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 accompanying consolidated financial statements and notes thereto included in the Annual Report on Form 10-K. Historical results and percentage relationships set forth in the statements of operations, including trends which might appear, are not necessarily indicative of future operations. 21 Business Strategy The Company is selectively continuing ongoing and planning to initiate new monotherapy and combination therapy ITU PV-10 clinical trials in melanoma and liver cancer indications to generate more and/or new clinical data and appropriately utilizing clinical data from historical ITU PV-10 trials, EAPs, and/or QOL study of these oncology indications. Our goals are to pursue drug approval pathways and/or co-development relationships with commercial pharmaceutical companies for ITU PV-10 based on these indications and data. The Company is developing a systemically administered formulation of pharmaceutical-grade RBS for the treatment of cancer. Our goals, when this work is complete, are to file an investigational new drug application (“IND”) with the U.S. Food and Drug Administration (“FDA”), take an initial systemic drug candidate into an early-stage clinic trial for an initial oncology or hematology indication, and/or pursue a co-development collaboration or out-license arrangement for this route of administration and disease area. The Company is developing different formulations of pharmaceutical-grade RBS using different concentrations and different routes of administration for other disease areas by endeavoring to show non-clinical activity and lack of toxicity. Our goals, when each task of this work is completed, are to file an IND with the FDA, take an initial drug candidate into an early-stage clinic trial for an initial indication, and/or pursue a co-development collaboration or out-license arrangement for the respective disease area and route of administration. The Company is endeavoring to fully elucidate the traits and characteristics of the RBS molecule using different academic medical centers under sponsored research and testing agreements. Our goal is to gain and communicate additional knowledge of the RBS molecule’s targeting, mechanism, signaling, immune response, and other features that are common to and/or different from each disease area and indication under research. The Company is doing rigorous chemical analytical comparisons of non-pharmaceutical grades of rose bengal from specialty chemical suppliers against the Company’s pharmaceutical-grade RBS. Our goal is to demonstrate the proprietary nature of the Company’s pharmaceutical-grade RBS and that our pharmaceutical-grade RBS meets the necessary uniformity and purity requirements for commercial pharmaceutical use. RBS API and Drug Candidate Manufacturing Our pharmaceutical-grade RBS resulted from the Company’s innovation of a proprietary, patented, commercial-scale process to synthesize and utilize the RBS molecule into a viable active pharmaceutical ingredient (“API”) for commercial pharmaceutical use; the development of unique chemistry, manufacturing, and control (“CMC”) specifications for API and drug candidate manufacturing processes; the production and multi-year stability testing of multiple API and drug candidate lots; the comprehensive documentation of lot composition and reproducibility; and the review and acceptance of CMC data from these lots by seven different national drug regulatory agencies for use in a prior, multi-country, multi-center Phase 3 randomized control trial of the Company. The Company’s API and drug candidate manufacturing processes employ Quality-by-Design principles, current good manufacturing practice (“cGMP”) regulations, and the guidelines of The International Council for Harmonization (ICH) of Technical Requirements for Pharmaceuticals for Human Use. These processes utilize controls that eliminate the formation of historical impurities and avoid the introduction of potentially hazardous impurities that the Company believes may have been and could be present in uncontrolled and unreported amounts in non-pharmaceutical grades of rose bengal. The Company’s processes of synthesizing the RBS molecule into pharmaceutical-grade RBS and manufacturing RBS API and ITU PV-10 drug candidate, the processes’ CMC specifications, and the CMC data from the production of stability lots of API and drug candidate have been reviewed by multiple national drug regulatory agencies prior to granting clinical trial authorizations for the Company to commence a historical Phase 3 study of ITU PV-10 for the treatment of the Company’s former lead indication of locally advanced cutaneous melanoma, including the U.S. FDA, Germany’s Bundesinstitut für Arzneimittel und Medizinprodukte (BfArM), Australia’s Therapeutic Goods Administration (TGA) under a clinical trial notification, France’s Agence Nationale de Sécurité du Médicament et des Produits de Santé (ANSM), Italy’s Agenzia Italiana del Farmaco (AIFA), Mexico’s Comisión Federal para la Protección contra Riesgos Sanitarios (COFEPRIS), and Argentina’s Administración Nacional de Medicamentos, Alimentos y Tecnología Médica (ANMAT). 22 RBS Non-proprietary Name The RBS name for the Company’s pharmaceutical-grade API was selected by and passed the review of the World Health Organization (“WHO”) Expert Advisory Panel on the International Pharmacopoeia and Pharmaceutical Preparations after the Company applied for a non-proprietary name in the third quarter of 2020 and reached the status of recommended International Non-proprietary Names (“INN”). INN Recommended List 88, which includes the RBS name, was published with the No. 3 issue of the WHO Drug Information, Volume 36 in the fourth quarter of 2022. Non-Pharmaceutical Grades of Rose Bengal Commercial Grade Commercial grade rose bengal can be purchased from specialty chemical suppliers in the U.S. and in other parts of the world that manufacture it under non-cGMP conditions. Commercial grade rose bengal appears to have reported purities that may vary between 80% and 95% and may contain substantial amounts of unreported impurities and/or gross contaminants. Commercial grade rose bengal is typically used by researchers unaffiliated with the Company for non-clinical study of the rose bengal molecule for potential biomedical therapeutic applications. We believe that commercial grade rose bengal is still manufactured using the original historical process, or a variant thereof, developed by the molecule’s original Swiss creator Rudolph Gnehm in 1881. Some chemical manufacturers may, however, apply purification techniques that the Company believes still result in commercial grade rose bengal possessing questionable purity and contaminants and substantial lot-to-lot manufacturing variability. Diagnostic Grade Diagnostic grade rose bengal describes non-approved rose bengal that is used as an ingredient in historical or current ophthalmic solutions, strips, and devices, has been historically or is presently compounded by pharmacists for ophthalmic use, and has been or is in other non-ophthalmic diagnostic tests such as the rose bengal test for human brucellosis. We presume, but have not yet confirmed, that diagnostic grade rose bengal is derived from commercial grade rose bengal that may have undergone a form of purification under cGMP regulations and/or may have been compounded by a pharmacist, academic medical researcher, or commercial entity under cGMP regulations. Here too, the Company believes that purification may not sufficiently improve the amounts and accuracy of diagnostic grade rose bengal purity and lot contents and may not adequately reduce or eliminate lot-to-lot manufacturing variability. Chemical Analytical Comparison In the first quarter of 2022, the Company began work with a U.S. contract development and manufacturing organization to assess rigorously and methodically three lots of commercial grade rose bengal, one each from three different specialty chemical suppliers, and compare these non-pharmaceutical grade materials with the Company’s pharmaceutical-grade RBS. This chemical analytical work was substantially completed by the end of the third quarter of 2022. The Company believes that the preliminary results of these analyses indicate that all three lots of commercial grade rose bengal had rose bengal purity that was drastically different from what was represented on their respective certificates of analysis (“CofAs”), and that one of the three lots contained gross contaminants that were not represented on its CofA. Potential Barriers to Entry The Company believes that the Company’s proprietary, patented, pharmaceutical-grade RBS possesses several competitive advantages over non-pharmaceutical-grade rose bengal (i.e., commercial and diagnostic grades) that researchers, clinicians, and academic, business, and/or governmental competitors have used, are using, and/or may attempt to use for potential biomedical applications. The Company believes that non-pharmaceutical-grade rose bengal may suffer from the uncontrolled presence of substance-related impurities and/or gross contaminants, substantial lot-to-lot manufacturing variability, inaccurately reported and/or misrepresented purity and contents, and the lack of reproducible, consistent, and fulsome CMC specifications and documentation. The Company believes that historical and potentially hazardous impurities and other manufacturing and handling issues facing non-pharmaceutical grade rose bengal may pose significant scientific, technological, and economic challenges to overcome and validate for compliance with modern drug regulatory standards. 23 Components of Operating Results Grant Revenue Grant revenue is recognized when qualifying costs are incurred and there is reasonable assurance that the conditions of the grant have been met. Cash received from grants in advance of incurring qualifying costs is recorded as unearned grant revenue and recognized as grant revenue when qualifying costs are incurred. 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. 24 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 expenses consist 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 expenses, insurance, and professional fees for legal, patent and accounting services. Comparison of the Years Ended December 31, 2024 and 2023 Overview Refer to tables below for year-over-year comparison of revenues and expenses. For the Years Ended December 31, 2024 2023 Increase/(Decrease) % Change Grant Revenue $ 617,140 $ 557,710 $ 59,430 10.7 % Operating Expenses: Research and development 1,999,127 1,749,240 249,887 14.3 % General and administrative 3,150,397 1,709,720 1,440,677 84.3 % Total Operating Expenses 5,149,524 3,458,960 1,690,564 48.9 % Total Operating Loss (4,532,384 ) (2,901,250 ) (1,631,134 ) 56.2 % Other Income/(Expense): Research and development tax credit 9,320 15,696 (6,376 ) -40.6 % Interest expense (239,073 ) (216,214 ) (22,859 ) 10.6 % Total Other Income (Expense), Net (229,753 ) (200,518 ) (29,235 ) 14.6 % Net Loss (4,762,137 ) (3,101,768 ) (1,660,369 ) 53.5 % Net loss attributable to noncontrolling interest 29,585 - 29,585 0.0 % Net loss attributable to common stockholders $ (4,732,552 ) $ (3,101,768 ) $ (1,630,784 ) -52.6 % 25 Grant Revenue For the years ended December 31, 2024 and 2023, there was $617,140 and $557,710 respectively, of grant revenue recognized related to qualifying expenses that were incurred and included within research and development on the consolidated statements of operations. Research and Development Research and development expenses were $1,999,127 for the year ended December 31, 2024, an increase of $249,887 or 14.3% compared to $1,749,240 for the year ended December 31, 2023. The increase was due to (i) higher clinical trial costs associated with closing out open trials, (ii) slightly higher rent expense, partially offset by iii) lower depreciation expense, iv) lower insurance cost, and v) lower payroll taxes and vacation expense. The following table summarizes our research and development expenses incurred during the years ended December 31, 2024 and 2023: For the Years Ended December 31, 2024 2023 Increase/(Decrease) % Change Operating Expenses: Research and development: Clinical trial and research expenses $ 1,463,422 $ 1,193,529 $ 269,893 22.6 % Depreciation/amortization 5,294 7,059 (1,765 ) -25.0 % Insurance 225,754 229,774 (4,020 ) -1.7 % Payroll and taxes 270,360 284,616 (14,256 ) -5.0 % Rent and utilities 34,297 34,262 35 0.1 % Total research and development $ 1,999,127 $ 1,749,240 $ 249,887 14.3 % General and Administrative General and administrative expenses were $3,150,397 for the year ended December 31, 2024, an increase of $1,440,677 or 84.3% compared to $1,709,720 for the year ended December 31, 2023. The increase was due to (i) stock-based compensation for vested options granted to company executives, employee and independent board members, (ii) higher legal costs relating to patent application and general business fees, (iii) increased payroll expense due to hiring two executives, (iv) increased professional fees related to investor relations, (v) higher other general and administrative costs due to a refund received in 2023 for employee retention, and (vi) unfavorable foreign currency translation cost, partially offset by (vii) reversal of director fees for Mr. Horowitz as he waived these fees upon his resignation on March 25, 2024, and (viii) lower insurance costs. The following table summarizes our general and administrative expenses incurred during the years ended December 31, 2024 and 2023: For the Years Ended December 31, 2024 2023 Increase/(Decrease) % Change Operating Expenses: General and administrative: Depreciation $ 1,862 $ 1,862 $ - 0.0 % Directors fees (121,250 ) 385,000 (506,250 ) -131.5 % Insurance 168,644 179,846 (11,202 ) -6.2 % Legal and litigation 576,908 387,189 189,719 49.0 % Other general and administrative cost 66,373 40,793 25,580 62.7 % Payroll and taxes 644,479 250,685 393,794 157.1 % Professional fees 512,500 469,438 43,062 9.2 % Rent and utilities 19,314 19,134 180 0.9 % Stock based compensation 1,280,776 - 1,280,776 0.0 % Foreign currency translation 791 (24,227 ) 25,018 100.0 % Total general and administrative $ 3,150,397 $ 1,709,720 $ 1,440,677 84.3 % 26 Other Income/(Expense) Research and development tax credits in Australia were $9,320 for the year ended December 31, 2024, a decrease of $6,376 or 40.6%, compared to $15,696 for the year ended December 31, 2023. The decrease was mainly due to no active clinical trials currently in Australia. Interest expense increased by $22,859 from $216,214 for the year ended December 31, 2023 to $239,073 for the year ended December 31, 2024. The increase was due to the issuance of new 2022 and 2024 Notes, partially offset by the impact of the conversion of the 2021 and 2022 Notes into shares of Series D-1 Preferred Stock. The following table summarizes our Other Income/(Expenses) incurred during the years ended December 31, 2024 and 2023: For the Years Ended December 31, 2024 2023 Increase/(Decrease) % Change Other Income/Expense): Research and development tax credit $ 9,320 $ 15,696 $ (6,376 ) -40.6 % Interest expense, net (239,073 ) (216,214 ) (22,859 ) -10.6 % Total Other Income/(Expense), Net $ (229,753 ) $ (200,518 ) $ (29,235 ) -14.6 % Liquidity and Going Concern Our cash, and restricted cash were $489,726 at December 31, 2024, which includes the $182,284 of restricted cash associated with the grant received from the State of Tennessee. 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 $257,422,961 as of December 31, 2024. 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. Management’s plans include selling our equity securities and obtaining other financing to fund our capital requirements and on-going operations, including the 2025 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, 2024, cash requirements for our current liabilities include approximately $3,307,226 for accounts payable and accrued expenses (including lease liabilities) and a $206,463 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 $2,953,000 plus $172,687 of accrued interest will mature one year from the date of the notes. The 2024 Notes are only subject to repayment in the event of a change of control or event of default. 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 2025 Financing, exchange offers, debt financings, corporate collaborations, or other means. If we are unable to raise sufficient capital through the 2025 Financing or otherwise, we will not be able to pay our obligations as they become due. 27 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 2025 and beyond. We anticipate that these funds will otherwise come from the proceeds of private placement transactions, including the 2025 Financing, exercise of 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, 2024 and 2023, our sources and uses of cash were as follows: Net Cash Used in Operating Activities We experienced negative cash flows from operating activities for the years ended December 31, 2024 and 2023 in the amounts of $3,284,091 and $2,571,978, respectively. The net cash used in operating activities for the year ended December 31, 2024 was primarily due to cash used to fund a net loss of $4,762,137, adjusted for non-cash items in the aggregate amount of $1,335,335, plus $156,942 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, 2023 was primarily due to cash used to fund a net loss of $3,101,768, adjusted for non-cash expenses in the aggregate amount of $56,868, plus $472,922 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, 2024 and 2023 was $2,733,158 and $2,191,555, respectively. During the year ended December 31, 2024, we received $2,853,000 proceeds from the issuance of convertible notes payable, $300,000 from the issuance of common stock of our majority-owned subsidiary, VisiRose, and offset by $100,000 repayment of a 2021 convertible note payable and $305,135 for repayment of the short-term note payable. During the year ended December 31, 2023, we received $2,475,000 proceeds from the issuance of convertible notes payable and paid $283,445 for the repayment of the short-term note payable. Critical Accounting Estimates We prepare our consolidated financial statements in accordance with U.S. GAAP, which require our management to make estimates that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the balance sheet dates, as well as the reported amounts of revenues and expenses during the reporting periods. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on our own historical experience and other assumptions that we believe are reasonable after taking account of our circumstances and expectations for the future based on available information. We evaluate these estimates on an ongoing basis. We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. There are items within our financial statements that require estimation but are not deemed critical, as defined above. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. 28