United
States
Securities
And Exchange Commission
Washington,
DC 20549
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, 2006; OR
o
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)
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Nevada
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90-0031917
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification Number)
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7327
Oak Ridge Highway, Suite A, Knoxville,
Tennessee
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37931
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(Address
of Principal Executive Offices)
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(Zip
Code)
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865/769-4011
(Issuer's
Telephone Number, Including Area Code)
Securities
registered under Section 12(b) of the Exchange Act:
None
(Title
of Class)
Securities
registered under Section 12(g) of the Exchange
Act:
Common
shares, par value $.001
per share
(Title
of Class)
Check
whether the
issuer is not required to file reports pursuant to Section 13 or 15(d) of
the
Exchange Act. o Note - Checking
the box
above will not relieve any registrant required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act from their obligations under those
Sections.
Check
whether the
issuer: (1) filed all reports required to be filed by Section 13 or 15(d)
of the
Exchange Act 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 o
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
Indicate
by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No x
The
issuer’s revenues for the most recent fiscal year were $1,368
The
aggregate market
value of the voting and non-voting common equity held by non-affiliates of
the
registrant as of March 21, 2007, was $23,318,557 (computed on the basis of
$1.29 per share).
The
number of shares outstanding of the issuer's stock, $0.001 par
value per share, as of March 21, 2007 was 45,450,619.
Documents
incorporated by reference in Part III hereof: Proxy
Statement for 2007 Annual Meeting of Stockholders.
Transitional
Small Business Disclosure Format (check one):
Yes o
No x
Provectus
Pharmaceuticals, Inc.
Annual
Report on Form 10-KSB
Table
of Contents
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Page
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Part
I
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Item
1A.
Risk
Factors
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3
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Item
1B.
Unresolved
Staff Comments
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8
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Item
1. Description of Business
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8
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History
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8
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Description
Of Business
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9
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Intellectual
Property
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15
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Competition
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16
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Federal
Regulation of Therapeutic Products
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16
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Personnel
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18
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Available
Information
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19
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Item
2. Description of Property
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19
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Item
3. Legal Proceedings
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20
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Item
4. Submission of Matters to a Vote of Security
Holders
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20
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Part
II
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Item
5. Market for Common Equity and Related Stockholder
Matters
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21
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Item
6. Management's Discussion and Analysis or Plan of
Operation
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22
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Plan
of Operation
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23
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Item
7. Financial Statements
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26
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Forward-Looking
Statements
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26
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Item
8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
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26
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Item
8A. Controls and Procedures
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26
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Item
8B. Other Information
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26
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Part
III
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Item
9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
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26
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Item
10. Executive Compensation
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27
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Item
11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
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27
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Item
12. Certain Relationships and Related
Transactions
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27
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Item
13. Exhibits
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27
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Item
14. Principal Accountant Fees and Services
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27
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Signatures
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28
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Financial Statements |
F-1
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Exhibit Index |
X-1
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PART
I
Item
1A. Risk Factors.
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 2006 and 2005, and
we do
not expect to generate revenues to enable us to be profitable for several
calendar quarters unless we sell and/or license our technologies. We must
raise
substantial additional funds beyond 2008 in order to fully implement our
integrated business plan, including execution of the next phases in clinical
development of our pharmaceutical products. 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 unless we are
acquired by another company. We intend to proceed as rapidly as possible
with
the asset sale and licensure 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 beyond
2008 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.
We
will need
additional capital to conduct our operations and develop our products beyond
2008, 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.
We
must raise
additional capital from external sources to execute our business plan beyond
2008. We plan to issue debt securities, capital stock, or a combination of
these
securities, if necessary depending on licensure and asset sale discussions.
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:
· |
a
product may be found to be ineffective or have harmful
side effects during subsequent pre-clinical testing or clinical
trials;
|
· |
a
product may fail to receive necessary regulatory
clearance;
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· |
a
product may be too difficult to manufacture on a large
scale;
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· |
a
product may be too expensive to manufacture or market;
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· |
a
product may not achieve broad market acceptance;
|
· |
others
may hold proprietary rights that will prevent a
product from being marketed; or
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· |
others
may market equivalent or superior products.
|
We
do not expect any
pharmaceutical drug 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
sold through a combination of asset sale and licensure in the marketplace
or
that we will have adequate capital to further develop these products, if
necessary, which are an important factor in the future success of our
business.
We
recently have
focused on marketing Pure-ific, one of our OTC products, on a limited basis
to
establish proof of concept. We have recognized minimal revenue from this
product, as the sales of this product has not been material. In order for
this
product, and our other OTC products, to become commercially successful, unless
we license and/or sell the underlying assets, we must increase significantly
our
distribution of them. Increasing distribution of our 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 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 assure you 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 plan
to
allocate 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 would likely require
additional capital beyond 2008 to continue as a going concern.
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 our competitors. Many of the pharmaceutical
companies developing and marketing these competing products have significantly
greater financial resources and expertise than we do in:
· |
research
and development;
|
· |
preclinical
and clinical testing;
|
· |
obtaining
regulatory approvals;
and
|
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:
· |
product
efficacy and safety;
|
· |
the
timing and scope of regulatory
consents;
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· |
availability
of resources;
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· |
reimbursement
coverage;
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· |
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.
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:
· |
Purell
(owned by Johnson &
Johnson),
|
· |
Avagard D (manufactured by 3M) and
|
· |
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 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:
· |
H.
Craig Dees, Ph.D., our Chief Executive Officer;
|
· |
Timothy
C. Scott, Ph.D., our
President;
|
· |
Eric
A. Wachter, Ph.D. our Vice President - Pharmaceuticals;
and
|
· |
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, 2006, we owe $265,929 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 in total, 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:
· |
Researching
diseases and possible therapies in the areas of
dermatology and skin care, oncology, and biotechnology;
|
· |
Developing
prescription drug, medical device and OTC
products based on our research;
|
· |
Marketing
and selling developed
products;
|
· |
Obtaining
additional capital to finance research,
development, production and marketing of our products; and
|
· |
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 an additional
regulatory affairs officer on a consulting basis 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 which has increased significantly from 2005 to 2006.
During
the year ended
December 31, 2006, the sale price of our common stock fluctuated from $1.97
to
$0.83 per share. We believe that our common stock is subject to wide price
fluctuations because of several factors, including:
· |
absence
of meaningful earnings and ongoing need for external
financing,
|
· |
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,
|
· |
general
volatilitiy of the stock markers and the market
prices of other publicly traded companies, and
|
· |
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.
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 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 we 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:
· |
broker-dealers
must deliver, prior to the transaction a
disclosure schedule prepared by the SEC relating to the penny stock
market;
|
· |
broker-dealers
must disclose the commissions payable to the
broker-dealer and its registered representative;
|
· |
broker-dealers
must disclose current quotations for the
securities;
|
· |
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
|
· |
a
broker-dealer must furnish its customers with monthly
statements disclosing recent price information for all pennies 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
1B. Unresolved Staff Comments.
None.
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:
· |
prescription
drugs, medical and other devices (including
laser devices) and over-the-counter pharmaceutical products in the
fields
of dermatology and oncology; and
|
· |
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:
· |
Xantech
Pharmaceuticals, Inc.
|
· |
Provectus
Biotech, Inc.
|
· |
Provectus
Devicetech, Inc.
|
· |
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:
· |
Over-the-counter
products, which we refer to in this report
as "OTC products;"
|
· |
Prescription
drugs; and
|
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 These patented technologies
are
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:
· |
hand
irritation associated with use of disposable gloves
|
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:
· |
Airport
security personnel;
|
· |
Food
handling and preparation
personnel;
|
· |
Postal
and package delivery handlers and
sorters;
|
· |
Laboratory
researchers;
|
· |
Health
care workers such as hospital and blood bank
personnel; and
|
· |
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. We now intend to
license this product to a third party with experience in the institutional
sales
market.
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 online sales of the antibacterial
hand spray. During 2005 and 2006, most of our sales were generated from
customers accessing our website for Pure-ific and making purchases online.
We
now intend to license the Pure-ific product and sell the underlying
assets.
Acne
A
number of
dermatological conditions, including acne and other blemishes 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 acne and other blemishes. 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
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 the use of Xantryl with 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 have decided to prioritize further clinical
development of Xantryl for treatment of psoriasis and eczema rather than
AK at
this time since the market is much larger for psoriasis and eczema.
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
worked 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 allowed by the FDA in 2004 setting the stage
for
two Phase 1 clinical trials; namely, treating metastatic melanoma and recurrent
breast carcinoma. We started both of these Phase 1 clinical trials in 2005
and
completed the initial Phase 1 objectives for both in 2006.
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 expanding
clinical studies of direct injection of Provecta into breast tumors while
completing expanded Phase 1 clinical studies of our indication for Provecta
in
recurrent breast carcinoma.
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.
Metastatic
Melanoma. Melanoma is expected to strike 60,000 people in the U.S. this
year, leading to 8,100 deaths. The incidence of melanoma in Australia, where
our
expanded Phase 1 clinical study is currently underway, is up to 5X that of
the
U.S. There have been no significant advances in the treatment of melanoma
for
approximately 30 years. We are completing plans for definitive clinical studies
in both Australia and the U.S. of direct injection of Provecta into melanoma
lesions while completing expanded Phase 1 clinical studies of our indication
for
Provecta in Stage 3 and Stage 4 metastatic melanoma.
Medical
Devices
We
have medical device technologies to
address two major markets:
· |
cosmetic
treatments, such as reduction of wrinkles and
elimination of spider veins and other cosmetic blemishes;
and
|
· |
therapeutic
uses, including photoactivation of Xantryl other
prescription drugs and non-surgical destruction of certain skin
cancers.
|
We
expect to further
develop medical devices through partnerships with, or selling our assets
to,
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 dermatological 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 have conducted 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 60,000 new cases annually in the U.S. and a 6% 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, or selling our assets to, a medical device manufacturer
to
bring it to market 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 maximizing shareholder value and advancing our corporate objectives
in
conjunction with our OTC product licensure, our current product development
and
maintaining our intellectual property portfolio.
Production
We
have determined
that the most efficient use of our capital in further developing our OTC
products is to license the products and sell the underlying assets for upfront
cash consideration.
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
have commenced
limited sales of Pure-ific, our antibacterial hand spray. We sold small amounts
of this product during 2004, 2005 and 2006. 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 through licensure, partnership and
asset
sale arrangements, and through potential merger and acquisition
candidates.
In
addition to
developing and selling products ourselves on a limited basis, 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 -activation of molecular
agents
|
November
3, 1998
|
October
30, 2016
|
5,832,931
|
Method
for improved selectivity in photo-activation and
detection of diagnostic agents
|
November
10, 1998
|
October
30, 2016
|
5,998,597
|
Method
for improved selectivity in -activation of molecular
agents
|
December
7, 1999
|
October
30, 2016
|
6,042,603
|
Method
for improved selectivity in photo-activation of
molecular agents
|
March
28, 2000
|
October
30, 2016
|
6,331,286
|
Methods
for high energy phototherapeutics
|
December
18, 2001
|
December
21, 2018
|
6,451,597
|
Method
for enhanced protein stabilization and for production of
cell lines useful production of such stabilized proteins
|
September
17, 2002
|
April
6, 2020
|
6,468,777
|
Method
for enhanced protein stabilization and for production of
cell lines useful production of such stabilized proteins
|
October
22, 2002
|
April
6, 2020
|
6,493,570
|
Method
for improved imaging and photodynamic therapy
|
December
10, 2002
|
December
10, 2019
|
6,495,360
|
Method
for enhanced protein stabilization for production of
cell lines useful production of such stabilized proteins
|
December
17, 2002
|
April
6, 2020
|
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 and for production of
cell lines useful production of such stabilized proteins
|
April
1, 2003
|
April
6, 2020
|
6,986,740
|
Ultrasound
contrast using halogenated xanthenes
|
January
17, 2006
|
September
9, 2023
|
6,991,776
|
Improved
intracorporeal medicaments for high energy
phototherapeutic treatment of disease
|
January
31, 2006
|
May
5, 2023
|
7,036,516
|
Treatment
of pigmented tissues using optical energy
|
May
2, 2006
|
January
28, 2020
|
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. This Material Transfer Agreement is still in effect through 2006.
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.
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. 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. Eventually, we believe
that we will be acquired.
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 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:
· |
Using
chemicals and combinations already allowed by the FDA;
|
· |
Carefully
making product performance claims to avoid the
need for regulatory approval;
|
· |
Using
drugs that have been previously approved by the FDA
and that have a long history of safe use;
|
· |
Using
chemical compounds with known safety profiles; and
|
· |
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:
· |
Preclinical
laboratory and animal
testing;
|
· |
Submission
of an application that must become effective
before clinical trials may begin;
|
· |
Adequate
and well-controlled human clinical trials to
establish the safety and efficacy of the product for its intended
indication; and
|
· |
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 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.
Personnel
Executive
Officers
As
of March 22, 2007,
our executive officers are:
H.
Craig Dees, Ph.D.,
55, 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., 48, 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., 44, 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, 47, 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 AAS in Accounting from the
Northern Virginia Community College - Annandale, Virginia in 1985. He earned
a
BA in Philosophy from the College of William and Mary - Williamsburg, Virginia
in 1982. He is a licensed Certified Public Accountant in both Tennessee and
Maryland.
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
website, 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
Item
2. Description of Property.
We
currently lease
approximately 6,000 square feet of space outside of Knoxville, Tennessee
for our
corporate office and operations. Our monthly rental charge for these offices
is
approximately $4,160 per month, and the lease is renewed on an annual 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, 2006, we did not submit any matters to a vote of
our
stockholders.
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, 2005:
|
High
|
Low
|
2005
|
|
|
First
Quarter (January 1 to March 31)
|
$1.25
|
0.64
|
Second
Quarter (April 1 to June 30)
|
0.85
|
0.52
|
Third
Quarter (July 1 to September 30)
|
0.99
|
0.60
|
Fourth
Quarter (October 1 to December 31)
|
1.14
|
0.77
|
2006
|
|
|
First
Quarter (January 1 to March 31)
|
1.20
|
0.83
|
Second
Quarter (April 1 to June 30)
|
1.97
|
1.01
|
Third
Quarter (July 1 to September 30)
|
1.47
|
0.94
|
Fourth
Quarter (October 1 to December 31)
|
1.34
|
1.11
|
|
|
|
The
closing price for
our common stock on March 21, 2007 was $1.29. 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 21, 2007, we had 1,847 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 quarter
ended December 31, 2006, 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 as follows:
During
the three
months ended December 31, 2006, we completed a private placement
transaction with 25 accredited investors pursuant to which we sold
2,315,000 shares of common stock at a purchase price of $1.00 per share of
which
150,000 are committed to be issued at December 31, 2006, for an aggregate
purchase price of $2,315,000. We paid $137,500, issued 125,000 shares of
common stock at a fair market value of $148,750, and committed to pay $16,500
and to issue 15,000 shares of common stock at a fair market value of $17,550
to
Chicago Investment Group of Illinois, L.L.C. as a placement agent for this
transaction which is accrued at December 31, 2006. We paid $118,950 and
issued 91,500 shares of common stock at a fair market value of $118,500 to
Network 1 Financial Securities, Inc. as a placement agent for this transaction.
The cash and accrued stock costs have been off-set against the proceeds
received. We believe that this offering was exempt from the registration
requirements of the Securities Act of 1933, as amended by reason of Rule
506 of Regulation D and Section 4(2) of the Securities Act, based upon the
fact
that the offer and issuance of the 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.
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.
CRITICAL
ACCOUNTING POLICIES
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, we 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.
Patent
Costs
Internal
patent costs are expensed in the period incurred. Patents
purchased are capitalized and amortized over the remaining life of the patent.
The patents are being amortized over the remaining lives of the patents,
which
range from 11-15 years. Annual amortization of the patents is expected to
be
approximately $671,000 per year for the next five years.
Stock
Based Compensation
On
December 16, 2004, the Financial Accounting Standards Board
(“FASB”) released FASB Statement No. 123 (revised 2004), “Share-Based Payment,
(“FASB 123R”)”. These changes in accounting replace existing requirements under
FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“FASB 123”),
and eliminates the ability to account for share-based compensation transaction
using APB Opinion No.25, “Accounting for Stock Issued to Employees” (“APB 25”).
The compensation cost relating to share-based payment transactions will be
measured based on the fair value of the equity or liability instruments issued.
This Statement did not change the accounting for similar transactions involving
parties other than employees.
We adopted
FASB 123R effective January 1, 2006 under the
modified prospective method, which recognizes compensation cost beginning
with
the effective date (a) based on the requirements of FASB 123R for all
share-based payments granted after the effective date and to awards modified,
repurchased, or cancelled after that date and (b) based on the requirements
of
FASB 123 for all awards granted to employees prior to the effective date
of FASB
123R that remain unvested on the effective date. There was no cumulative
effect
of our initially applying this Statement. At December 31, 2006 we
have estimated that an additional $1,211,371 will be expensed over the
applicable remaining vesting periods for all share-based payments granted
to
employees on or before December 31, 2005 which remained unvested on January
1,
2006.
The
compensation cost relating to share-based payment transactions
will be measured based on the fair value of the equity or liability instruments
issued and will be expensed on a straight-line basis. For purposes of estimating
the fair value of each stock option or restricted stock unit on the date
of
grant, we utilized the Black-Scholes option-pricing model. The
Black-Scholes option valuation model was developed for use in estimating
the
fair value of traded options, which have no vesting restrictions and are
fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected volatility factor of the market
price of the company’s common stock (as determined by reviewing its historical
public market closing prices). Because our employee stock options and restricted
stock units have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models
do
not necessarily provide a reliable single measure of the fair value of its
employee stock options or restricted stock units.
For
the year ended December 31, 2005 we adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
No.
123, "Accounting for Stock Based Compensation" (SFAS No. 123). If we 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.
CONTRACTUAL
OBLIGATIONS
Leases
We lease
office and laboratory space in Knoxville, Tennessee, on
an annual basis, renewable for one year at our option. We are
committed to pay a total of $12,480 in lease payments over three months,
which
is the remainder of its current lease term at December 31, 2006.
CAPITAL
STRUCTURE
Our
ability to
continue as a going concern is assured due to our financing completed during
2006. At the current rate of expenditures, we will not need to raise additional
capital until 2008, although our existing funds are sufficient to meet
anticipated needs throughout 2008.
We
have implemented
our integrated business plan, including execution of the current and next
phases
in clinical development of our pharmaceutical products and continued execution
of research programs for new research initiatives.
We
intend to proceed
as rapidly as possible with the asset sale and licensure of our 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 medical
device
and biotech intellectual property portfolio. Although we believe that there
is a
reasonable basis for our expectation that we will become profitable due to
the
asset sale and licensure of our OTC products, 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 have added additional consultants and anticipate adding more
consultants in the next 12 months. Our current plans also include minimal
purchases of new property, plant and equipment, and increased research and
development for additional clinical trials.
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 2007 we plan to build on that
foundation to increase shareholder value through careful control of
expenditures, preparation for the asset sale and licensure of our OTC products,
medical device and biotech technologies, and issuance of equity only when
it
makes sense to the Company and primarily for purposes of attracting strategic
investors.
In
the short term, we
intend to develop our business by selling the OTC assets and licensing our
existing OTC products, principally Pure-Stick, GloveAid and Pure-ific. We
will
also sell and/or license our medical device and biotech technologies. In
the
longer term, we expect to continue the process of developing, testing, and
obtaining the allowance and ultimately approval of the U. S. Food and Drug
Administration for prescription drugs in particular. Additionally, we have
continued 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 the Years Ended December 31, 2006 and 2005.
Revenues.
OTC
Product Revenue
decreased by $4,184 in 2006 to $1,368 from $5,552 in 2005. The decrease in
OTC
Product Revenue resulted from lower online sales. We have discontinued our
proof
of concept program in November 2006 and have, therefore, ceased selling our
OTC
products. Medical Device Revenue decreased by $984 in 2006 to $-0- from $984
in
2005. The decrease in Medical Device Revenue resulted due to no emphasis
on
selling in 2006 versus the sales of three devices in 2005.
Research
and
development.
We
have continued to
make significant progress with the major research and development projects
expected to be ongoing in the next 12 months. Our expanded Phase 1 metastatic
melanoma and breast carcinoma clinical trials are expected to be completed
in
early 2007 for approximately $1,000,000 in the aggregate, most of which has
been
expended in 2005 and 2006. At that time the planning phase for the expected
Phase 2/3 trial in metastatic melanoma will be completed, which will cost
approximately $3,000,000 through 2008. This includes expenditures in 2007
to
significantly advance the expected metastatic melanoma pivotal efficacy studies.
Additionally, we plan $1,000,000 of expenditures in 2007 to substantially
advance our work with other oncology indications. Our Phase 2 psoriasis trial
is
expected to commence in early 2007 and will cost approximately
$1,500,000
over 12 to 24 months. Our Phase 1 liver cancer trial is
expected to cost approximately $500,000 in total, and is expected to commence
in
Q2 2007. Research and development costs comprising the total of $3,016,361
for
2006 included depreciation expense of $4,442, consulting of $461,701, lab
supplies and pharmaceutical preparations of $259,198, insurance of $43,361,
legal of $202,044, payroll of $1,969,474, and rent and utilities of $56,442.
Research and development costs comprising the total of $2,044,391 for 2005
included depreciation expense of $1,708, consulting of $805,915, lab supplies
and pharmaceutical preparations of $111,504, insurance of $120,493, legal
of
$208,368, payroll of $747,197, and rent and utilities of $49,206. The decrease
in consulting is the result of the absence of start-up related consulting
costs
for the beginning of the clinical trial program. The increase in lab supplies
and pharmaceutical preparations is primarily the result of materials necessary
to prepare for additional clinical trials expected to commence in early 2007.
The increase in payroll is the result of raises and primarily the impact
of
adopting SFAS No. 123(R).
General
and
administrative.
General
and
administrative expenses increased by $535,263 in 2006 to $3,534,597 from
$2,999,334 in 2005. The increase resulted primarily from higher payroll expenses
for general corporate purposes due to raises totaling $311,346 and primarily
as
a result of the impact of adopting SFAS No. 123(R) totaling $912,040, offset
by
lower consulting expenses totaling $714,820.
CASH
FLOW
As
of March 21, 2007, we
held approximately $7,500,000 in cash and short-term United States Treasury
Notes. At our current cash expenditure rate, this amount will be sufficient
to
meet our current and planned needs in 2007 and 2008. We have been increasing
our
expenditure rate by accelerating some of our research programs for new research
initiatives; in addition, we are seeking to improve our cash flow through
the
asset sale and licensure of our OTC products. However, we cannot assure you
that
we will be successful in selling the OTC assets and licensing our existing
OTC
products. Moreover, even if we are successful in improving our current cash
flow
position, we nonetheless plan to require additional funds to meet our long-term
needs in 2009 and beyond. We anticipate these funds will come from the proceeds
of private placements, the exercise of existing warrants outstanding, 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 current and next phases in
clinical development of our pharmaceutical products. We anticipate that any
required funds for our operating and development needs beyond 2008 will come
from the proceeds of private placements, the exercise of existing warrants
outstanding, 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
The
Financial Accounting
Standards Board (“FASB”) released SFAS No. 156, “Accounting for Servicing of
Financial Assets,” to simplify accounting for separately recognized
servicing assets and servicing liabilities. SFAS No. 156 amends SFAS No.
140,
“Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.” SFAS No. 156 permits an entity to
choose either the amortization method or the fair value measurement method
for
measuring each class of separately recognized servicing assets and servicing
liabilities after they have been initially measured at fair value. SFAS
No. 156 applies to all separately recognized servicing assets and liabilities
acquired or issued after the beginning of an entity’s fiscal year that begins
after September 15, 2006. SFAS No. 156 will be effective for the company
as of
January 1, 2007, the beginning of the company’s fiscal-2007 year. We do
not believe the adoption of SFAS No. 156 will have a material impact on the
company’s consolidated financial position or results of operations.
changes in tax uncertainties, FIN No. 48 will also require a company
to
recognize a financial statement benefit for a position taken for tax return
purposes when it will be more-likely-than-not that the position will be
sustained. FIN No. 48 will be effective for fiscal years beginning after
December 15, 2006. We will adopt FIN No. 48 in the first quarter of fiscal
2007, effective as of December 31, 2006, the beginning of the company's 2007
fiscal year. We do not believe the adoption of FIN No. 48 will have a
material impact on the Company's consolidated financial position or results
of
operations.
The
FASB released SFAS No. 157, “Fair
Value Measurements,” to define fair value, establish a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expand disclosures about fair value measurements. SFAS No.
157 will be effective for the company as of December 30, 2007, the beginning
of
the company’s fiscal-2008 year. We are assessing the impact the adoption
of SFAS No. 157 will have on the company’s consolidated financial position and
results of operations.
In
September 2006, the FASB issued SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Postretirement Plans: an
amendment of
FASB Statements No. 87, 88, 106, and 132(R),” which requires an employer to
recognize the over-funded or under-funded status of a single-employer defined
benefit postretirement plan as an asset or liability in its statement of
financial position and to recognize changes in that funded status in
comprehensive income in the year in which the changes occur. SFAS No. 158
requires an employer to initially apply the requirement to recognize the
funded
status of a benefit plan as of the end of the employer’s fiscal year ending
after December 16, 2006. In addition, SFAS No. 158 also requires an
employer to measure plan assets and benefit obligations as of the date of
the employer’s fiscal year-end statement of financial position for fiscal years
ending after December 15, 2008. The adoption of SFAS No. 158 will not
have an impact on the company’s consolidated financial position or results of
operations as the company does not have a defined benefit plan.
In
February 2007, the
FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities—Including an amendment of FASB Statement No. 115,”
which permits entities to choose to measure many financial instruments
and
certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility
in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. SFAS No. 159
is
expected to expand the use of fair value measurement, which is consistent
with
the long-term measurement objectives for accounting for financial instruments.
This Statement is effective as of the beginning of an entity’s first fiscal year
that begins after November 15, 2007. Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007, provided
the entity also elects to apply the provisions of SFAS No. 157, “Fair Value
Measurements.” We are assessing the impact the adoption of SFAS No. 159
will have on the company’s consolidated financial position and results of
operations.
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, 2006 and 2005
|
F-2
|
Consolidated
Statements of Operations for the years December 31, 2006 and 2005
|
F-3
|
Consolidated
Statements of Shareholders' Equity for years ended December 31,
2006 and
2005
|
F-4
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2006
and 2005
|
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 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.
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 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 December 31, 2006. 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.
Item
8B. Other Information.
None.
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 22, 2007 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 June 21, 2007, 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 June 21, 2007, 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 June 21, 2007, which will
be
filed with the SEC pursuant to Regulation 14A under the Exchange Act.
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 June 21, 2007, 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 June 21, 2007, which will
be
filed with the SEC pursuant to Regulation 14A under the Exchange Act.
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, 2006 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 22, 2007
Signature
|
Title
|
Date
|
/s/
H. Craig Dees
H.
Craig Dees, Ph.D.
|
Chief
Executive Officer (principal executive officer) and Chairman of
the Board
|
March
22, 2007
|
/s/
Peter R. Culpepper
Peter
R. Culpepper, CPA
|
Chief
Financial Officer (principal financial officer and principal accounting
officer)
|
March
22, 2007
|
/s/
Timothy C. Scott
Timothy
C. Scott, Ph.D.
|
President
and Director
|
March
22, 2007
|
/s/
Eric A. Wachter , Ph.D
Eric
A. Wachter, Ph.D.
|
Vice
President - Pharmaceuticals and Director
|
March
22, 2007
|
/s/
Stuart Fuchs
Stuart
Fuchs
|
Director
|
March
22, 2007
|
Report of Independent Registered Public
Accounting Firm
Board of Directors
Provectus Pharmaceuticals, Inc.
We have audited the
accompanying consolidated balance sheets of Provectus
Pharmaceuticals, Inc., a development stage company, as of December
31, 2006 and 2005 and the related consolidated
statements of operations, stockholders' equity, and cash
flows for the period from January 17, 2002
(inception) to December 31, 2006 and for each of the two years in the
period ended December 31, 2006. 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 financial 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, 2006 and 2005, and the results of its
operations and its cash flows for the period from January 17, 2002
(inception) to December 31, 2006 and for each of the two years in the period
ended December 31, 2006 in conformity with accounting
principles generally accepted in the United States of America.
As disclosed in Note 1 to the consolidated
financial statements, effective January 1, 2006, the Company adopted the
fair
value method of accounting provisions of Statement of Financial Accounting
Standard No. 123 (revised 2004), “Share Based Payment.”
/s/BDO Seidman, LLP
Chicago, Illinois
March 19, 2007
PROVECTUS
PHARMACEUTICALS, INC.
(A
Development-Stage Company)
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
2006
|
|
December
31,
2005
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash
equivalents
|
$
|
638,334
|
$
|
6,878,990
|
|
United
States
Treasury Notes, total face value $6,507,019
|
|
6,499,034
|
|
--
|
|
Prepaid
expenses
and other current assets
|
|
173,693
|
|
67,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
7,311,061
|
|
6,946,952
|
|
|
|
|
|
|
|
Equipment
and Furnishings, less accumulated depreciation of
$372,721 and $368,279
|
|
30,075
|
|
12,287
|
|
|
|
|
|
|
|
Patents,
net of amortization of $2,762,777 and $2,091,657
|
|
8,952,668
|
|
9,623,788
|
|
|
|
|
|
|
|
Deferred
loan costs, net of amortization of $103,018 and
$161,004
|
|
3,713
|
|
709,092
|
|
|
|
|
|
|
|
Other
assets
|
|
27,000
|
|
27,000
|
|
|
$
|
16,324,517
|
$
|
17,319,119
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Accounts
payable
- trade
|
$
|
64,935
|
$
|
90,124
|
|
Accrued
compensation
|
|
265,929
|
|
179,170
|
|
Accrued
common
stock costs
|
|
17,550
|
|
964,676
|
|
Accrued
consulting expense
|
|
42,500
|
|
692,512
|
|
Other
accrued
expenses
|
|
46,500
|
|
61,500
|
|
Accrued
interest
|
|
--
|
|
65,055
|
|
March
2005
convertible debt, net of debt discount of $2,797 and $884,848
|
|
364,703
|
|
221,401
|
|
November
2005
convertible debt, net of debt discount of $134,008 in 2005
|
|
--
|
|
334,828
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
802,117
|
|
2,609,266
|
|
|
|
|
|
|
|
March
2005 convertible debt, net of debt discount of
$46,039 in 2005
|
|
--
|
|
322,712
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
Common
stock; par value $.001 per share; 100,000,000 shares authorized;
42,452,366 and 27,822,977 shares issued and outstanding,
respectively
|
|
42,452
|
|
27,823
|
|
Paid-in
capital
|
|
50,680,353
|
|
40,689,144
|
|
Deficit
accumulated during the development stage
|
|
(35,200,405)
|
|
(26,329,826)
|
|
|
|
|
|
|
|
Total
Stockholders’ Equity
|
|
15,522,400
|
|
14,387,141
|
|
|
|
|
|
|
|
|
$
|
16,324,517
|
$
|
17,319,119
|
|
See
accompanying notes to financial statements.
PROVECTUS
PHARMACEUTICALS, INC.
(A
Development-Stage Company)
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Year
Ended
December
31, 2006
|
|
Year
Ended
December
31, 2005
|
|
Cumulative
Amounts from January 17, 2002 (Inception)
Through
December
31, 2006
|
Revenues
|
|
|
|
|
|
|
OTC
product revenue
|
$
|
1,368
|
$
|
5,552
|
$
|
25,648
|
Medical
device revenue
|
|
--
|
|
984
|
|
14,109
|
Total
revenues
|
|
1,368
|
|
6,536
|
|
39,757
|
|
|
|
|
|
|
|
Cost
of sales
|
|
875
|
|
3,560
|
|
15,216
|
|
|
|
|
|
|
|
Gross
profit
|
|
493
|
|
2,976
|
|
24,541
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
Research
and development
|
$
|
3,016,361
|
$
|
2,044,391
|
$
|
7,128,207
|
General
and administrative
|
|
3,534,597
|
|
2,999,334
|
|
16,729,968
|
Amortization
|
|
671,120
|
|
671,120
|
|
2,762,777
|
|
|
|
|
|
|
|
Total
operating loss
|
|
(7,221,585)
|
|
(5,711,869)
|
|
(26,596,411)
|
|
|
|
|
|
|
|
Gain
on sale of fixed assets
|
|
75
|
|
--
|
|
55,075
|
|
|
|
|
|
|
|
Loss
on extinguishment of debt
|
|
--
|
|
(724,455)
|
|
(825,867)
|
|
|
|
|
|
|
|
Investment
income
|
|
253,393
|
|
--
|
|
253,393
|
|
|
|
|
|
|
|
Net
interest expense
|
|
(1,902,462)
|
|
(5,327,529)
|
|
(8,086,595)
|
|
|
|
|
|
|
|
Net
loss
|
$
|
(8,870,579)
|
$
|
(11,763,853)
|
$
|
(35,200,405)
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
$
|
(0.23)
|
$
|
(0.62)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common
shares
outstanding - basic and diluted
|
|
37,973,403
|
|
18,825,670
|
|
|
See
accompanying notes to financial statements.
PROVECTUS
PHARMACEUTICALS, INC.
(A
Development-Stage Company)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’
EQUITY
|
|
|
Common
Stock
|
|
|
Number
of Shares
|
|
Par
Value
|
|
Paid
in capital
|
|
Accumulated
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock for services
|
|
226,733
|
|
227
|
|
152,058
|
|
--
|
|
152,285
|
|
Issuance
of stock for interest payable
|
|
263,721
|
|
264
|
|
195,767
|
|
--
|
|
196,031
|
|
Issuance
of warrants for services
|
|
--
|
|
--
|
|
1,534,405
|
|
--
|
|
1,534,405
|
|
Issuance
of warrants for contractual
obligations
|
|
--
|
|
--
|
|
985,010
|
|
--
|
|
985,010
|
|
Exercise
of warrants and stock options
|
|
1,571,849
|
|
1,572
|
|
1,438,223
|
|
--
|
|
1,439,795
|
|
Employee
compensation from stock options
|
|
--
|
|
--
|
|
15,752
|
|
--
|
|
15,752
|
|
Issuance
of stock pursuant to Regulation D
|
|
6,221,257
|
|
6,221
|
|
6,506,955
|
|
--
|
|
6,513,176
|
|
Debt
conversion to common stock
|
|
3,405,541
|
|
3,405
|
|
3,045,957
|
|
--
|
|
3,049,362
|
|
Issuance
of warrants with convertible debt
|
|
--
|
|
--
|
|
1,574,900
|
|
--
|
|
1,574,900
|
|
Beneficial
conversion related to convertible debt
|
|
--
|
|
--
|
|
1,633,176
|
|
--
|
|
1,633,176
|
|
Beneficial
conversion related to interest expense
|
|
--
|
|
--
|
|
39,529
|
|
--
|
39,529
|
|
Repurchase
of beneficial conversion feature
|
|
--
|
|
--
|
|
(144,128)
|
|
--
|
|
(144,128)
|
|
Net
loss for the year ended 2005
|
|
--
|
|
--
|
|
--
|
|
(11,763,853)
|
|
(11,763,853)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
at December 31, 2005
|
$ |
27,822,977
|
$
|
27,823
|
$
|
40,689,144
|
$
|
(26,329,826)
|
$
|
14,387,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock for services
|
|
719,246
|
|
719
|
|
676,024
|
|
--
|
|
676,743
|
|
Issuance
of stock for interest payable
|
|
194,327
|
|
195
|
|
183,401
|
|
--
|
|
183,596
|
|
Issuance
of warrants for services
|
|
--
|
|
--
|
|
370,023
|
|
--
|
|
370,023
|
|
Exercise
of warrants and stock options
|
|
1,245,809
|
|
1,246
|
|
1,188,570
|
|
--
|
|
1,189,816
|
|
Employee
compensation from stock options
|
|
--
|
|
--
|
|
1,862,456
|
|
--
|
|
1,862,456
|
|
Issuance
of stock pursuant to Regulation D
|
|
10,092,495
|
|
10,092
|
|
4,120,329
|
|
--
|
|
4,130,421
|
|
Debt
conversion to common stock
|
|
2,377,512
|
|
2,377
|
|
1,573,959
|
|
--
|
|
1,576,336
|
|
Beneficial
conversion related to interest expense
|
|
--
|
|
--
|
|
16,447
|
|
--
|
|
16,447
|
|
Net
loss for the year ended 2006
|
|
--
|
|
--
|
|
--
|
|
(8,870,579)
|
|
(8,870,579)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
at December 31, 2006
|
$
|
42,452,366
|
$
|
42,452
|
$
|
50,680,353
|
$
|
(35,200,405)
|
$
|
15,522,400
|
|
See
accompanying notes to financial statements.
PROVECTUS
PHARMACEUTICALS, INC.
(A
Development-Stage Company)
CONSOLIDATED
STATEMENTS OF CASH FLOW
|
|
Year
Ended
December
31, 2006
|
|
Year
Ended
December
31, 2005
|
|
|
Cumulative
Amounts
from
January
17, 2002
(Inception)
through
December
31, 2006
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net
loss
|
$
|
(8,870,579)
|
$
|
(11,763,853)
|
|
$
|
(35,200,405)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
4,442
|
|
1,708
|
|
|
395,722
|
|
Amortization
of patents
|
|
671,120
|
|
671,120
|
|
|
2,762,777
|
|
Amortization
of original issue
discount
|
|
1,062,098
|
|
2,293,251
|
|
|
3,842,924
|
|
Amortization
of commitment fee
|
|
--
|
|
272,540
|
|
|
310,866
|
|
Amortization
of prepaid consultant
expense
|
|
84,020
|
|
274,337
|
|
|
1,211,207
|
|
Amortization
of deferred loan costs
|
|
705,379
|
|
1,411,970
|
|
|
2,257,871
|
|
Accretion
of United States Treasury
Bills
|
|
(182,198)
|
|
--
|
|
|
(182,198)
|
|
Loss
on extinguishment of debt
|
|
--
|
|
724,455
|
|
|
825,867
|
|
Loss
on exercise of warrants
|
|
--
|
|
236,146
|
|
|
236,146
|
|
Beneficial
conversion of convertible
interest
|
|
16,447
|
|
39,529
|
|
|
55,976
|
|
Convertible
interest
|
|
122,188
|
|
266,504
|
|
|
388,692
|
|
Compensation
through issuance of stock
options
|
|
1,862,456
|
|
15,752
|
|
|
1,928,479
|
|
Compensation
through issuance of
stock
|
|
--
|
|
--
|
|
|
932,000
|
|
Issuance
of stock for services
|
|
26,100
|
|
388,373
|
|
|
5,995,031
|
|
Issuance
of warrants for services
|
|
201,984
|
|
318,704
|
|
|
543,169
|
|
Issuance
of warrants for contractual
obligations
|
|
--
|
|
985,010
|
|
|
985,010
|
|
Gain
on sale of equipment
|
|
(75)
|
|
--
|
|
|
(55,075)
|
|
(Increase)
decrease in assets
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other current
assets
|
|
(21,712)
|
|
46,762
|
|
|
(89,674)
|
|
Increase
(decrease) in liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
(25,189)
|
|
(64,090)
|
|
|
61,290
|
|
Accrued
expenses
|
|
68,743
|
|
98,196
|
|
|
533,226
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
(4,274,776)
|
|
(3,783,586)
|
|
|
(12,261,099)
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Proceeds
from sale of fixed asset
|
|
75
|
|
--
|
|
|
180,075
|
|
Capital
expenditures
|
|
(22,230)
|
|
(13,995)
|
|
|
(39,922)
|
|
Proceeds
from investments
|
|
11,000,000
|
|
--
|
|
|
11,000,000
|
|
Purchase
of investments
|
|
(17,316,836)
|
|
--
|
|
|
(17,316,836)
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
(6,338,991)
|
|
(13,995)
|
|
|
(6,176,683)
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Net
proceeds from loans from
stockholder
|
|
--
|
|
25,000
|
|
|
174,000
|
|
Proceeds
from convertible debt
|
|
--
|
|
4,430,836
|
|
|
6,706,795
|
|
Net
proceeds from sale of common
stock
|
|
3,183,295
|
|
7,477,853
|
|
|
13,148,493
|
|
Proceeds
from exercise of warrants and stock
options
|
|
1,189,816
|
|
1,203,649
|
|
|
2,398,918
|
|
Cash
paid to retire convertible
debt
|
|
--
|
|
(1,885,959)
|
|
|
(2,385,959)
|
|
Cash
paid for deferred loan costs
|
|
--
|
|
(515,582)
|
|
|
(747,612)
|
|
Premium
paid on extinguishments of
debt
|
|
--
|
|
(70,000)
|
|
|
(170,519)
|
|
Purchase
and retirement of common
stock
|
|
--
|
|
--
|
|
|
(48,000)
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
4,373,111
|
|
10,665,797
|
|
|
19,076,116
|
|
|
|
Year
Ended
December
31, 2006
|
|
Year
Ended
December
31, 2005
|
|
Cumulative
Amounts
from
January
17, 2002
(Inception)
through December 31, 2006
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
$
|
(6,240,656)
|
$
|
6,868,216
|
$
|
638,334
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, at beginning of period
|
$
|
6,878,990
|
$
|
10,774
|
$
|
--
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, at end of period
|
$
|
638,334
|
$
|
6,878,990
|
$
|
638,334
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
|
|
|
|
|
|
Interest
paid of $127,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Noncash Investing and Financing
Activities
|
|
|
|
Year
ended December 31, 2006
1.
Issuance of warrants in exchange for prepaid services of
$168,039
2.
Debt converted to common stock of $1,576,336
3.
Payment of accrued interest through the issuance of stock of
$183,596
4.
Issuance of stock for stock issuance costs of $964,676 incurred in
2005
5.
Stock committed to be issued for services of $650,643 accrued at
December 31, 2005 and issued in 2006
6.
Accrual of $17,550 for stock committed to be issued for stock
issuance costs
Year
ended December 31, 2005
1.
Issuance of warrants in exchange for prepaid services of
$68,910
2.
Shareholder debt of $174,000 and accrued interest of $24,528
converted to common stock of $198,528
3.
Debt converted to common stock of $2,537,000
4.
Payment of accrued interest through the issuance of stock of
$196,031 and stock committed to be issued of $61,408
5.
Beneficial conversion on convertible debt of $1,633,176
6.
Discount on convertible debt with warrants of $1,574,900
7.
Warrants issued for deferred loan costs of $1,215,700
8.
Accrual of $964,676 for stock committed to be issued for stock
issuance costs
9.
Stock committed to be issued for deferred loan costs of
$345,645
10.
Stock committed to be issued for consulting expense of $304,998
See
accompanying notes to financial statement.
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, and certain forms of cancer including recurrent breast
carcinoma, metastatic melanoma, and liver cancer. The Company intends to
license
its laser device and biotech technology. Through a previous acquisition,
the
Company also intends to further develop, if necessary, and license or sell
the
underlying assets of its over-the-counter pharmaceuticals. To date the Company
has no material revenues.
Principles
of
Consolidation
Intercompany
balances and transactions have been eliminated in
consolidation.
Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
Cash
and cash
equivalents
The
Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
United
States Treasury Notes
United
States Treasury Notes are classified as held-to-maturity
securities and all investments mature within one year. Held-to-maturity
securities are stated at amortized cost which approximates market.
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, 2006 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 carryover basis. The patents
are
being amortized over the remaining lives of the patents, which range from
11-15
years. Annual amortization of the patents is expected to be approximately
$671,000 per year for the next five years.
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.
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 and pharmaceutical
preparations, insurance, legal - patents, office supplies, payroll expenses,
rental - building, repairs, software, taxes and fees, and utilities.
Income
Taxes
The
Company accounts for income taxes under the liability method in
accordance with Statement of Financial Accounting Standards No. 109 (“SFAS No.
109”), “Accounting for Income Taxes.” Under this method, deferred income tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using
the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. A valuation allowance is established if it is more likely
than not that all, or some portion, of deferred income tax assets will not
be
realized. The Company has recorded a full valuation allowance to reduce its
net
deferred income tax assets to zero. In the event the Company were to determine
that it would be able to realize some or all its deferred income tax assets
in
the future, an adjustment to the deferred income tax asset would increase
income
in the period such determination was made.
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, 2006 are 9,014,714
options 26,663,081 warrants and 490,000 shares issuable upon the conversion
of
convertible debt. Included in the weighted average number of shares outstanding
are 165,000 common shares committed to be issued but not outstanding at December
31, 2006.
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
On
December 16, 2004, the Financial Accounting Standards Board
(“FASB”) released FASB Statement No. 123 (revised 2004), “Share-Based Payment,
(“FASB 123R”).” These changes in accounting replace existing requirements under
FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“FASB 123”),
and eliminates the ability to account for share-based compensation transaction
using APB Opinion No.25, “Accounting for Stock Issued to Employees” (“APB 25”).
The compensation cost relating to share-based payment transactions will be
measured based on the fair value of the equity or liability instruments issued.
This Statement did not change the accounting for similar transactions involving
parties other than employees.
The
Company adopted FASB 123R effective January 1, 2006 under the
modified prospective method, which recognizes compensation cost beginning
with
the effective date (a) based on the requirements of FASB 123R for all
share-based payments granted after the effective date and to awards modified,
repurchased, or cancelled after that date and (b) based on the requirements
of
FASB 123 for all awards granted to employees prior to the effective date
of FASB
123R that remain unvested on the effective date. There was no cumulative
effect
of initially applying this Statement for the Company. At December 31, 2006
the
Company has estimated that an additional $1,211,371 will be expensed over
the
applicable remaining vesting periods for all share-based payments granted
to
employees on or before December 31, 2005 which remained unvested on January
1,
2006.
The
compensation cost relating to share-based payment transactions
will be measured based on the fair value of the equity or liability instruments
issued and will be expensed on a straight-line basis. For purposes of estimating
the fair value of each stock option or restricted stock unit on the date
of
grant, the Company utilized the Black-Scholes option-pricing model. The
Black-Scholes option valuation model was developed for use in estimating
the
fair value of traded options, which have no vesting restrictions and are
fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected volatility factor of the market
price of the company’s common stock (as determined by reviewing its historical
public market closing prices). Because the Company's employee stock options
and
restricted stock units have characteristics significantly different from
those
of traded options and because changes in the subjective input assumptions
can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value
of
its employee stock options or restricted stock units.
For
the year ended December 31, 2005 the Company adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
No.
123, "Accounting for Stock Based Compensation" (SFAS No. 123). 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 December 31, 2005
|
|
|
|
Net
loss, as reported
|
|
$(11,763,853)
|
Add
stock-based employee compensation expense included in
reported loss
|
|
15,752
|
Less
total stock-based employee compensation expense determined
under the fair
value
based method for all awards
|
|
(791,111)
|
|
|
|
Pro
forma net loss
|
|
$(12,539,212)
|
|
|
|
Basic
and diluted loss per common share, as reported
|
|
$(0.62)
|
Basic
and diluted loss per common share, pro forma
|
|
$(0.67)
|
Recent
Accounting Pronouncements
Effective
January 1,
2006, the Company adopted SFAS No. 123(R) using the modified prospective
method. See Notes 1 and 5 for information regarding stock-based
compensation.
The
Financial Accounting Standards Board (“FASB”) released SFAS No.
156, “Accounting for Servicing of Financial Assets,” to simplify
accounting for separately recognized servicing assets and servicing liabilities.
SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.” SFAS No. 156
permits an entity to choose either the amortization method or the fair value
measurement method for measuring each class of separately recognized servicing
assets and servicing liabilities after they have been initially measured
at fair
value. SFAS No. 156 applies to all separately recognized servicing assets
and liabilities acquired or issued after the beginning of an entity’s fiscal
year that begins after September 15, 2006. SFAS No. 156 will be effective
for
the Company as of December 31, 2006, the beginning of the Company’s fiscal-2007
year. We do not believe the adoption of SFAS No. 156 will have a material
impact on the Company’s consolidated financial position or results of
operations.
On
July 13, 2006, the FASB issued Interpretation No. 48 (“FIN No.
48”) “Accounting for Uncertainty in Income Taxes: an Interpretation of FASB
Statement No. 109.” This interpretation clarifies the accounting for
uncertainty in income taxes recognized in an entity’s financial statements in
accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN
No. 48 clarifies what criteria must be met prior to recognition of the financial
statement benefit of a position taken in a tax return. FIN No. 48 will require
companies to include additional qualitative and quantitative disclosures
within
their financial statements. The disclosures will include potential tax benefits
from positions taken for tax return purposes that have not been recognized
for
financial reporting purposes and a tabular presentation of significant changes
during each period. The disclosures will also include a discussion of the
nature
of uncertainties, factors which could cause a change, and an estimated range
of
reasonably possible changes in tax uncertainties. FIN No. 48 will also require
a
company to recognize a financial statement benefit for a position taken for
tax
return purposes when it will be more-likely-than-not that the position will
be
sustained. FIN No. 48 will be effective for fiscal years beginning after
December 15, 2006. We will adopt FIN No. 48 in the first quarter of fiscal
2007,
effective as of December 31, 2006, the beginning of the Company’s 2007 fiscal
year. We do not believe the adoption of FIN No. 48 will have a material
impact on the Company’s consolidated financial position or results of
operations.
The
FASB released SFAS No. 157, “Fair Value Measurements,”
to define fair value, establish a framework for measuring fair value in
accordance with generally accepted accounting principles, and expand disclosures
about fair value measurements. SFAS No. 157 will be effective for the
Company as of December 30, 2007, the beginning of the Company’s fiscal-2008
year. We are assessing the impact the adoption of SFAS No. 157 will have
on the Company’s consolidated financial position and results of
operations.
In
September 2006, the FASB issued SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Postretirement Plans: an
amendment of
FASB Statements No. 87, 88, 106, and 132(R),” which requires an employer to
recognize the over-funded or under-funded status of a single-employer defined
benefit postretirement plan as an asset or liability in its statement of
financial position and to recognize changes in that funded status in
comprehensive income in the year in which the changes occur. SFAS No. 158
requires an employer to initially apply the requirement to recognize the
funded
status of a benefit plan as of the end of the employer’s fiscal year ending
after December 16, 2006. In addition, SFAS No. 158 also requires an
employer to measure plan assets and benefit obligations as of the date of
the employer’s fiscal year-end statement of financial position for fiscal years
ending after December 15, 2008. The adoption of SFAS No. 158 will not
have an impact on the Company’s consolidated financial position or results of
operations as the Company does not have a defined benefit plan.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities—Including an amendment of
FASB Statement No. 115,” which permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective
is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS No. 159 is expected to expand the use of fair value
measurement, which is consistent with the long-term measurement objectives
for
accounting for financial instruments. This Statement is effective as of the
beginning of an entity’s first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins
on
or before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS No. 157, “Fair Value Measurements.” We are assessing
the impact the adoption of SFAS No. 159 will have on the Company’s consolidated
financial position and results of operations.
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 Pharmaceuticals, 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.
3.
Commitments
Leases
The
Company leases office and laboratory space in Knoxville,
Tennessee, on an annual basis, renewable for one year at the option of the
Company. The Company is committed to pay a total of $12,480 in lease payments
over three months, which is the remainder of its current lease term at December
31, 2006. The Company plans to renew the lease at the end of the current
lease
term. Rent expense was approximately $49,000 and $45,000 in 2006 and 2005,
respectively.
Employee
Agreements
On
May 1, 2006, we entered into executive employment agreements with
each of H. Craig Dees. Ph.D., Timothy C. Scott, Ph.D., Eric A. Wachter, Ph.D.,
and Peter R. Culpepper, CPA, to serve as our Chief Executive Officer, President,
Executive Vice President and Chief Financial Officer, respectively. Each
agreement provides that such executive will be employed for a one-year term
with
automatic one-year renewals unless previously terminated pursuant to the
terms
of the agreement or either party gives notice that the term will not be
extended. The Company is committed to pay a total of $467,000 over four months,
which is the remainder of the current employment agreements at December 31,
2006. Executives are also entitled to participate in any incentive compensation
plan or bonus plan adopted by us without diminution of any compensation or
payment under the agreement. Executives are further entitled to reimbursement
for all reasonable out-of-pocket expenses incurred during his performance
of
services under the agreement.
Each
agreement generally provides that if the executive’s employment
is terminated prior to a change in control (as defined in the agreement)
(1) due
to expiration or non-extension of the term by us; or (2) by us for any reason
other than for cause (as defined in the agreement), then such executive shall
be
entitled to receive payments under the agreement as if the agreement was
still
in effect through the end of the period in effect as of the date of such
termination. If the executive’s employment (1) is terminated by the company at
any time for cause, (2) is terminated by executive prior to, and not coincident
with, a change in control or (3) is terminated by executive’s death, disability
or retirement prior to a change in control, the executive (or his estate,
as the
case may be) shall be entitled to receive payments under the agreement through
the last date of the month of such termination, a pro rata portion of any
incentive or bonus payment earned prior to such termination, any benefits
to
which he is entitled under the terms and conditions of the pertinent plans
in
effect at termination and any reasonable expenses incurred during the
performance of services under the agreement.
In
the event that coincident with or following a change in control,
the executive’s employment is terminated or the agreement is not extended (1) by
action of the executive including his death, disability or retirement or
(2) by
action of the company not for cause, the executive (or his estate, as the
case
may be) shall be entitled to receive payments under the agreement through
the
last date of the month of such termination, a pro rata portion of any incentive
or bonus payment earned prior to such termination, any benefits to which
he is
entitled under the terms and conditions of the pertinent plans in effect
at
termination and any reasonable expenses incurred during the performance of
services under the agreement. In addition, the company shall pay to the
executive (or his estate, as the case may be), within 30 days following the
date
of termination or on the effective date of the change in control (whichever
occurs later), a lump sum payment in cash in an amount equal to 2.90 times
the
base salary paid in the preceding calendar year, or scheduled to be paid
to such
executive during the year of such termination, whichever is greater, plus
an
additional amount sufficient to pay United States income tax on the lump
sum
amount paid.
4.
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 2005, 10,000 warrants were issued for the third anniversary date.
In
January 2006, 10,000 warrants were exercised in a cashless exercise resulting
in
4,505 shares issued. 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, 2006 and 2005, 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 which was fully amortized
as of
December 31, 2004.
(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 which was fully amortized
as of
December 31, 2004.
(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 totaled $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 which was fully amortized as of December 31, 2004.
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.
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.
Consulting costs charged to operations were $68,910. 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 May 2005, the Company
issued 25,000 warrants to consultants in exchange for services rendered.
Consulting costs charged to operations were $9,250. In December 2005, the
Company issued 33,583 warrants to consultants in exchange for services.
Consulting costs charged to operations were $24,571. The fair market value
for
the warrants issued in 2005 ranged from $0.37 to $1.01.
In
May 2006, 350,000
warrants were exercised for $334,000 resulting in 350,000 shares issued.
During
April, May and June, the Company issued 60,000 warrants to consultants in
exchange for services. Consulting costs charged to operations were $58,400.
In
August and September 2006, 732,534 warrants were exercised for $693,357
resulting in 732,534 shares issued. During the three months ended September
30,
2006, the Company issued 335,000 warrants to consultants in exchange for
services. At December 31, 2006, $155,814 of these costs have been charged
to
operations with the remaining $84,019 recorded as prepaid consulting expense
as
it represents payments for future services and the warrants are fully vested
and
non-forfeitable. In November 2006, 100,000 warrants were forfeited. During
the
three months ended December 31, 2006, the Company issued 85,000 warrants
to
consultants in exchange for services. Consulting costs charged to operations
were $71,790. The fair market value for the warrants issued in 2006 ranged
from
$0.67 to $1.11.
(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 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 amortized 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 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.
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.
In
December 2005, the Company committed to issue 689,246 shares to
consultants in exchange for services rendered. 655,663 of these shares of
were
issued in February 2006 and 33,583 shares were issued in May 2006. The total
value for these shares was $650,643 which was based on the market value of
the
shares issued and was recorded as an accrued liability at December 31, 2005.
In
February 2006, the Company issued 30,000 shares to consultants in exchange
for
services. Consulting costs charged to operations were $26,100.
(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 proceeds 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, 2005 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 was being amortized over the term of the commitment period which was
one
year from the date of registration. The full amount was amortized as of December
31, 2005 with $272,540 amortized in 2005.
(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.
During
the three
months ended March 31, 2005, the Company completed a private placement
transaction with 8 accredited investors, which were 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 were 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 325,500 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.
During
the three
months ended September 30, 2005, the Company completed a private placement
transaction with 12 accredited investors pursuant to which the Company sold
899,338 shares of common stock at a purchase price of $0.75 per share of
which
109,333 are committed to be issued at December 31, 2005, for an aggregate
purchase price of $674,500. In connection with the sale of common stock,
the
Company also issued warrants to the investors to purchase up to 1,124,167
shares
of common stock at an exercise price of $0.935 per share. The Company paid
$87,685 and committed to issue 79,000 shares of common stock at a fair market
value of $70,083 to Network 1 Financial Securities, Inc. as placement agent
for
this transaction which is accrued at December 31, 2005. The cash and common
stock costs have been off-set against the proceeds received.
During
the three
months ended December 31, 2005, the Company completed a private placement
transaction with 62 accredited investors pursuant to which the Company sold
10,065,605 shares of common stock at a purchase price of $0.75 per share
of
which 5,126,019 are committed to be issued at December 31, 2005, for an
aggregate purchase price of $7,549,202. In connection with the sale of common
stock, the Company also issued warrants to the investors to purchase up to
12,582,009 shares of common stock at an exercise price of $0.935 per share.
The
Company paid $959,540, issued 46,667 shares of common stock at a fair market
value of $46,467, issued 30,550 warrants, and committed to issue 950,461
shares
of common stock at a fair market value of $894,593 to a syndicate led by
Network
1 Financial Securities, Inc. as placement agent for this transaction which
is
accrued at December 31, 2005. The cash and common stock costs have been off-set
against the proceeds received.
In
January 2006, the Company issued 5,235,352 shares committed to be
issued at December 31, 2005 for shares sold in 2005. In February 2006, the
Company issued 1,029,460 shares committed to be issued at December 31, 2005
for
stock issuance costs related to shares sold in 2005. The total value for
these
shares was $964,676 which was based on the market value of the shares issued
and
was recorded as an accrued liability at December 31, 2005.
During
the three months ended March 31, 2006, the Company completed a
private placement transaction with 5 accredited investors pursuant to which
the
Company sold 466,833 shares of common stock at a purchase price of $0.75
per
share for an aggregate purchase price of $350,125. In connection with the
sale
of common stock, the Company also issued warrants to the investors to purchase
up to 466,833 shares of common stock at an exercise price of $0.935 per share.
The Company paid $35,013 and issued 46,683 shares of common stock at a fair
market value of $41,815 to Chicago Investment Group, L.L.C. as placement
agent
for this transaction. The cash costs have been off-set against the proceeds
received.
In
May 2006, the Company completed a private placement transaction
with 2 accredited investors pursuant to which the Company sold a total of
153,647 shares of common stock at an average purchase price of $1.37 per
share,
for an aggregate purchase price of $210,000. In connection with the sale
of
common stock, the Company also issued warrants to the 2 investors to purchase
up
to 76,824 shares of common stock at an average exercise price of $2.13 per
share.
In
September 2006, the Company completed a private placement
transaction with 7 accredited investors pursuant to which the Company sold
a
total of 708,200 shares of common stock at a purchase price of $1.00 per
share,
for an aggregate purchase price of $708,200. The Company paid $92,067 and
issued
70,820 shares of common stock at a fair market value of $84,984 to Network
1
Financial Securities, Inc. as placement agent for this transaction. The cash
costs have been off-set against the proceeds received.
In
October 2006 the Company completed a private placement transaction
with 15 accredited investors pursuant to which the Company sold a total of
915,000 shares of common stock at a purchase price of $1.00 per share, for
an
aggregate purchase price of $915,000. The Company paid $118,950 and issued
91,500 shares of common stock at a fair market value of $118,500 to Network
1
Financial Securities, Inc. as placement agent for this transaction. The cash
costs have been off-set against the proceeds received.
During
the three
months ended December 31, 2006, the Company completed a private placement
transaction with 10 accredited investors pursuant to which the Company sold
1,400,000 shares of common stock at a purchase price of $1.00 per share of
which
150,000 are committed to be issued at December 31, 2006, for an aggregate
purchase price of $1,400,000. The Company paid $137,500, issued 125,000 shares
of common stock at a fair market value of $148,750, and committed to pay
$16,500
and to issue 15,000 shares of common stock at a fair market value of $17,550
to
Chicago Investment Group of Illinois, L.L.C. as a placement agent for this
transaction which is accrued at December 31, 2006. The cash and accrued stock
costs have been off-set against the proceeds received.
(o)
The Company issued
175,000 warrants each month from March 2005 to November 2005 resulting in
total
warrants of 1,575,000 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 $985,010.
5.
Stock Incentive Plan and Warrants
The
Company maintains
one long-term incentive compensation plan, the Provectus Pharmaceuticals,
Inc.
2002 Stock Plan, which provides for the issuance of up to 10,000,000 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.
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.
Included
in the
results for the year ended December 31, 2006 is $1,862,456, of stock-based
compensation expense which relates to the fair value of stock options and
restricted stock units, net of expected forfeitures, granted prior to December
31, 2006 which continue to vest over the related employees requisite service
periods which generally end by June 2009.
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,
$15,752 of expense was recorded for the year ended December 31, 2005.
For
stock options granted to employees
during 2006 and 2005, the Company has estimated the fair value of each option
granted using the Black-Scholes option pricing model with the following
assumptions:
|
2006
|
2005
|
Weighted
average fair value per options granted
|
$0.96
|
$0.66
|
Significant
assumptions (weighted average) risk-free interest
rate at grant date
|
4.0%
- 5.0%
|
4.0%
|
Expected
stock price volatility
|
116%
- 130%
|
130%
|
Expected
option life (years)
|
10
|
10
|
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. 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. 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.
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. On May 19, 2005, 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. 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. On December 9, 2005, the Company issued
775,000 stock options to employees. The options vest over three years with
no
options vesting on the date of grant. The exercise price is the fair market
price on the date of issuance. During 2005 an employee of the Company exercised
26,516 options at an exercise price of $1.10 per share of common stock for
$29,167.
Two
employees of the
Company exercised a total of 114,979 options during the three months ended
March
31, 2006 at an exercise price of $1.10 per share of common stock for $126,477.
On June 23, 2006, the Company issued 4,000,000 stock options to employees.
The
options vest over three years with no options vesting on the date of grant.
The
exercise price is the fair market price on the date of issuance. On June
23,
2006, the Company issued 200,000 stock options to its Members of the Board.
The
options vested on the date of grant. The exercise price is the fair market
price
on the date of issuance. One employee of the Company exercised a total of
7,166
options during the three months ended June 30, 2006 at an exercise price
of
$1.10 per share of common stock for $7,882 and another employee of the Company
exercised a total of 12,500 options during the three months ended June 30,
2006
at an exercise price of $0.32 per share of common stock for $4,000. One employee
of the Company exercised a total of 14,000 options during the three months
ended
September 30, 2006 at an exercise price of $1.10 per share of common stock
for
$15,400 and another employee of the Company exercised a total of 3,125 options
during the three months ended September 30, 2006 at an exercise price of
$0.32
per share of common stock for $1,000. One employee of the Company exercised
a
total of 7,000 options during the three months ended December 31, 2006 at
an
exercise price of $1.10 per share of common stock for $7,700.
The
following table
summarizes the options granted, exercised and outstanding as of December
31,
2005 and 2006, respectively:
|
Shares
|
Exercise
Price
Per
Share
|
Weighted
Average Exercise Price
|
|
|
|
|
Outstanding
at January 1, 2005
|
1,725,000
|
$0.32
- 1.25
|
$0.97
|
Granted
|
3,275,000
|
$0.64
- 0.94
|
$0.75
|
Exercised
|
(26,516)
|
$
1.10
|
$1.10
|
Forfeited
|
--
|
--
|
--
|
|
|
|
|
Outstanding
at December 31, 2005
|
4,973,484
|
$0.32
- 1.25
|
$0.83
|
|
|
|
|
Options
exercisable at December 31, 2005
|
1,017,234
|
$0.32
- 1.25
|
$0.88
|
|
|
|
|
Outstanding
at January 1, 2006
|
4,973,484
|
$0.32
- 1.25
|
$0.83
|
Granted
|
4,200,000
|
$
1.02
|
$1.02
|
Exercised
|
(158,770)
|
$0.32
- 1.10
|
$1.02
|
Forfeited
|
--
|
--
|
--
|
|
|
|
|
Outstanding
at December 31, 2006
|
9,014,714
|
$0.32
- 1.25
|
$0.91
|
|
|
|
|
Options
exercisable at December 31, 2006
|
2,406,378
|
$0.32
- 1.25
|
$0.86
|
|
|
|
|
The
following table summarizes information about stock options
outstanding at December 31, 2006.
Exercise
Price
|
Number
Outstanding at December 31,
2006
|
Weighted
Average Remaining contractual
Life
|
Outstanding
Weighted Average Exercise
price
|
Number
Exercisable at December 31,
2006
|
Exercisable
Weighted Average Exercise
Price
|
|
|
|
|
|
|
$0.32
|
209,375
|
6.58
years
|
$0.32
|
209,375
|
$0.32
|
$0.60
|
100,000
|
6.58
years
|
$0.60
|
100,000
|
$0.60
|
$1.10
|
1,030,339
|
7.17
years
|
$1.10
|
655,339
|
$1.10
|
$0.95
|
100,000
|
7.42
years
|
$0.95
|
100,000
|
$0.95
|
$1.25
|
100,000
|
7.50
years
|
$1.25
|
75,000
|
$1.25
|
$0.64
|
1,200,000
|
8.00
years
|
$0.64
|
300,000
|
$0.64
|
$0.75
|
1,300,000
|
8.42
years
|
$0.75
|
500,000
|
$0.75
|
$0.94
|
775,000
|
8.92
years
|
$0.94
|
266,664
|
$0.94
|
$1.02
|
4,200,000
|
9.50
years
|
$1.02
|
200,000
|
$1.02
|
|
9,014,714
|
8.68
years
|
$0.91
|
2,406,378
|
$0.86
|
The
weighted-average grant-date fair value of options granted during
the year 2006 was $0.96. The total intrinsic value of options exercised during
the year ended December 31, 2006 was $19,966.
The
following is a summary of nonvested stock option activity
for the year ended December 31, 2006:
|
|
|
|
|
Weighted
Average
|
|
|
|
Number
of Shares
|
|
Grant-Date
Fair Value
|
|
|
|
|
|
|
|
Nonvested
at December 31, 2005
|
|
3,956,250
|
|
$
0.75
|
|
Granted
|
|
4,200,000
|
|
$
0.96
|
|
Vested
|
|
(1,547,914)
|
|
$
0.80
|
|
Canceled
|
|
--
|
|
--
|
|
Nonvested
at December 31, 2006
|
|
6,608,336
|
|
$
0.87
|
|
As
of December 31, 2006, there was $4,411,372 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
granted under the Plan. That cost is expected to be recognized over a
weighted-average period of 1.4 years. The total fair value of shares vested
during the year ended December 31, 2006 was $1,239,331.
The following is a summary of the aggregate intrinsic value of shares
outstanding and exercisable at December 31, 2006. The aggregate intrinsic
value
of stock options outstanding and exercisable is defined as the difference
between the market value of the Company's stock as of the end of the period
and
the exercise price of the stock options.
|
|
|
|
Aggregate
|
|
|
|
Number
of Shares
|
|
Intrinsic
Value
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
9,014,714
|
|
$
2,491,637
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2006
|
|
2,406,378
|
|
$
805,303
|
|
|
|
|
|
|
|
The
following table
summarizes the warrants granted, exercised and outstanding as of December
31,
2005 and 2006, respectively.
|
Warrants
|
Exercise
Price
Per
Warrant
|
Weighted
Average Exercise Price
|
|
|
|
|
Outstanding
at January 1, 2005
|
4,092,393
|
$0.50
- 1.25
|
$0.99
|
Granted
|
26,179,565
|
$0.50
- 1.25
|
$0.95
|
Exercised
|
(1,545,333)
|
$0.75
- 1.00
|
$0.76
|
Forfeited
|
(1,894,667)
|
$0.90
- 1.00
|
$0.92
|
|
|
|
|
Outstanding
at December 31, 2005
|
26,831,958
|
$0.50
- 1.25
|
$0.96
|
|
|
|
|
Warrants
exercisable at December 31, 2005
|
26,831,958
|
$0.50
- 1.25
|
$0.96
|
|
|
|
|
Outstanding
at January 1, 2006
|
26,831,958
|
$0.50
- 1.25
|
$0.96
|
Granted
|
1,023,657
|
$0.75
- 2.16
|
$0.99
|
Exercised
|
(1,092,534)
|
$0.50
- 1.00
|
$0.94
|
Forfeited
|
(100,000)
|
$1.25
|
$1.25
|
|
|
|
|
Outstanding
at December 31, 2006
|
26,663,081
|
$0.50
- 2.16
|
$0.96
|
|
|
|
|
Warrants
exercisable at December 31, 2006
|
26,663,081
|
$0.50
- 2.16
|
$0.96
|
The
following table summarizes information
about warrants outstanding at December 31, 2006.
Exercise
Price
|
Number
Outstanding and Exercisable at December 31,
2006
|
Weighted
Average Remaining Contractual
Life
|
Weighted
Average Exercise Price
|
|
|
|
|
$0.50
|
10,000
|
0.92
|
$0.50
|
$0.75
|
664,275
|
1.25
|
$0.75
|
$0.935
|
17,934,939
|
3.78
|
$0.935
|
$0.94
|
20,000
|
0.25
|
$0.94
|
$0.98
|
525,000
|
3.25
|
$0.98
|
$1.00
|
6,482,043
|
2.37
|
$1.00
|
$1.23
|
275,000
|
3.23
|
$1.23
|
$1.25
|
675,000
|
3.58
|
$1.25
|
$2.125
|
55,147
|
2.38
|
$2.125
|
$2.16
|
21,677
|
2.38
|
$2.16
|
|
26,663,081
|
3.34
|
$0.96
|
6.
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 was due and payable in full on November
26, 2004. Subject to certain exceptions, the Note was convertible into shares
of
the Company's common stock on or after November 26, 2003, at which time the
principal amount of the Note was 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 was 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 were 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 were guaranteed by Xantech, and
Xantech's guarantee was 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 was being amortized over the
life
of the debt using the effective interest method.
In
2003, an additional
$25,959 of principal 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, was 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 was amortized over the life
of
the debt using the effective interest method. Amortization of $95,157 has
been
recorded as additional interest expense as of December 31, 2005.
During
2005, the
Company recorded additional interest expense of $36,945 related to the
beneficial conversion feature of the interest on the Gryffindor convertible
debt.
On
November 26, 2005
the Company entered into a redemption agreement with Gryffindor to pay
$1,185,959 of the Gryffindor convertible debt and accrued interest of $94,877.
Also on November 26, 2005 the Company issued a legal assignment attached
to and
made a part of that certain Second Amended and Restated Senior Secured
Convertible Note dated November 26, 2004 in the original principal amount
of
$1,185,959 together with interest of $94,877 paid to the order of 8 investors
dated November 26, 2005 for a total of $1,280,836. The Company subsequently
entered into debt conversion agreements with 7 of the investors for an aggregate
of $812,000 of convertible debt which was converted into 1,101,764 shares
of
common stock at $0.737 per share. As of December 31, 2005, the Company had
$468,836 in principal and $3,647 in accrued interest owed to holders of the
convertible debentures due on November 26, 2006. At December 31, 2005, the
Company recorded additional interest expense of $2,584 related to the beneficial
conversion feature of the interest on the November 2005 convertible debt.
The
$1,280,836 in principal was issued when the conversion price was lower than
the
market value of the Company's common stock on the date of issue. As a result,
a
discount of $404,932 was recorded for this beneficial conversion feature.
The
debt discount of $404,932 is being amortized over the life of the debt using
the
effective interest method. At December 31, 2005, $270,924 of the debt discount
has been amortized which includes $256,711 of the unamortized portion of
the
debt discount related to the debt which was converted.
At
December 31, 2005,
the November 2005 convertible debentures totaled $334,828, net of debt discount
of $134,008. The entire principal, net of debt discount, was recorded as
a
current liability.
In
conjunction with
the November 26, 2005 financing, the Company incurred debt issuance costs
consisting of cash of $128,082, 356,335 shares of common stock valued at
$345,645 and 1,000,000 warrants valued at $789,000. The warrants are exercisable
over 5 years, have an exercise price of $1.00, a fair market value of $0.79
and
were valued using the Black-Scholes option-pricing model. The total debt
issuance costs of $1,262,727 were recorded as an asset and amortized over
the
term of the debt. At December 31, 2005, $835,294 of the debt issuance costs
have
been amortized which includes $800,520 related to the debt that was converted
as
of December 31, 2005. The 356,335 shares of common stock were not issued
as of
December 31, 2005 and therefore have been recorded as an accrued liability
at
December 31, 2005.
In
May 2006, the
Company entered into a debt conversion agreement with one of the November
2005
accredited investors for $86,586 of its convertible debt which was converted
into 117,483 shares of common stock at $0.737 per share. In addition, accrued
interest expense of $3,078 due at the time of the debt conversion was paid
in
5,597 shares of common stock. In June 2006, the Company entered into a debt
conversion agreement with one of the November 2005 accredited investors for
$382,250 of convertible debt which was converted into 518,657 shares of common
stock at $0.737 per share. In addition, accrued interest expense of $15,800
due
at the time of the debt conversion was paid in 28,727 shares of common stock.
As
of December 31, 2006, all principal and accrued interest owed to
holders of the November 2005 convertible debentures had been converted. At
March
31, 2006, the Company recorded additional interest expense of $8,354 related
to
the beneficial conversion feature of the interest on the November 2005
convertible debt. At June 30, 2006, the Company recorded additional interest
expense of $8,093 related to the beneficial conversion feature of the interest
on the November 2005 convertible debt. In 2006 the remaining $417,886 of
debt
issuance costs have been amortized which includes $189,948 of the unamortized
portion of the deferred loan costs related to the converted debt at the time
of
conversion. In 2006 the remaining debt discount of $134,008 has been
amortized.
(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. During 2005, 52,000 of the warrants
were exercised and the remaining warrants expired on 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 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 term 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
4(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 received 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 repurchased the beneficial conversion feature
amount of $258,345 in 2004.
(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 was due together with interest on
July
28, 2007. This debt had a subordinated security interest in the assets of
the
Company. The Company issued a second secured convertible debenture on October
7,
2004 which had 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 was due together with interest on October 7, 2007 and
had
a subordinated security interest in the assets of the Company. The debentures
were 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
was
being amortized over the term of the debt which was three years.
In
conjunction with
the debt financing, the Company issued warrants to purchase 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 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 amortized over the
term
of the debt.
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
December 31, 2005,
there was no amount outstanding related to the Cornell debt.
(d)
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 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.
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”).
Interest
at the
greater of (i) the prime rate (adjust monthly), plus 4% and (ii) 8% is due
on a
quarterly basis. 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.
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.
The
Purchasers of the
$3,150,000 in Senior Convertible Debentures 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
30,
2010 depending on the particular Purchaser. Class B Warrants were exercisable
for a period through and including 175 days after an effective registration
of
the common stock underlying the warrants, which began June 20, 2005 and ended
December 12, 2005. The range of the per share exercise price of a Class A
Warrant is $0.93 to $0.99 and the range of the per share exercise price of
the
Class B Warrant was $0.8925 to $0.945.
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. 1,493,333 of the Class B Warrants
were
exercised in December, 2005 for proceeds of $1,122,481. The warrant holders
were
given an incentive to exercise their warrants due to the lowering of the
exercise price to $0.75. Interest expense of $236,147 was recorded to recognize
expense related to this conversion incentive. The remaining Class B Warrants
were forfeited in December, 2005 at the expiration of their exercise period.
The
$3,150,000
proceeds received in March and 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 $1,574,900 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 $1,228,244
was recorded for this beneficial conversion feature. The combined debt discount
of $2,803,144 is being amortized over the life of the debt using the effective
interest method.
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.
In
July 2005, the Company entered into a debt conversion agreement with two
of the
April accredited investors for an aggregate of $350,000 of convertible debt
which was converted into 466,666 shares of common stock at $0.75 per share.
In
September 2005, the Company entered into a debt conversion agreement with
one of
the March accredited investors for $400,000 of its convertible debt which
was
converted into 533,333 shares of common stock at $0.75 per share. In October
2005, the Company entered into a debt conversion agreement with two of the
March
accredited investors for an aggregate of $100,000 of convertible debt which
was
converted into 133,334 shares of common stock at $0.75 per share. In November
2005, the Company entered into a debt conversion agreement with three of
the
April accredited investors for an aggregate of $675,000 of convertible debt
which was converted into 900,000 shares of common stock at $0.75 per
share.
At
December 31, 2005,
$1,872,257 of the total debt discount had been amortized which included
$1,454,679 of the unamortized portion of the debt discount related to the
converted debt at the time of the debt conversions.
At
December 31, 2005,
the Senior Convertible Debentures totaled $544,113, net of debt discount
of
$930,887. Of this total, $221,401 was recorded as a current liability, net
of
debt discount of $884,848 and $322,712 was recorded as a long-term liability,
net of debt discount of $46,039.
In
conjunction with
the financing, the Company incurred debt issuance costs consisting of $387,500
in cash and 980,000 of warrants valued at $426,700. The warrants are exercisable
over 5 years, have exercise prices ranging from $0.98 - $1.23, fair market
values ranging from $0.42 - $0.44 and were valued using the Black-Scholes
option
pricing model. The total debt issuance costs of $814,200 were recorded as
an
asset and amortized over the term of the debt. At December 31, 2005, $532,541
of
the debt issuance costs have been amortized which includes $413,109 related
to
the debt that was converted as of December 31, 2005.
The
Company chose to
pay the quarterly interest due at June 30, 2005, September 30, 2005 and December
31, 2005 in common stock instead of cash. As a result, accrued interest at
June
30, 2005 of $78,904 was paid in 165,766 shares of common stock resulting
in
additional interest expense of $28,843. 159,780 shares were issued July 11,
2005
and the remaining 5,986 shares were issued November 7, 2005. The accrued
interest due September 30, 2005 of $72,985 was converted into 97,955 shares
of
common stock resulting in additional interest expense of $15,299. 66,667
of
these shares were issued on September 30, 2005 and the remaining 31,288 shares
were issued October 20, 2005. The interest due December 31, 2005 of $50,486
was
converted into 65,742 shares of common stock resulting in additional interest
expense of $10,922. The 65,742 shares were not issued as of December 31,
2005
and have been recorded in accrued liabilities at December 31, 2005. The shares
were issued January 9, 2006.
In
January 2006, the Company entered into a debt conversion agreement
with one of the March 2005 accredited investors for $250,000 of its convertible
debt which was converted into 333,333 shares of common stock at $0.75 per
share.
In March 2006, the Company entered into a total of three debt conversion
agreements with two of the March 2005 accredited investors for an aggregate
of
$500,000 of convertible debt which was converted into 666,667 shares of common
stock at $0.75 per share. In May 2006, the Company entered into a debt
conversion agreement with one of the March 2005 accredited investors for
$25,000
of its convertible debt which was converted into 33,333 shares of common
stock
at $0.75 per share. In September 2006, the Company entered into a debt
conversion agreement with one of the March 2005 accredited investors for
$112,500 of its convertible debt which was converted into 150,000 shares
of
common stock at $0.75 per share. In November 2006, the Company entered into
a
debt conversion agreement with one of the March 2005 accredited investors
for
$200,000 of its convertible debt which was converted into 266,666 shares
of
common stock at $0.75 per share. In December 2006, the Company entered into
a
debt conversion agreement with one of the March 2005 accredited investors
for
$20,000 of its convertible debt which was converted into 26,667 shares of
common
stock at $0.75 per share.
In
2006, $928,090 of the total debt discount has been amortized which
includes $386,451 of the unamortized portion of the debt discount related
to the
converted debt at the time of the debt conversions. In 2006, $287,493 of
the
deferred loan costs have been amortized which includes $112,256 of the
unamortized portion of the deferred loan costs related to the converted debt
at
the time of the debt conversions.
At
December 31, 2006, the March 2005 convertible debentures totaled
$364,703, net of debt discount of $2,797. The full amount is current at December
31, 2006.
The
Company chose to pay the quarterly interest due at March 31,
2006, June 30, 2006, September 30, 2006 and December 31, 2006 in common stock
instead of cash. As a result, accrued interest due March 31, 2006 of $33,274
was
converted into 35,939 shares of common stock resulting in additional interest
expense of $4,975. 7,656 of these shares were issued March 20, 2006 and the
remaining shares of 28,283 were issued March 31, 2006. The accrued interest
due
June 30, 2006 of $21,305 was converted into 24,674 shares of common stock
resulting in additional interest expense of $3,650. These shares were issued
June 30, 2006. The accrued interest due September 30, 2006 of $21,010 was
converted into 18,888 shares of common stock resulting in additional interest
expense of $2,167. These shares were issued September 29, 2006. The accrued
interest due December 31, 2006 of $15,086 was converted into 14,760 shares
of
common stock resulting in additional interest expense of $1,843. These shares
were issued December 29, 2006.
7.
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 as an additional $25,000. Interest expense was $16,525 at December
31,
2005.
In
December 2005, the
Company approved a request from the shareholder to exchange the total loan
amount of $174,000 plus accrued interest of $24,529 for 264,705 shares of
common
stock at $0.75 per share which were committed to be issued at December 31,
2005.
These shares were issued on January 3, 2006. In connection with this transaction
which was based on the same terms as the private placement conducted at the
same
time, the Company also issued warrants to the shareholder to purchase up
to
330,881 shares of common stock at an exercise price of $0.935 per share.
The
value of the stock
and warrants received by the shareholder was $311,000 greater than the face
value of the debt and accrued interest. The $311,000 was a loss on
extinguishment of debt in 2005.
8.
Income Taxes
Reconciliations
between the
statutory federal income tax rate and the Company’s effective rate were as
follow:
Years
Ended December 31,
|
2006
|
|
2005
|
|
|
Amount
|
%
|
|
Amount
|
%
|
Federal
statutory rate
|
$
(3,016,000)
|
(34.0)
|
|
$
(3,894,000)
|
(34.0)
|
|
Adjustment
to valuation allowance
|
2,832,000
|
31.9
|
|
3,412,000
|
29.8
|
|
Non-deductible
financing costs
|
184,000
|
2.1
|
|
475,000
|
4.1
|
|
Other
|
--
|
--
|
|
7,000
|
0.1
|
|
|
|
|
|
|
|
Actual
tax benefit
|
$ --
|
--
|
|
$
--
|
--
|
The
components of the Company’s deferred income taxes, pursuant to
SFAS No. 109, are summarized as follow:
December
31,
|
2006
|
2005
|
|
|
|
|
Deferred
tax assets
|
|
|
|
Net
operating loss carryforwards
|
$
5,794,000
|
$
4,126,000
|
|
Stock
compensation
|
633,000
|
--
|
|
Warrants
for services
|
1,472,000
|
1,169,000
|
Deferred
tax asset
|
7,899,000
|
5,295,000
|
|
|
|
|
Deferred
tax liability
- patent amortization |
(3,044,000) |
(3,272,000) |
Valuation
allowance
|
(4,855,000)
|
(2,023,000)
|
Net
deferred taxes
|
$
--
|
$
--
|
SFAS
No. 109 required
a valuation allowance against deferred tax assets if, based on the weight
of
available evidence, it is more likely than not that some or all of the deferred
tax assets may not be realized. The Company is in the development stage and
realization of the deferred tax assets is not considered more likely than
not.
As a result, the Company has recorded a valuation allowance for the
net deferred tax asset.
Since
inception of the
Company on January 17, 2002, the Company has generated tax net operating
losses
of approximately $17.0 million, expiring in 2022 through 2026. The tax loss
carryforwards of the Company may be subject to limitation by Section 382
of the
Internal Revenue Code with respect to the amount utilizable each year. This
limitation reduces the Company’s ability to utilize net operating loss
carryforwards. The amount of the limitation has not been quantified by the
Company. In addition, the Company 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.
9.
Subsequent Events
In
January 2007 the Company established the Provectus
Pharmaceuticals, Inc. Cash Balance Defined Benefit Plan and Trust (the “Plan”),
effective January 1, 2007, for the exclusive benefit of its four employees
and
their beneficiaries. The Plan was fully funded for 2007 in January totaling
$324,000 or $81,000 per employee. The Plan contributions vest equally over
six
years and the Plan will be funded at approximately the same level each year
in
accordance with the provisions of the Plan.
In
January and February 2007 the Company completed a private
placement transaction with 6 accredited investors pursuant to which the Company
sold a total of 265,000 shares of common stock at a purchase price of $1.00
per
share, for an aggregate purchase price of $265,000. The Company paid $29,150
and
issued 26,500 shares of common stock at a fair market value of $32,130 to
Chicago Investment Group of Illinois, L.L.C. as a placement agent for this
transaction. The cash costs have been off-set against the proceeds
received.
In
January and February 2007 the Company completed a private
placement transaction with 13 accredited investors pursuant to which the
Company
sold a total of 1,745,742 shares of common stock at a purchase price of $1.05
per share, for an aggregate purchase price of $1,833,029. The Company paid
$238,294 and is committed to issue 174,574 shares of common stock at a fair
market value of $200,760 to Network 1 Financial Securities, Inc. as placement
agent for this transaction. The cash costs have been off-set against the
proceeds received.
In
January 2007 the Company entered into a separate debt conversion
agreement with two of its March 2005 accredited investors for $245,833 of
convertible debt which was converted into 327,777 shares of common stock
at
$0.75 per share.
In
February 2007 the
Company entered into a separate debt conversion agreement with two of its
March
2005 accredited investors for $121,667 of convertible debt which was converted
into 162,223 shares of common stock at $0.75 per share. As of February 28,
2007
all principal and accrued interest owed to holders of the March 2005 convertible
debentures had been converted.
EXHIBIT
INDEX
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.
10.1* 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.
10.2* 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.
10.3* 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.
10.4* 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.
10.5* 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.
10.6* Executive
Employment Agreement by and between the Company
and H. Craig Dees, Ph.D, dated January 4, 2005.
10.7**
Executive Employment Agreement by and between the Company and
Eric Wachter, Ph.D, dated January 4, 2005
10.8* Executive
Employment Agreement by and between the
Company and Timothy C. Scott, Ph.D, dated January 4, 2005
10.9* Executive
Employment Agreement by and between the
Company and Peter Culpepper dated January 4, 2005
21.1 + List of Subsidiaries
23.1
+ Consent of Independent Registered Public Accounting
Firm
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.
32.1+
Certification Pursuant to 18 U.S.C. ss. 1350.
_____________________________________________
*
Management
Compensation Plan
+
Filed
herewith