PROVECTUS BIOPHARMACEUTICALS, INC. 10-K

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Market Information and Holders Our common stock trades on the OTCQB Marketplace under the symbol “PVCT”. As of February 28, 2021, we had 827 active shareholders of record of our common stock. Dividend Policy We have never declared or paid any cash dividends on our common 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. The holders of our outstanding Series B Preferred Stock are entitled to receive cumulative dividends at the rate per share of 8% per annum of the stated value per share, until the fifth anniversary of the date of issuance of the Series B Preferred Stock. The dividends become payable, at our option, in either cash, out of any funds legally available for such purpose, or in shares of common stock, (i) upon any conversion of the Series B Preferred Stock, (ii) on each such other date as our Board of Directors may determine, subject to written consent of the holders of Series B Preferred Stock holding a majority of the then issued and outstanding Series B Preferred Stock, (iii) upon our liquidation, dissolution or winding up, and (iv) upon occurrence of a fundamental transaction, including any merger or consolidation, sale of all or substantially all of our assets, exchange or conversion of all of our common stock by tender offer, exchange offer or reclassification, provided, however, that if Series B Preferred Stock is converted into shares of common stock at any time prior to the fifth anniversary of the date of issuance of the Series B Preferred Stock, the holder will receive a make-whole payment in an amount equal to all of the dividends that, but for the early conversion, would have otherwise accrued on the applicable shares of Series B Preferred Stock being converted for the period commencing on the conversion date and ending on the fifth anniversary of the date of issuance, less the amount of all prior dividends paid on such converted Series B Preferred Stock before the date of conversion. Make-whole payments are payable at our option in either cash, out of any funds legally available for such purpose, or in shares of common stock. With respect to any dividend payments and make-whole payments paid in shares of common stock, the number of shares of common stock to be issued to a holder of Series B Preferred Stock will be an amount equal to the quotient of (a) the amount of the dividend payable to such holder divided by (b) the conversion price then in effect. 16 Recent Issuances of Unregistered Securities During the year ended December 31, 2019, we issued 229,090 shares of common stock as incentive compensation with a value of $11,538. During the year ended December 31, 2020, we issued 1,062,500 shares of common stock as incentive compensation with a value of $69,088. During the year ended December 31, 2020, we issued 62,500 three-year immediately vested warrants to board members to purchase an aggregate of 62,500 shares of common stock with exercise price of $.28620 per share. The warrants had an aggregate grant date fair value of $1,372, which was recognized immediately within stock compensation in general and administrative expenses. During the year ended December 31, 2020, pursuant to the Company’s 2017 Equity Compensation Plan (the “Compensation Plan”), we issued 2,425,000 five-year immediately vested stock options to a board member/officer to purchase an aggregate of 2,425,000 shares of common stock with an exercise price of $0.12 per share. The stock options had an aggregate grant date fair value of $62,880, which was recognized immediately within stock compensation in general and administrative expenses. During the year ended December 31, 2020, pursuant to the Compensation Plan, we issued 100,000 five-year immediately vested stock options to a board member to purchase an aggregate of 100,000 shares of common stock with an exercise price of $0.2862 per share. The stock options had an aggregate grant date fair value of $1,414, which was recognized immediately within stock compensation in general and administrative expenses. The issuances of the securities were exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(a)(2) and Rule 506 promulgated under Regulation D thereunder as transactions not involving a public offering. Securities Authorized for Issuance under Equity Compensation Plans Information about the securities authorized for issuance under our equity compensation plans will be set forth under the heading “Equity Compensation Plan Information” in the definitive Proxy Statement for our 2021 Annual Meeting of Stockholders, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act, incorporated by reference in Part III, Item 12 of this Annual Report on Form 10-K. ITEM 6. SELECTED FINANCIAL DATA. Not applicable. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion is intended to assist in the understanding and assessment of significant changes and trends related to our results of operations and our financial condition together with our consolidated subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included in this Annual Report on Form 10-K. Historical results and percentage relationships set forth in the statement of operations, including trends which might appear, are not necessarily indicative of future operations. 17 Overview Provectus Biopharmaceuticals, Inc is a clinical-stage biotechnology company developing immunotherapy medicines based on an entire, wholly-owned, family of small molecules called halogenated xanthenes (“HXs”). The Company’s lead HX molecule is proprietary current Good Manufacturing Practice (“cGMP”) rose bengal disodium (“RBD”). Recent Developments 2017 Financing On March 23, 2017, the Company entered into the 2017 Term Sheet with the PRH Group that set forth the terms on which the PRH Group would use their best efforts to arrange for a financing of a minimum of $10,000,000 and maximum of $20,000,000 (the “2017 Financing”). As of December 31, 2020, the Company had received aggregate Loans, as defined below, of $20,067,000 in connection with the 2017 Financing. The 2017 Financing is in the form of a secured convertible loan (the “1 st Loan”) from the PRH Group or other investors in the 2017 Financing (the “1 st Loan Investors”). The 1 st Loan is evidenced by secured convertible promissory notes (individually a “2017 Note” and collectively, the “2017 Notes”) from the Company to the PRH Group or the 1 st Loan Investors. In addition to the customary provisions, the 2017 Notes contains the following provisions: (i) It is secured by a first priority security interest on the Company’s IP, (ii) The 1 st Loan bears interest at the rate of 8% per annum on the outstanding principal amount of the 2017 Notes that has been funded to the Company, (iii) The 1 st Loan proceeds are held in one or more accounts (the “Escrow”) pending the funding of the tranches of the 2017 Financing pursuant to borrowing requests made by the Company, (iv) The 2017 Notes, including interest and principal, are due and payable in full on the earlier of: (i) on such date upon which the Company defaults under the 2017 Notes, (ii) upon a change of control of the Company, or (iii) dates ranging from May 31, 2021 to the 18-month anniversary of the funding of the Final Tranche. In the event there is a change of control of the Company’s Board as proposed by any person or group other than the 1 st Loan Investors, the term of the 2017 Notes will be accelerated and all amounts due under the 2017 Notes will be immediately due and payable, plus interest at the rate of 8% per annum, plus a penalty in the amount equal to 10 times the outstanding principal amount of the 1 st Loan that has been funded to the Company, (v) The outstanding principal amount and interest payable under the 1 st Loan will become convertible at the sole discretion of the 1 st Loan Investors into shares of the Company’s Series D Preferred Stock, a new series of preferred stock, that the Company’s Board may designate in the future, at a price per share equal to $0.2862, and (vi) Notwithstanding (v) above, the principal amount of the 2017 Notes and the interest payable under the 1 st Loan will automatically convert into shares of the Company’s Series D Preferred Stock at a price per share equal to $0.2862 effective on the 18-month anniversary of the funding of the final tranche of the 2017 Financing subject to certain exceptions if the Company’s Board designates such series of preferred stock in the future. Pursuant to the 2017 Term Sheet, the PRH Group concluded its best-efforts activity to arrange for a financing of $20,000,000, which amounts were provided in a number of tranches, between the first tranche on April 4, 2017 and the Final Tranche, on December 20, 2019. As a result, the 2017 Notes under the 1 st Loan will convert into shares of Series D Preferred Stock (once designated) of the Company on or before June 20, 2021, which is the 18-month anniversary of the funding of the Final Tranche of the 2017 Financing, subject to certain exceptions. 18 Upon conversion of the 2017 Notes, the 1 st Loan Investors will release their first lien on the Company’s IP. 2020 Financing On December 31, 2019, the Board approved a Definitive Financing Term Sheet (the “2020 Term Sheet”), which sets forth the terms under which the Company will use its best efforts to arrange for financing of a maximum of $20,000,000 (the “2020 Financing”). As of December 31, 2020, the Company had received aggregate 2 nd Loan, as defined below, of $3,325,000 in connection with the 2020 Financing. Pursuant to the 2020 Term Sheet, the 2020 Notes (defined below) will convert into shares of the Company’s Series D Preferred Stock on or before June 20, 2021, subject to certain exceptions. As of December 31, 2020, and through the date of filing, the Series D Preferred Stock had not been designated by the Board. The 2020 Term Sheet is similar to the 2017 Term Sheet. Subject to the terms and conditions of the 2020 Term Sheet, the Company will use its best efforts to arrange for the 2020 Financing, which amounts will be obtained in several tranches. The proceeds from the 2020 Financing will be used to fund the Company’s clinical development program, as currently constituted and envisioned, and to fund the Company’s general and administrative expenses. The 2020 Financing will be in the form of a secured convertible loan (the “2 nd Loan”) from the Investors (the “2 nd Loan Investors”) that will be evidenced by convertible promissory notes (individually, a “2020 Note” and collectively, the “2020 Notes”) subordinate to the 2017 Notes in right of payment and to the security interests granted to holders of the 2017 Notes. In addition to customary provisions, the 2020 Notes contains the following provisions: (i) It will be secured by a second priority security interest on the Company’s IP subordinate to the first priority security interest of the 2017 Notes; (ii) The 2 nd Loan will bear interest at the rate of eight percent (8%) per annum on the outstanding principal amount of the 2 nd Loan that has been funded to the Company; (iii) In the event there is a change of control of the Company’s Board, the term of the 2020 Notes will be accelerated and all amounts due under the 2020 Notes will be immediately due and payable, plus interest at the rate of eight percent (8%) per annum, plus a penalty in the amount equal to ten times (10x) the outstanding principal amount of the 2 nd Loan that has been funded to the Company; (iv) The outstanding principal amount and interest payable under the 2 nd Loan will become convertible at the sole discretion of the 2 nd Loan Investors into shares of the Company’s Series D Preferred Stock, a series of preferred stock to be designated by the Board, at a price per share equal to $2.8620; and (v) Notwithstanding (iv) above, the principal amount of the 2020 Notes and the interest payable under the 2 nd Loan will automatically convert into shares of the Company’s Series D Preferred Stock at a price per share equal to $2.8620 effective on June 20, 2021 subject to certain exceptions. Upon conversion of the 2 nd Loan, the 2 nd Loan Investors will release their second lien on the IP. 2 nd Loan Investors in the 2020 Financing will hold Series D Preferred Stock pari passu with the Series D Preferred Stock of 1 st Loan Investors in the 2017 Financing. The Series D Preferred Stock As of December 31, 2020, and through the date of filing, the Series D Preferred Stock had not been designated by the Board. Per the terms of the 2017 Notes and 2020 Notes, if the Company has not designated the Series D Preferred Stock or if an insufficient number of Series D Preferred shares exist upon a conversion by a note holder, then the outstanding loans will continue to accrue interest at a rate of 8% per annum until which time the Company has designated a sufficient number of Series D Preferred shares. 19 The Series D Preferred Stock will have a first priority right to receive proceeds from the sale, liquidation or dissolution of the Company or any of the Company’s assets (each, a “Company Event”). If a Company Event occurs within two (2) years of the date of issuance of the Series D Preferred Stock (the “Date of Issuance”), the holders of Series D Preferred Stock will receive a preference of four times (4x) their respective investment amount. If a Company Event occurs after the second (2nd) anniversary of the Date of Issuance, the holders of the Series D Preferred Stock will receive a preference of six times (6x) their respective investment amount. The Series D Preferred Stock will be convertible at the option of the holders thereof into shares of the Company’s common stock based on a formula to achieve a one-for-ten conversion ratio. The Series D Preferred Stock will automatically convert into shares of the Company’s common stock upon the fifth (5 th ) anniversary of the Date of Issuance. On an as-converted basis, the Series D Preferred Stock will carry the right to ten (10) votes per share. The Series D Preferred Stock will not have any dividend preference but will be entitled to receive, on a pari passu basis, dividends, if any, that are declared and paid on any other class of the Company’s capital stock. The holders of Series D Preferred Stock will not have anti-dilution protection. Exercise of Warrants In 2020 holders of 7,855,062 warrants to purchase the common stock of the Company at $0.0533 per share, have exercised these warrants. The Company has received proceeds in the aggregate amount of $418,675. Components of Operating Results Research and Development Expenses A large component of our total operating expenses is the Company’s investment in research and development activities, including the clinical development of our product candidates. Research and development expenses represent costs incurred to conduct research and undertake clinical trials to develop our drug product candidates. These expenses consist primarily of: ● costs of conducting clinical trials, including amounts paid to clinical centers, clinical research organizations and consultants, among others; ● salaries and related expenses for personnel, including stock-based compensation expense; ● other outside service costs including cost of contract manufacturing; ● the costs of supplies and reagents; ● occupancy and depreciation charges. We expense research and development costs as incurred. Research and development activities are central to our business model. We expect our research and development expenses to increase in the future as we advance our existing product candidates through clinical trials and pursue their regulatory approval. Undertaking clinical development and pursuing regulatory approval are both costly and time-consuming activities. As a result of known and unknown uncertainties, we are unable to determine the duration and completion costs of our research and development activities, or if, when, and to what extent we will generate revenue from any subsequent commercialization and sale of our drug product candidates. General and Administrative Expenses General and administrative expense consists primarily of salaries, stock-based compensation expense and other related costs for personnel in executive, finance, accounting, business development, legal, information technology and corporate communication functions. Other costs include facility costs not otherwise included in research and development expense, insurance, and professional fees for legal, patent and accounting services. 20 Comparison of the Years Ended December 31, 2020 and 2019 Overview Total operating expenses were $4,963,576 for the year ended December 31, 2020, a decrease of $1,336,120 or 21.2% compared to the year ended December 31, 2019. The decrease was driven by our continued transformation and process improvement efforts within the Company, along with slower recruitment and treatment in clinical trials due to the effects of SARS-CoV-2. Net loss for the year ended December 31, 2020 was $6,677,587, a decrease of $244,950 or 3.5% compared to the year ended December 31, 2019, which resulted from costs incurred in connection with our preclinical and clinical trial programs and general and administrative costs. For the Years Ended December 31, 2020 2019 Increase/(Decrease) % Change Operating Expenses: Research and development $ 2,812,760 $ 4,002,014 $ (1,189,254 ) -29.7 % General and administrative 2,150,816 2,297,682 (146,866 ) -6.4 % Total Operating Expenses 4,963,576 6,299,696 (1,336,120 ) -21.2 % Total Operating Loss (4,963,576 ) (6,299,696 ) (1,336,120 ) 21.2 % Other Income/(Expense): EIDL grant 3,000 - 3,000 0.0 % Gain on settlement of lawsuits - 675,000 (675,000 ) -100.0 % Research and development tax credit 27,694 134,081 (106,387 ) -79.3 % Investment and interest income 3,415 23,162 (19,747 ) -85.3 % Interest expense (1,748,120 ) (1,455,084 ) (293,036 ) 20.1 % Total Other Expense, Net (1,714,011 ) (622,841 ) (1,091,170 ) 175.2 % Net Loss $ (6,677,587 ) $ (6,922,537 ) $ (244,950 ) 3.5 % Research and Development Research and development expenses were $2,812,760 for the year ended December 31, 2020, a decrease of $1,189,254 or 29.7% compared to the year ended December 31, 2019. The decrease was due to (i) lower clinical operations due to closure of Phase III study in early 2019 and slower recruitment and treatment in clinical trials due to the effects of SARS-CoV-2, (ii) lower amortization due to patents being fully amortized, and (iii) lower payroll and related taxes due to a lower negotiated employment agreement. The following table summarizes our research and development expenses incurred during the year ended December 31, 2020 and 2019: For the Years Ended December 31, 2020 2019 Increase/(Decrease) % Change Research and development: Clinical trial and research expenses $ 1,983,498 $ 2,661,530 $ (678,032 ) -25.5 % Depreciation/amortization 236,754 679,767 (443,013 ) -65.2 % Insurance 263,074 258,067 5,007 1.9 % Payroll and taxes 264,983 329,532 (64,549 ) -19.6 % Rent and utilities 64,451 73,118 (8,667 ) -11.9 % Total research and development $ 2,812,760 $ 4,002,014 $ (1,189,254 ) -29.7 % 21 General and Administrative General and administrative expenses were $2,150,816 for the year ended December 31, 2020, a decrease of $146,866 or 6.4% compared to the year ended December 31, 2019. The decrease was due to (i) lower legal fees as we concluded the Company’s lawsuits against former accounting vendors and a former officer, (ii) lower payroll and related taxes due to a lower negotiated employment agreement, and (iii) lower professional fees, partially offset by (iv) increased stock awards to an employee, directors, and consultants. The following table summarizes our general and administrative expenses incurred during the years ended December 31, 2020 and 2019: For the Years Ended December 31, 2020 2019 Increase/(Decrease) % Change General and administrative: Depreciation $ 5,036 $ 5,445 $ (409 ) -7.5 % Directors fees 383,065 385,000 (1,935 ) -0.5 % Insurance 185,516 170,384 15,132 8.9 % Legal and litigation 485,569 509,810 (24,241 ) -4.8 % Other general and administrative cost 190,577 117,964 72,613 61.6 % Payroll and taxes 168,448 305,074 (136,626 ) -44.8 % Professional fees 698,577 765,654 (67,077 ) -8.8 % Rent and utilities 32,755 37,525 (4,770 ) -12.7 % Foreign currency translation 1,273 826 447 54.1 % Total general and administrative $ 2,150,816 $ 2,297,682 $ (146,866 ) -6.4 % Other Income/(Expense) Other income decreased by $798,134 from $832,243 for the year ended December 31, 2019 to $34,109 for the year ended December 31, 2020. During the year ended December 31, 2019, the matters with former accounting vendors Bible Harris Smith, PC (“BHS”) and RSM US LLP (“RSM”) were resolved pursuant to a settlement between these parties and the Company, the terms of which are confidential. Interest expense increased by $293,036 from $1,455,084 for the year ended December 31, 2019 to $1,748,120 for the year ended December 31, 2020. The increase was due to the increased number of convertible notes payable relating to the 2020 Notes. The following table summarizes our Other Income/(Expenses) incurred during the years ended December 31, 2020 and 2019: For the Years Ended December 31, 2020 2019 Increase/(Decrease) % Change Other Income/(Expense): EIDL grant 3,000 - 3,000 0.0 % Gain on settlement of lawsuits - 675,000 (675,000 ) -100.0 % Research and development tax credit 27,694 134,081 (106,387 ) -79.3 % Investment and interest income 3,415 23,162 (19,747 ) -85.3 % Interest expense (1,748,120 ) (1,455,084 ) (293,036 ) 20.1 % Total Other Expense (1,714,011 ) (622,841 ) (1,091,170 ) 175.2 % Liquidity and Going Concern Our cash and cash equivalents were $97,231 at December 31, 2020, compared with $590,706 at December 31, 2019. The consolidated financial statements and notes thereto included in this Annual Report on Form 10-K have been prepared on a basis that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. We have continuing net losses and negative cash flows from operating activities. In addition, we have an accumulated deficit of $240,494,415 as of December 31, 2020. These conditions raise substantial doubt about our ability to continue as a going concern for a period of at least one year from the date that the financial statements included elsewhere in this Annual Report on Form 10-K are issued. Our financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern. Our ability to continue as a going concern depends on our ability to obtain additional financing as may be required to fund current operations. 22 Management’s plans include selling our equity securities and obtaining other financing to fund our capital requirement and on-going operations, including the 2020 Financing discussed above; however, there can be no assurance we will be successful in these efforts. The financial statements do not include any adjustment that might be necessary if we are unable to continue as a going concern. Significant funds will be needed to continue and complete our ongoing and planned clinical trials. Access to Capital Management plans to access capital resources through possible public or private equity offerings, including the 2020 Financing, exchange offers, debt financings, corporate collaborations, or other means. If we are unable to raise sufficient capital through the 2020 Financing or otherwise, we will not be able to pay our obligations as they become due. The primary business objective of management is to build the Company into a commercial-stage biotechnology company; however, we cannot assure you that management will be successful in implementing the Company’s business plan of developing, licensing, and/or commercializing our prescription drug candidates. Moreover, even if we are successful in improving our current cash flow position, we nonetheless plan to seek additional funds to meet our current and long-term requirements in 2021 and beyond. We anticipate that these funds will otherwise come from the proceeds of private placement transactions, including the 2020 Financing, the exercise of existing warrants and outstanding stock options, or public offerings of debt or equity securities. While we believe that we have a reasonable basis for our expectation that we will be able to raise additional funds, we cannot assure you that we will be able to complete additional financing in a timely manner. In addition, any such financing may result in significant dilution to stockholders. During the years ended December 31, 2020 and 2019, our sources and uses of cash were as follows: Net Cash Used in Operating Activities We experienced negative cash flow from operating activities for the years ended December 31, 2020 and 2019 in the amounts of $4,085,795 and $6,190,215, respectively. The net cash used in operating activities for the year ended December 31, 2020 was primarily due to cash used to fund a net loss of $6,677,587, adjusted for non-cash expenses in the aggregate amount of $450,123, less $2,141,669 of cash used to fund changes in the levels of operating assets and liabilities. The net cash used in operating activities for the year ended December 31, 2019 was primarily due to cash used to fund a net loss of $6,922,537, adjusted for non-cash expenses in the aggregate amount of $779,341, plus $47,019 of cash used to fund changes in the levels of operating assets and liabilities. Net Cash Used in Investing Activities During the years ended December 31, 2020 and 2019, net cash used in investing activities was $0 and $0, respectively. Net Cash Provided by Financing Activities Net cash provided by financing activities during the years ended December 31, 2020 and 2019 was $3,600,191 and $6,753,943, respectively. During the year ended December 31, 2020, $3,225,000 were proceeds from the issuance of convertible notes payable, $418,676 were from the exercise of warrants, $105,985 for repayment of short-term note payable, and $62,500 was proceeds received through the PPP loan. During the year ended December 31, 2019, $6,485,000 were proceeds from the issuance of convertible notes payable and $268,943 were from the exercise of warrants. Critical Accounting Policies Our critical accounting policies are included in Note 3 – Significant Accounting Policies of our consolidated financial statements included within this annual report. Recent Accounting Pronouncements Recently issued accounting standards are included in Note 3 – Significant Accounting Policies of our consolidated financial statements included within this annual report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. 23