PROVECTUS BIOPHARMACEUTICALS, INC. 10-K

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 a family of small molecules called halogenated xanthenes (“HXs”). The Company’s lead HX molecule is rose bengal sodium (“RBS”). Recent Developments The Series D and D-1 Convertible Preferred Stock On June 20, 2021, the outstanding non-amended 2017 Notes converted into 12,373,247 shares of Series D Convertible Preferred Stock at the Original Conversion Price of $0.2862, and all the outstanding Amended 2017 Notes and outstanding 2020 Notes converted into 9,440,594 shares of Series D-1 Convertible Preferred Stock at the New Conversion Price of $2.862. As a result of the conversion of the 2017 Notes and 2020 Notes into convertible preferred stock, all the security interests of these notes in the Company’s intellectual property were released. 2021 Financing On August 13, 2021, the Board approved a Financing Term Sheet (the “2021 Term Sheet”), which sets forth the terms under which the Company will use its best efforts to arrange for financing of a maximum of $5,000,000 (the “2021 Financing”), which amounts will be obtained in several tranches. As of December 31, 2021, the Company had received 2021 Notes proceeds of $1,460,000, as defined below, of which $200,000 is from a related party investor. Pursuant to the 2021 Term Sheet, the 2021 Notes (defined below) will be paid back, convert into shares of the Company’s Series D-1 Preferred Stock, or convert into Company equity securities and/or debt instruments of certain future financings on or before twelve months after the issue date of a 2021 Note, subject to certain exceptions. The 2021 Financing will be in the form of unsecured convertible loans from the investors and evidenced by convertible promissory notes (individually, a “2021 Note” and collectively, the “2021 Notes”). In addition to customary provisions, the 2021 Notes will contain the following provisions: (i) The 2021 Notes will bear interest at the rate of eight percent (8%) per annum on the outstanding principal amount of the Loan that has been funded to the Company; (ii) In the event there is a change of control of the Board, the term of the 2021 Notes will be accelerated and all amounts due under the 2021 Notes may be immediately due and payable at the investors’ option; (iii) The outstanding principal amount and interest payment under the 2021 Notes may be paid back at maturity at the investors’ option; (iv) The outstanding principal amount and interest payable under the 2021 Notes may be convertible at the investors’ option into shares of Series D-1 Convertible Preferred Stock at a price per share equal to $2.8620. The Series D-1 Convertible Preferred Stock is convertible into ten (10) shares of common stock; and (v) In the event the Company conducts a qualified equity or debt financing and the Company receives gross proceeds in the aggregate amount of $20 million, the 2021 Notes may be converted into the equity securities and/or debt instruments of such financing at the same terms as those investors. 18 On an as-converted basis, the Series D-1 Preferred Stock carries the right to ten (10) votes per share. The Series D-1 Preferred Stock does 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-1 Preferred Stock do not have anti-dilution protection. Warrants In 2021, holders of 18,052,966 warrants to purchase the common stock of the Company at $0.053 per share, have exercised these warrants. The Company has received proceeds in the aggregate amount of $962,223. On August 30, 2021, a total of 68,723,698 of August 2016 warrants expired. 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; and ● 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. 19 Comparison of the Years Ended December 31, 2021 and 2020 Overview Total operating expenses were $4,672,254 for the year ended December 31, 2021, a decrease of $291,322 or 5.9% compared to the year ended December 31, 2020. The decrease was driven by our continued transformation and process improvement efforts within the Company, along with lower amortization expense and reduced professional service fees. Net loss for the year ended December 31, 2021 was $5,539,543, a decrease of $1,138,044 or 17.0% compared to the year ended December 31, 2020, which resulted from reduced costs incurred in connection with our preclinical and clinical trial programs, general and administrative costs, and interest expense due to the conversion of the 2017 and 2020 Notes, plus the gain associated with the extinguishment of the Company’s PPP loan. For the Years Ended December 31, 2021 2020 Increase/(Decrease) % Change Operating Expenses: Research and development $ 2,608,357 $ 2,812,760 $ (204,403 ) -7.3 % General and administrative 2,063,897 2,150,816 (86,919 ) -4.0 % Total Operating Expenses 4,672,254 4,963,576 (291,322 ) -5.9 % Total Operating Loss (4,672,254 ) (4,963,576 ) (291,322 ) 5.9 % Other Income/(Expense): EIDL grant - 3,000 (3,000 ) -100.0 % Research and development tax credit 31,315 27,694 3,621 13.1 % Investment and interest income 4 3,415 (3,411 ) -99.9 % Gain from forgiveness of PPP Loan and interest 63,094 - 63,094 0.0 % Interest expense (961,702 ) (1,748,120 ) 786,418 -45.0 % Total Other Expense, Net (867,289 ) (1,714,011 ) 846,722 -49.4 % Net Loss $ (5,539,543 ) $ (6,677,587 ) $ (1,138,044 ) 17.0 % Research and Development Research and development expenses were $2,608,357 for the year ended December 31, 2021, a decrease of $204,403 or 7.3% compared to the year ended December 31, 2020. The decrease was due to (i) lower amortization due to patents being fully amortized, and (ii) lower insurance cost, partially offset by (iii) increased clinical trial costs as sites resumed enrollment and treatments. The following table summarizes our research and development expenses incurred during the years ended December 31, 2021 and 2020: For the Years Ended December 31, 2021 2020 Increase/(Decrease) % Change Operating Expenses: Research and development: Clinical trial and research expenses $ 2,064,125 $ 1,983,498 $ 80,627 4.1 % Depreciation/amortization 8,647 236,754 (228,107 ) -96.3 % Insurance 207,556 263,074 (55,518 ) -21.1 % Payroll and taxes 266,514 264,983 1,531 0.6 % Rent and utilities 61,515 64,451 (2,936 ) -4.6 % Total research and development $ 2,608,357 $ 2,812,760 $ (204,403 ) -7.3 % 20 General and Administrative General and administrative expenses were $2,063,897 for the year ended December 31, 2021, a decrease of $86,919 or 4.0% compared to the year ended December 31, 2020. The decrease was due to (i) lower insurance cost, (ii) lower professional fees, and (iii) lower other general and administrative cost, partially offset by (iv) higher legal fees from conversion of 2017 and 2020 Notes and addition of 2021 Notes, and (v) higher payroll and related taxes due to an additional employee. The following table summarizes our general and administrative expenses incurred during the years ended December 31, 2021 and 2020: For the Years Ended December 31, 2021 2020 Increase/(Decrease) % Change Operating Expenses: General and administrative: Depreciation $ 4,218 $ 5,036 $ (818 ) -16.2 % Directors’ fees 385,000 383,065 1,935 0.5 % Insurance 161,992 185,516 (23,524 ) -12.7 % Legal and litigation 590,779 485,569 105,210 21.7 % Other general and administrative cost 63,679 190,577 (126,898 ) -66.6 % Payroll and taxes 230,898 168,448 62,450 37.1 % Professional fees 591,356 698,577 (107,221 ) -15.3 % Rent and utilities 31,055 32,755 (1,700 ) -5.2 % Foreign currency translation 4,920 1,273 3,647 286.5 % Total general and administrative $ 2,063,897 $ 2,150,816 $ (86,919 ) -4.0 % Other Income/(Expense) Other income increased by $60,304 from $34,109 for the year ended December 31, 2020 to $94,413 for the year ended December 31, 2021, mainly due to the forgiveness of the PPP Loan. Interest expense decreased by $786,418 from $1,748,120 for the year ended December 31, 2020 to $961,702 for the year ended December 31, 2021. The decrease was due to the conversion of the 2017 and 2020 Notes into shares of Series D and Series D-1 Convertible Preferred Stock. The following table summarizes our Other Income/(Expenses) incurred during the years ended December 31, 2021 and 2020: For the Years Ended December 31, 2021 2020 Increase/(Decrease) % Change Other Income/(Expense): EIDL grant $ - 3,000 $ (3,000 ) -100.0 % Research and development tax credit 31,315 27,694 3,621 13.1 % Investment and interest income 4 3,415 (3,411 ) -99.9 % Gain from forgiveness of PPP Loan and interest 63,094 - 63,094 0.0 % Interest expense (961,702 ) (1,748,120 ) 786,418 -45.0 % Total Other Expenses, Net $ (867,289 ) $ (1,714,011 ) $ 846,722 -49.4 % Liquidity and Going Concern Our cash, cash equivalents, and restricted cash were $3,106,942 at December 31, 2021, which includes the $2,423,958 of restricted cash associated with the grant received from the State of Tennessee, compared with $97,231 at December 31, 2020. 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 $246,033,958 as of December 31, 2021. 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 consolidated 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. 21 Management’s plans include selling our equity securities and obtaining other financing to fund our capital requirement and on-going operations, including the 2021 Financing discussed above; however, there can be no assurance we will be successful in these efforts. Significant funds will be needed to continue and complete our ongoing and planned clinical trials. As of December 31, 2021 and 2020, we had cash and cash equivalents of $3,106,942, including $2,423,958 of restricted cash, and $97,231, respectively, and a working capital deficit of $4,258,679 and $30,288,035, respectively. Cash requirements for our current liabilities include approximately, $3,352,184 for accounts payable and accrued expenses (including lease liabilities) and a $238,452 note payable related to our short-term financing of our commercial insurance policies. Also, if not converted prior to maturity, convertible debt in the amount of $1,460,000 plus accrued interest will mature one year from the date of the notes. There are no cash requirements for long term liabilities at December 31, 2021. The Company intends to meet these cash requirements from its current cash balance and from future financing. Access to Capital Management plans to access capital resources through possible public or private equity offerings, including the 2021 Financing, exchange offers, debt financings, corporate collaborations, or other means. If we are unable to raise sufficient capital through the 2021 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 2022 and beyond. We anticipate that these funds will otherwise come from the proceeds of private placement transactions, including the 2021 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, 2021 and 2020, 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, 2021 and 2020 in the amounts of $1,013,304- and $4,085,795, respectively. The net cash used in operating activities for the year ended December 31, 2021 was primarily due to cash used to fund a net loss of $5,539,543, adjusted for non-cash expenses in the aggregate amount of $54,717, plus $4,471,522 of cash generated from changes in the levels of operating assets and liabilities. 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, plus $2,141,669 of cash generated from changes in the levels of operating assets and liabilities. Net Cash Provided by Financing Activities Net cash provided by financing activities during the years ended December 31, 2021 and 2020 was $4,024,046 and $3,600,191, respectively. During the year ended December 31, 2021, $3,160,000 were proceeds from the issuance of convertible notes payable, $962,223 were from the exercise of warrants and, $150,000 was from the investment to purchase Series D-1 Preferred Stock, less $248,177 for repayment of short-term note payable. 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, less $105,985 for repayment of short-term note payable, and $62,500 was proceeds received through the PPP loan. Critical Accounting Estimates The preparation of financial statements and related disclosures must be in conformity with U.S. GAAP. These accounting principles require us to make estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expense during the periods presented. We believe that the estimates and judgments upon which it relies are reasonably based upon information available to us at the time that it makes these estimates and judgments. To the extent that there are material differences between these estimates and actual results, our financial results will be affected. The accounting policies that reflect our more significant estimates and judgments and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described below. The following is not intended to be a comprehensive list of all of our accounting policies or estimates. Our accounting policies are more fully described in Note 3 – Summary of Significant Accounting Policies, in our financial statements included at the end of this Annual Report. Stock-Based Compensation We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award on the date of grant. The fair value amount of the shares expected to ultimately vest is then recognized over the period for which services are required to be provided in exchange for the award, usually the vesting period. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period that the estimates are revised. We account for forfeitures as they occur. Research and Development Research and development expenses consist of expenses incurred in performing research and development activities, including compensation and benefits for research and development employees and consultants, facilities expenses, overhead expenses, cost of laboratory supplies, manufacturing expenses, fees paid to third parties and other outside expenses. We accrue for costs incurred as the services are being provided by monitoring the status of the clinical trial or project and the invoices received from our external service providers. We adjust our accrual as actual costs become known. 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. 22