United States Securities And Exchange Commission
Washington, DC 20549
--------------------------------------------------------------------------------
FORM 10-QSB
(Mark One)
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 2004
OR
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to _______________
Commission file number: 0-9410
Provectus Pharmaceuticals, Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 90-0031917
---------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7327 Oak Ridge Highway Suite A, Knoxville, TN 37931
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(Address of Principal Executive Offices) (Zip Code)
865/769-4011
(Issuer's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's stock, $0.001 par value
per share, as of August 13, 2004 was 15,361,042.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Part I
ITEM 1. FINANCIAL STATEMENTS
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31,
June 30, 2004 2003
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(Unaudited) (Audited)
Assets
Current Assets
Cash $ 109,693 $ 164,145
Stock subscription receivable 668,667 87,875
Deferred Loan Costs, net of amortization of $170,530 and $19,569 - 150,961
Inventory 67,930 72,578
Prepaid expenses and other current assets 20,567 26,227
Prepaid consulting expense 177,716 420,817
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Total Current Assets 1,044,573 922,603
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Equipment and Furnishings, less accumulated depreciation of
$337,269 and $244,760 29,302 121,415
Patents, net of amortization of $1,855,696 and $1,281,770 18,181,865 18,755,791
Other Assets 27,000 27,000
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$ 19,282,740 $ 19,826,809
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Liabilities and Stockholders' Deficit
Current Liabilities
Accounts payable - trade $ 80,034 $ 100,640
Accrued compensation 183,750 352,500
Accrued expenses 125,735 57,549
Accrued interest 222,695 100,021
Short-term convertible debt, net of debt discount of
$-0- and $442,623 333,333 57,377
Current maturities of long-term convertible debt, net of debt
discount of $25,405 and $57,052 1,000,553 968,907
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Total Current Liabilities 1,946,100 1,636,994
------------------------------------------------------------------------------------------------------------------
Loan From Stockholder 149,000 149,000
Stockholders' Equity
Common stock; par value $.001 per share; 100,000,000 shares
authorized; 14,111,002 and 10,867,509 shares issued and
outstanding, respectively 14,111 10,868
Paid-in capital 30,527,580 28,783,747
Deficit accumulated during the development stage (13,354,051) (10,753,800)
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TOTAL STOCKHOLDERS' EQUITY 17,187,640 18,040,815
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$ 19,282,740 $ 19,826,809
------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
2
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Three Six Six Cumulative
Months Ended Months Ended Months Ended Months Ended Through
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003 June 30, 2004
---------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Operating Income
Net OTC Product Revenue $ 301 - $ 941 $ 941
Net Medical Device Revenue - - 13,125 - 13,125
Operating Expenses
Research and development $ 246,185 $ 80,503 $ 434,139 $ 236,286 $ 1,209,777
General and administrative 332,540 435,425 816,218 947,342 9,321,414
Amortization 286,963 286,964 573,926 573,927 1,855,695
---------------------------------------------------------------------------------------------------------------------------------
Total operating loss (865,387) (802,892) (1,810,217) (1,757,555) (12,372,820)
Gain on sale of fixed assets - 55,000 - 55,000 55,000
Loss on extinguishment of debt (100,519) - (100,519) - (100,519)
Net interest (expense) income (474,789) (38,230) (689,515) (76,251) (935,712)
---------------------------------------------------------------------------------------------------------------------------------
Net Loss Applicable to Common
Stockholders $ (1,440,695) $ (786,122) $ (2,600,251) $ (1,778,806) $ (13,354,051)
---------------------------------------------------------------------------------------------------------------------------------
Basic and Diluted Loss Per
Common Share (0.11) (0.08) (0.20) (0.19)
---------------------------------------------------------------------------------------------------------------------------------
Weighted Average Number of
Common Shares
Outstanding -
Basic and Diluted 13,714,234 9,487,689 12,977,703 9,470,033
---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
3
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
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Common Stock
---------------------------------
Number Paid-in Accumulated
of Shares Par Value Capital Deficit Total
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Balance, at January 17, 2002 - $ - $ - $ - $ -
Issuance to founding shareholders 6,000,000 6,000 (6,000) - -
Sale of stock 50,000 50 24,950 - 25,000
Issuance of stock to employees 510,000 510 931,490 - 932,000
Issuance of stock for services 120,000 120 359,880 - 360,000
Net loss for the period from January 17, 2002 (inception)
to April 23, 2002 (date of reverse merger) - - - (1,316,198) (1,316,198)
--------- --------- ----------- ----------- ----------
Balance, at April 23, 2002 6,680,000 6,680 1,310,320 (1,316,198) 802
Shares issued in reverse merger 265,763 266 (3,911) - (3,645)
Issuance of stock for services 1,900,000 1,900 5,142,100 - 5,144,000
Purchase and retirement of stock (400,000) (400) (47,600) - (48,000)
Stock issued for acquisition of Valley Pharmaceuticals 500,007 500 20,547,935 - 20,548,435
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 - - - (5,805,556) (5,805,556)
--------- -------- ---------- ----------- -----------
Balance, at December 31, 2002 9,423,689 9,424 27,102,406 (7,121,754) 19,990,076
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
Issuance of convertible debt with warrants - - 601,000 - 601,000
Net loss for the year ended December 31, 2003 - - - (3,632,046) (3,632,046)
---------- -------- ----------- ------------ -------------
Balance, at December 31, 2003 $ 10,867,509 $ 10,868 $ 28,783,747 $(10,753,800) $ 18,040,815
Issuance of stock for services 351,606 352 11,148 - 11,500
Issuance of warrants for services - - 18,800 - 18,800
Exercise of warrants 10,000 10 4,990 - 5,000
Stock to be issued for services - - 62,500 - 62,500
Employee compensation from stock options - - 7,806 - 7,806
Issuance of stock pursuant to Regulation S 2,437,443 2,437 790,700 - 793,137
Issuance of stock pursuant to Regulation D 444,444 444 847,889 - 848,334
Net loss for the six months ended
June 30, 2004 - - - (2,600,251) (2,600,251)
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Balance, at June 30, 2004 $ 14,111,002 $ 14,111 $30,527,580 $ (13,354,051) $17,187,640
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See accompanying notes to financial statements.
4
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONSOLICATED STATEMENTS OF CASH FLOWS
Cumulative
Accounts from
Six Six January 17,
Months Ended Months Ended 2002
June 30, 2004 June 30, 2003 (Inception)
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(Unaudited) (Unaudited) (Unaudited)
Cash Flows From Operating Activities
Net loss $ (2,600,251) $ (1,778,806) $ (13,354,051)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 92,508 137,861 360,269
Amortization of patents 573,926 573,927 1,855,695
Amortization of original issue discount 474,269 31,313 601,181
Amortization of prepaid consulting expense 305,601 305,601
Amortization of deferred loan costs 150,961 - 170,530
Compensation through issuance of stock
options 7,806 27,506 42,465
Compensation through issuance of
stock - - 932,000
Issuance of stock for services 11,500 22,800 5,660,150
Issuance of warrants for services 18,800 57,177 120,112
Gain on sale of fixed asset - (55,000) (55,000)
(Increase) decrease in assets
Prepaid expenses 5,660 14,605 (20,567)
Inventory 4,648 (72,135) (67,930)
Increase (decrease) in liabilities
Accounts payable (20,607) 130,065 76,388
Accrued expenses (97,890) 25,389 412,180
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Net cash used in operating activities (1,073,069) (885,298) (2,960,977)
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Cash Flows From Investing Activities
Proceeds from sale of fixed asset - 180,000 180,000
Capital expenditures (395) (3,301) (3,696)
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Net cash (used in) provided by investing activities (395) 176,699 176,304
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Cash Flows From Financing Activities
Proceeds from loans from stockholder - - 149,000
Proceeds from convertible debt - 25,959 1,525,959
Proceeds from sale of common stock 1,180,679 - 1,498,151
Proceeds from exercise of warrants 5,000 - 5,453
Cash paid for deferred loan costs - - (69,530)
Payment on convertible debt (166,667) - (166,667)
Purchase and retirement of common stock - - (48,000)
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Net cash provided by financing activities 1,019,012 25,959 2,894,366
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See accompanying notes to financial statements.
5
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
Cumulative
Accounts from
Six Six January 17,
Months Ended Months Ended 2002
June 30, 2004 June 30, 2003 (Inception)
--------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
NET CHANGE IN CASH $ (54,452) $ (682,640) $ 109,693
Cash, at beginning of period $ 164,145 $ 717,833 $ -
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Cash, at end of period $ 109,693 $ 35,193 $ 109,693
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Supplemental Disclosure of Noncash Investing
and Financing Activities
June 30, 2004
Issuance of stock for services of $11,500,
issuance of warrants for services of
$18,800, and commitment to issue stock
for prepaid services of $62,500
Accrual of $119,999 for stock issuance
costs off-set against gross proceeds
from sale of common stock
Stock subscription receivable recorded of
$668,667
June 30, 2003
Warrants issued to consultants for prepaid
services of $84,174
See accompanying notes to financial statements.
6
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information pursuant to Regulation S-B. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and six months ended June 30, 2004 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2004.
2. GOING CONCERN
At December 31, 2003, there was doubt regarding the Company's ability to
continue as a going concern considering the lack of working capital required to
develop its products and develop sales and distribution channels for its
products. The accompanying financial statements as of December 31, 2003 have
been prepared assuming the Company will continue as a going concern. The
December 31, 2003 financial statements do not include any adjustments to reflect
the possible future effects on the recoverbility and classification of assets
and amounts and classifications of liabilities that might result from any
outcome different from this expectation.
At June 30, 2004, as a result of the subsequent financing transaction
described in Note 8, there is no longer doubt regarding the Company's ability to
continue as a going concern.
3. RECAPITALIZATION AND MERGER
Provectus Pharmaceuticals, Inc., formerly known as "Provectus
Pharmaceutical, Inc." and "SPM Group, Inc.," was incorporated under Colorado law
on May 1, 1978. SPM Group ceased operations in 1991, and became a
development-stage company effective January 1, 1992, with the new corporate
purpose of seeking out acquisitions of properties, businesses, or merger
candidates, without limitation as to the nature of the business operations or
geographic location of the acquisition candidate.
On April 1, 2002, SPM Group changed its name to "Provectus Pharmaceutical,
Inc." and reincorporated in Nevada in preparation for a transaction with
Provectus Pharmaceuticals, Inc., a privately-held Tennessee corporation ("PPI").
On April 23, 2002, an Agreement and Plan or reorganization between Provectus
Pharmaceutical and PPI was approved by the written consent of a majority of the
outstanding shares of Provectus Pharmaceutical. As a result, Provectus
Pharmaceuticals, Inc. issued 6,680,000 shares of common stock in exchange for
all of the issued and outstanding shares of PPI. As part of the acquisition,
Provectus Pharmaceutical changed its name to "Provectus Pharmaceuticals, Inc."
and PPI became a wholly owned subsidiary of Provectus. This transaction was
recorded as a recapitalization of PPI.
On November 19, 2002, the Company acquired Valley Pharmaceuticals, Inc., a
privately-held Tennessee corporation formerly known as Photogen, Inc., by
merging PPI with and into Valley and naming the surviving corporation "Xantech
Pharmaceuticals, Inc." Photogen, Inc. was separated from Photogen Technologies,
Inc. in a non-pro rata split-off to some of its shareholders. The assets of
Photogen, Inc. consisted primarily of the equipment and intangibles related to
its therapeutic activity and were recorded at their fair value. The majority
shareholders of Valley were also the majority shareholders of Provectus. Valley
had no revenues prior to the transaction with the Company. By acquiring Valley,
the Company acquired its intellectual property, including issued U.S. patents
and patentable inventions.
7
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
4. BASIC AND DILUTED LOSS PER COMMON SHARE
Basic and diluted loss per common share is computed based on the weighted
average number of common shares outstanding. Loss per share excludes the impact
of outstanding options, warrants, and convertible debt as they are antidilutive.
Potential common shares excluded from the calculation at June 30, 2004 are
2,308,333 warrants, 1,725,000 options and 1,624,802 shares issuable upon
conversion of convertible debt and interest. Additionally, the Company is
committed to issue 20,000 warrants. Included in the weighted average number of
common shares outstanding are 1,065,520 shares committed to be issued but not
outstanding at June 30, 2004.
5. EQUITY TRANSACTIONS
(a) At December 31, 2003, the Company was committed to issue 341,606 shares
to consultants in exchange for services rendered. In January 2004, all of these
shares were issued. In January 2004, the Company also issued 10,000 shares to a
consultant in exchange for services rendered. Consulting costs charged to
operations were $11,500. In March 2004, the Company committed to issue 36,764
shares to consultants in exchange for services. Consulting costs charged to
operations were $62,500 of which $25,000 remains in prepaid consulting expense
at June 30, 2004 as it represents payments for services to be provided in the
future. The shares are fully vested and non-forfeitable. In May 2004, the
Company issued 20,000 warrants to consultants in exchange for services.
Consulting costs charged to operations for these warrants were $18,800.
(b) In 2004, the Company sold 2,437,443 shares of restricted common stok
under this offering of which 1,867,490 shares were issued in the first quarter
2004 and 569,953 were issued in the second quarter 2004. Shares were sold during
2004 at an average gross price of $0.98 per share with net proceeds of $793,137.
Costs related to the placement agent for proceeds received in 2004 of $1,588,302
have been off-set against gross proceeds of $2,381,439. The transaction is a
Regulations S offering to foreign investors as defined by Regulation S of the
Securities Act. The restricted shares cannot be traded for 12 months. After the
first 12 months, sales of the shares are subject to restriction under rule 144
for an additional year.
(c) On June 25, 2004, the Company entered into an agreement to sell
1,333,333 shares of common stock at a purchase price of $.75 per share for an
aggregate purchase price of $1,000,000. Payments are to be received in three
equal installments on June 25, 2004, July 16, 2004 and August 9, 2004. As of
June 30, 2004, the first installment was received and 444,444 shares of stock
were issued. A stock subscription receivable of $666,667 was recorded as of June
30, 2004 for the last two payments, as all the cash was received prior to the
filing of the 10-QSB. Stock issuance costs of $151,666 have been off-set against
the proceeds received of which $119,900 was accrued at June 30, 2004 as it
relates to the installments to be received after June 30, 2004. Stock issuance
costs consists of $65,000 in cash and 66,667 shares of common stock with a fair
market value of $86,666. In conjunction with the sale of the common stock, the
Company issued 1,333,333 warrants with an exercise price of $1.00 and a
termination date of three years from the installment payment dates. In addition,
the Company has given the investors an option to purchase 1,333,333 shares of
additional stock including the attachment of warrants under the same terms as
the original agreement. This option expires six months after the last
installment date.
In conjunction with the June 25, 2004 transaction, the Company entered into
a redemption agreement for its $500,000 short-term convertible debt. Payments on
the convertible debt are to be made in three equal installments which
corresponded to the common stock issuance dates noted above. Payment of the debt
is contingent on receiving the payments from the sale of the common stock. As
all installment payments for the sale of common stock were received prior to the
filing of the 10-QSB, the full redemption of the convertible debt has been
recorded as of June 30, 2004. As a result, the debt discount previously recorded
on the convertible debt and the deferred loan costs were fully amortized and
recorded as additional interest expense of $172,378 as of June 30, 2004. In
addition to principal payments, the redemption payments include accrued interest
and a premium payment of $100,519. This premium payment has been recorded as
loss on extinguishment of debt as of June 30, 2004. As of June 30, 2004,
principal payments of $166,667 were made and an accrual of $67,013 has been
recorded for the remaining premium paid subsequent to June 30, 2004.
8
6. STOCK-BASED COMPENSATION
On March 1, 2004, the Company issued 1,200,000 stock options to employees.
The options vest over 3 years with 225,000 options vesting on the date of grant.
The exercise price is the fair market price on the date of issuance and all
options are outstanding at June 30, 2004.
On May 27, 2004, the Company issued 100,000 stock options to the Board of
Directors. The options vested immediately on the date of grant. The exercise
price is the fair market price on the date of issuance, and all options were
outstanding at June 30, 2004. On June 28, 2004, the Company issued 100,000 stock
options to an employee. The options vest over four years with 25,000 options
vesting on the date of grant. The exercise price is the fair market price on the
date of issuance, and all options were outstanding at June 30, 2004.
For stock options granted to the Board of Directors and the employee during
the second quarter of 2004, the Company has estimated the fair value of each
option granted using the Black-Scholes pricing model with the following
assumptions:
2004
--------------------------------------------------------------------------------
Weighted average fair value per options granted - $ 0.95
Board of Directors
Weighted average fair value per options granted - $ 1.25
employee
Significant assumptions (weighted average)
Risk-free interest rate at grant date 2.0 %
Expected stock price volatility 150 %
Expected option life (years) 10
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (SFAS No. 123), but applies the intrinsic value method where
compensation expense, if any, is recorded as the difference between the exercise
price and the market price, as set forth in Accounting Principles Board Opinion
No. 25 for stock options granted to employees and directors. In 2003, the
Company issued stock options to employees in which the exercise price was less
than the market price on the date of grant. These options vest over three years
and accordingly, $7,806 of expense was recorded for the six months ended June
30, 2004. If the Company had elected to recognize compensation expense based on
the fair value at the grant dates, consistent with the method prescribed by SFAS
No. 123, net loss per share would have been changed to the pro forma amount
indicated below:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
-----------------------------------------------------------------------------------------------------------------------
Net loss, as reported $ (1,440,695) $ (786,122) $ (2,600,251) $ (1,778,806)
Add stock-based employee compensation
expense included in reported net loss 3,903 27,506 7,806 27,506
Less total stock-based employee
compensation expense determined under
the fair value based method for all
awards (217,187) (57,200) (500,625) (57,200)
-----------------------------------------------------------------------------------------------------------------------
Pro forma net loss $ (1,653,979) $ (815,816) $ (3,093,070) $ (1,808,500)
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Basic and diluted loss per common
share, as reported (0.11) (0.08) (0.20) $ (0.19)
Basic and diluted loss per common
share, pro forma (0.12) (0.08) (0.24) $ (0.19)
8
The following table summarizes the options granted, exercised and outstanding as
of June 30, 2004.
Weighted
Exercise Average
Price Per Exercise
Shares Share Price
----------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2003 356,250 $ 0.26 - $ 0.60 $ 0.40
Granted 1,400,000 $ 0.95 - $ 1.25 $ 1.10
Exercised - - - -
Forfeited (31,250) $ 0.26 - $ 0.32 $ 0.30
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Outstanding at June 30, 2004 1,725,000 $ 0.32 - $ 1.25 $ 0.97
----------------------------------------------------------------------------------------------------------------------
Options exercisable at
June 30, 2004 562,500 $ 0.32 - $ 1.10 $ 0.84
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9
PROVECTUS PHARMACEUTICALS, INC.
(A Development-Stage Company)
7. REVENUE RECOGNITION
The Company recognizes revenue when product is shipped. When advance
payments are received, these payments are recorded as deferred revenue and
recognized when the product is shipped.
8. SUBSEQUENT EVENTS
(a) On August 9, 2004 the Company completed the redemption in full of its
outstanding long-term convertible debt.
(b) Pursuant to a Standby Equity Distribution Agreement ("SEDA") dated July
28, 2004 between the Company and Cornell Capital Partners, L.P. ("Cornell"), the
Company may, at its discretion, issue shares of common stock to Cornell at any
time over the next two years. The facility is subject to having in effect a
registration statement covering the shares. 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 240,000 shares of common stock to Cornell as commitment shares.
(c) Pursuant to a Securities Purchase Agreement between the Company and
Cornell dated July 28, 2004 (the "Debenture SPA"), the Company issued a Secured
Convertible Debenture (the "Debenture") to Cornell at an original principal
amount of $375,000. The Debenture bears interest at 8% per annum. The Debenture
is due and payable in full on July 28, 2007. At the Company's option, the entire
principal amount and all accrued interest may be paid in either cash or in
shares of common stock at a price per share defined in the Debenture SPA.
Pursuant to the Debenture SPA, the Company has also agreed to issue a second
secured convertible debenture on the same terms as the Debenture, on the date
that the Company files a registration statement for the shares underlying both
debentures.
10
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion is intended to assist in the understanding and
assessment of significant changes and trends related to our results of
operations and our financial condition together with our consolidated
subsidiaries. This discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto included elsewhere in
this Quarterly Report on Form 10-QSB. Historical results and percentage
relationships set forth in the statement of operations, including trends which
might appear, are not necessarily indicative of future operations.
CAPITAL STRUCTURE
Our ability to continue as a going concern has become reasonably assured
due to our financing in June and July 2004. However, our ongoing operations
continue to be dependent upon our ability to raise capital.
We plan to implement our integrated business plan, including execution of
the next phases in clinical development of our pharmaceutical products and full
resumption of research programs for new research initiatives.
We intend to proceed as rapidly as possible with the development of OTC
products that can be sold with a minimum of regulatory compliance and with the
further development of revenue sources through licensing of our existing
intellectual property portfolio. Although we believe that there is a reasonable
basis for our expectation that we will become profitable due to revenues from
OTC product sales, we cannot assure you that we will be able to achieve, or
maintain, a level of profitability sufficient to meet our operating expenses.
Our current plans include continuing to operate with our four employees
during the immediate future, but we anticipate adding some part-time employees
during the next year. Our current plans also include minimal purchases of new
property, plant and equipment, and significantly increased research and
development.
PLAN OF OPERATION
With the reorganization of Provectus and PPI and the acquisition and
integration into the company of Valley and Pure-ific, we believe we have
obtained a unique combination of OTC products and core intellectual properties.
This combination represents the foundation for an operating company that we
believe will provide both profitability and long-term growth. In 2004, through
careful control of expenditures, increasing sales of OTC products, and issuance
of debt and equity, we plan to build on that foundation to increase shareholder
value.
In the short term, we intend to develop our business by marketing,
manufacturing, and distributing our existing OTC products, principally GloveAid
and Pure-ific. In the longer term, we expect to continue the process of
developing, testing and obtaining the approval of the U. S. Food and Drug
Administration of prescription drugs and medical devices. Additionally, we
intend to restart our research programs that will identify additional conditions
that our intellectual properties may be used to treat and additional treatments
for those and other conditions.
We are in the planning phase for the major research and development
projects, and therefore do not have estimated completion dates, completion costs
and capital requirements for these projects. The reason we do not have this
information available is because we have not completed our planning process.
Since there is no defined schedule for completing these development projects,
there are no defined consequences if they are not completed timely.
CASH FLOW
As of August 10, 2004, we held approximately $250,000 in cash. At our
current cash expenditure rate, this amount in addition to proceeds expected from
our July 2004 financing will be sufficient to meet our needs. We already have
begun to increase our expenditure rate by accelerating some of our research
programs for new research initiatives; in addition, we are seeking to improve
our cash flow by increasing sales of OTC products. However, we cannot assure you
that we will be successful in increasing sales of OTC products. Moreover, even
if we are successful in improving our current cash flow position, we nonetheless
will require additional funds to meet our long-term needs. We anticipate these
funds will come from the proceeds of private placements or public offerings of
debt or equity securities.
11
CAPITAL RESOURCES
As noted above, our present cash flow is currently sufficient to meet our
short-term operating needs for initial production and distribution of OTC
products in order to achieve meaningful sales volumes. Excess cash will be used
to finance the next phases in clinical development of our pharmaceutical
products and resumption of our currently suspended research programs. We
anticipate that the majority of the funds for our operating and development
needs in 2004 will come from the proceeds of private placements or public
offerings of debt or equity securities. While we believe that we have a
reasonable basis for our expectation that we will be able to raise additional
funds, we cannot assure you that we will be able to complete additional
financing in a timely manner. In addition, any such financing may result in
significant dilution to shareholders. For further information on funding
sources, please see Notes 5(c) and 8 of the notes to our financial statements
included in this report.
MARKET OUTLOOK
Our products are divided into three classes:
o OTC products addressing the skincare markets;
o Prescription pharmaceuticals addressing the dermatology and
oncology markets; and
o Medical devices
Our estimates of the size of the markets for each of these three product
classes are set forth in the following table:
Approximate Annual Value
Product Area of Sales in U.S. Market
------------ ------------------------
(millions)
OTC Products
Personal hygiene.................................. $ 100
Disposable glove care............................. 100
Acne (all grades)................................. 1,000
Prescription Pharmaceuticals
Psoriasis......................................... 1,500
Liver, breast and prostate cancer................. 1,000
Medical Devices
Medical device systems............................ 250
Our estimates of market size are based on relevant technical and scientific
literature, published market analyses, and analysis of publicly-available sales
data for products currently directed at these markets described below.
(1) Our estimates of market size are based on relevant technical and
scientific literature, published market analyses, and analysis of
publicly-available sales data for products currently directed at these markets.
(2) Company Profile Report: GOJO Industries, Inc., D&B, April 22, 2004 and
GOJO Company Facts from GOJO Industries website, April 22, 2004.
(3) "Anxiety Spreads Love of Gloves," USA Today, February 28, 2002; and
"Kimberly-Clark Completes Acquisition of Safeskin Corporation," company press
release dated February 8, 2000.
12
(4) Abstract in: Berson et al., "Current concepts in the treatment of acne:
report from a clinical roundtable," Cutis. 72 (2003) 5-13; and Figure 1 in: "US
Prescription Dermatology Pharms - Anti-Acne Mkt," Frost & Sullivan, October 31,
1996.
(5) Zanolli, in Principles and Practice of Dermatology, 1996, p. 341; C.
Camisa, Handbook of Psoriasis, 1998, p. 5; and Ho et al., Goldman Sachs Global
Equity Research, "Healthcare: Biotechnology, Industry Overview," January 8,
2004, p. 56.
(6) Cancer Facts & Figures 2004, American Cancer Society, p. 4; Ho et al.,
Goldman Sachs Global Equity Research, "Genentech, Inc., Analyst Day Handbook,"
March 10, 2004, pp. 3, 20; Murphy et al., Goldman Sachs Global Equity Research,
"Novartis, R&D Pipeline Analysis," September 8, 2003, p. 39; Ho et al., Goldman
Sachs Global Equity Research, "Genentech, Inc., Analyst Day Handbook," March 10,
2004, p. 15; and Form 10-K, Bristol-Meyers Squibb, March 15, 2004, p. 5.
(7) Medical Laser Report, Vol. 14, No. 1, January 2000, p. 1; "Skin
Rejuvenation" in Form 10-K, Candela Corporation, September 26, 2003, p. 7; and
Laser Hair Removal Market Study, Medial Insight, Inc., May 2000, p. 24.
Skincare
We are developing OTC products for three areas in the skincare market:
1. personal hygiene products;
2. hand care products for workers who use disposable gloves; and
3. products for treatment of acne.
In the future, we expect to develop products for additional areas in the
skincare market, including treatments for psoriasis, eczema, and various fungal
infections such as dandruff and athlete's foot.
Personal Hygiene. Our Pure-ific brand of OTC products includes a number of
topical antibacterial products that address the personal hygiene market,
including a hand sanitizer that immediately kills germs on skin and prevents
regrowth for six hours. We believe that annual retail sales in the United States
of hand sanitizers are approximately $100 million; this figure excludes sales of
antibacterial sprays such as Lysol(R), which we estimate at more than $1.2
billion in annual U.S. sales. We anticipate extending our Pure-ific brand to
include additional products that leverage technologies utilized in our other
skincare products.
Disposable Glove Care. We estimate that annual wholesale sales of
disposable gloves in the U.S. are over $1.2 billion, including $530 million in
sales to the acute care or hospital market, $560 million in sales to the medical
laboratory and non-hospital market, and $100 million in sales to the dental
market. Use of gloves for protection in other areas, including airport security,
food preparation, sanitation, blood banks, research facilities, mail handling,
police and fire personnel, is rapidly growing as concerns over possible exposure
to biological or other hazards increase. We further anticipate that consumers
will spend comparable amounts on hand care products as on the gloves themselves.
Acne. Acne affects an estimated 17 million people in the U.S. at any given
time. 85% of all people aged 12 to 25 will experience acne problems, while 59%
of women aged 25 to 39 suffer from this affliction. 70% percent of adult acne
sufferers, and an even a higher fraction of teenagers, rely on self-medication
to treat their acne. OTC products for treatment of mild- to moderate-grade acne
generally are sold through department stores, supermarkets, and drug stores;
combined sales of these products are believed to have exceeded $800 million in
the year 2000 and were expected to increase by approximately 10% per year. In
addition to these OTC products, Frost & Sullivan have estimated the U.S.
prescription acne care market at $1.3 billion, with over 7.7 million visits to
physicians in 2001 for treatment of severe acne.
Other Skincare. We anticipate that the formulations of our OTC products and
prescription drugs can be used to treat other conditions of the skin, including
psoriasis, eczema, and fungal infections such as dandruff and athlete's foot.
There are approximately 7 million psoriasis patients in the U.S., with between
160,000 and 250,000
13
new cases diagnosed every year. In the U.S., the total cost of psoriasis
treatment was $2.9 billion in 1995. The numbers are similar for eczema and
fungal infections. We believe these represent extremely large future
opportunities for our skincare products.
Prescription Pharmaceuticals
We are developing prescription drugs for the treatment of certain severe
dermatologic conditions such as psoriasis, and for the treatment of serious
cancers, including those of the liver, breast, and prostate.
Acute Psoriasis. Psoriasis is a chronic skin disease affecting
approximately 5 million Americans, with over 150,000 new cases diagnosed
annually. The cause of psoriasis is unknown and there is no cure. Thus, patients
typically undergo prolonged care over a period of years to decades.
Approximately 2.5 million psoriasis patients are treated annually by U.S.
physicians (primarily dermatologists), comprising an estimated annual
expenditure of $1.5 billion for treatment in the mid-1990s. More recent
estimates project a $1-2 billion market opportunity for new therapies divided
among several multi-hundred-million dollar products.
Liver Cancer. Hepatocellular carcinoma, or HCC, accounts for approximately
90% of all liver tumors and is the most common solid-organ tumor worldwide,
causing over 1 million deaths annually. HCC is associated with chronic liver
injury from viral hepatitis (hepatitis B and C), and has attained epidemic
proportions among men aged 25 to 34 in eastern Asia, tropical Africa, and
southern Italy. Although currently of relatively low incidence in the U.S. and
Europe, the rapid rise in hepatitis infection in these regions signifies that
this may soon change. In contrast, the primary form of liver cancer in the U.S.
currently is metastatic colorectal carcinoma (155,000 new cases and 60,000
deaths annually, with a 6% five-year survival rate). The current standard of
care for these forms of liver cancer is ablative therapy (via localized ethanol
injection, cryosurgery, or radiofrequency ablation). A combined five-year
survival rate of 33% for these therapies demonstrates the pressing need for new
therapeutic approaches in a worldwide market estimated at over $500 million.
Breast Cancer. The American Cancer Society estimates that approximately
205,000 new cases of invasive breast cancer, and over 54,000 new cases of in
situ breast cancer, occurred in the U.S. in 2002, leading to approximately
40,000 deaths. Current treatments (lumpectomy, mastectomy, removal of regional
lymph nodes, radiation therapy, chemotherapy, and hormone therapy) are expensive
and associated with unacceptable side effects. While five-year survival rates
are excellent for localized tumors (96%), this rate drops to 21% once distant
metastasis has occurred. This illustrates that surgical excision and standard
adjuvant treatments (such as chemotherapy and radiation) are ineffective at
eliminating metastatic cells that have migrated from the primary treatment site.
New, minimally invasive treatment modalities for breast cancer may have broad
applicability to this therapeutic market estimated at well over $1 billion.
Prostate Cancer. The American Cancer Society estimates that approximately
190,000 U.S. men are afflicted annually with cancer of the prostate, 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 new, minimally-invasive modalities - such as direct injection of our
prescription drug Provecta into prostate tumors - may have broad applicability
to this therapeutic market as an adjuvant or primary form of therapy, providing
an entry into a therapeutic market estimated at well over $500 million.
Medical Device Systems
This market area comprises two sectors: cosmetic treatments, such as
non-ablative wrinkle reduction, elimination of spider veins and other cosmetic
blemishes, and laser hair reduction; and therapeutic uses, including activation
of certain of our light-activated drugs. Additional areas include non-surgical
destruction of skin cancers and removal of unwanted moles and other
hyperpigmented features. The U.S. medical laser market exceeded $1.6 billion in
2000, while the market for wrinkle reduction and hair reduction systems alone is
currently in excess of $100 million annually. We believe that we can develop new
markets for laser devices, significantly in addition to the current market for
these devices, as a result of the development of therapies consisting of
photoactivation of the our prescription drug products.
14
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB contains forward-looking statements
regarding, among other things, our anticipated financial and operating results.
Forward-looking statements reflect our management's current assumptions,
beliefs, and expectations. Words such as "anticipate," "believe, "estimate,"
"expect," "intend," "plan," and similar expressions are intended to identify
forward-looking statements. While we believe that the expectations reflected in
our forward-looking statements are reasonable, we can give no assurance that
such expectations will prove correct. Forward-looking statements are subject to
risks and uncertainties that could cause our actual results to differ materially
from the future results, performance, or achievements expressed in or implied by
any forward-looking statement we make. Some of the relevant risks and
uncertainties that could cause our actual performance to differ materially from
the forward-looking statements contained in this report are discussed under the
heading "Risk Factors" and elsewhere in our Annual Report on Form 10-KSB for the
year ended December 31, 2003. We caution investors that these discussions of
important risks and uncertainties are not exclusive, and our business may be
subject to other risks and uncertainties which are not detailed there.
Investors are cautioned not to place undue reliance on our forward-looking
statements. We make forward-looking statements as of the date on which this
Quarterly Report on Form 10-QSB is filed with the SEC, and we assume no
obligation to update the forward-looking statements after the date hereof
whether as a result of new information or events, changed circumstances, or
otherwise, except as required by law.
Item 3. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. Our chief executive
officer and chief financial officer have evaluated the effectiveness
of the design and operation of our "disclosure controls and
procedures" (as that term is defined in Rule 13a-14(c) under the
Exchange Act) as of June 30, 2004, the end of the fiscal quarter
covered by this Quarterly Report on Form 10-QSB. Based on that
evaluation, the chief executive officer and chief financial officer
have concluded that our disclosure controls and procedures are
effective to ensure that material information relating to the Company
and the Company's consolidated subsidiaries is made known to such
officers by others within these entities, particularly during the
period this Quarterly Report on Form 10-QSB was prepared, in order to
allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls. There has been no change in our internal
control over financial reporting that occurred during the fiscal
quarter covered by this Quarterly Report on Form 10-QSB that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
15
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company was not involved in any legal proceedings during the fiscal
quarter covered by this Quarterly Report of Form 10-QSB.
Item 2. Changes in Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
In December 2003, the Company commenced an offering for the sale of
restricted common stock. In the second quarter 2004, the Company sold 245,462
shares of restricted common stock under this offering at an average gross price
of $1.09 per share and received net proceeds of $90,360. The Company has also
recorded a stock subscription receivable of $2,000 for stock subscriptions prior
to June 30, 2004 for which payment was received subsequent to June 30, 2004. The
Company has engaged a placement agent to assist in the offering. Costs related
to the placement agent for proceeds received in the second quarter 2004 of
$178,047 have been off-set against the gross proceeds of $268,407 and therefore
are reflected as a direct reduction of equity at June 30, 2004. 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 restriction under rule
144 for an additional year. We have engaged a placement agent to assist us in
the offering.
Recent Sales of Unregistered Securities.
Pursuant to a Securities Purchase Agreement between us and A.I. International
Corporate Holdings, Ltd. ("A.I."), American Equity Consulting Services, Inc.
("American Equity") and Castlerigg Master Investments, Ltd. ("Castlerigg") dated
June 25, 2004 (the "Common Stock SPA"), we have issued 1,333,333 shares of
common stock at a purchase price of $.75 per share, for an aggregate purchase
price of $1 million. In addition, we have issued warrants on the following
terms:
Investor Number of Shares Exercise Price Issue Date Termination Date
-------- ---------------- -------------- ---------- ----------------
A.I. 222,222 $1.00 June 25, 2004 June 25, 2009
Castlerigg 222,222 $1.00 June 25, 2004 June 25, 2009
A.I. 148,148 $1.00 July 16, 2004 July 16, 2009
Castlerigg 148,148 $1.00 July 16, 2004 July 16, 2009
Castlerigg 148,148 $1.00 August 5, 2004 August 5, 2009
Castlerigg 444,444 $1.00 August 9, 2004 August 9, 2009
A.I. and Castlerigg have an option to purchase an additional 1,333,333 shares of
common stock on the same terms and conditions described above, including the
attachment of warrants. We have paid $50,000 and we will issue 66,667 shares of
restricted common stock to Baker Consulting, Inc. as compensation for its broker
services. We believe that this offering was exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act") by
reason of Section 4(2) of the Securities Act, based upon the fact that the offer
and sale of the securities was made to a limited number of purchasers in a
transaction not involving any general solicitation or general advertising.
16
Pursuant to a Standby Equity Distribution Agreement ("SEDA") dated July 28, 2004
between us and Cornell Capital Partners, L.P. ("Cornell"), we may, at our
discretion, issue shares of common stock to Cornell at any time over the next
two years. The facility is subject to having in effect a registration statement
covering the shares. The maximum aggregate amount of the equity placements
pursuant to the SEDA is $20 million, and we may draw down up to $1 million per
month. Pursuant to the SEDA, on July 28, 2004, we issued 240,000 shares of
common stock to Cornell as commitment shares. In addition, we issued 10,000
shares of common stock to Newbridge Securities Corporation ("Newbridge") as
compensation for its services as placement agent. We also paid $10,000 in
structuring fees to Cornell. We believe that this offering was exempt from the
registration requirements of the Securities Act by reason of Rule 506 of
Regulation D and Section 4(2) of the Securities Act, based upon the fact that
the offer and issuance of the securities satisfied all the terms and conditions
of Rules 501 and 502 of the Securities Act, Cornell and Newbridge are
financially sophisticated and had access to complete information concerning us
and acquired the securities for investment and not with a view to the
distribution thereof.
Pursuant to a Securities Purchase Agreement between us and Cornell dated July
28, 2004 (the "Debenture SPA"), we issued a Secured Convertible Debenture (the
"Debenture") to Cornell at an original principal amount of $375,000. The
Debenture bears interest at 8% per annum. The Debenture is due and payable in
full on July 28, 2007. At our option, the entire principal amount and all
accrued interest may be paid in either cash or in shares of common stock, at a
price per share equal to the lesser of (a) $1.82 (the "Fixed Price") or (b) an
amount equal to 80% of the lowest daily volume weighted average price of the
common stock, as quoted by Bloomberg, L.P., during the 5 trading days
immediately preceding the conversion date. We may redeem a portion or all of the
outstanding Debenture at any time with 3 business days advance written notice,
at a price that is 110% of the amount redeemed plus accrued interest; provided
that if on the date that we provide notice of redemption the price of the common
stock is greater than the Fixed Price, the redemption price will be 120% of the
amount redeemed plus accrued interest. We have agreed, pursuant to the Debenture
SPA, to issue a second secured convertible debenture (the "Second Debenture"),
on the same terms as the Debenture, on the date that we file a registration
statement with the Securities and Exchange Commission to register the shares
underlying the Debenture and the Second Debenture. We believe that this offering
was exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act") by reason of Rule 506 of Regulation D and Section
4(2) of the Securities Act, based upon the fact that the offer and issuance of
the Debenture satisfied all the terms and conditions of Rules 501 and 502 of the
Securities Act, Cornell is financially sophisticated and had access to complete
information concerning us and acquired the securities for investment and not
with a view to the distribution thereof.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
An annual meeting was held on May 27, 2004, at which the following
directors were elected:
Withhold
For Authority
------------ ------------
H. Craig Dees 7,931,372 300
Eric Wachter 7,931,272 400
Timothy D. Scott 7,931,272 400
Stuart R. Fuchs 7,931,372 300
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
21.0 List of Subsidiaries
31.1 Certification Pursuant to Rule 13a-14(a) (Section 302
Certification), dated August 16, 2004, executed by H. Craig Dees,
Ph.D., Chief Executive Officer of the Company.
31.2 Certification Pursuant to Rule 13a-14(a) (Section 302
Certification), dated August 16, 2004, executed by Peter R.
Culpepper, Chief Financial Officer of the Company.
32. Certification Pursuant to 18 U.S.C. ss. 1350 (Section 906
Certification), dated August 16, 2004, executed by H. Craig Dees,
Ph.D., Chief Executive Officer of the Company, and Peter R.
Culpepper, Chief Financial Officer of the Company.
17
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROVECTUS PHARMACEUTICALS, INC.
By:/s/ H. Craig Dees, Ph.D.
---------------------------------------
H. Craig Dees, Ph.D.
Chief Executive Officer
Date: August 16, 2004
18
EXHIBIT INDEX
---------------- ------------------------------------------------------------
Exhibit No. Description
---------------- ------------------------------------------------------------
21.1 List of Subsidiaries
---------------- ------------------------------------------------------------
31.1 Certification Pursuant to Rule 13a-14(a) (Section 302
Certification), dated August 16, 2004, executed by H.
Craig Dees, Ph.D., Chief Executive Officer of the Company.
---------------- ------------------------------------------------------------
31.2 Certification Pursuant to Rule 13a-14(a) (Section 302
Certification), dated August 16, 2004, executed by Peter
R. Culpepper, Chief Financial Officer of the Company.
---------------- ------------------------------------------------------------
32. Certification Pursuant to 18 U.S.C. ss. 1350 (Section 906
Certification), dated August 16, 2004, executed by H.
Craig Dees, Ph.D., Chief Executive Officer of the Company,
and Peter R. Culpepper, Chief Financial Officer of the
Company.
19