technologies. The Material Transfer
Agreement can also be terminated by either of us in the event the other party
breaches the agreement and does not cure the breach within 30 days of notice
from the other party. We can give you no assurance that SPAH will determine that
it can commercialize our technologies or that the goals required for us to
obtain progress payments from SPAH will be achieved.
8
Competition
In general, the pharmaceutical industry is intensely competitive,
characterized by rapid advances in products and technology. A number of
companies have developed and continue to develop products that address the areas
we have targeted. Some of these companies are major pharmaceutical companies
that are international in scope and very large in size, while others are niche
players that may be less familiar but have been successful in one or more areas
we are targeting. Existing or future pharmaceutical, device, or other
competitors may develop products that accomplish similar functions to our
technologies in ways that are less expensive, receive faster regulatory
approval, or receive greater market acceptance than our products. Many of our
competitors have been in existence for considerably longer than we have, have
greater capital resources, broader internal structure for research, development,
manufacturing and marketing, and are in many ways further along in their
respective product cycles.
At present, our most direct competitors are smaller companies that are
exploiting niches similar to ours. In the field of photodynamic therapy, one
competitor, QLT, Inc., has received FDA approval for use of its agent
Photofrin(R) for treatment of several niche cancer indications, and has a second
product, Visudyne(R), approved for treatment of certain forms of macular
degeneration. Another competitor in this field, Dusa Pharmaceuticals, Inc.
recently received FDA approval of its photodynamic product Levulan(R)
Kerastik(R) for treatment of actinic keratosis. We believe that QLT and Dusa,
among other competitors, have established a working commercial model in
dermatology and oncology, and that we can benefit from this model by offering
products that, when compared to our competitors' products, afford superior
safety and performance, greatly reduced side effects, improved ease of use, and
lower cost, compared to those of our competitors.
While it is possible that eventually we may compete directly with major
pharmaceutical companies, we believe it is more likely that we will enter into
joint development, marketing, or other licensure arrangements with such
competitors.
We also have a number of market areas in common with traditional skincare
cosmetics companies, but in contrast to these companies, our products are based
on unique, proprietary formulations and approaches. For example, we are unaware
of any products in our targeted OTC skincare markets that our similar to our
GloveAid and Pure-ific products. Further, proprietary protection of our products
may help limit or prevent market erosion until our patents expire. Federal
Regulation of Therapeutic Products
All of the prescription drugs and medical devices we currently contemplate
developing will require approval by the FDA prior to sales within the United
States and by comparable foreign agencies prior to sales outside the United
States. The FDA and comparable regulatory agencies impose substantial
requirements on the manufacturing and marketing of pharmaceutical products and
medical devices. These agencies and other entities extensively regulate, among
other things, research and development activities and the testing,
manufacturing, quality control, safety, effectiveness, labeling, storage, record
keeping, approval, advertising and promotion of our proposed products. While we
attempt to minimize and avoid significant regulatory bars when formulating our
products, some degree of regulation from these regulatory agencies is
unavoidable. Some of the things we do to attempt to minimize and avoid
significant regulatory bars include the following:
o Using chemicals and combinations already allowed by the FDA;
o Carefully making product performance claims to avoid the need for
regulatory approval;
o Using drugs that have been previously approved by the FDA and that
have a long history of safe use;
o Using chemical compounds with known safety profiles; and
9
o In many cases, developing OTC products which face less regulation than
prescription pharmaceutical products.
The regulatory process required by the FDA, through which our drug or
device products must pass successfully before they may be marketed in the U.S.,
generally involves the following:
o Preclinical laboratory and animal testing;
o Submission of an application that must become effective before
clinical trials may begin;
o Adequate and well-controlled human clinical trials to establish the
safety and efficacy of the product for its intended indication; and
o FDA approval of the application to market a given product for a given
indication.
For pharmaceutical products, preclinical tests include laboratory
evaluation of the product, its chemistry, formulation and stability, as well as
animal studies to assess the potential safety and efficacy of the product. Where
appropriate (for example, for human disease indications for which there exist
inadequate animal models), we will attempt to obtain preliminary data concerning
safety and efficacy of proposed products using carefully designed human pilot
studies. We will require sponsored work to be conducted in compliance with
pertinent local and international regulatory requirements, including those
providing for Institutional Review Board approval, national governing agency
approval and patient informed consent, using protocols consistent with ethical
principles stated in the Declaration of Helsinki and other internationally
recognized standards. We expect any pilot studies to be conducted outside the
United States; but if any are conducted in the United States, they will comply
with applicable FDA regulations. Data obtained through pilot studies will allow
us to make more informed decisions concerning possible expansion into
traditional FDA-regulated clinical trials.
If the FDA is satisfied with the results and data from preclinical tests,
it will authorize human clinical trials. Human clinical trials typically are
conducted in three sequential phases which may overlap. Each of the three phases
involves testing and study of specific aspects of the effects of the
pharmaceutical on human subjects, including testing for safety, dosage
tolerance, side effects, absorption, metabolism, distribution, excretion and
clinical efficacy.
Phase 1 clinical trials include the initial introduction of an
investigational new drug into humans. These studies are closely monitored and
may be conducted in patients, but are usually conducted in healthy volunteer
subjects. These studies are designed to determine the metabolic and
pharmacologic actions of the drug in humans, the side effects associated with
increasing doses, and, if possible, to gain early evidence on effectiveness.
While the FDA can cause us to end clinical trials at any phase due to safety
concerns, Phase 1 clinical trials are primarily concerned with safety issues. We
also attempt to obtain sufficient information about the drug's pharmacokinetics
and pharmacological effects during Phase 1 clinical trial to permit the design
of well-controlled, scientifically valid, Phase 2 studies.
Phase 1 studies also evaluate drug metabolism, structure-activity
relationships, and the mechanism of action in humans. These studies also
determine which investigational drugs are used as research tools to explore
biological phenomena or disease processes. The total number of subjects included
in Phase 1 studies varies with the drug, but is generally in the range of twenty
to eighty.
Phase 2 clinical trials include the early controlled clinical studies
conducted to obtain some preliminary data on the effectiveness of the drug for a
particular indication or indications in patients with the disease or condition.
This phase of testing also helps determine the common short-term side effects
and risks associated with the drug. Phase 2 studies are typically
well-controlled, closely monitored, and conducted in a relatively small number
of patients, usually involving several hundred people.
Phase 3 studies are expanded controlled and uncontrolled trials. They are
10
performed after preliminary evidence suggesting effectiveness of the drug has
been obtained in Phase 2, and are intended to gather the additional information
about effectiveness and safety that is needed to evaluate the overall
benefit-risk relationship of the drug. Phase 3 studies also provide an adequate
basis for extrapolating the results to the general population and transmitting
that information in the physician labeling. Phase 3 studies usually include
several hundred to several thousand people.
Applicable medical devices can be cleared for commercial distribution
through a notification to the FDA under Section 510(k) of the applicable
statute. The 510(k) notification must demonstrate to the FDA that the device is
as safe and effective and substantially equivalent to a legally marketed or
classified device that is currently in interstate commerce. Such devices may not
require detailed testing. Certain high-risk devices that sustain human life, are
of substantial importance in preventing impairment of human health, or that
present a potential unreasonable risk of illness or injury, are subject to a
more comprehensive FDA approval process initiated by filing a premarket
approval, also known as a "PMA," application (for devices) or accelerated
approval (for drugs).
We have established a core clinical development team and have been working
with outside FDA consultants to assist us in developing product-specific
development and approval strategies, preparing the required submittals, guiding
us through the regulatory process, and providing input to the design and site
selection of human clinical studies. Historically, obtaining FDA approval for
photodynamic therapies has been a challenge. Wherever possible, we intend to
utilize lasers or other activating systems that have been previously approved by
the FDA to mitigate the risk that our therapies will not be approved by the FDA.
The FDA has considerable experience with lasers by virtue of having reviewed and
acted upon many 510(k) and premarket approval filings submitted to it for
various photodynamic and non-photodynamic therapy laser applications, including
a large number of cosmetic laser treatment systems used by dermatologists.
The testing and approval process requires substantial time, effort, and
financial resources, and we may not obtain FDA approval on a timely basis, if at
all. Success in preclinical or early-stage clinical trials does not assure
success in later stage clinical trials. The FDA or the research institution
sponsoring the trials may suspend clinical trials or may not permit trials to
advance from one phase to another at any time on various grounds, including a
finding that the subjects or patients are being exposed to an unacceptable
health risk. Once issued, the FDA may withdraw a product approval if we do not
comply with pertinent regulatory requirements and standards or if problems occur
after the product reaches the market. If the FDA grants approval of a product,
the approval may impose limitations, including limits on the indicated uses for
which we may market a product. In addition, the FDA may require additional
testing and surveillance programs to monitor the safety and/or effectiveness of
approved products that have been commercialized, and the agency has the power to
prevent or limit further marketing of a product based on the results of these
post-marketing programs. Further, later discovery of previously unknown problems
with a product may result in restrictions on the product, including its
withdrawal from the market.
Marketing our products abroad will require similar regulatory approvals by
equivalent national authorities and is subject to similar risks. To expedite
development, we may pursue some or all of our initial clinical testing and
approval activities outside the United States, and in particular in those
nations where our products may have substantial medical and commercial
relevance. In some such cases any resulting products may be brought to the U.S.
after substantial offshore experience is gained. Accordingly, we intend to
pursue any such development in a manner consistent with U.S. standards so that
the resultant development data is maximally applicable for potential FDA
approval.
OTC products are subject to regulation by the FDA and similar regulatory
agencies but the regulations relating to these products are much less stringent
than those relating to prescription drugs and medical devices. The types of OTC
products developed and sold by us only require that we follow cosmetic rules
relating to labeling and the claims that we make about our product. The process
for obtaining approval of prescription drugs with the FDA does not apply to the
OTC products which we sell. The FDA can, however, require us to stop selling our
product if we fail to comply with the rules applicable to our OTC products.
11
Personnel
Executive Officers
As of March 17, 2005, our executive officers are:
H. Craig Dees, Ph.D., 53, Chief Executive Officer. Dr. Dees has served as
our Chief Executive Officer and as a member of our Board of Directors since we
acquired PPI on April 23, 2002. Before joining us, from 1997 to 2002 he served
as senior member of the management team of Photogen Technologies, Inc.,
including serving as a member of the Board of Directors of Photogen from 1997 to
2000. Prior to joining Photogen, Dr. Dees served as a Group Leader at the Oak
Ridge National Laboratory (ORNL), and as a senior member of the management teams
of LipoGen Inc., a medical diagnostic company which used genetic engineering
technologies to manufacture and distribute diagnostic assay kits for auto-immune
diseases, and TechAmerica Group Inc., now a part of Boehringer Ingelheim
Vetmedica, Inc., the U.S. animal health subsidiary of Boehringer Ingelhem GmbH,
an international chemical and pharmaceutical company headquartered in Germany.
He has developed numerous products in a broad range of areas, including ethical
vaccines, human diagnostics, cosmetics and OTC pharmaceuticals, and has set
several regulatory precedents in licensing and developing biotechnology-derived
products. For example, Dr. Dees developed and commercialized the world's first
live viral vaccine produced by recombinant DNA technologies and licensed the
first recombinant antigen human diagnostic assay using a FDA Class II licensure.
While at TechAmerica he developed and obtained USDA approval for the first in
vitro assay for releasing "killed" viral vaccines. Dr. Dees also has licensed
successfully a number of proprietary cosmetic products and formulated strategic
planning for developing cosmetic companies. He earned a Ph.D. in Molecular
Virology from the University of Wisconsin - Madison in 1984.
Timothy C. Scott, Ph.D., 47, President. Dr. Scott has served as our
President and as a member of our Board of Directors since we acquired PPI on
April 23, 2002. Prior to joining us, Dr. Scott was as a senior member of the
Photogen management team from 1997 to 2002, including serving as Photogen's
Chief Operating Officer from 1999 to 2002, as a director of Photogen from 1997
to 2000, and as interim CEO for a period in 2000. Before joining Photogen, he
served as senior management of Genase LLC, a developer of enzymes for fabric
treatment, and held senior research and management positions at ORNL. Dr. Scott
has been involved in developing numerous high-tech innovations in a broad range
of areas, including separations science, biotechnology, biomedical, and advanced
materials. He has licensed several of his innovations to the oil and gas and
biotechnology industries. As Director of the Bioprocessing R&D Center at ORNL,
Dr. Scott achieved a national presence in the area of use of advanced
biotechnology for the production of energy, fuels, and chemicals. He earned a
Ph.D. in Chemical Engineering from the University of Wisconsin - Madison in
1985.
Eric A. Wachter, Ph.D., 42, Vice President - Pharmaceuticals. Dr. Wachter
has served as our Vice President - Pharmaceuticals and as a member of our Board
of Directors since we acquired PPI on April 23, 2002. Prior to joining us, from
1997 to 2002 he was a senior member of the management team of Photogen,
including serving as Secretary and a director of Photogen since 1997 and as Vice
President and Secretary and a director of Photogen since 1999. Prior to joining
Photogen, Dr. Wachter served as a senior research staff member with ORNL.
Starting during his affiliation with Photogen, Dr. Wachter has been extensively
involved in pre-clinical development and clinical testing of pharmaceuticals and
medical device systems, as well as with coordination and filing of patents. He
earned a Ph.D. in Chemistry from the University of Wisconsin - Madison in 1988.
Peter R. Culpepper, CPA, MBA, 45, Chief Financial Officer. Mr. Culpepper
was appointed to serve as our Chief Financial Officer in February 2004.
Previously, Mr. Culpepper served as Chief Financial Officer for Felix Culpepper
International, Inc. from 2001 to 2004; was a Registered Representative with AXA
Advisors, LLC from 2002 to 2003; has served as Chief Accounting Officer and
Corporate Controller for Neptec, Inc. from 2000 to 2001; has served in various
Senior Director positions with Metromedia Affiliated Companies from 1998 to
2000; has served in various Senior Director and other financial positions with
Paging Network, Inc. from 1993 to 1998; and has served in a variety of financial
roles in public accounting and industry from 1982 to 1993. He earned an MBA in
Finance from the University of Maryland - College Park in 1992. He earned an
12
undergraduate degree from the College of William and Mary - Williamsburg,
Virginia in 1982. He is a licensed Certified Public Accountant in both Tennessee
and Maryland and is a faculty member with the University of Phoenix.
Employees
We currently employ four persons, all of whom are full-time employees.
Available Information
Provectus Pharmaceuticals, Inc. is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, which we refer
to as the "Exchange Act." To comply with those requirements, we file annual
reports, quarterly reports, periodic reports and other reports and statements
with the Securities and Exchange Commission, which we refer to as the "SEC." You
may read and copy any materials that we file with the SEC at the SEC's Public
Reference Room, at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at
http://www.sec.gov, from which you can access electronic copies of materials we
file with the SEC.
Our Internet address is http://www.pvct.com. We have made available,
through a link to the SEC's Web site, electronic copies of the materials we file
with the SEC (including our annual reports on Form 10-KSB, our quarterly reports
on Form 10-QSB, our current reports on Form 8-K, the Section 16 reports filed by
our executive officers, directors and 10% shareholders and amendments to those
reports). To receive paper copies of our SEC materials, please contact us by
U.S. mail, telephone, facsimile or electronic mail at the following address:
Provectus Pharmaceuticals, Inc.
Attention: President
7327 Oak Ridge Highway, Suite A
Knoxville, TN 37931
Telephone: 865/769-4011
Facsimile: 865/769-4013
Electronic mail: info@pvct.com
Item 2. Description of Property.
We currently lease approximately 4,000 square feet of space outside of
Knoxville, Tennessee for our corporate office and operations. Our monthly rental
charge for these offices is approximately $2,800 per month, and the lease is
renewed on a month-to-month basis. We believe that these offices generally are
adequate for our needs currently and in the immediate future.
Item 3. Legal Proceedings.
From time to time, we are party to litigation or other legal proceedings
that we consider to be a part of the ordinary course of our business. At
present, we are not involved in any legal proceedings nor are we party to any
pending claims that we believe could reasonably be expected to have a material
adverse effect on our business, financial condition, or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
During the three months ended December 31, 2004, we did not submit any
matters to a vote of our stockholders.
13
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
Market Information and Holders
Quotations for our common stock are reported on the OTC Bulletin Board
under the symbol "PVCT." The following table sets forth the range of high and
low bid information for the periods indicated since January 1, 2002:
High Low
---- ---
2003
First Quarter (January 1 to March 31) $0.60 $0.26
Second Quarter (April 1 to June 30) $1.01 $0.21
Third Quarter (July 1 to September 30) $0.60 $0.20
Fourth Quarter (October 1 to December 31) $2.00 $0.22
2004
First Quarter (January 1 to March 31) $1.70 $0.80
Second Quarter (April 1 to June 30) $1.51 $0.85
Third Quarter (July 1 to September 30) $1.68 $0.52
Fourth Quarter (October 1 to December 31) $0.82 $0.47
The closing price for our common stock on March 17, 2005 was $0.97. High
and low quotation information was obtained from data provided by Yahoo! Inc.
Quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not reflect actual transactions.
As of March 17, 2005, we had 1,822 shareholders of record of our common
stock.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We
currently plan to retain future earnings, if any, to finance the growth and
development of our business and do not anticipate paying any cash dividends in
the foreseeable future. We may incur indebtedness in the future which may
prohibit or effectively restrict the payment of dividends, although we have no
current plans to do so. Any future determination to pay cash dividends will be
at the discretion of our board of directors.
Recent Sales of Unregistered Securities
During the year ended December 31, 2004, we did not sell any securities
which were not registered under the Securities Act of 1933, as amended, which we
refer to as the "Securities Act," except on November 16, 2004, the Company
completed a private placement transaction with 14 accredited investors, pursuant
to which we sold 530,166 shares of our common stock at a purchase price of $0.75
per share, for an aggregate purchase price of $397,625 pursuant to Securities
Purchase Agreements with each investor. In connection with the sale of the
common stock, we also issued warrants (the "Warrants") to the investors to
purchase up to 795,249 shares of our common stock at an exercise price of $1.00
per share. We paid $39764 to Venture Catalyst, LLC as placement agent for this
transaction. 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
14
of Regulation D and Section 4(2) of the Securities Act, based upon the fact that
the offer and issuance of the common stock and warrants satisfied all the terms
and conditions of Rules 501 and 502 of the Securities Act, the investors 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. Proceeds will be used for general corporate purposes.
Pursuant to an agreement dated November 26, 2004 between us and Gryffindor, we
issued Gryffindor a Second Amended and Restated Senior Secured Convertible Note
dated November 26, 2004 in the amended principal amount of $1,185,959. The
amended note bears interest at 8% per annum, payable quarterly in arrears, is
due and payable in full on November 26, 2005, and amends and restated the
amended note in its entirety. As with the prior notes, our obligations under the
amended note are secured by a first priority security interest in all of our
assets, including the assets held by our Xantech and Pure-ific subsidiaries.
Subject to certain exceptions, the amended note is convertible into shares of
our common stock beginning on the November 26, 2004; the principal amount of the
note is convertible at the rate of one share of common stock for each
$0.73655655 of principal converted, while accrued but unpaid interest on the
note is convertible at the rate of one share of common stock for each $0.55 of
accrued but unpaid interest converted. We relied on an exemption from
registration pursuant to Section 4(2) of the Securities Act, based on the
issuance of the amended note, and the issuance of the shares of common stock
issuable upon conversion of the amended note, to a limited number of purchasers
in a transaction not involving any general solicitation or general advertising.
Item 6. 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 Annual Report on Form 10-KSB. 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, July, and November 2004, as well as March 2005.
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.
15
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 2005, 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 $1,291,817 for 2004 included
depreciation expense of $121,811, consulting of $493,305, lab expense of
$10,958, insurance of $74,059, legal expense of $127,775, office and other
expense of $3,751, payroll of $431,068, rent and utilities of $20,533, and taxes
and fees of $8,557. The research and development costs comprising a total of
$724,924 for 2003 included depreciation expense of $218,082 ($10,233 of
depreciation expense is recorded in general and administrative), consulting of
$49,198, lab expense of $12,800, insurance of $10,153, legal expense of
$130,271, office and other expense of $2,008, payroll of $252,042, rent and
utilities of $38,057, and taxes and fees of $12,313.
-16-
CASH FLOW
As of March 30, 2005, we held approximately $1,600,000 in cash in escrow
for our benefit. We anticipate these funds will be released from the escrow
shortly. At our current cash expenditure rate, this amount will be sufficient to
meet our needs for the forseeable future. 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 2005 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 the notes to our financial statements included in this
report.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised 2004), "Shared-Based Payment," which is a revision of SFAS No. 123.
SFAS No. 123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and amends SFAS No. 95, "Statement of Cash Flows." Generally, the
approach in SFAS No. 123(R) is similar to the approach described in SFAS No.
123. However, SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. This revised standard will be effective
for us beginning with the third quarter in 2005.
As permitted by SFAS No. 123, the Company currently accounts for share-based
payments to employees using APB 25 intrinsic value method and, as such,
generally recognizes no compensation cost for Employee stock options.
Accordingly, the adoption of SFAS No. 123(R)'s fair value method will have an
impact on the result of operations, although it will have no impact on the
overall financial position. The impact of the modified prospective adoption of
SFAS No. 123(R) cannot be estimated at this time because it will depend on
levels of share-based payments granted in the future. However, had the Company
adopted SFAS No. 123(R) in prior periods, the impact of that standard would have
approximated the impact of SFAS 123 as described in the disclosure of pro forma
net income and earnings per share.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs: an amendment
of ARB No. 43, Chapter 4," to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material. SFAS No. 151
is effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. The Company does not believe the provisions of SFAS No. 151, when
applied, will have a material impact on the finanical position or results of
operations.
17
Item 7. Financial Statements.
Our consolidated financial statements, together with the report thereon of
BDO Seidman LLP, independent accountants, are set forth on the pages of this
Annual Report on Form 10-KSB indicated below.
Page
----
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2004
and December 31, 2003 F-2
Consolidated Statements of Operations for the years
ended December 31, 2004 and 2003 F-3
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 2004 and 2003 F-4
Consolidated Statements of Cash Flows for the year
ended December 31, 2004 and 2003 F-5
Notes to Consolidated Financial Statements F-7
Forward-Looking Statements
This Annual Report on Form 10-KSB contains forward-looking statements
regarding, among other things, our anticipated financial and operating results.
Forward-looking statements reflect our management's current assumptions,
beliefs, and expectations. Words such as "anticipate," "believe, "estimate,"
"expect," "intend," "plan," and similar expressions are intended to identify
forward-looking statements. While we believe that the expectations reflected in
our forward-looking statements are reasonable, we can give no assurance that
such expectations will prove correct. Forward-looking statements are subject to
risks and uncertainties that could cause our actual results to differ materially
from the future results, performance, or achievements expressed in or implied by
any forward-looking statement we make. Some of the relevant risks and
uncertainties that could cause our actual performance to differ materially from
the forward-looking statements contained in this report are discussed below
under the heading "Risk Factors" and elsewhere in this Annual Report on Form
10-KSB. We caution investors that these discussions of important risks and
uncertainties are not exclusive, and our business may be subject to other risks
and uncertainties which are not detailed there.
Investors are cautioned not to place undue reliance on our forward-looking
statements. We make forward-looking statements as of the date on which this
Annual Report on Form 10-KSB 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.
Risk Factors
Our business is subject to various risks, including those described below.
You should carefully consider these risk factors, together with all of the other
information included in this Annual Report on Form 10-KSB. Any of these risks
could materially adversely affect our business, operating results and financial
condition:
Our technologies are in early stages of development. We have generated minimal
initial revenues from sales and operations in 2004, but we do not expect to
generate sufficient revenues to enable us to be profitable for several calendar
quarters. 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
18
implement our integrated business plan, including execution of the next phases
in clinical development of our pharmaceutical products and resumption of
research programs currently suspended. We estimate that our existing capital
resources will be sufficient to fund our current and planned operations.
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. 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.
Because of our limited operations and the fact that we are currently
generating limited revenue, we may be unable to pay our debts when they become
due.
As of December 31, 2004, we had $2,084,959 in debt, net of a debt discount
of $411,210 and $43,671 of accrued interest on our balance sheet, consisting of
$1,185,959 in principal and $9,224 in accrued but unpaid interest owed to
Gryffindor pursuant to the Note; $750,000 in principal and $19,011 in accrued
interest owed to the holders of our debentures which has been authorized to be
paid on March 30, 2005 and $149,000 in principal and $15,436 in accrued interest
owed to Dr. Wachter. The amounts due to Gryffindor are due in November 2005, the
amounts due in equal installments to the holders of our debentures are due in
July and October 2007, and the amounts due to Dr. Wachter are due in 2009.
Because of the convertible nature of the debt owed to Gryffindor and to the
holders of the convertible debentures, we may not have to repay this debt if the
debt is converted into shares of our common stock. However, we can not assure
you that this debt will be converted into common stock and we may have to repay
this indebtedness. Our ability to satisfy our current debt service obligations
and any additional obligations we might incur will depend upon our future
financial and operating performance, which, in turn, is subject to prevailing
economic conditions and financial, business, competitive, legislative and
regulatory factors, many of which are beyond our control. We cannot assure you
that our operating results, cash flow and capital resources will be sufficient
for payment of our debt service and other obligations in the future.
We will need additional capital to conduct our operations and develop our
products, and our ability to obtain the necessary funding is uncertain.
We estimate that our existing capital resources will be sufficient to fund
our current and planned operations; however, we may need additional capital. We
have based this estimate on assumptions that may prove to be wrong, and we
cannot assure that estimates and assumptions will remain unchanged. For example,
we are currently assuming that we will continue to operate without any
significant staff or other resources expansion. We intend to acquire additional
funding through public or private equity financings or other financing sources
that may be available. Additional financing may not be available on acceptable
terms, or at all. As discussed in more detail below, additional equity financing
could result in significant dilution to shareholders. Further, in the event that
additional funds are obtained through licensing or other arrangements, these
arrangements may require us to relinquish rights to some of our technologies,
product candidates or products that we would otherwise seek to develop and
commercialize ourselves. If sufficient capital is not available, we may be
required to delay, reduce the scope of or eliminate one or more of our programs,
any of which could have a material adverse effect on our business, and may
impair the value of our patents and other intangible assets.
Existing shareholders may face dilution from our financing efforts.
19
We must raise additional capital from external sources to execute our
business plan. We plan to issue debt securities, capital stock, or a combination
of these securities. We may not be able to sell these securities, particularly
under current market conditions. Even if we are successful in finding buyers for
our securities, the buyers could demand high interest rates or require us to
agree to onerous operating covenants, which could in turn harm our ability to
operate our business by reducing our cash flow and restricting our operating
activities. If we were to sell our capital stock, we might be forced to sell
shares at a depressed market price, which could result in substantial dilution
to our existing shareholders. In addition, any shares of capital stock we may
issue may have rights, privileges, and preferences superior to those of our
common shareholders.
The prescription drug and medical device products in our internal pipeline
are at an early stage of development, and they may fail in subsequent
development or commercialization.
We are continuing to pursue clinical development of our most advanced
pharmaceutical drug products, Xantryl and Provecta, for use as treatments for
specific conditions. These products and other pharmaceutical drug and medical
device products that we are currently developing will require significant
additional research, formulation and manufacture development, and pre-clinical
and extensive clinical testing prior to regulatory licensure and
commercialization. Pre-clinical and clinical studies of our pharmaceutical drug
and medical device products under development may not demonstrate the safety and
efficacy necessary to obtain regulatory approvals. Pharmaceutical and
biotechnology companies have suffered significant setbacks in advanced clinical
trials, even after experiencing promising results in earlier trials.
Pharmaceutical drug and medical device products that appear to be promising at
early stages of development may not reach the market or be marketed successfully
for a number of reasons, including the following:
o a product may be found to be ineffective or have harmful side
effects during subsequent pre-clinical testing or clinical
trials;
o a product may fail to receive necessary regulatory clearance;
o a product may be too difficult to manufacture on a large scale;
o a product may be too expensive to manufacture or market;
o a product may not achieve broad market acceptance;
o others may hold proprietary rights that will prevent a product
from being marketed; or
o others may market equivalent or superior products.
We do not expect any pharmaceutical drug products or medical device
products we are developing to be commercially available for at least several
years, if at all. Our research and product development efforts may not be
successfully completed and may not result in any successfully commercialized
products. Further, after commercial introduction of a new product, discovery of
problems through adverse event reporting could result in restrictions on the
product, including withdrawal from the market and, in certain cases, civil or
criminal penalties.
Our OTC products are at an early stage of introduction, and we cannot be
sure that they will be widely accepted in the marketplace or that we will have
adequate capital to market and distribute these products which are an important
factor in the future success of our business.
We recently have begun marketing GloveAid and Pure-ific, our first two OTC
products, on a limited basis. We have recognized minimal revenue from these
products, as the sales of these products have not been material. In order for
these products to become commercially successful, we must increase significantly
our distribution of them. Increasing distribution of these products requires, in
turn, that we or distributors representing us increase marketing of these
products. In view of our limited financial resources, we may be unable to afford
20
increases in our marketing of our OTC products sufficient to improve our
distribution of our products. Even if we can and do increase our marketing of
our OTC products, we cannot give you any assurances that we can successfully
increase our distribution of our products.
If we do begin increasing our distribution of our OTC products, we must
increase our production of these products in order to fill our distribution
channels. Increased production will require additional financial resources that
we do not have at present. Additionally, we may succeed in increasing production
without succeeding in increasing sales, which could leave us with excess,
possibly unsaleable, inventory.
If we are unable to successfully introduce, market and distribute these
products, our business, financial condition, results of operations and cash
flows could be materially adversely affected.
Competition in the prescription drug, medical device and OTC
pharmaceuticals markets is intense, and we may be unable to succeed if our
competitors have more funding or better marketing.
The pharmaceutical and biotechnology industries are intensely competitive.
Other pharmaceutical and biotechnology companies and research organizations
currently engage in or have in the past engaged in research efforts related to
treatment of dermatological conditions or cancers of the skin, liver and breast,
which could lead to the development of products or therapies that could compete
directly with the prescription drug, medical device and OTC products that we are
seeking to develop and market.
Many companies are also developing alternative therapies to treat cancer
and dermatological conditions and, in this regard, are out competitors. Many of
the pharmaceutical companies developing and marketing these competing products
have significantly greater financial resources and expertise than we do in:
o research and development;
o manufacturing;
o preclinical and clinical testing;
o obtaining regulatory approvals; and
o marketing.
Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large and established
companies. Academic institutions, government agencies and other public and
private research organizations also may conduct research, seek patent protection
and establish collaborative arrangements for research, clinical development and
marketing of products similar to ours. These companies and institutions compete
with us in recruiting and retaining qualified scientific and management
personnel as well as in acquiring technologies complementary to our programs.
In addition to the above factors, we expect to face competition in the
following areas:
o product efficacy and safety;
o the timing and scope of regulatory consents;
o availability of resources;
o reimbursement coverage;
o price; and
o patent position, including potentially dominant patent positions
of others.
As a result of the foregoing, our competitors may develop more effective or
more affordable products or achieve earlier product commercialization than we
do.
21
Product Competition. Additionally, since our currently marketed products are
generally established and commonly sold, they are subject to competition from
products with similar qualities.
Our OTC product Pure-ific competes in the market with other hand sanitizing
products, including in particular, the following hand sanitizers:
o Purell (manufactured by GOJO Industries),
o Avagard D (manufactured by 3M) and
o a large number of generic and private-label equivalents to these
market leaders.
Our OTC product GloveAid represents a new product category that has no
direct competitors; however, other types of products, such as AloeTouch(R)
disposable gloves (manufactured by Medline Industries) target the same market
niche.
Since our prescription products Provecta and Xantryl have not yet been
approved by the FDA or introduced to the marketplace, we cannot estimate what
competition these products might face when they are finally introduced, if at
all. We cannot assure you that these products will not face significant
competition for other prescription drugs and generic equivalents.
If we are unable to secure or enforce patent rights, trademarks, trade
secrets or other intellectual property our business could be harmed.
We may not be successful in securing or maintaining proprietary patent
protection for our products or products and technologies we develop or license.
In addition, our competitors may develop products similar to ours using methods
and technologies that are beyond the scope of our intellectual property
protection, which could reduce our anticipated sales. While some of our products
have proprietary patent protection, a challenge to these patents can be subject
to expensive litigation. Litigation concerning patents, other forms of
intellectual property and proprietary technology is becoming more widespread and
can be protracted and expensive and can distract management and other personnel
from performing their duties for us.
We also rely upon trade secrets, unpatented proprietary know-how and
continuing technological innovation in order to develop a competitive position.
We cannot assure you that others will not independently develop substantially
equivalent proprietary technology and techniques or otherwise gain access to our
trade secrets and technology, or that we can adequately protect our trade
secrets and technology.
If we are unable to secure or enforce patent rights, trademarks, trade
secrets or other intellectual property, our business, financial condition,
results of operations and cash flows could be materially adversely affected. If
we infringe on the intellectual property of others, our business could be
harmed.
We could be sued for infringing patents or other intellectual property that
purportedly cover products and/or methods of using such products held by persons
other than us. Litigation arising from an alleged infringement could result in
removal from the market, or a substantial delay in, or prevention of, the
introduction of our products, any of which could have a material adverse effect
on our business, financial condition, or results of operations and cash flows.
If we do not update and enhance our technologies, they will become
obsolete.
The pharmaceutical market is characterized by rapid technological change,
and our future success will depend on our ability to conduct successful research
in our fields of expertise, to discover new technologies as a result of that
research, to develop products based on our technologies, and to commercialize
those products. While we believe that are current technology is adequate for our
22
present needs, if we fail to stay at the forefront of technological development,
we will be unable to compete effectively. Our competitors are using substantial
resources to develop new pharmaceutical technologies and to commercialize
products based on those technologies. Accordingly, our technologies may be
rendered obsolete by advances in existing technologies or the development of
different technologies by one or more of our current or future competitors.
If we lose any of our key personnel, we may be unable to successfully
execute our business plan.
Our business is presently managed by four key employees:
o H. Craig Dees, Ph.D., our Chief Executive Officer;
o Timothy C. Scott, Ph.D., our President;
o Eric A. Wachter, Ph.D. our Vice President - Pharmaceuticals; and
o Peter R. Culpepper, CPA, our Chief Financial Officer.
In addition to their responsibilities for management of our overall
business strategy, Drs. Dees, Scott and Wachter are our chief researchers in the
fields in which we are developing and planning to develop prescription drug,
medical device and OTC products. Also, as of December 31, 2004, we owe $156,377
in accrued but unpaid compensation to our employees. The loss of any of these
key employees could have a material adverse effect on our operations, and our
ability to execute our business plan might be negatively impacted. Any of these
key employees may leave their employment with us if they choose to do so, and we
cannot assure you that we would be able to hire similarly qualified executives
if any of our key employees should choose to leave.
Because we have only four employees, our management may be unable to
successfully manage our business.
In order to successfully execute our business plan, our management must
succeed in all of the following critical areas:
o Researching diseases and possible therapies in the areas of
dermatology and skin care, oncology, and biotechnology;
o Developing prescription drug, medical device and OTC products
based on our research;
o Marketing and selling developed products;
o Obtaining additional capital to finance research, development,
production and marketing of our products; and
o Managing our business as it grows.
As discussed above, we currently have only four employees, all of whom are
full-time employees. The greatest burden of succeeding in the above areas
therefore falls on Drs. Dees, Scott, Wachter, and Mr. Culpepper. Focusing on any
one of these areas may divert their attention from our other areas of concern
and could affect our ability to manage other aspects of our business. We cannot
assure you that our management will be able to succeed in all of these areas or,
even if we do so succeed, that our business will be successful as a result. We
anticipate adding a part-time regulatory affairs officer, a part-time lab
technician and a part-time office manager within the next year. While we have
not historically had difficulty in attracting employees, our small size and
limited operating history may make it difficult for us to attract and retain
employees in the future which could further divert management's attention from
the operation of our business.
Our common stock price can be volatile because of several factors,
including a limited public float.
During the twelve-month period ended December 31, 2004, the sale price of
our common stock fluctuated from $1.70 to $0.47 per share. We believe that our
23
common stock is subject to wide price fluctuations because of several factors,
including:
o absence meaningful earnings and external financing,
o a relatively thin trading market for our common stock, which
causes trades of small blocks of stock to have a significant
impact on our stock price,
o general volatility of the stock markets and the market prices of
other publicly traded companies, and
o investor sentiment regarding equity markets generally, including
public perception of corporate ethics and governance and the
accuracy and transparency of financial reporting.
Financings that may be available to us under current market conditions
frequently involve sales at prices below the prices at which our common stock
trades on the Over the Counter Electronic Bulletin Board, as well as the
issuance of warrants or convertible debt that require exercise or conversion
prices that are calculated in the future at a discount to the then market price
of our common stock.
Any agreement to sell, or convert debt or equity securities into, common
stock at a future date and at a price based on the then current market price
will provide an incentive to the investor or third parties to sell the common
stock short to decrease the price and increase the number of shares they may
receive in a future purchase, whether directly from us or in the market. For
example, the initial conversion rate of the debentures issued during the third
and fourth quarters of 2004 is equal to the lower of (i) 80% of the average
market price of our common stock for the five (5) trading days ending on the
effective date of the exercise to convert or (ii) $1.88 per share. If the
average market price of our common stock is so low that it causes the conversion
rate on the debentures to fall below approximately $0.73, and if the debenture
holders enforce this provision of our agreement with them, we will have to issue
more shares to the debenture holders upon conversion of the debentures and the
anti-dilutive provisions contained in our agreements with Gryffindor will become
operative. If these anti-dilutive provisions become operative, we may be
required to issue a significant number of shares of common stock to Gryffindor.
We will not receive any additional proceeds from Gryffindor for the issuance of
these shares of common stock. Other financings that we may obtain may contain
similar provisions, and the existence of anti-dilutive provisions in some of our
existing financings may make it more difficult for us to obtain financing in the
future. These types of transactions which cause the issuance of our common stock
in connection with the exercise or conversion of securities may result in
substantial dilution to the remaining holders of our common stock.
Financings that may be available to us frequently involve high selling
costs.
Because of our limited operating history, low market capitalization, thin
trading volume and other factors, we have historically had to pay high costs to
24
obtain financing and expect to continue to be required to pay high costs for any
future financings in which we may participate. For example, our past sales of
shares and our sale of the debentures have involved the payment of finder's fees
or placement agent's fees. These types of fees are typically higher for small
companies like us. Payment of fees of this type reduces the amount of cash that
we receive from a financing transaction and makes it more difficult for us to
obtain the amount of financing that need to maintain and expand our operations.
It is our general policy to retain any earnings for use in our operation.
We have never declared or paid cash dividends on our common stock. We
currently intend to retain all of our future earnings, if any, for use in our
business and therefore do not anticipate paying any cash dividends on our common
stock in the foreseeable future.
Our stock price is below $5.00 per share and is treated as a "Penny Stock"
which places restrictions on broker-dealers recommending the stock for purchase.
Our common stock is defined as "penny stock" under the Exchange Act and its
rules. The SEC has adopted regulations that define "penny stock" to include
common stock that has a market price of less than $5.00 per share, subject to
certain exceptions. These rules include the following requirements:
o broker-dealers must deliver, prior to the transaction a
disclosure schedule prepared by the SEC relating to the penny
stock market;
o broker-dealers must disclose the commissions payable to the
broker-dealer and its registered representative;
o broker-dealers must disclose current quotations for the
securities;
o if a broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealers presumed control
over the market; and
o a broker-dealer must furnish its customers with monthly
statements disclosing recent price information for all penny
stocks held in the customer's account and information on the
limited market in penny stocks.
Additional sales practice requirements are imposed on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors. For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and must have received the
purchaser's written consent to the transaction prior to sale. If our common
stock remains subject to these penny stock rules these disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for our common stock. As a result, fewer broker-dealers may be willing to
make a market in our stock, which could affect a shareholder's ability to sell
their shares.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 8A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our chief executive
officer and chief financial officer have evaluated the effectiveness
25
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 the last day of the period covered by this Annual
Report on Form 10-KSB. Based on that evaluation, the chief executive
officer and chief financial officer have concluded that our disclosure
controls and procedures are effective.
(b) Changes in Internal Controls. There was no change in our internal
control over financial reporting identified in connection with the
evaluation during our fourth fiscal quarter that materially affected,
or is reasonably likely to materially affect, our internal control
over financial reporting.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
Except as set forth below, the information called for by this item with
respect to our executive officers as of March 30, 2005 is furnished in Part I of
this report under the heading "Personnel--Executive Officers." The information
called for by this item, to the extent it relates to our directors or to certain
filing obligations of our directors and executive officers under the federal
securities laws, is incorporated herein by reference to the Proxy Statement for
our Annual Meeting of Stockholders to be held on May 19, 2005, which will be
filed with the SEC pursuant to Regulation 14A under the Exchange Act.
Audit Committee Financial Expert
We do not currently have an "audit committee financial expert," as defined
under the rules of the SEC. Because the board of directors consists of only four
members and our operations remain amenable to oversight by a limited number of
directors, the board has not delegated any of its functions to committees. The
entire board of directors acts as our audit committee as permitted under Section
3(a)(58)(B) of the Exchange Act. We believe that all of the members of our board
are qualified to serve as the committee and have the experience and knowledge to
perform the duties required of the committee. We do not have any independent
directors who would qualify as an audit committee financial expert, as defined.
We believe that it has been, and may continue to be, impractical to recruit such
a director unless and until we are significantly larger.
Code of Ethics
We have not adopted a formal Code of Ethics. Since our company only has
four employees, we expect those employees to adhere to high standards of ethics
without the need for a formal policy.
Item 10. Executive Compensation.
The information called for by this item is incorporated herein by reference
to the Proxy Statement for our Annual Meeting of Stockholders to be held on May
19, 2005, which will be filed with the SEC pursuant to Regulation 14A under the
Exchange Act.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information called for by this item is incorporated herein by reference
to the Proxy Statement for our Annual Meeting of Stockholders to be held on May
19, 2005, which will be filed with the SEC pursuant to Regulation 14A under the
Exchange Act.
26
Item 12. Certain Relationships and Related Transactions.
The information called for by this item is incorporated herein by reference
to the Proxy Statement for our Annual Meeting of Stockholders to be held on May
19, 2005, which will be filed with the SEC pursuant to Regulation 14A under the
Exchange Act.
Item 13. 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 Annual Report on Form 10-KSB.
Item 14. Principal Accountant Fees and Services.
The information called for by this item is incorporated herein by reference
to the Proxy Statement for our Annual Meeting of Stockholders to be held on May
19, 2005, which will be filed with the SEC pursuant to Regulation 14A under the
Exchange Act.
27
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this annual report on From 10-KSB for the year ended December 31, 2004 to
be signed on its behalf by the undersigned, thereunto duly authorized.
Provectus Pharmaceuticals, Inc.
By: /s/ H. Craig Dees
--------------------------------------
H. Craig Dees, Ph.D. Chief Executive
Officer
Date: March 30, 2005
Signature Title Date
--------- ----- -----
/s/ H. Craig Dees
-------------------------------------------- Chief Executive Officer (principal March 30, 2005
H. Craig Dees, Ph.D. executive officer) and Chairman of the
Board
/s/ Peter R. Culpepper
-------------------------------------------- Chief Financial Officer (principal financial March 30, 2005
Peter R. Culpepper, CPA officer and principal accounting officer)
/s/ Timothy C. Scott
--------------------------------------------
Timothy C. Scott, Ph.D. President and Director March 30, 2005
/s/ Eric A. Wachter
-------------------------------------------- Vice President - Pharmaceuticals and March 30, 2005
Eric A. Wachter, Ph.D. Director
/s/ Stuart Fuchs
-------------------------------------------- Director March 30, 2005
Stuart Fuchs
28
Report of Independent Registered Public Accounting Firm
Board of Directors
Provectus Pharmaceuticals, Inc.
Knoxville, Tennessee
We have audited the accompanying consolidated balance sheets of Provectus
Pharmaceuticals, Inc., a development stage company as of December 31, 2004 and
2003 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the period from January 17, 2002 (inception) to
December 31, 2004 and for each of the two years in the period ended December 31,
2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
finanical reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Provectus
Pharmaceuticals, Inc. at December 31, 2004 and 2003, and the results of its
operations and its cash flows for the period from January 17, 2002 (inception)
to December 31, 2004 and for each of the two years in the period ended December
31, 2004 in conformity with accounting principles generally accepted in the
United States of America.
/s/BDO Seidman, LLP
--------------------
Chicago, Illinois
February 11, 2005
F-1
Provectus Pharmaceuticals, Inc.
(A Development-Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2004 2003
---------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash $ 10,774 $ 164,145
Stock subscription receivable - 87,875
Inventory 94,142 72,578
Prepaid expenses and other current assets 20,582 26,227
Prepaid consulting expense 205,427 420,817
Prepaid commitment fee, net of amortization of $38,326 272,540 -
---------------------------------------------------------------------------------------------------------------
Total Current Assets 603,465 771,642
---------------------------------------------------------------------------------------------------------------
Equipment and Furnishings, less accumulated depreciation of
$366,571 and $244,760 - 121,415
Patents, net of amortization of $1,420,537 and $749,417 10,294,908 10,966,028
Deferred loan costs, net of amortization of $35,922 and $19,569 270,578 150,961
Other Assets 27,000 27,000
---------------------------------------------------------------------------------------------------------------
$ 11,195,951 $ 12,037,046
---------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable - trade $ 154,214 $ 100,640
Accrued compensation 156,377 352,500
Accrued expenses 6,240 57,549
Accrued interest 43,670 100,021
Short-term convertible debt, net of debt discount of $-0- and
$442,623 - 57,377
Gryffindor convertible debt, net of debt discount of $95,157 and
$57,052 1,090,802 968,907
---------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,451,303 1,636,994
---------------------------------------------------------------------------------------------------------------
Loan From Stockholder 149,000 149,000
---------------------------------------------------------------------------------------------------------------
Cornell convertible debt, net of debt discount of $316,053 and $-0- 433,947 -
---------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock; par value $.001 per share; 100,000,000 shares authorized;
16,133,876 and 10,867,509 shares issued and
outstanding, respectively 16,134 10,868
Paid-in capital 23,711,540 20,461,632
Deficit accumulated during the development stage (14,565,973) (10,221,448)
---------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 9,161,701 10,251,052
---------------------------------------------------------------------------------------------------------------
$ 11,195,951 $ 12,037,046
---------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
Amounts from
January 17,
2002
(Inception)
Year Ended Year Ended Through
December 31, December 31, December 31,
2004 2003 2004
--------------------------------------------------------------------------------------------------------------------
Revenues
OTC Product Revenue $ 18,728 $ - $ 18,728
Medical Device Revenue 13,125 - 13,125
--------------------------------------------------------------------------------------------------------------------
Total revenues 31,853 - 31,853
Cost of Sales 10,781 - 10,781
---------------------------------------------------------------------------------------------------------------------
Gross Profit 21,072 - 21,072
Operating Expenses
Research and development 1,291,817 724,924 2,067,455
General and administrative 1,690,841 1,582,250 10,196,037
Amortization 671,120 671,120 1,420,537
---------------------------------------------------------------------------------------------------------------------
Total operating loss (3,632,706) (2,978,294) (13,662,957)
Gain on sale of equipment - 55,000 55,000
Net loss on extinguishment of debt ( 101,412) - (101,412)
Interest expense (610,407) (232,019) (856,604)
---------------------------------------------------------------------------------------------------------------------
Net Loss Applicable to Common
Stockholders $ (4,344,525) $(3,155,313) $(14,565,973)
---------------------------------------------------------------------------------------------------------------------
Basic and Diluted Loss Per
Common Share (0.31) (0.33)
---------------------------------------------------------------------------------------------------------------------
Weighted Average Number of
Common Shares
Outstanding -
Basic and Diluted 14,122,559 9,706,064
---------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
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, 2003 - - - (3,155,313) (3,155,313)
------------- ------------- ------------ --------------- -------------
Balance, at December 31, 2003 10,867,509 $ 10,868 $ 20,461,632 $ (10,221,448) $ 10,251,052
Issuance of stock for services 733,872 734 449,190 - 449,923
Issuance of warrants for services - - 495,480 - 495,480
Exercise of warrants 132,608 133 4,867 - 5,000
Employee compensation from stock options - - 15,612 - 15,612
Issuance of stock pursuant to Regulation S 2,469,723 2,469 790,668 - 793,137
Issuance of stock pursuant to Regulation D 1,930,164 1,930 1,286,930 - 1,288,861
Beneficial conversion related to
convertible debt - - 360,256 - 360,256
Issuance of convertible debt with warrants - - 105,250 - 105,250
Repurchase of beneficial conversion
feature - - (258,345) - (258,345)
Net loss for the year ended
December 31, 2004 - - - (4,344,525) (4,344,525)
-----------------------------------------------------------------------------------------------------------------------------
Balance, at December 31, 2004 16,133,876 $ 16,134 $ 23,711,540 $ (14,565,973) $ 9,161,701
-----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-4
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOW
Cumulative
Amounts from
January 17, 2002
(Inception)
Year Ended Year Ended through
December 31, December 31, December 31,
2004 2003 2004
------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net loss $ (4,344,525) $ (3,155,313) $ (14,565,973)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 121,811 228,315 389,572
Amortization of patents 671,120 671,120 1,420,537
Amortization of original issue discount 360,663 120,669 487,575
Amortization of commitment fee 38,326 - 38,326
Amortization of prepaid consultant expense 606,888 245,962 852,850
Amortization of deferred loan costs 120,953 19,569 140,522
Loss on extinguishment of debt 101,412 - 101,412
Compensation through issuance of stock options 15,612 34,659 50,271
Compensation through issuance of stock - - 932,000
Issuance of stock for services 76,558 - 5,580,558
Issuance of warrants for services 22,481 - 22,481
Gain on sale of fixed asset - (55,000) (55,000)
Increase (decrease) in assets
Prepaid expenses 5,645 9,254 (20,582)
Inventory (21,564) (72,578) (94,142)
Increase (decrease) in liabilities
Accounts payable 53,574 1,766 150,569
Accrued expenses (143,783) 432,289 366,287
------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,314,829) (1,519,288) (4,202,737)
------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sale of fixed asset - 180,000 180,000
Capital expenditures (396) (3,301) (3,697)
------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (396) 176,699 176,303
------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from loans from stockholder - 40,000 149,000
Proceeds from convertible debt 750,000 525,959 2,275,959
Proceeds from sale of common stock 2,169,873 292,472 2,487,345
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 (162,500) (69,530) (232,030)
Premium paid on extinquishment of debt (100,519) - (100,519)
Purchase and retirement of common stock - - (48,000)
------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,161,854 788,901 4,037,208
------------------------------------------------------------------------------------------------------------------------
F-5
Cumulative
Amounts from
January 17, 2002
(Inception)
Year Ended Year Ended through
December 31, December 31, December 31,
2004 2003 2004
----------------------------------------------------------------------------------------------------------------
Net Change in Cash $ (153,371) $ (553,688) $ 10,774
Cash, at beginning of period $ 164,145 $ 717,833 $ -
----------------------------------------------------------------------------------------------------------------
Cash, at end of period $ 10,774 $ 164,145 $ 10,774
----------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Noncash Investing and
Financing Activities
December 31, 2004
Issuance of stock for prepaid services
of $62,499
Issuance of warrants for prepaid services
of $329,000
Issuance of stock in exchange for
standby equity commitment of $310,866
Discount on convertible debt with warrants
of $105,250
Deferred loan costs through the issuance
of warrants of $144,000
Beneficial conversion on convertible debt
of $360,256
Conversion of accrued interest of $160,000
to convertible debt
December 31, 2003
Issuance or commitment to issue stock and
warrants for prepaid services of $666,779
Stock subscription receivable recorded of
$87,875
Discount on convertible debt with warrants
of $500,000
Deferred loan costs through the issuance
of warrants of $101,000
See accompanying notes to financial statement.
F-6
Provectus Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. Organization and Significant Accounting Policies
Nature of Operations
Provectus Pharmaceuticals, Inc.(together with its subsidiaries, the
"Company")is a development-stage biopharmaceutical company that is focusing
on developing minimally invasive products for the treatment of psoriasis
and other topical diseases, cancer, and certain laser device technology.
Through a previous acquisition, the Company also intends to develop,
manufacture, and distribute over-the-counter pharmaceuticals. To date the
Company has no material revenues.
Principles of Consolidation
Intercompany balances and transactions have been eliminated in
consolidation.
F-7
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Inventory
Inventory, consisting principally of finished goods, is stated at the lower
of cost or market. Cost is determined using a first-in, first-out method.
Deferred Loan Costs and Debt Discounts
The costs related to the issuance of the convertible debt, including lender
fees, legal fees, due diligence costs, escrow agent fees and commissions,
have been recorded as deferred loan costs and are being amortized over the
term of the loan using the effective interest method. Additionally, the
Company recorded debt discounts related to warrants and beneficial
conversion features issued in connection with the debt. Debt discounts are
being amortized over the term of the loan using the effective interest
method.
Equipment and Furnishings
Equipment and furnishings acquired through the acquisition of Valley
Pharmaceuticals, Inc. (Note 2) have been stated at carry over basis. Other
equipment and furnishings are stated at cost. Depreciation of equipment is
provided for using the straight-line method over the estimated useful lives
of the assets. Computers and laboratory equipment are being depreciated
over five years, furniture and fixtures are being depreciated over seven
years.
Long-Lived Assets
The Company reviews the carrying values of its long-lived assets for
possible impairment whenever an event or change in circumstances indicates
that the carrying amount of the assets may not be recoverable. Any
long-lived assets held for disposal are reported at the lower of their
carrying amounts or fair value less cost to sell.
Patent Costs
Internal patent costs are expensed in the period incurred. Patents
purchased are capitalized and amortized over the remaining life of the
patent.
Patents at December 31, 2004 were acquired as a result of the merger with
Valley Pharmaceuticals, Inc. ("Valley") (Note 2). The majority shareholders
of Provectus also owned all of the shares of Valley and therefore the
assets acquired from Valley were recorded at their carry over basis. The
patents are being amortized over the remaining lives of the patents, which
range from 12-16 years. Annual amortization of the patents is expected to
be approximately $671,000 per year for the next five years.
Research and Development
Research and development costs are charged to expense when incurred. An
allocation of payroll expenses was made based on a percentage estimate of
time spent. The research and development costs include the following:
consulting - IT, depreciation, lab equipment repair, lab supplies,
insurance, legal - patents, office supplies, payroll expenses, rental -
building, repairs, software, taxes and fees, and utilities.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the tax basis and
financial reporting basis of certain assets and liabilities based upon
currently enacted tax rates expected to be in effect when such amounts are
realized or settled.
Since inception of the Company on January 17, 2002, the Company has
generated tax net operating losses of approximately $5.9 million, expiring
in 2022 through 2024. The Company has not recorded an income tax benefit
for the net operating losses as the Company is in the development stage and
realization of the losses is not considered more likely than not. An income
tax valuation allowance has been provided for the losses realized to date.
F-8
The amortization of patents, noncash stock compensation and the
amortization of debt discounts related to beneficial conversions are not
deductible for tax purposes. In addition, the Company may have acquired
certain net operating losses in its acquisition of Valley Pharmaceuticals,
Inc. (Note 2). However, the amount of these net operating losses has not
been determined and even if recorded the amount would be fully reserved.
Basic and Diluted Loss Per Common Share
Basic and diluted loss per common share and diluted loss per common share
is computed based on the weighted Per Common Share 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 December 31, 2004 are
1,725,000 options, 4,092,393 warrants and 3,176,368 shares issuable upon
the conversion of convertible debt and accrued interest. Additionally, the
Company is committed to issue 10,000 warrants.
Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash,
accounts payable and accrued expenses approximate fair value because of the
short-term nature of these amounts. The Company believes the fair value of
its fixed-rate borrowings approximates the market value.
Stock Based Compensation
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.
Options granted to non-employees are accounted for under SAS 123. SAS 123
requires options to be accounted for based on their fair value.
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, $15,612 and $34,659 of
expense was recorded for the year ended December 31, 2004 and 2003,
respectively.
F-9
For stock options granted to employees during 2004 and 2003, the Company
has estimated the fair value of each option granted using the Black-Scholes
option pricing model with the following assumptions:
2004 2003
-------- --------
Weighted average fair value per options granted $ 1.10 $ 0.60*
Significant assumptions (weighted average)
Risk-free interest rate at grant date 2.0% 2.0%
Expected stock price volatility 150% 150%
Expected option life (years) 10 10
* The weighted average fair value for both the options less than
market price at date of grant and options equal to market price at
date of grant was $0.60.
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:
Year Ended Year Ended
December 31, December 31,
2004 2003
--------------- ---------------
Net loss, as reported $ (4,344,525) $ (3,155,313)
Add stock-based employee compensation
expense included in reported net loss 15,612 34,659
Less total stock-based employee compensation
expense determined under the fair
value based method for all awards (698,125) (132,663)
---------------- ---------------
Pro forma net loss $ (5,027,038) $ (3,253,317)
================ ===============
Basic and diluted loss per common share,
as reported $ (0.31) $ (0.33)
Basic and diluted loss per common share,
pro forma $ (0.36) $ (0.34)
F-10
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board issued
SFAS No. 123 (revised 2004), "Shared-Based Payment," which is a
revision of SFAS No. 123. SFAS No. 123(R) supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees," and amends SFAS No.
95, "Statement of Cash Flows." Generally, the approach in SFAS No.
123(R) is similar to the approach described in SFAS No. 123. However,
SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the
income statement based on their fair values. This revised standard
will be effective for us beginning with the third quarter in 2005.
As permitted by SFAS No. 123, the Company currently accounts for
share-based payments to employees using APB 25 intrinsic value method
and, as such, generally recognizes no compensation cost for employee
stock options. Accordingly, the adoption of SFAS No. 123(R)'s fair
value method will have an impact on the result of operations, although
it will have no impact on the overall financial position. The impact
of the modified prospective adoption of SFAS No. 123(R) cannot be
estimated at this time because it will depend on levels of share-based
payments granted in the future. However, had the Company adopted SFAS
No. 123(R) in prior periods, the impact of that standard would have
approximated the impact of SFAS 123 as described in the disclosure of
pro forma net income and earnings per share.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs: an
amendment of ARB No. 43, Chapter 4," to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs and
waster material. SFAS No. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The
Company does not believe the provisions of SFAS No. 151, when applied,
will have a material impact on the financial position or results of
operations.
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.
Reclassifications
Certain 2003 amounts have been reclassified to conform to the 2004
presentation.
2. Recapitalization and Merger.
On April 23, 2002, Provectus Pharmaceutical, Inc., a Nevada corporation and
a Merger "blank check" public company, acquired Provectus Pharmaceuticals,
Inc., a privately held Tennessee corporation ("PPI"), by issuing 6,680,000
shares of common stock of Provectus Pharmaceutical to the stockholders of
PPI in exchange for all of the issued and outstanding shares of PPI, as a
result of which Provectus Pharmaceutical changed its name to Provectus
Pharmaceuticals, Inc. (the "Company") and PPI became a wholly owned
subsidiary of the Company. Prior to the transaction, PPI had no significant
operations and had not generated any revenues.
For financial reporting purposes, the transaction has been reflected in the
accompanying financial statements as a recapitalization of PPI and the
financial statements reflect the historical financial information of PPI
which was incorporated on January 17, 2002. Therefore, for accounting
purposes, the shares recorded as issued in the reverse merger are the
265,763 shares owned by Provectus Pharmaceuticals, Inc. shareholders prior
to the reverse merger.
The issuance of 6,680,000 shares of common stock of Provectus
Pharmaceutical, Inc. to the stockholders of PPI in exchange for all of the
issued and outstanding shares of PPI was done in anticipation of PPI
acquiring Valley Pharmaceuticals, Inc, which owned the intellectual
property to be used in the Company's operations.
On November 19, 2002, the Company acquired Valley Pharmeceuticals, Inc,
("Valley") a privately-held Tennessee corporation by merging PPI with and
into Valley and naming the surviving company Xantech Pharmaceuticals, Inc.
Valley had no significant operations and had not generated any revenues.
Valley was formed to hold certain intangible assets which were transferred
from an entity which was majority owned by the shareholders of Valley.
Those shareholders gave up their shares of the other company in exchange
for the intangible assets in a non-pro rata split off. The intangible
assets were valued based on the market price of the stock given up in the
split-off. The shareholders of Valley also owned the majority of the shares
of the Company at the time of the transaction. The Company issued 500,007
shares of stock in exchange for the net assets of Valley which were valued
at $12,226,320 and included patents of $11,715,445 and equipment and
furnishings of $510,875.
F-11
3. Equity Transactions
(a) During 2002, the Company issued 2,020,000 shares of stock in exchange
for consulting services. These services were valued based on the fair
market value of the stock exchanged which resulted in consulting costs
charged to operations of $5,504,000.
(b) During 2002, the Company issued 510,000 shares of stock to employees
in exchange for services rendered. These services were valued based on
the fair market value of the stock exchanged which resulted in
compensation costs charged to operations of $932,000.
(c) In February 2002, the Company sold 50,000 shares of stock to a related
party in exchange for proceeds of $25,000.
(d) In June 2002, the Company issued a warrant to a consultant for the
purchase of 100,000 shares at $2.29 per share. The warrant is only
exercisable upon the successful introduction of the Company to a
designated pharmaceutical company. The warrant was forfeited in 2004.
(e) In October 2002, the Company purchased 400,000 outstanding shares of
stock from one shareholder for $48,000. These shares were then
retired.
(f) On December 5, 2002, the Company purchased the assets of Pure-ific
L.L.C, a Utah limited liability company, and created a wholly owned
subsidiary called Pure-ific Corporation, to operate the Pure-ific
business which consists of product formulations for Pure-ific personal
sanitizing sprays, along with the Pure-ific trademarks. The assets of
Pure-ific were acquired through the issuance of 25,000 shares of the
Company's stock with a fair market value of $0.50 and the issuance of
various warrants. These warrants included warrants to purchase 10,000
shares of the Company's stock at an exercise price of $0.50 issuable
on the first, second and third anniversary dates of the acquisition.
Accordingly, the fair market value of these warrants of $14,500,
determined using the Black-Scholes option pricing model, was recorded
as additional purchase price for the acquisition of the Pure-ific
assets. In 2004, 20,000 warrants were issued for the first and second
anniversary dates. 10,000 of these warrants were exercised in 2004. In
addition, warrants to purchase 80,000 shares of stock at an exercise
price of $0.50 will be issued upon the achievement of certain sales
targets of the Pure-ific product. At December 31, 2004 and 2003, none
of these targets have been met and accordingly, no costs have been
recorded.
(g) In 2003, the Company issued 764,000 shares to consultants in exchange
for services rendered, consisting of 29,000 shares issued in January
valued at $11,600, 35,000 shares issued in March valued at $11,200,
and 700,000 shares issued in October valued at $217,000. The value for
these shares was based on the market value of the shares issued. As
all of these amounts represented payments for services to be provided
in the future and the shares were fully vested and non-forfeitable, a
prepaid consulting expense was recorded in 2003 of which $0 and
$144,667 remained as of December 31, 2004 and 2003, respectively.
Consulting costs charged to operations were $144,667 in 2004 and
$95,133 in 2003.
(h) In November and December 2003, the Company committed to issue 341,606
shares to consultants in exchange for services rendered. The total
value for these shares was $281,500 which was based on the market
value of the shares issued. The shares were issued in January 2004. As
these amounts represented payments for services to be provided in the
future and the shares were fully vested and non-forfeitable, a prepaid
consulting expense was recorded in 2003 of which $0 and $231,983
remained as of December 31, 2004 and 2003, respectively. Consulting
costs charged to operations were $231,983 in 2004 and $49,517 in 2003.
F-12
(i) The Company applies the recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," in accounting for stock
options and warrants issued to nonemployees. In January 2003, the
Company issued 25,000 warrants to a consultant for services rendered.
In February 2003, the Company issued 360,000 warrants to a consultant,
180,000 of which were fully vested and non-forfeitable at the issuance
and 180,000 of which were cancelled in August 2003 due to the
termination of the consulting contract. In September 2003, the Company
issued 200,000 warrants to two consultants in exchange for services
rendered. In November 2003, the Company issued 100,000 warrants to one
consultant in exchange for services rendered. As the fair market value
of these services was not readily determinable, these services were
valued based on the fair market value, determined using the
Black-Scholes option-pricing model. Fair market value for the warrants
issued in 2003 ranged from $0.20 to $0.24 and totalled $145,479.. As
these amounts represented payments for services to be provided in the
future and the warrants were fully vested and non-forfeitable, a
prepaid consulting expense was recorded in 2003 of which $0 and
$44,167 remained as of December 31, 2004 and 2003, respectively.
Consulting costs charged to operations were $44,167 in 2004 and
$101,312 in 2003.
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 December
31, 2004, $123,375 of these costs have been charged to operations with
the remaining $205,427 recorded as prepaid consulting expense as it
represents payments for future services and the warrants are
fully-vested and non-forfeitable. In December 2004, the Company issued
10,000 warrants to consultants in exchange for services valued at
$3,680. Fair market value for the warrants issued in 2004 ranged from
$0.37 to $0.94.
(j) In December 2003, the Company commenced an offering for sale of
restricted common stock. As of December 31, 2003, the Company had sold
874,871 shares at an average gross price of $1.18 per share. As of
December 31, 2003, the Company had received net proceeds of $292,472
and recorded a stock subscription receivable of $87,875 for stock
subscriptions prior to December 31, 2003 for which payment was
received subsequent to December 31, 2003. The transaction is a
Regulation S offering to foreign investors as defined by Regulation S
of the Securities Act. The restricted shares cannot be traded for 12
months. After the first 12 months, sales of the shares are subject to
restrictions under rule 144 for an additional year. The Company has
engaged a placement agent to assist the offering. Costs related to the
placement agent of $651,771 have been off-set against the gross
proceeds of $1,032,118 and therefore are reflected as a direct
reduction of equity at December 31, 2003. At December 31, 2003,
195,051 shares had not yet been issued. These shares were issued in
the first quarter of 2004.
In 2004, the Company sold 2,274,672 shares of restricted common stock
under this offering of which 1,672,439 shares were issued in the first
quarter 2004 and 602,233 were issued in the second quarter 2004.
Shares were sold during 2004 at an average gross price of $1.05 per
share with net proceeds of $793,137. Costs related to the placement
agent for proceeds received in 2004 of $1,588,627 have been off-set
against gross proceeds of $2,381,764.
(k) In January 2004, the Company issued 10,000 shares to a consultant
in exchange for services rendered. Consulting costs charged to
operations were $11,500. In March 2004, the Company committed to issue
36,764 shares to consultants in exchange for services. These shares
were recorded as a prepaid consulting expense and were fully amotized
at December 31, 2004. Consulting costs charged to operations were
$62,500. These 36,764 shares, along with 75,000 shares committed in
2003 were issued in August 2004. The 75,000 shares committed to be
issued in 2003 were the result of a cashless exercise of 200,000
warrants in 2003, which were not issued as of December 31, 2003. In
August 2004, the Company also issued 15,000 shares to a consultant in
exchange for services rendered. Consulting costs charged to operations
were $25,200. In September 2004, the Company issued 16,666 shares to a
consultant in exchange for services rendered. Consulting costs charged
to operations were $11,666. In October 2004, the Company issued 16,666
shares to a consultant in exchange for services rendered. Consulting
costs charged to operations were $13,666. In November 2004, the
Company issued 16,666 shares to a consultant in exchange for services
rendered. Consulting costs charged to operations were $11,000. In
December 2004, the Company issued 7,500 shares to a consultant in
exchange for services rendered. Consulting costs charged to operations
were $3,525.
F-13
(l) On June 25, 2004, the Company entered into an agreement to sell
1,333,333 shares of common stock at a purchase price of $.75 per share
for an aggregate purchase price of $1,000,000. Payments were received
in four installments, the last of which was on August 9, 2004. Stock
issuance costs included 66,665 shares of stock valued at $86,666 and
cash costs of $69,000. The cash costs have been off-set against the
lproceeds received. received. In conjunction with the sale of the
common stock, the Company issued 1,333,333 warrants with an exercise
price of $1.00 and a termination date of three years from the
installment payment dates. In addition, the Company has given the
investors an option to purchase 1,333,333 shares of additional stock
including the attachment of warrants under the same terms as the
original agreement. This option expired February 8, 2005.
(m) 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
December 31, 2004 there were no shares issued pursuant to the SEDA.
The facility is subject to having in effect a registration statement
covering the shares. A registration statement covering 2,023,552
shares was declared effective by the Securities and Exchange
Commission on November 16, 2004. The maximum aggregate amount of the
equity placements pursuant to the SEDA 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 from the date of registration.
At December 31, 2004, $38,326 has been amortized.
(n) On November 16, 2004, the Company completed a private placement
transaction with 14 accredited investors, pursuant to which the
Company sold 530,166 shares of common stock at a purchase price of
$0.75 per share, for an aggregate purchase price of $397,625. In
connection with the sale of the common stock, the Company also issued
warrants to the investors to purchase up to 795,249 shares of our
common stock at an exercise price of $1.00 per share. The Company paid
$39,764 and issued 198,812 warrants to Venture Catalyst, LLC as
placement agent for this transaction. The cash costs have been off-set
against the proceeds received
4. Stock Incentive Plan
The Company maintains one long-term incentive compensation plan, the Provectus
Pharmaceuticals, Inc. 2002 Stock Plan, which provides for the issuance of up to
3,000,000 shares of common stock pursuant to stock options, stock appreciation
rights, stock purchase rights and long-term performance awards granted to key
employees and directors of and consultants to the Company.
F-14
Options granted under the 2002 Stock Plan may be either "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code or
options which are not incentive stock options. The stock options are exercisable
over a period determined by the Board of Directors (through its Compensation
Committee), but generally no longer than 10 years after the date they are
granted.
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 December 31, 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 December 31, 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 December 31, 2004.
The following table summarizes the options granted, exercised and outstanding as
of December 31, 2003 and 2004, respectively. There were no options issued in
2002.
Exercise Weighted
Shares Price Per Average
Share Exercise
Price
--------- ------------- --------
Outstanding at January 1, 2003 - - -
Granted * 452,000 $0.26 - $0.60 $0.38
Exercised - - -
Forfeited (95,750) $0.26 - $0.32 $0.30
--------- ------------- --------
Outstanding at December 31, 2003 356,250 $0.26 - $0.60 $0.40
========= ============= ========
Options exercisable at
December 31, 2003 187,500 $0.26 - $0.60 $0.47
========= ============= ========
Outstanding at January 1, 2004 356,250 $0.26 - $0.60 $0.40
Granted 1,400,000 $0.95 - $1.25 $1.10
Exercised - - -
Forfeited (31,250) $0.26 - $0.32 $0.30
--------- ------------- --------
Outstanding at December 31, 2004 1,725,000 $0.32 - $1.25 $0.97
========= ============= ========
Options exercisable at
December 31, 2004 562,500 $0.32 - $1.25 $0.84
========= ============= ========
* Includes 352,000 options granted at less than market price with a weighted
average exercise price of $0.31 and 100,000 options granted at a price equal to
market price with a weighted average exercise price of $0.60.
The following table summarizes information about stock options outstanding at
December 31, 2004.
Options Outstanding Options Exercisable
---------------------------------------- ----------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
December 31, Contractual Exercise December 31, Exercise
Exercise Price 2004 Life Price 2004 Price
-------------- ------------- ---------- -------- ------------- --------
$0.32 225,000 8.58 years 0.32 112,500 0.32
$0.60 100,000 8.58 years 0.60 100,000 0.60
$1.10 1,200,000 9.17 years 1.10 225,000 1.10
$0.95 100,000 9.42 years 0.95 100,000 0.95
$1.25 100,000 9.50 years 1.25 25,000 1.25
-------------- ------------- ---------- -------- ------------- --------
1,725,000 9.00 years $0.97 562,500 $0.84
============= ========== ======== ============= ========
F-15
The following table summarizes the warrants granted, exercised and
outstanding as of December 31, 2003 and 2004, respectively.
Weighted
Exercise Average
Price Per Exercise
Warrants Warrant Price
--------- ------------- --------
Outstanding at January 1, 2003 100,000 $2.29 $2.29
Granted 1,285,000 $0.25 - $1.25 $0.78
Exercised (200,000) $0.75 $0.75
Forfeited (180,000) $0.25 - $0.50 $0.37
--------- ------------- --------
Outstanding at December 31, 2003 1,005,000 $0.25 - $2.29 $1.01
========= ============= ========
Warrants exercisable at
December 31, 2003 905,000 $0.25 - $1.25 $0.87
========= ============= ========
Outstanding at January 1, 2004 1,005,000 $0.25 - $2.29 $1.01
Granted 3,402,393 $0.50 - $1.00 $0.99
Exercised (190,000) $0.25 - $0.50 $0.37
Forfeited (125,000) $0.75 - $2.29 $1.98
--------- ------------- --------
Outstanding at December 31, 2004 4,092,393 $0.50 - $1.25 $0.99
========= ============= ========
Warrants exercisable at
December 31, 2004 4,092,393 $0.50 - $1.25 $0.99
========= ============= ========
Warrants exercised include a cashless exercise of 200,000 warrants in exchange
for 75,000 shares in 2003 and a cashless exercise of 180,000 warrants in
exchange for 122,608 shares in 2004. At December 31, 2004 there were 10,000
warrants committed but not issued.
The following table summarizes information about warrants outstanding at
December 31, 2004.
Warrants Outstanding Warrants Exercisable
--------------------------------------------- -----------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
December 31, Contractual Exercise December 31, Exercise
Exercise Price 2004 Life Price 2004 Price
------------------- -------------- ----------- -------- --------------- --------
$0.50 10,000 1.92 $0.50 10,000 $0.50
$0.75 189,525 3.42 $0.75 189,525 $0.75
$0.94 20,000 2.25 $0.94 20,000 $0.94
$1.00 3,772,868 3.48 $1.00 3,772,868 $1.00
$1.25 100,000 1.92 $1.25 100,000 $1.25
------------------- -------------- ----------- -------- --------------- --------
4,092,393 3.43 $0.99 4,092,393 $0.99
============== =========== ======== =============== ========
5. Convertible Debt.
(a) Pursuant to a Convertible Secured Promissory Note and Warrant Purchase
Agreement dated November 26, 2002 (the "Purchase Agreement") between the
Company and Gryffindor Capital Partners I, L.L.C., a Delaware limited
liability company ("Gryffindor"), Gryffindor purchased the Company's $1
million Convertible Secured Promissory Note dated November 26, 2002 (the
"Note"). The Note bears interest at 8% per annum, payable quarterly in
arrears, and is due and payable in
F-16
full on November 26, 2004. Subject to certain exceptions, the Note is
convertible into shares of the Company's common stock on or after November
26, 2003, at which time the principal amount of the Note is convertible
into common stock at the rate of one share for each $0.737 of principal so
converted and any accrued but unpaid interest on the Note is convertible at
the rate of one share for each $0.55 of accrued but unpaid interest so
converted.
The Company's obligations under the Note are secured by a first priority
security interest in all of the Company's assets, including the capital
stock of the Company's wholly owned subsidiary Xantech Pharmaceuticals,
Inc., a Tennessee corporation ("Xantech"). In addition, the Company's
obligations to Gryffindor are guaranteed by Xantech, and Xantech's
guarantee is secured by a first priority security interest in all of
Xantech's assets.
Pursuant to the Purchase Agreement, the Company also issued to Gryffindor
and to another individual Common Stock Purchase Warrants dated November 26,
2002 (the "Warrants"), entitling these parties to purchase, in the
aggregate, up to 452,919 shares of common stock at a price of $0.001 per
share. Simultaneously with the completion of the transactions described in
the Purchase Agreement, the Warrants were exercised in their entirety. The
$1,000,000 in proceeds received in 2002 was allocated between the long-term
debt and the warrants on a pro-rata basis. The value of the warrants was
determined using a Black-Scholes option pricing model. The allocated fair
value of these warrants was $126,587 and was recorded as a discount on the
related debt and is being amortized over the life of the debt using the
effective interest method. Amortization of $57,052 and $63,292 have been
recorded as additional interest expense as of December 31, 2004 and 2003,
respectively.
In 2003, an additional $25,959 was added to the 2002 convertible debt
outstanding.
Pursuant to an agreement dated November 26, 2004 between the Company and
Gryffindor, the Company issued Gryffindor a Second Amended and Restated
Senior Secured Convertible Note dated November 26, 2004 in the amended
principal amount of $1,185,959 which included the original note principal
plus accrued interest. The second amended note bears interest at 8% per
annum, payable quarterly in arrears, is due and payable in full on November
26, 2005, and amends and restates the amended note in its entirety.
Subject to certain exceptions, the Note is convertible into shares of the
Company's common stock on or after November 26, 2004, at which time the
principal amount of the Note is convertible into common stock at the rate
of one share for each $0.737 of principal so converted and any accrued but
unpaid interest on the Note is convertible at the rate of one share for
each $0.55 of accrued but unpaid interest so converted.
The Company issued warrants to Gryffindor to purchase up to 525,000 shares
of the Company's common stock at an exercise price of $1.00 per share in
satisfaction of issuing Gryffindor the Second Amended and Restated Senior
Secured Convertible Note dated November 26, 2004. The value of these
warrants was determined to be $105,250 using a Black-Scholes option-
pricing model and was recorded as a discount on the related debt and is
being amortized over the life of the debt using the effective interest
method. Amortization of $10,093 has been recorded as additional interest
expense as of December 31, 2004.
(b) On November 19, 2003, the Company completed a short-term unsecured debt
financing in the aggregate amount of $500,000. The notes bear interest of
8% and were due in full on November 19, 2004. The notes were convertible
into common shares at a conversion rate equal to the lower of (i) 75% of
the average market price for the 20 trading days ending on the 20th trading
day subsequent to the effective date or (ii) $0.75 per share. Pursuant to
the note agreements, the Company also issued warrants to purchase up to
500,000 shares of the Company's common stock at an exercise price of $1.00
per share. The warrants expire November 19, 2005.
The $500,000 proceeds received was allocated between the debt and the
warrants on a pro-rata basis. The value of the warrants was determined
using a Black-Scholes option-pricing model. The allocated fair value of
F-17
these warrants was $241,655 and was recorded as a discount to the related
debt. In addition, the conversion price was lower than the market value of
the Company's common stock on the date of issue. As a result, an additional
discount of $258,345 was recorded for this beneficial conversion feature.
The combined debt discount of $500,000 was being amortized over the life of
the debt using the effective interest method.
In conjunction with the debt financing, the Company issued warrants to
purchase up to 100,000 shares of the Company's common stock at an exercise
price of $1.25 per share in satisfaction of a finder's fee. The value of
these warrants was determined to be $101,000 using a Black-Scholes
option-pricing model. In addition, the Company incurred debt issuance costs
of $69,530 which were payable in cash. Total debt issuance costs of
$170,530 were recorded as an asset and amortized over the term of the debt.
In 2004, in conjunction with the June 25, 2004 transaction (Note 3(1)), the
Company entered into a redemption agreement for its $500,000 of short-term
convertible debt. Payments on the convertible debt corresponded to payments
recelived from the sale of common stock. As a result, the unamortized
portion of the debt discount at the date of extinguishment of $193,308 and
the unamortized portion of the deferred loan costs of $65,930 were recorded
as a loss on extinguishment of debt. In addition to principal payments, the
redemption payments included accrued interest and a premium payment of
$100,519. This premium payment has been recorded as a loss on
extinguishement. As part of this redemption, the Company has repurchased
the beneficial conversion feature amount of $258,345 in 2004. Amortization
of the debt discount up to the date of redemption was $249,316 and $57,377
for the years ended 2004 and 2003, respectively and amortization of
deferred loans costs up to the date of redemption was $85,031 and 19,569
for the years ended December 31, 2004 and 2003, respectively. These amounts
were recorded as additional interest expense.
(c) On July 28, 2004, the Company entered into an agreement to issue 8%
convertible debentures to Cornell in the amount of $375,000 which is due
together with interest on July 28, 2007. This debt has a subordinated
security interest in the assets of the Company. The Company issued a second
secured convertible debenture on October 7, 2004 which has the same
conversion terms as the prior debenture and was issued on the date the
Company filed a registration statement for the shares underlying both
debentures. This is due together with interest on October 7, 2007 and 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 ($1.88 on Closing Date)
or (b) an amount equal to 80% of the lowest daily VWAP of the Company's
common stock during the 5 trading days immediately preceding the conversion
date. There was a floor conversion price of $.75 until December 1, 2004.
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 and October 7, 2004, respectively. As a result, the
beneficial conversion amount was computed using 80% of the lowest fair
market value for the stock for the five days preceding July 28, 2004 and
October 7, 2004, respectively, which resulted in a beneficial conversion
amount of $254,006 and $106,250, respectively. The beneficial conversion
amount is being amortized over the term of the debt which is three years.
At December 31, 2004, $44,203 has been amortized.
In conjunction with the debt financing, the Company issued warrants to
purchse up to 150,000 shares of the Company's common stock at an exercise
price of $1.00 per share in satisfaction of a finder's fee. The value of
these warrants was determined to be $144,000 using a Black-Scholes
option-pricing model. In addition, the Company incurred debt issuance costs
of $162,500 which were payable in cash. Total debt issuance costs of
$306,500 were recorded as an asset and are being amortized over the term of
the debt. Amortization of deferred loan costs of $35,922 has been
recognized as of December 31, 2004.
6. Loan From Shareholder
During 2002, a shareholder who is also an employee and member of the
Company's board of directors, loaned the Company $109,000. During 2003, the
same shareholder loaned the Company an additional $40,000. Interest on the
loan is 5%, compounded monthly. Principal is due on December 31, 2009 and
interest is payable quarterly in arrears beginning on June 30, 2003.
Accrued interest was $15,434 and $7,431 at December 31, 2004 and 2003,
respectively. Interest expense was $8,003 and $7,431 at December 31, 2004
and 2003, respectively.
F-18
7. Subsequent Events
As of March 30, 2005, the Company held net proceeds of $2.65 million in
debt financing in escrow for the Company's benefit via a convertible debenture
placed with an investor group led by DC Opportunity Fund Ltd. The Company
anticipates that the proceeds will be released from escrow shortly. The new
debenture instruments are convertible to common stock at a fixed price of $0.75
per share. As an additional consideration, the new debenture holders will
receive five-year warrants to purchase 4.5 million shares of Company common
stock at an exercise price of $1.06 per share and 175 day warrants, after an
effective registration of the underlying shares, to purchase 3.2 million shares
of Company common stock at an exercise price of $1.01 per share.
On March 30, 2005, the Company authorized retirement of existing $.65
million convertible debt instrument wilth Cornell Capital Partners. The
debenture instrument had been reduced from the $.75 million balance as of
December 31, 2004.
F-19
EXHIBIT INDEX
Exhibit No. Description
------------ -----------
2.1* Agreement and Plan of Reorganization dated April 23, 2002, among
Provectus Pharmaceutical, Inc., a Nevada corporation ("Provectus"),
Provectus Pharmaceuticals, Inc., a Tennessee corporation ("PPI"), and
the stockholders of PPI identified therein, incorporated herein by
reference to Exhibit 99 to the Company's Current Report on Form 8-K
dated April 23, 2002, as filed with the SEC on April 24, 2002.
2.2* Agreement and Plan of Reorganization dated as of November 15, 2002
among the Company, PPI, Valley Pharmaceuticals, Inc., a Tennessee
corporation formerly known as Photogen, Inc., H. Craig Dees, Ph.D.,
Dees Family Foundation, Walter Fisher, Ph.D., Fisher Family Investment
Limited Partnership, Walt Fisher 1998 Charitable Remainder Unitrust,
Timothy C. Scott, Ph.D., Scott Family Investment Limited Partnership,
John T. Smolik, Smolik Family LLP, Eric A. Wachter, Ph.D., and Eric A.
Wachter 1998 Charitable Remainder Unitrust, incorporated herein by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
dated November 19, 2002, as filed with the SEC on November 27, 2002.
2.3* Asset Purchase Agreement dated as of December 5, 2002 among Pure-ific
Corporation, a Nevada corporation ("Pure-ific"), Pure-ific, L.L.C., a
Utah limited liability company, and Avid Amiri and Daniel Urmann,
incorporated herein by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K dated December 5, 2002, as filed with the
SEC on December 20, 2002.
2.4* Stock Purchase Agreement dated as of December 5, 2002 among the
Company, Pure-ific, and Avid Amiri and Daniel Urmann, incorporated
herein by reference to Exhibit 2.2 to the Company's Current Report on
Form 8-K dated December 5, 2002, as filed with the SEC on December 20,
2002.
3.1 Restated Articles of Incorporation of Provectus, incorporated herein
by reference to Exhibit 3.1 to the Company's Quarterly Report on Form
10-QSB for the fiscal quarter ended June 30, 2003, as filed with the
SEC on August 14, 2003.
3.2 Bylaws of Provectus, incorporated herein 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.
4.1 Specimen certificate for the common shares, $.001 par value per share,
of Provectus Pharmaceuticals, Inc., incorporated herein by reference
to Exhibit 4.1 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2002, as filed with the SEC on April
15, 2003.
4.2.1+ Convertible Secured Promissory Note and Warrant Purchase Agreement
dated as of November 26, 2002 between the Company and Gryffindor
Capital Partners I, L.L.C. ("Gryffindor"), incorporated herein by
reference, 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 the Company and
Gryffindor, incorporated by reference to Exhibit 4.2.2 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended March
31, 2003, as filed with the SEC on May 9, 2003.
4.3 Amended and Restated Convertible Secured Promissory Note of the
Company dated January 31, 2003, issued to Gryffindor, incorporated
herein by reference to Exhibit 4.3 to the Company's Quarterly Report
on Form 10-QSB dated March 31, 2003, as filed with the SEC on May 9,
2003.
4.4 Common Stock Purchase Warrant dated November 26, 2002, issued to
Gryffindor, incorporated herein by reference to Exhibit 4.3 to the
Company's Current Report on Form 8-K dated November 26, 2002, as filed
with the SEC on December 10, 2002.
4.5 Common Stock Purchase Warrant dated November 26, 2002, issued to
Stuart Fuchs, incorporated herein by reference to Exhibit 4.4 to the
Company's Current Report on Form 8-K dated November 26, 2002, as filed
with the SEC on December 10, 2002.
X-1
4.6 Stock Pledge Agreement dated as of November 26, 2002 between the
Company 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.
4.12 Registration Rights Agreement dated as of November 26, 2002 between
the Company and Gryffindor, incorporated herein by reference to
Exhibit 4.11 to the Company's Current Report on Form 8-K dated
November 26, 2002, as filed with the SEC on December 10, 2002.
4.13 Shareholders' Agreement dated as of November 26, 2002 among Provectus,
Gryffindor, H. Craig Dees, Ph.D., Dees Family Foundation, Walter
Fisher, Ph.D., Fisher Family Investment Limited Partnership, Walt
Fisher 1998 Charitable Remainder Unitrust, Timothy C. Scott, Ph.D.,
Scott Family Investment Limited Partnership, John T. Smolik, Smolik
Family LLP, Eric A. Wachter, Ph.D., and Eric A. Wachter 1998
Charitable Remainder Unitrust, incorporated herein by reference to
Exhibit 4.12 to the Company's Current Report on Form 8-K dated
November 26, 2002, as filed with the SEC on December 10, 2002.
4.14 Warrant Agreement dated as of December 5, 2002 among Provectus, Avid
Amiri and Daniel Urmann, incorporated herein by reference to Exhibit
4.1 to the Company's Current Report on Form 8-K dated December 5,
2002, as filed with the SEC on December 20, 2002.
4.15 Form of Warrant issuable pursuant to the Warrant Agreement,
incorporated herein by reference to Exhibit 4.2 to the Company's
Current Report on Form 8-K dated December 5, 2002, as filed with the
SEC on December 20, 2002.
4.16 Promissory Note of the Company dated December 31, 2002, issued to Eric
A. Wachter, incorporated herein by reference to Exhibit 4.16 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2002, as filed with the SEC on April 15, 2003.
4.17 Common Share Purchase Warrant dated January 29, 2003, issued to
Investor-Gate.com, incorporated herein by reference to Exhibit 4.17 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.
4.18 Form of 8% Convertible Debenture incorporated herein by reference to
Annex I to Exhibit 10.16 to the Company's Registration Statement on
Form S-2, as filed with the SEC on February 12, 2004.
4.19 Form of Warrant incorporated herein by reference to Annex IV to
Exhibit 10.16 to the Company's Registration Statement on Form S-2, as
filed with the SEC on February 12, 2004.
4.20 Registration Rights Agreement dated as of November 19, 2003 by and
among the Company and the investors named therein incorporated by
reference to Annex IV to Exhibit 10.16 to the Company's Registration
Statement on Form S-2, as filed with the SEC on February 12, 2004.
X-2
4.21 Registration Rights Agreement dated as of September 4, 2003 by and
among the Company and Bruce A. Cosgrove and George F. Martin,
incorporated herein by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-2, as filed with the SEC on February
12, 2004.
4.22 Form of Warrant issued to selling shareholders other than holders of
8% Convertible Debentures, incorporated herein by reference to Exhibit
4.5 to the Company's Registration Statement on Form S-2, as filed with
the SEC on February 12, 2004.
4.23 Registration Rights Agreement dated as of December 26, 2003 by and
between the Company and The Research Foundation of State University of
New York, incorporated herein by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-2, as filed with the SEC on
February 12, 2004.
10.1 Consultant Compensation Agreement dated April 23, 2002 among Provectus
and Russell Ratliff, Justeene Blankenship, Michael L. Labertew, and
Phillip Baker, incorporated herein by reference to Exhibit 99.1 to the
Company's Registration Statement on Form S-8 (Registration No.
333-86896), as filed with the SEC on April 24, 2002.
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 10QSB for the fiscal quarter ended June 30,
2003, as filed with the SEC on August 14, 2003.
10.3 Consulting Agreement dated August 15, 2002 between Provectus and
Numark Capital Corporation ("Numark"), incorporated herein by
reference to Exhibit 10.3 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2002, as filed with the
SEC on April 15, 2004.
10.4 Consulting Agreement dated August 28, 2002 between Provectus and
Robert S. Arndt, incorporated herein by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-8 (Registration No.
333-99639), as filed with the SEC on September 17, 2002.
10.5 Consulting Agreement dated August 28, 2002 between Provectus and
Nunzio Valerie, Jr., incorporated herein by reference to Exhibit 4.2
to the Company's Registration Statement on Form S-8 (Registration No.
333-99639), as filed with the SEC on September 17, 2002.
10.6 Letter Agreement dated June 7, 2002 between Provectus and Nace Pharma,
LLC, incorporated herein by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31,
2002, as filed with the SEC on April 15, 2003..
10.7 Letter Agreement dated August 29,2002 between Provectus and Nace
Resources, Inc., incorporated herein by reference to Exhibit 10.7 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2002, as filed with the SEC on April 15, 2004.
10.8 Confidentiality, Inventions and Non-competition Agreement between the
Company and H. Craig Dees, incorporated herein by reference to Exhibit
10.8 to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2002, as filed with the SEC on April 15, 2004.
10.9 Confidentiality, Inventions and Non-competition Agreement between the
Company and Timothy C. Scott, incorporated herein by reference to
Exhibit 10.9 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2002, as filed with the SEC on April
15, 2004.
10.10 Confidentiality, Inventions and Non-competition Agreement between the
Company and Eric A. Wachter, incorporated herein by reference to
Exhibit 10.10 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2002, as filed with the SEC on April
15, 2004.
10.11.1 Letter Agreement dated January 8, 2003 between the Company and
Investor - Gate.com, incorporated herein by reference to Exhibit
10.11.1 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.
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10.11.2 Termination Letter dated February 28, 2003 from the Company to
Investor-Gate.com, incorporated herein by reference to Exhibit 10.11.2
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.
10.12 Letter Agreement dated February 20, 2003 between the Company and SGI,
incorporated herein by reference to Exhibit 10.12 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.
10.13 Letter Agreement dated March 27, 2003 between the Company and
Josephberg Grosz & Co., Inc., incorporated herein by reference to
Exhibit 10.13 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.
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 herein 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 and Provectus, incorporated
herein by reference to Exhibit 10.15 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.
10.16 Securities Purchase Agreement dated as of November 19, 2003 by and
among the Company and the lenders named therein, incorporated herein
by reference to Exhibit 10.16 to the Company's Registration Statement
on Form S-2, as filed with the SEC on February 12, 2004
10.17 Securities Purchase Agreement dated June 25, 2004 by and among the
Company and A.I. International Corporate Holdings, Ltd. and Castlerigg
Master Investments, Ltd., incorporated herein by reference to the
Company's Registration Statement on Form S-2, as filed with the SEC
on October 7, 2004
10.18 Standby Equity Distribution dated July 28, 2004 by and among the
Company and Cornell Capital Partners, LP, incorporated herein by
reference to the Company's Registration Statement on Form S-2, as
filed with the SEC on October 7, 2004
10.19 Securities Purchase Agreement dated July 28, 2004 by and among the
Company and Cornell Capital Partners, LP, incorporated herein by
reference to the Company's Registration Statement on Form S-2, as
filed with the SEC on October 7, 2004
10.20+ Second Amended and Restated Senior Secured Convertible Note by and
between the Company and Gryffindor Capital Partners I, L.L.C.
21.1+ List of Subsidiaries.
23.1+ Consent of BDO Seidman, LLP.
31.1+ Certification of CEO pursuant to Rules 13a - 14(a) of the Securities
Exchange Act of 1934.
31.2+ Certification of CFO pursuant to Rules 13a-14(a) of the Securities
Exchange Act of 1934.
32+ Certification Pursuant to 18 U.S.C. ss. 1350.
--------------------------
* 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.
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