United States Securities And Exchange Commission
Washington, DC 20549
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FORM 10-QSB
(Mark One)
|X| Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 2005
OR
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to____________
Commission file number: 0-9410
Provectus Pharmaceuticals, Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 90-0031917
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7327 Oak Ridge Highway Suite A, Knoxville, TN 37931
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(Address of Principal Executive Offices) (Zip Code)
865/769-4011
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(Issuer's Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's stock, $0.001 par value
per share, as of June 30, 2005 was 17,086,052.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31,
June 30, 2005 2004
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(Unaudited) (Audited)
Assets
Current Assets
Cash $ 604,130 $ 10,774
Inventory 75,591 94,142
Prepaid expenses and other current assets 1,512 20,582
Prepaid consulting expense 102,397 205,427
Prepaid commitment fee, net of amortization of $192,482 and $38,326 118,384 272,540
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Total Current Assets 902,014 603,465
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Equipment and Furnishings, less accumulated depreciation of
$367,095 and $366,571 11,324 -
Patents, net of amortization of $1,756,097 and $1,420,537 9,959,348 10,294,908
Deferred loan costs, net of amortization of $120,455 and $35,922 693,745 270,578
Other Assets 27,000 27,000
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$ 11,593,431 $ 11,195,951
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Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable - trade $ 147,321 $ 154,214
Accrued compensation 152,244 156,377
Accrued expenses 17,200 6,240
Accrued interest 184,590 43,670
Other convertible debt, net of debt discount of $774,886 and $-0- 225,114 -
Gryffindor convertible debt, net of debt discount of $40,820 and $95,157 1,145,139 1,090,802
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Total Current Liabilities 1,871,608 1,451,303
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Loan From Stockholder 174,000 149,000
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Cornell convertible debt, net of debt discount of $-0- and $316,053 - 433,947
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Other convertible debt, net of debt discount of $1,549,769 and $-0- 450,231 -
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Stockholders' Equity
Common stock; par value $.001 per share; 100,000,000 shares
authorized; 17,086,052 and 16,133,876 shares issued and
outstanding, respectively 17,086 16,134
Paid-in capital 28,093,407 23,711,540
Deficit accumulated during the development stage (19,012,901) (14,565,973)
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Total Stockholders' Equity 9,097,592 9,161,701
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$ 11,593,431 $ 11,195,951
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See accompanying notes to financial statements.
-2-
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Cumulative
Amounts from
January 17,
2002
Three Three Six Six (Inception)
Months Ended Months Ended Months Ended Months Ended Through
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 June 30, 2005
-------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues
OTC Product Revenue $ 1,672 $ 835 $ 4,066 $ 2,611 $ 22,794
Medical Device Revenue - - 984 13,125 14,109
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Total revenues 1,672 835 5,050 15,736 36,903
Cost of Sales 1,069 534 2,609 1,670 13,390
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Gross Profit 603 301 2,441 14,066 23,513
Operating Expenses
Research and development $ 1,005,610 $ 246,185 $ 1,298,637 $ 434,139 $ 3,366,092
General and administrative 558,791 332,540 1,141,542 816,218 11,337,579
Amortization 167,780 167,780 335,560 335,560 1,756,097
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Total operating loss (1,731,578) (746,204) (2,773,298) (1,571,851) (16,436,255)
Gain on sale of fixed assets - - - - 55,000
Loss on extinguishment of debt (376,487) (100,519) (413,455) (100,519) (514,867)
Net interest (expense) income (967,280) (474,789) (1,260,175) (689,515) (2,116,779)
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Net Loss Applicable to Common
Stockholders $ (3,075,345) $ (1,321,512) $ (4,446,928) $ (2,361,885) $ (19,012,901)
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Basic and Diluted Loss Per
Common Share (0.18) (0.10) (0.27) (0.18)
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Weighted Average Number of
Common Shares
Outstanding -
Basic and Diluted 16,789,415 13,714,234 16,534,946 12,977,703
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See accompanying notes to financial statements.
-3-
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
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Common Stock
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Number Paid-in Accumulated
of Shares Par Value Capital Deficit Total
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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)
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Balance, at December 31, 2004 16,133,876 $ 16,134 $ 23,711,540 $(14,565,973) $ 9,161,701
Issuance of stock for services 226,733 227 152,058 - 152,285
Issuance of warrants for services - - 720,834 - 720,834
Issuance of warrants for contractual
obligations - - 317,818 - 317,818
Exercise of warrants 10,000 10 9,990 - 10,000
Employee compensation from stock options - - 7,876 - 7,876
Issuance of stock pursuant to Regulation D 444,999 445 300,930 - 301,375
Debt conversion to common stock 270,444 270 202,563 - 202,833
Issuance of convertible debt with warrants - - 1,574,900 - 1,574,900
Beneficial conversion related to
convertible debt - - 1,228,244 - 1,228,244
Beneficial conversion related to interest
expense - - 10,782 - 10,782
Repurchase of beneficial conversion feature - - (144,128) - (144,128)
Net loss for the six months ended June 30,
2005 - - - (4,446,928) (4,446,928)
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Balance, at June 30, 2005 17,086,052 $ 17,086 $ 28,093,407 $(19,012,901) $ 9,097,592
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See accompanying notes to financial statements.
-4-
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Cumulative
Amounts from
January 17, 2002
Six Months Six Months (Inception)
Ended Ended through June 30,
June 30, 2005 June 30, 2004 2005
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Cash Flows From Operating Activities
Net loss $ (4,446,928) $ (2,361,885) $ (19,012,901)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 524 92,508 390,096
Amortization of patents 335,560 335,560 1,756,097
Amortization of original issue discount 587,739 474,269 1,075,314
Amortization of commitment fee 154,156 - 192,482
Amortization of prepaid consultant expense 248,940 305,601 1,101,790
Amortization of deferred loan costs 164,590 150,961 305,112
Loss on extinguishment of debt 413,455 - 514,867
Beneficial conversion of convertible interest and
conversion of interest 13,614 - 13,614
Compensation through issuance of stock options 7,876 7,806 58,147
Compensation through issuance of stock - - 932,000
Issuance of stock for services 152,286 11,500 5,732,844
Issuance of warrants for services 225,224 18,800 247,705
Issuance of warrants for contractual obligations 317,818 - 317,818
Gain on sale of equipment - - (55,000)
(Increase) decrease in assets
Prepaid consulting expenses (77,000) - (77,000)
Prepaid expenses 19,070 5,660 (1,512)
Inventory 18,551 4,648 (75,591)
Increase (decrease) in liabilities
Accounts payable (6,893) (20,607) 143,676
Accrued expenses 147,747 (97,890) 514,034
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Net cash used in operating activities (1,723,671) (1,073,069) (5,926,408)
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Cash Flows From Investing Activities
Proceeds from sale of fixed asset - - 180,000
Capital expenditures (11,848) (395) (15,545)
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Net cash (used in) provided by investing activities (11,848) (395) 164,455
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Cash Flows From Financing Activities
Proceeds from loans from stockholder 25,000 - 174,000
Proceeds from convertible debt 3,150,000 - 5,425,959
Proceeds from sale of common stock 301,375 1,180,679 2,788,720
Proceeds from exercise of warrants 10,000 5,000 15,453
Cash paid to retire convertible debt (700,000) (166,667) (1,200,000)
Cash paid for deferred loan costs (387,500) - (619,530)
Premium paid on extinguishments of debt (70,000) - (170,519)
Purchase and retirement of common stock - - (48,000)
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Net cash provided by financing activities 2,328,875 1,019,012 6,366,083
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-5-
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Cumulative
Amounts from
January 17, 2002
Six Months (Inception)
Six Months Ended Ended through June 30,
June 30, 2005 June 30, 2004 2005
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Net Change in Cash $ 593,356 $ (54,452) $ 604,130
Cash, at beginning of period $ 10,774 $ 164,145 $ -
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Cash, at end of period $ 604,130 $ 109,693 $ 604,130
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Supplemental Disclosure of Cash Flow Information
June 30, 2005
Interest paid of $32,567
Supplemental Disclosure of Noncash Investing and
Financing Activities
June 30, 2005
Issuance of warrants in exchange for prepaid services of $68,910
Debtconverted to common stock of $200,000
Beneficial conversion on convertible debt of $1,228,244
Discount on convertible debt with warrants of $1,574,900
Warrants issued for deferred loan costs of $426,700
June 30, 2004
Issuance of stock for services of $11,500, issuance of warrants for
services of $18,800 and commitment to issue stock for prepaid services
of $62,500
Accrual of $119,999 for stock issuance costs off-set against gross
proceeds from sale of common stock
Stock subscription receivable recorded of
$668,667
See accompanying notes to financial statements.
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information pursuant to Regulation S-B. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and six months ended June 30, 2005 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2005.
2. RECAPITALIZATION AND MERGER
Provectus Pharmaceuticals, Inc., formerly known as "Provectus
Pharmaceutical, Inc." and "SPM Group, Inc.," was incorporated under Colorado law
on May 1, 1978. SPM Group ceased operations in 1991, and became a
development-stage company effective January 1, 1992, with the new corporate
purpose of seeking out acquisitions of properties, businesses, or merger
candidates, without limitation as to the nature of the business operations or
geographic location of the acquisition candidate.
On April 1, 2002, SPM Group changed its name to "Provectus Pharmaceutical,
Inc." and reincorporated in Nevada in preparation for a transaction with
Provectus Pharmaceuticals, Inc., a privately-held Tennessee corporation ("PPI").
On April 23, 2002, an Agreement and Plan or reorganization between Provectus
Pharmaceutical and PPI was approved by the written consent of a majority of the
outstanding shares of Provectus Pharmaceutical. As a result, Provectus
Pharmaceuticals, Inc. issued 6,680,000 shares of common stock in exchange for
all of the issued and outstanding shares of PPI. As part of the acquisition,
Provectus Pharmaceutical changed its name to "Provectus Pharmaceuticals, Inc."
and PPI became a wholly owned subsidiary of Provectus. This transaction was
recorded as a recapitalization of PPI.
On November 19, 2002, the Company acquired Valley Pharmaceuticals, Inc., a
privately-held Tennessee corporation formerly known as Photogen, Inc., by
merging PPI with and into Valley and naming the surviving corporation "Xantech
Pharmaceuticals, Inc." Photogen, Inc. was separated from Photogen Technologies,
Inc. in a non-pro rata split-off to some of its shareholders. The assets of
Photogen, Inc. consisted primarily of the equipment and intangibles related to
its therapeutic activity and were recorded at their fair value. The majority
shareholders of Valley were also the majority shareholders of Provectus. Valley
had no revenues prior to the transaction with the Company. By acquiring Valley,
the Company acquired its intellectual property, including issued U.S. patents
and patentable inventions.
3. BASIC AND DILUTED LOSS PER COMMON SHARE
Basic and diluted loss per common share is computed based on the weighted
average number of common shares outstanding. Loss per share excludes the impact
of outstanding options, warrants, and convertible debt as they are antidilutive.
Potential common shares excluded from the calculation at June 30, 2005 are
14,265,768 warrants, 4,225,000 options and 5,712,193 shares issuable upon
conversion of convertible debt and interest. Additionally, the Company is
committed to issue 10,000 warrants.
-7-
4. EQUITY AND DEBT TRANSACTIONS
(a) In January 2005, the Company issued 7,500 shares to consultants in
exchange for services rendered. Consulting costs charged to operations were
$4,950. In February 2005, the Company issued 7,500 shares to consultants in
exchange for services. Consulting costs charged to operations were $7,574. In
April 2005, the Company issued 190,733 shares to consultants in exchange for
services. Consulting costs charged to operations were $127,791. In May 2005, the
Company issued 21,000 shares to consultants in exchange for services. Consulting
costs charged to operations were $11,970.
(b) In January 2005, the Company issued 16,000 warrants to consultants in
exchange for services rendered. Consulting costs charged to operations were
$6,944. In February 2005, the Company issued 13,000 warrants to consultants in
exchange for services rendered. Consulting costs charged to operations were
$13,130. In March 2005, the Company issued 100,000 warrants to consultants in
exchange for services rendered. At June 30, 2005, $45,940 of these costs have
been charged to operations with the remaining $22,970 recorded as prepaid
consulting expense as it represents payments for future services and the
warrants are fully-vested and non-forfeitable. In April 2005, the Company issued
410,000 warrants to consultants in exchange for services rendered. Consulting
costs charged to operations were $195,900. In April 2005, the Company issued
980,000 warrants to consultants in exchange for services rendered relating to
the April 2005 Senior Convertible Debentures (see 4(f) below). Deferred loan
costs of $426,700 were recorded which will be amortized over the life of the
debentures. At June 30, 2005, $55,456 has been amortized and charged to interest
expense. In May 2005, the Company issued 25,000 warrants to consultants in
exchange for services rendered. Consulting costs charged to operations were
$9,250.
(c) In March 2005 the Company issued 175,000 warrants to Gryffindor Capital
Partners I, L.L.C. pursuant to the terms of the Second Amended and Restated Note
dated November 26, 2004. Interest costs charged to operations were $117,568. In
April, May and June 2005 the Company issued 175,000 warrants each month to
Gryffindor Capital Partners I, L.L.C. pursuant to the terms of the Second
Amended and Restated Note dated November 26, 2004. Total interest costs charged
to operations were $200,250.
(d) In February 2005, the Company entered into a redemption agreement with
Cornell Capital Partners to pay $50,000 of the Cornell convertible debt. As a
result, the unamortized portion of the debt discount of $27,715 and deferred
loan costs of $20,702, which related to this amount at the date of
extinguishments, were recorded as a loss on extinguishment of debt. The Company
also paid a $5,000 prepayment penalty which has been recorded as loss on
extinguishment of debt. As part of this redemption, the Company has repurchased
the beneficial conversion feature related to the redeemed amount of $16,449.
In March 2005, the Company entered into a debt conversion agreement with
Cornell Capital Partners for $50,000 of its convertible debt which was converted
into 66,667 shares of common stock at $0.75 per share. As a result of this
conversion, the unamortized portion of the debt discount of $24,890 and deferred
loan costs of $18,779, which related to this amount at the date of conversion,
have been recorded as additional interest expense.
In April 2005, the Company entered into a redemption agreement with Cornell
Capital Partners to pay $650,000 of the Cornell convertible debt. As a result,
the unamortized portion of the debt discount of $233,425 and deferred loan costs
of $205,741, which related to this amount at the date of extinguishments, were
recorded as a loss on extinguishment of debt. The Company also paid a $65,000
prepayment penalty which has been recorded as loss on extinguishment of debt. As
part of this redemption, the Company has repurchased the beneficial conversion
feature related to the redeemed amount of $127,679.
At June 30, 2005, there was no amount outstanding related to the Cornell
convertible debt.
(e) During the three months ended March 31, 2005, the Company completed a
private placement transaction with 8 accredited investors, which have been
subsequently registered effective June 20, 2005, pursuant to which the Company
sold 214,666 shares of common stock at a purchase price of $0.75 per share, for
an aggregate purchase price of $161,000. In connection with the sale of common
stock, the Company also issued warrants to the investors to purchase up to
322,000 shares of common stock at an exercise price of $1.00 per share. The
Company paid $16,100 and issued 80,500 warrants to Venture Catalyst, LLC as
placement agent for this transaction. The cash costs have been off-set against
the proceeds received. During the three months ended June 30, 2005, the Company
completed a private placement transaction with 4 accredited investors, which
have been subsequently registered effective June 20, 2005, pursuant to which the
Company sold 230,333 shares of common stock at a purchase price of $0.75 per
share, for an aggregate purchase price of $172,750. In connection with the sale
of common stock, the Company also issued warrants to the investors to purchase
up to 345,500 shares of common stock at an exercise price of $1.00 per share.
The Company paid $16,275 and issued 81,375 warrants to Venture Catalyst, LLC as
placement agent for this transaction. The cash costs have been off-set against
the proceeds received.
-8-
(f) In March 2005, the Company entered into agreements to issue Senior
Convertible Debentures to 2 accredited investors with Network 1 Financial
Securities, Inc. in the aggregate amount of $450,000. This debt has a security
interest in the assets of the Company, a maturity date of March 30, 2007, and is
convertible into shares of the Company's common stock at a per share conversion
price of $0.75. In addition, the Company incurred deferred loan costs of $45,000
which were payable in cash. These costs were recorded as an asset and amortized
over the term of the debt. At June 30, 2005, $6,904 has been amortized and
charged to interest expense. In April 2005, the Company entered into agreements
to issue Senior Convertible Debentures to 5 accredited investors in the
aggregate amount of $2,700,000. This debt has a security interest in the assets
of the Company, a maturity date of March 30, 2007, and is convertible into
shares of the Company's common stock at a per share conversion price of $0.75.
In addition, the Company incurred deferred loan costs of $342,500 which were
payable in cash. These costs were recorded as an asset and amortized over the
term of the debt. At June 30, 2005, $58,094 has been amortized and charged to
interest expense.
The Company shall be obligated to pay the principal of the Senior
Convertible Debentures in installments as follows: Twelve (12) equal monthly
payments of principal (the "Monthly Amount") plus, to the extent not otherwise
paid, accrued but unpaid interest plus any other obligations of the Company to
the Investor under this Debenture, the Purchase Agreement, or the Registration
Rights Agreement, or otherwise. The first such installment payment shall be due
and payable on March 30, 2006, and subsequent installments shall be due and
payable on the thirtieth (30th) day of each succeeding month thereafter (each a
"Payment Date") until the Company's obligations under this Debenture is
satisfied in full. The Company shall have the option to pay all or any portion
of any Monthly Amount in newly issued, fully paid and nonassessable shares of
Common Stock, with each share of Common Stock having a value equal to (i)
eighty-five percent (85%) multiplied by (ii) the Market Price as of the third
(3rd) Trading Day immediately preceding the Payment Date (the "Payment
Calculation Date"). At June 30, 2005, the Senior Convertible Debentures totaled
$675,345, net of debt discount of $2,324,655. Of this total, $225,114 was
recorded as a current liability, net of debt discount of $774,886, and $450,231
was recorded as a long-term liability, net of debt discount of $1,549,769.
Interest at the greater of (i) the prime rate (adjust monthly), plus 4% and
(ii) 8% is due on a quarterly basis with the first installment accrued at June
30, 2005 in the amount of $78,904. At the time the interest is payable, upon
certain conditions, the Company has the option to pay all or any portion of
accrued interest in either cash or shares of the Company's common stock valued
at 85% multiplied by the market price as of the third trading date immediately
preceding the interest payment date. Under the senior convertible debentures,
for purposes of determining market price as of any date, market price means: (i)
the average of the last reported sale prices for the shares on the National
Association of Securities Dealers Inc.'s Over-the-Counter Bulletin Board, for
the five days immediately preceding such date; (ii) if the OTCBB is not the
principal trading market for the shares, the average of the last reported sale
prices on the principal trading market for the common stock during the same
period as reported by Bloomberg, L.P., or (iii) if unable to calculate on any of
the foregoing bases, as reasonable determined in good faith by the Board or an
independent investment back of nationally recognized standing in the valuation
businesses similar to the business of the Company. The Company has chosen to pay
the accrued interest at June 30, 2005 in common stock. As a result additional
interest expense of $28,843 has been recorded and accrued at June 30, 2005.
The Company may prepay the Senior Convertible Debentures in full by paying
the holders the greater of (i) 125% multiplied by the sum of the total
outstanding principal, plus accrued and unpaid interest, plus default interest,
if any or (ii) the highest number of shares of common stock issuable upon
conversion of the total amount calculated pursuant to (i) multiplied by the
highest market price for the common stock during the period beginning on the
date until prepayment.
On or after any event or series of events which constitutes a fundamental
change, the holder may, in its sole discretion, require the Company to purchase
the debentures, from time to time, in whole or in part, at a purchase price
equal to 110% multiplied by the sum of the total outstanding principal, plus
accrued and unpaid interest, plus any other obligations otherwise due under the
debenture. Under the senior convertible debentures, fundamental change means (i)
any person becomes a beneficial owner of securities representing 50% or more of
the (a) outstanding shares of common stock or (b) the combined voting power of
the then outstanding securities; (ii) a merger or consolidation whereby the
voting securities outstanding immediately prior thereto fail to continue to
represent at least 50% of the combined voting power of the voting securities
immediately after such merger or consolidation; (iii) the sale or other
disposition of all or substantially all or the Company's assets; (iv) a change
in the composition of the Board within two years which results in fewer than a
majority of directors are directors as of the date of the debenture; (v) the
dissolution or liquidation of the Company; or (vi) any transaction or series of
transactions that has the substantial effect of any of the foregoing.
-9-
The Purchaser of the $400,000 Senior Convertible Debenture also purchased
Class A Warrants and Class B Warrants under the Securities Purchase Agreement.
Class A Warrants are exercisable at any time between March 10, 2005 through and
including March 10, 2010. Class B Warrants are exercisable for a period through
and including 175 days after an effective registration of the common stock
underlying the warrants. The per share exercise price of a Class A Warrant is
$0.99 and the per share exercise price of the Class B Warrant is $0.945.
The Purchaser of the $50,000 Senior Convertible Debenture and the
Purchasers of the Senior Convertible Debentures totaling $2,700,000 also
purchased Class A Warrants and Class B Warrants under the Securities Purchase
Agreement. Class A Warrants are exercisable at any time between March 30, 2005
through and including March 30, 2010. Class B Warrants are exercisable for a
period through and including 175 days after an effective registration of the
common stock underlying the warrants. The per share exercise price of a Class A
Warrant is $0.935 and the per share exercise price of the Class B Warrant is
$0.8925.
The Purchasers of the Senior Convertible Debentures received a total of
4,200,000 Class A Warrants and a total of 2,940,000 Class B Warrants.
The $450,000 proceeds received in March 2005 was allocated between the debt
and the warrants on a pro-rata basis. The value of the warrants was determined
using a Black-Scholes option-pricing model. The allocated fair value of these
warrants was $254,328 and was recorded as a discount to the related debt. In
addition, the conversion prices were lower than the market value of the
Company's common stock on the date of issue. As a result, an additional discount
of $195,672 was recorded for this beneficial conversion feature. The combined
debt discount of $450,000 is being amortized over the life of the debt using the
effective interest method. At June 30, 2005, $67,671 has been amortized and has
been recorded as additional interest expense. The $2,700,000 proceeds received
in April 2005 was allocated between the debt and the warrants on a pro-rata
basis. The value of the warrants was determined using a Black-Scholes
option-pricing model. The allocated fair value of these warrants was $1,320,572
and was recorded as a discount to the related debt. A beneficial conversion
amount of $1,032,572 was also recorded as the value of the debt, if converted,
is greater than the pro-rata value allocated to the debt. The combined debt
discount of $2,353,144 is being amortized over the life of the debt using the
effective interest method. At June 30, 2005, $296,561 has been amortized and has
been recorded as additional interest expense.
In June 2005, the Company entered into a debt conversion agreement with one
of the April accredited investors for $150,000 of its convertible debt which was
converted into 200,000 shares of common stock at $0.75 per share, and $2,833 of
accrued interest was converted into 3,777 shares of common stock at $0.75 per
share. As a result of this conversion, the unamortized portion of the debt
discount of $114,255 and deferred loan costs of $24,325, which related to this
amount at the date of conversion, have been recorded as additional interest
expense.
(g) At June 30, 2005, the Company recorded additional interest expense of
$10,782 related to the beneficial conversion feature of the interest on the
Gryffindor convertible debt.
5. STOCK-BASED COMPENSATION
On January 7, 2005, the Company issued 1,200,000 stock options to
employees. The options vest over four years with no options vesting on the date
of grant. The exercise price is the fair market price on the date of issuance,
and all options were outstanding at June 30, 2005. On May 25, 2005, the Company
issued 1,200,000 stock options to employees. The options vest over three years
with no options vesting on the date of grant. The exercise price is $0.75 which
is greater than the fair market price on the date of issuance, and all options
were outstanding at June 30, 2005.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (SFAS No. 123), but applies the intrinsic value method where
compensation expense, if any, is recorded as the difference between the exercise
price and the market price, as set forth in Accounting Principles Board Opinion
No. 25 for stock options granted to employees and directors. In 2003, the
Company issued stock options to employees in which the exercise price was less
than the market price on the date of grant. These options vest over three years
and accordingly, $7,876 of expense was recorded for the six months ended June
30, 2005. 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:
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Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
---------------------------------------- ----------------- ---------------- ---------------- -----------------
Net loss, as reported $ (3,075,345) $ (1,321,512) $ (4,446,928) $ (2,361,885)
Add stock-based employee
compensation expense included in
reported net loss 3,938 3,903 7,876 7,806
Less total stock-based employee
compensation expense determined
under the fair value based method
for all awards (158,833) ( 217,187) ( 303,333) ( 500,625)
---------------------------------------- ----------------- ---------------- ---------------- -----------------
Pro forma net loss $ (3,230,240) $ (1,534,796) $ (4,742,385) $ (2,854,704)
---------------------------------------- ----------------- ---------------- ---------------- -----------------
Basic and diluted loss per common
share, as reported $ (0.18) $ (0.10) $ (0.27) $ (0.18)
Basic and diluted loss per common
share, pro forma $ (0.19) $ (0.11) $ (0.29) $ (0.22)
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. During 2005, the same
shareholder loaned the Company an additional $25,000. 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
$20,180 and $11,361 at June 30, 2005 and 2004, respectively. Interest expense
was $4,746 and $3,930 at June 30, 2005 and 2004, respectively.
7. SUBSEQUENT EVENTS
In July 2005, the Company entered into debt conversion agreements with two
of the April accredited investors for $350,000 of convertible debt which was
converted into 466,667 shares of common stock at $0.75 per share.
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion is intended to assist in the understanding and
assessment of significant changes and trends related to our results of
operations and our financial condition together with our consolidated
subsidiaries. This discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto included elsewhere in
this Quarterly Report on Form 10-QSB. Historical results and percentage
relationships set forth in the statement of operations, including trends which
might appear, are not necessarily indicative of future operations.
CAPITAL STRUCTURE
Our ability to continue as a going concern continues to be reasonably
assured due to our financing in March and April 2005. However, our long-term
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 year. Our current plans also include minimal purchases of new
property, plant and equipment, and significantly increased research and
development.
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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 licensing our
existing OTC products, principally Pure-Stick, 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 have restarted 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.
Comparison of Three and Six Months Ended June 30, 2005 and June 30, 2004.
Revenues. OTC Product Revenue increased by $837 in the three months ended
June 30, 2005 to $1,672 from $835 in the three months ended June 30, 2004. The
increase in OTC Product Revenue resulted primarily from sales of Pure-ific in
retail stores. OTC Product Revenue increased by $1,455 in the six months ended
June 30, 2005 to $4,066 from $2,611 in the six months ended June 30, 2004. The
increase in OTC Product Revenue resulted primarily from sales of Pure-ific in
retail stores. Medical Device Revenue was unchanged in the three months ended
June 30, 2005 from the three months ended June 30, 2004. Medical Device Revenue
decreased by $12,141 in the six months ended June 30, 2005 to $984 from $13,125
in the six months ended June 30, 2004. The decrease in Medical Device Revenue
resulted primarily due to a large beta unit sale in the six months ended June
30, 2004 that was not repeated in the six months ended June 30, 2005, partially
offset by sales of three smaller devices in the six months ended June 30, 2005.
Research and development. The Company is in the planning phase for the
major research and development projects, and therefore does not have estimated
completion dates, completion costs and capital requirements for these projects.
The reason the Company does not have this information available is because it
has not completed the 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
$1,005,610 for the three months ending June 30, 2005 include depreciation
expense of $524, consulting of $612,922, lab supplies of $75,415, insurance of
$58,735, legal of $61,233, payroll of $188,781, and rent and utilities of
$8,000. The research and development costs are higher for the three months
ending June 30, 2005 because the Company has initiated clinical trials under the
aegis of the Food & Drug Administration (FDA). Research and development costs
comprising the total of $1,298,637 for the six months ending June 30, 2005
included depreciation expense of $524, consulting of $702,005, lab supplies of
$75,415, insurance of $82,327, legal of $106,054, payroll of $318,712, and rent
and utilities of $13,600. The research and development costs are higher for the
six months ending June 30, 2005 because the Company has initiated clinical
trials under the aegis of the Food & Drug Administration (FDA). Research and
development costs comprising the total of $246,185 for the three months ending
June 30, 2004 include consulting of $114,525, lab expense of $8,458, insurance
of $16,037, legal of $17,886, office and other expense of $3,751, payroll of
$71,799, rent and utilities of $3,733, and taxes and fees of $9,996. Research
and development costs comprising the total of $434,139 for the six months ending
June 30, 2004 include consulting of $141,368, lab expense of $10,958, insurance
of $36,175, legal of $46,934, office and other expense of $3,751, payroll of
$175,624, rent and utilities of $9,333, and taxes and fees of $9,996.
General and administrative. General and administrative expenses increased
by $226,251 in the three months ended June 30, 2005 to $558,791 from $332,540 in
the three months ended June 30, 2004. The increase resulted primarily from
higher consulting expenses for general corporate purposes. General and
administrative expenses increased by $325,324 in the six months ended June 30,
2005 to $1,141,542 from $816,218 in the six months ended June 30, 2004. The
increase resulted primarily from higher consulting expenses for general
corporate purposes.
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CASH FLOW
As of July 1, 2005, we held approximately $600,000 in cash. At our current
cash expenditure rate, this amount will be sufficient to meet our needs. We
already have begun to increase our expenditure rate by accelerating some of our
research programs for new research initiatives; in addition, we are seeking to
improve our cash flow by increasing sales of OTC products. However, we cannot
assure you that we will be successful in increasing sales of OTC products.
Moreover, even if we are successful in improving our current cash flow position,
we nonetheless will require additional funds to meet our long-term needs. We
anticipate these funds will come from the proceeds of private placements or
public offerings of debt or equity securities.
CAPITAL RESOURCES
As noted above, our present cash flow is currently sufficient to meet our
short-term operating needs. Excess cash will be used to finance the next phases
in clinical development of our pharmaceutical products. We anticipate that the
majority of the funds for our operating and development needs beyond 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 Note 4 of the notes to
our financial statements included in this report.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. The
purpose of this statement is to clarify the accounting of abnormal amounts of
idle facility expense, freight, handling costs and waste material. ARB No. 43
stated that under some circumstances these costs may be so abnormal that they
are required to be treated as current period costs. SFAS 151 requires that these
costs be treated, as current period costs regardless if they meet the criteria
of "so abnormal." In addition, the statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The provision of this Statement shall be effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
The adoption of SFAS 151 is not expected to have a material impact on the
Company's results of operations or financial position.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29. SFAS 153 is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005, with earlier application permitted. The adoption of SFAS 153 is not
expected to have a material impact on the Company's results of operations or
financial position.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payments
(revised 2004). This statement eliminates the option to apply the intrinsic
value measurement provisions of APB Board Opinion No. 25, Accounting for Stock
Issued to Employees, to stock compensation awards issued to employees. Rather,
the Statement requires companies to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant date
fair value of the award. That cost will be recognized over the period during
which an employee is required to provide services in exchange for the award --
the requisite service period (usually the vesting period). In March 2005, the
SEC staff expressed their views with respect to SFAS No. 123(R) in Staff
Accounting Bulletin No. 107, Share-Based Payment, (SAB 107). SAB 107 provides
guidance on valuing options. SFAS 123(R) will be effective for the Company's
fiscal year beginning January 1, 2006. The Company is currently evaluating the
impact of the adoption of this statement on its financial statements.
In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations, (FIN 47). FIN 47 is an interpretation
of SFAS No. 143, Asset Retirement Obligations, which was issued in June 2001.
FIN 47 was issued to address diverse accounting practices that have developed
with regard to the timing of liability recognition for legal obligations
associated with the retirement of a tangible long-lived asset in which the
timing and/or method of settlement are conditional on a future event that may or
may not be within the control of the entity. According to FIN 47, uncertainty
about the timing and/or method of settlement of a conditional asset retirement
obligation should be factored into the measurement of the liability when
sufficient information exists. FIN 47 also clarifies when an
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entity would have sufficient information to reasonably estimate the fair value
of an asset retirement obligation. FIN 47 is effective no later than December
31, 2005 for the Company. The adoption of FIN 47 is not expected to have a
material impact on the Company's results of operations or financial position.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and Statement No. 3. SFAS 154
changes the requirements for the accounting and reporting of a change in
accounting principle. SFAS 154 applies to all voluntary changes in accounting
principle as well as to changes required by an accounting pronouncement that
does not include specific transition provisions. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The adoption of SFAS 154 is not expected to have a
material impact on the Company's results of operations or financial position.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB contains forward-looking statements
regarding, among other things, our anticipated financial and operating results.
Forward-looking statements reflect our management's current assumptions,
beliefs, and expectations. Words such as "anticipate," "believe, "estimate,"
"expect," "intend," "plan," and similar expressions are intended to identify
forward-looking statements. While we believe that the expectations reflected in
our forward-looking statements are reasonable, we can give no assurance that
such expectations will prove correct. Forward-looking statements are subject to
risks and uncertainties that could cause our actual results to differ materially
from the future results, performance, or achievements expressed in or implied by
any forward-looking statement we make. Some of the relevant risks and
uncertainties that could cause our actual performance to differ materially from
the forward-looking statements contained in this report are discussed under the
heading "Risk Factors" and elsewhere in our Annual Report on Form 10-KSB for the
year ended December 31, 2004. We caution investors that these discussions of
important risks and uncertainties are not exclusive, and our business may be
subject to other risks and uncertainties which are not detailed there. Investors
are cautioned not to place undue reliance on our forward-looking statements. We
make forward-looking statements as of the date on which this Quarterly Report on
Form 10-QSB is filed with the SEC, and we assume no obligation to update the
forward-looking statements after the date hereof whether as a result of new
information or events, changed circumstances, or otherwise, except as required
by law.
Item 3. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. Our chief executive
officer and chief financial officer have evaluated the effectiveness
of the design and operation of our "disclosure controls and
procedures" (as that term is defined in Rule 13a-15(e) under the
Exchange Act) as of June 30, 2005, the end of the fiscal quarter
covered by this Quarterly Report on Form 10-QSB. Based on that
evaluation, the chief executive officer and chief financial officer
have concluded that our disclosure controls and procedures are
effective to ensure that material information relating to the Company
and the Company's consolidated subsidiaries is made known to such
officers by others within these entities, particularly during the
period this Quarterly Report on Form 10-QSB was prepared, in order to
allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls. There has been no change in our internal
control over financial reporting that occurred during the fiscal
quarter covered by this Quarterly Report on Form 10-QSB that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company was not involved in any legal proceedings during the fiscal
quarter covered by this Quarterly Report of Form 10-QSB.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Recent
Sales of Unregistered Securities
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) Our annual meeting of shareholders was held on May 19, 2005.
(b) The following is a list of all nominees for Director of the Company
who were elected at the annual meeting and whose term of office
continued after the annual meeting:
H. Craig Dees
Timothy D. Scott
Eric A. Wachter
Stuart R. Fuchs
(c) There were present at the annual meeting in person or by proxy
9,272,015 shares of our common stock out of a total of 16,644,275
shares of our common stock issued and outstanding and entitled to vote
at the annual meeting.
(d) The results of the vote of the shareholders taken at the annual
meeting by ballot and by proxy as solicited by us on behalf of the
board of directors were as follows:
(i) The results of the vote taken at the annual meeting for the
election of the nominees for our board of directors were as
follows:
------------------------------------------------------------
Nominee For Withheld
Authority
------------------------------------------------------------
H. Craig Dees 8,648,645 623,370
------------------------------------------------------------
Timothy D. Scott 8,648,645 623,370
------------------------------------------------------------
Eric A.Wachter 8,648,645 623,370
------------------------------------------------------------
Stuart R. Fuchs 8,648,645 623,370
------------------------------------------------------------
(ii) A vote was taken on the proposal to amend the Company's
Amended and Restated 2002 Stock Plan to increase the number
of shares reserved for issuance from 3,000,000 to 5,000,000.
The results of the vote taken at the annual meeting with
respect to such proposal were as follows:
------------------------------------------------------------
For Against Abstain Non-Votes
8,457,742 189,403 624,870 -0-
------------------------------------------------------------
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Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31.1 Certification Pursuant to Rule 13a-14(a) (Section 302
Certification), dated August 15, 2005, executed by H. Craig Dees,
Ph.D., Chief Executive Officer of the Company.
31.2 Certification Pursuant to Rule 13a-14(a) (Section 302
Certification), dated August 15, 2005, executed by Peter R.
Culpepper, Chief Financial Officer of the Company.
32.1 Certification Pursuant to 18 U.S.C. ss. 1350 (Section 906
Certification), dated August 15, 2005, executed by H. Craig Dees,
Ph.D., Chief Executive Officer of the Company, and Peter R.
Culpepper, Chief Financial Officer of the Company.
(b) Current Reports on Form 8-K.
On April 8, 2005, the Company filed an 8-K.
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Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Provectus Pharmaceuticals, Inc.
By:/s/ H. Craig Dees, Ph.D.
--------------------------------------------
H. Craig Dees, Ph.D. Chief Executive Officer
Date: August 15, 2005
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EXHIBIT INDEX
Exhibit No. Description
----------- ------------
31.1 Certification Pursuant to Rule 13a-14(a) (Section 302 Certification),
dated August 15, 2005, executed by H. Craig Dees, Ph.D., Chief
Executive Officer of the Company.
31.2 Certification Pursuant to Rule 13a-14(a) (Section 302 Certification),
dated August 15, 2005, executed by Peter R. Culpepper, Chief Financial
Officer of the Company.
32.1 Certification Pursuant to 18 U.S.C. ss. 1350 (Section 906
Certification), dated August 15, 2005, executed by H. Craig Dees,
Ph.D., Chief Executive Officer of the Company, and Peter R. Culpepper,
Chief Financial Officer of the Company.
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