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 in this Annual Report on Form 10-K. Historical results and percentage relationships set forth in the statement of operations, including trends which might appear, are not necessarily indicative of future operations. Overview
Provectus is a clinical-stage biotechnology company developing a new class of drugs for oncology, hematology, and dermatology based on an entire, wholly-owned, family of chemical small molecules called halogenated xanthenes. Intratumoral (aka intralesional) PV-10®, the first small molecule autolytic immunotherapy, which can induce immunogenic cell death, is undergoing clinical study for adult solid tumor cancers, such as melanoma and GI tumors (e.g., hepatocellular carcinoma, metastatic colorectal cancer, metastatic neuroendocrine tumors, metastatic uveal melanoma), and preclinical study for pediatric solid tumor cancers (e.g., neuroblastoma, Ewing sarcoma, rhabdomyosarcoma, osteosarcoma) and blood cancers (e.g., acute myeloid leukemia). Topical PH-10®is undergoing clinical study for inflammatory dermatoses (e.g., psoriasis, atopic dermatitis). Our Advisory Boards The Company named a second member,Frank Akers , Ph.D., to itsStrategic Advisory Board effective as ofSeptember 1, 2019 . The purpose of theStrategic Advisory Board is for the Company to have formal access to a group of independent people with significant, meaningful, professional experience who provide high quality, objective advice to the Company in areas of strategic importance, including but not limited to business development, corporate development, and business operations (such as clinical operations, drug development, regulatory affairs, and manufacturing of drug substance and drug product). The Company named the first member,Harold Schmitz , Ph.D., to itsScientific Advisory Board effective as ofSeptember 1, 2019 . The purpose of theScientific Advisory Board is for the Company to have formal access to a group of independent people with significant, meaningful, professional experience who provide high quality, objective advice to the Company in areas of strategic scientific importance, such as but not limited to the Company's science and technology, and drug development. Recent Developments 2017 Financing OnMarch 23, 2017 , the Company entered into an exclusive Definitive Financing Commitment Term Sheet with a group of the Company's stockholders (the "PRH Group "), which was amended and restated effective as ofMarch 19, 2017 (the "2017 Term Sheet") that set forth the terms on which thePRH Group would use their best efforts to arrange for a financing of a minimum of$10,000,000 and maximum of$20,000,000 (the "2017 Financing"). 24
As of
The 2017 Financing is in the form of a secured convertible loan (the "1st Loan") from thePRH Group or other investors in the 2017 Financing (the "1stLoan Investors "). The 1st Loan is evidenced by secured convertible promissory notes (individually a "2017 Note" and collectively, the "2017 Notes") from the Company to thePRH Group or the 1stLoan Investors . In addition to the customary provisions, the 2017 Notes contains the following provisions:
(i) It is secured by a first priority security interest on the Company's IP,
(ii) The 1st Loan bears interest at the rate of 8% per annum on the outstanding
principal amount of the 2017 Notes that has been funded to the Company,
(iii) The 1st Loan proceeds are held in one or more accounts (the "Escrow")
pending the funding of the tranches of the 2017 Financing pursuant to
borrowing requests made by the Company,
(iv) The 2017 Notes, including interest and principal, are due and payable in
full on the earlier of: (i) on such date upon which the Company defaults
under the 2017 Notes, (ii) upon a change of control of the Company, or
(iii) dates ranging from
funding of the Final Tranche. In the event there is a change of control of
the Company's Board as proposed by any person or group other than the 1st
amounts due under the 2017 Notes will be immediately due and payable, plus
interest at the rate of 8% per annum, plus a penalty in the amount equal
to 10 times the outstanding principal amount of the 1st Loan that has been
funded to the Company, (v) The outstanding principal amount and interest payable under the 1st Loan
will become convertible at the sole discretion of the 1st
into shares of the Company's Series D Preferred Stock, a new series of
preferred stock, that the Company's Board may designate in the future, at
a price per share equal to
(vi) Notwithstanding (v) above, the principal amount of the 2017 Notes and the
interest payable under the 1st Loan will automatically convert into shares
of the Company's Series D Preferred Stock at a price per share equal to
tranche of the 2017 Financing subject to certain exceptions if the
Company's Board designates such series of preferred stock in the future.
Pursuant to the 2017 Term Sheet, thePRH Group concluded its best efforts activity to arrange for a financing of$20,000,000 , which amounts were provided in a number of tranches, between the first tranche onApril 4, 2017 and the Final Tranche, onDecember 20, 2019 . As a result, the 2017 Notes under the 1st Loan will convert into shares of Series D Preferred Stock (once designated) of the Company on or beforeJune 20, 2021 , which is the 18-month anniversary of the funding of the Final Tranche of the 2017 Financing, subject to certain exceptions.
Upon conversion of the 2017 Notes, the 1st
2020 Financing
OnDecember 31, 2019 , the Board approved a Definitive Financing Term Sheet (the "2020 Term Sheet"), which sets forth the terms under which the Company will use its best efforts to arrange for financing of a maximum of$20,000,000 (the
"2020 Financing").
As of
25 Pursuant to the 2020 Term Sheet, the 2020 Notes (defined below) will convert into shares of the Company's Series D Preferred Stock on or beforeJune 20, 2021 , subject to certain exceptions. As ofDecember 31, 2019 , and through the date of filing, the Series D Preferred Stock had not been designated by the Board. The 2020 Term Sheet is similar to the 2017 Term Sheet. Subject to the terms and conditions of the 2020 Term Sheet, the Company will use its best efforts to arrange for the 2020 Financing, which amounts will be obtained in several tranches. The proceeds from the 2020 Financing will be used to fund the Company's clinical development program, as currently constituted and envisioned, and to fund the Company's general and administrative expenses. The 2020 Financing will be in the form of a secured convertible loan (the "2nd Loan") from the Investors (the "2ndLoan Investors ") that will be evidenced by convertible promissory notes (individually, a "2020 Note" and collectively, the "2020 Notes") subordinate to the 2017 Notes in right of payment and to the security interests granted to holders of the 2017 Notes. In addition to customary provisions, the 2020 Notes contains the following provisions:
(i) It will be secured by a second priority security interest on the Company's IP subordinate to the first priority security interest of the 2017 Notes;
(ii) The 2nd Loan will bear interest at the rate of eight percent (8%) per annum on the outstanding principal amount of the 2nd Loan that has been funded to
the Company;
(iii) In the event there is a change of control of the Company's Board, the term of the 2020 Notes will be accelerated and all amounts due under the 2020 Notes will be immediately due and payable, plus interest at the rate of eight percent (8%) per annum, plus a penalty in the amount equal to ten times (10x) the outstanding principal amount of the 2nd Loan that has been funded to the Company; (iv) The outstanding principal amount and interest payable under the 2nd Loan will become convertible at the sole discretion of the 2ndLoan Investors into shares of the Company's Series D Preferred Stock, a series of preferred stock to be designated by the Board, at a price per share equal to$2.8620 ; and (v) Notwithstanding (iv) above, the principal amount of the 2020 Notes and the interest payable under the 2nd Loan will automatically convert into shares of the Company's Series D Preferred Stock at a price per share equal to$2.8620 effective onJune 20, 2021 subject to certain exceptions.
Upon conversion of the 2nd Loan, the 2nd
The Series D Preferred Stock As ofDecember 31, 2019 , and through the date of filing, the Series D Preferred Stock had not been designated by the Board. Per the terms of the 2017 Notes and 2020 Notes, if the Company has not designated the Series D Preferred Stock or if an insufficient number of Series D Preferred shares exist upon a conversion by a note holder, then the outstanding loans will continue to accrue interest at a rate of 8% per annum until which time the Company has designated a sufficient number of Series D Preferred shares.
The Series D Preferred Stock will have a first priority right to receive proceeds from the sale, liquidation or dissolution of the Company or any of the Company's assets (each, a "Company Event").
If a Company Event occurs within two (2) years of the date of issuance of the Series D Preferred Stock (the "Date of Issuance"), the holders of Series D Preferred Stock will receive a preference of four times (4x) their respective investment amount. If a Company Event occurs after the second (2nd) anniversary of the Date of Issuance, the holders of the Series D Preferred Stock will receive a preference of six times (6x) their respective investment amount. The Series D Preferred Stock will be convertible at the option of the holders thereof into shares of the Company's common stock based on a formula to achieve a one-for-ten conversion ratio. The Series D Preferred Stock will automatically convert into shares of the Company's common stock upon the fifth (5th) anniversary of the Date of Issuance. On an as-converted basis, the Series D Preferred Stock will carry the right to ten (10) votes per share. The Series D Preferred Stock will not have any dividend preference but will be entitled to receive, on a pari passu basis, dividends, if any, that are declared and paid on any other class of the Company's capital stock. The holders of Series D Preferred Stock will not have anti-dilution protection. 26 Exercise of Warrants
In 2019, holders of 5,045,857 warrants to purchase the common stock of the
Company at
Components of Operating Results
Research and Development Expenses
A large component of our total operating expenses is the Company's investment in research and development activities, including the clinical development of our product candidates. Research and development expenses represent costs incurred to conduct research and undertake clinical trials to develop our drug product candidates. These expenses consist primarily of: ? costs of conducting clinical trials, including amounts paid to clinical centers, clinical research organizations and consultants, among others; ? salaries and related expenses for personnel, including stock-based compensation expense; ? other outside service costs including cost of contract manufacturing; ? the costs of supplies and reagents; ? occupancy and depreciation charges.
We expense research and development costs as incurred.
Research and development activities are central to our business model. We expect our research and development expenses to increase in the future as we advance our existing product candidates through clinical trials and pursue their regulatory approval. Undertaking clinical development and pursuing regulatory approval are both costly and time-consuming activities. As a result of known and unknown uncertainties, we are unable to determine the duration and completion costs of our research and development activities, or if, when, and to what extent we will generate revenue from any subsequent commercialization and sale of our drug product candidates.
General and Administrative Expenses
General and administrative expense consists primarily of salaries, stock-based compensation expense and other related costs for personnel in executive, finance, accounting, business development, legal, information technology and corporate communication functions. Other costs include facility costs not otherwise included in research and development expense, insurance, and professional fees for legal, patent and accounting services.
Comparison of the Years Ended
Overview Total operating expenses were$6,299,696 for the year endedDecember 31, 2019 , a decrease of$1,754,529 or 21.8% compared to the year endedDecember 31, 2018 . The decrease was driven primarily by our transformation and process improvement efforts within the Company. Net loss for the year endedDecember 31, 2019 was$6,922,537 , a decrease of$1,230,518 or 15.1% which resulted from costs incurred in connection with our preclinical and clinical trial programs and general
and administrative costs. 27 For the Years Ended December 31, Increase/ 2019 2018 (Decrease) % Change Operating Expenses: Research and development$ 4,002,014 $ 4,747,557 $ (745,543 ) -15.7 % General and administrative 2,297,682 3,306,668 (1,008,986 ) -30.5 % Total Operating Expenses 6,299,696 8,054,225 (1,754,529 ) -21.8 % Total Operating Loss (6,299,696 ) (8,054,225 ) (1,754,529 ) 21.8 % Other Income/(Expense):
Gain on settlement of lawsuits 675,000 825,000 (150,000 ) -18.2 % Research and development tax credit 134,081 26,325 107,756 409.3 % Investment and interest income 23,162 19,560
3,602 18.4 % Interest expense (1,455,084 ) (969,715 ) (485,369 ) 50.1 % Net Loss$ (6,922,537 ) $ (8,153,055 ) $ (1,230,518 ) 15.1 % Research and Development Research and development expenses were$4,002,014 for the year endedDecember 31, 2019 , a decrease of$745,543 or 15.7% compared to the year endedDecember 31, 2018 . The decrease was due to (i) lower clinical operations due to closure of Phase III study in 2019 and drug manufacturing in 2018, (ii) lower insurance costs, and (iii) lower payroll and related taxes due to a lower negotiated employment agreement.
The following table summarizes our research and development expenses incurred
during the year ended
For the Years Ended December 31, Increase/ 2019 2018 (Decrease) % Change Research and development: Clinical trial and research expenses$ 2,661,530 $ 3,206,457 $ (544,927 ) -17.0 % Depreciation/amortization 679,767 679,767 - 0.0 % Insurance 258,067 285,853 (27,786 ) -9.7 % Payroll and taxes 329,532 509,615 (180,083 ) -35.3 % Rent and utilities 73,118 65,865 7,253 11.0 %
Total research and development
General and Administrative General and administrative expenses were$2,297,682 for the year endedDecember 31, 2019 , a decrease of$1,008,986 or 30.5% compared to the year endedDecember 31, 2018 . The decrease was due to (i) lower legal fees as we concluded the Company's lawsuits against former accounting vendors, (ii) lower payroll and related taxes, and (iii) lower professional fees, partially offset by (vi) increased director fees (from having period-over-period, a five-member Board compared to a four-member Board in previous year). 28
The following table summarizes our general and administrative expenses incurred
during the years ended
For the Years Ended December 31, Increase/ 2019 2018 (Decrease) % Change General and administrative: Depreciation$ 5,445 $ 5,445 $ - 0.0 % Directors fees 385,000 333,357 51,643 15.5 % Insurance 170,384 187,367 (16,983 ) -9.1 % Legal and litigation 509,810 1,318,785 (808,975 ) -61.3 %
Other general and administrative cost 118,790 115,000
3,790 3.3 % Payroll and taxes 305,074 490,386 (185,312 ) -37.8 % Professional fees 765,654 822,458 (56,804 ) -6.9 % Rent and utilities 37,525 33,870 3,655 10.8 %
Total general and administrative
Other Income/(Expense)
Other income decreased by$38,642 from$870,885 for the year endedDecember 31, 2018 to$832,243 for the year endedDecember 31, 2019 . During the year endedDecember 31, 2019 , the matters with former accounting vendors BibleHarris Smith , PC ("BHS") andRSM US LLP ("RSM") were resolved pursuant to a settlement between these parties and the Company, the terms of which are confidential. During the year endedDecember 31, 2018 , the matter withBDO USA LLP ("BDO"), the Company's former external audit firm, was resolved pursuant to a settlement between the party and the Company, the terms of which are confidential. Interest expense increased by$485,369 from$969,715 for the year endedDecember 31, 2018 to$1,455,084 for the year endedDecember 31, 2019 . The increase was due to the increased number of convertible notes payable relating to the 2017 Notes.
The following table summarizes our Other Income/(Expenses) incurred during the
years ended
For the Years Ended December 31, Increase/ 2019 2018 (Decrease) % Change Other Income/(Expense):
Gain on settlement of lawsuits 675,000 825,000 (150,000 ) -18.2 % Research and development tax credit 134,081 26,325 107,756 409.3 % Investment and interest income 23,162 19,560
3,602 18.4 % Interest expense (1,455,084 ) (969,715 ) (485,369 ) 50.1 % Net Loss$ (6,922,537 ) $ (8,153,055 ) $ (1,230,518 ) 15.1 %
Liquidity and Going Concern
Our cash and cash equivalents were$590,706 atDecember 31, 2019 , compared with$50,986 atDecember 31, 2018 . The consolidated financial statements and notes thereto included in this Annual Report on Form 10-K have been prepared on a basis that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. We have continuing net losses and negative cash flows from operating activities. In addition, we have an accumulated deficit of$233,816,828 as ofDecember 31, 2019 . These conditions raise substantial doubt about our ability to continue as a going concern for a period of at least one year from the date that the financial statements included elsewhere in this Annual Report on Form 10-K are issued. Our financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern. Our ability to continue as a going concern depends on our ability to obtain additional financing as may be required to fund current operations. Management's plans include selling our equity securities and obtaining other financing to fund our capital requirement and on-going operations, including the 2020 Financing discussed above; however, there can be no assurance we will be successful in these efforts. The financial statements do not include any adjustment that might be necessary if we are unable to continue as a going concern. Significant funds will be needed to continue and complete our ongoing and planned clinical trials. 29 Access to Capital Management plans to access capital resources through possible public or private equity offerings, including the 2020 Financing, exchange offers, debt financings, corporate collaborations, or other means. If we are unable to raise sufficient capital through the 2020 Financing or otherwise, we will not be able to pay our obligations as they become due. The primary business objective of management is to build the Company into a commercial-stage biotechnology company; however, we cannot assure you that management will be successful in implementing the Company's business plan of developing, licensing, and/or commercializing our prescription drug candidates. Moreover, even if we are successful in improving our current cash flow position, we nonetheless plan to seek additional funds to meet our current and long-term requirements in 2020 and beyond. We anticipate that these funds will otherwise come from the proceeds of private placement transactions, including the 2020 Financing, the exercise of existing warrants and outstanding stock options, 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 stockholders.
During the years ended
We experienced negative cash flow from operating activities for the years endedDecember 31, 2019 and 2018 in the amounts of$6,190,215 and$5,204,926 , respectively. The net cash used in operating activities for the year endedDecember 31, 2019 was primarily due to cash used to fund a net loss of$6,922,537 , adjusted for non-cash expenses in the aggregate amount of$779,341 , plus$47,019 of cash used to fund changes in the levels of operating assets and liabilities. The net cash used in operating activities for the year endedDecember 31, 2018 was primarily due to cash used to fund a net loss of$8,153,055 , adjusted for non-cash expenses in the aggregate amount of$765,213 , partially reduced by$2,182,916 of cash provided by changes in the levels of operating assets and liabilities.
During the years ended
Net Cash Provided by Financing Activities
Net cash provided by financing activities during the years endedDecember 31, 2019 and 2018 was$6,753,943 and$5,150,408 , respectively. During the year endedDecember 31, 2019 ,$6,485,000 were proceeds from the issuance of convertible notes payable and$268,943 were from the exercise of warrants. During the year endedDecember 31, 2018 ,$4,476,000 were proceeds from the issuance of convertible notes payable and$674,408 were from the exercise of warrants.
Critical Accounting Policies
Our critical accounting policies are included in Note 3 - Significant Accounting Policies of our consolidated financial statements included within this annual report.
Recent Accounting Pronouncements
Recently issued accounting standards are included in Note 3 - Significant Accounting Policies of our consolidated financial statements included within this annual report.
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