NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Business Organization and Nature of Operations
Provectus
Biopharmaceuticals, Inc., a Delaware corporation (together with its subsidiaries, “Provectus” or the “Company”),
is a clinical-stage biotechnology company developing immunotherapy medicines for different diseases, with the aim of maximizing the curative
impact of these medicines and achieving immunity from treated disease. These investigational drugs are based on a wholly owned class
of small molecules called halogenated xanthenes (“HXs”). Our lead HX molecule is named rose bengal sodium (“RBS”).
| |
● |
Oncology:
PV-10®, an investigational cancer immunotherapy administered by intralesional (“IL”) injection and
an injectable formulation of cGMP (“current Good Manufacturing Practice”) RBS, is undergoing clinical study for adult
solid tumor cancers, such as melanoma and gastrointestinal (“GI”) tumors (including hepatocellular carcinoma (“HCC”),
colorectal cancer metastatic to the liver (“mCRC”), neuroendocrine tumors (“NET”) metastatic to the liver
(“mNET”), and uveal melanoma metastatic to the liver (“mUM”), among others). Orphan drug designation (“ODD”)
status was granted to PV-10 by the FDA for metastatic melanoma in 2006, HCC
in 2011, and ocular melanoma (including uveal melanoma) in 2019.
Oral
formulations of cGMP RBS are also undergoing preclinical study as prophylactic and therapeutic treatments for high-risk and refractory
adult solid tumor cancers, such as head and neck, breast, colorectal, and testicular cancers. In vivo data of a colorectal
tumor murine model that continuously promotes abnormal cell proliferation and transformation into cancer indicate increased survival
in both prophylactic and therapeutic settings. |
| |
|
|
| |
● |
Pediatric
Oncology: IL PV-10 is also undergoing preclinical study for pediatric solid tumor cancers (including neuroblastoma, Ewing sarcoma,
rhabdomyosarcoma, and osteosarcoma). ODD status was granted to PV-10 by the FDA for neuroblastoma in 2018. |
| |
|
|
| |
● |
Hematology:
Oral formulations of cGMP RBS are undergoing preclinical study for refractory and relapsed pediatric blood cancers (including
leukemias). In vivo data of an acute lymphoblastic leukemia murine model indicated increased survival. |
| |
|
|
| |
● |
Virology:
Systemically administered formulations of cGMP RBS are undergoing preclinical study for the novel strain of coronavirus (“CoV”):
severe acute respiratory syndrome (“SARS”) CoV 2 (“SARS-CoV-2”). In silico data indicate docking-based
binding affinity to SARS-CoV-2’s main protease, spike protein, and different variants of the spike protein. In vitro
data indicate activity against SARS-CoV-2 in African green monkey kidney cell (Vero) and human lung epithelial cell (Calu-3) models,
and synergistic activity with remdesivir in a Vero cell model. |
| |
|
|
| |
● |
Microbiology:
Different formulations of cGMP RBS are undergoing preclinical study as potential treatments for multi-drug resistant (“MDR”)
bacteria, such as gram-positive and gram-negative. |
| |
|
|
| |
● |
Ophthalmology:
Topical formulations of cGMP RBS are undergoing preclinical study as potential treatments for diseases of the eye, such as infectious
keratitis. |
| |
● |
Dermatology:
PH-10®, an investigational immuno-dermatology agent administered as a topical gel and formulation of cGMP RBS,
is undergoing monotherapy clinical study and preclinical study of combination therapy with approved drugs for inflammatory dermatoses
(including psoriasis and atopic dermatitis). |
| |
|
|
| |
● |
Animal
Health: Different formulations of cGMP RBS are undergoing development as potential treatments for animal cancers and dermatological
disorders. |
To
date, the Company has not generated any revenues or profits from planned principal operations. The Company’s activities are subject
to significant risks and uncertainties, including failing to successfully develop and license or commercialize the Company’s prescription
drug candidates.
SARS-CoV-2
was reportedly first identified in late-2019 and subsequently declared a global pandemic by the World Health Organization on March 11,
2020. As a result of the SARS-CoV-2 pandemic, many companies have experienced disruptions of their operations and the markets they serve.
The Company has taken several temporary precautionary measures intended to help ensure the well-being of its employees and contractors
and to minimize business disruption. The Company considered the impact of SARS-CoV-2 pandemic on its business and operational assumptions
and estimates, and determined there were no material adverse impacts on the Company’s results of operations and financial position
at December 31, 2021.
The
full extent of the SARS-CoV-2 pandemic impacts on the Company’s operations and financial condition is still uncertain. The
Company has experienced slower than normal enrollment and treatment of patients, and a prolonged SARS-CoV-2 pandemic could have a material
adverse impact on the Company’s business and financial results, including the timing and ability of the Company to raise capital,
initiate and/or complete current and/or future preclinical studies and/or clinical trials; disrupt the Company’s regulatory activities;
and/or have other adverse effects on the Company’s clinical development.
2.
Liquidity and Going Concern
The
Company’s cash, cash equivalents, and restricted cash were $3,106,942
at December 31, 2021 which includes the $2,423,958
of restricted cash resulting from a grant
received from the State of Tennessee. The Company’s working capital deficiency was $4,258,679
and $30,288,035
as of December 31, 2021 and 2020, respectively.
The improvement in working capital is primarily driven by the conversion of the 2017 and 2020 Notes into Series D and D-1 Preferred Stock.
The Company continues to incur significant operating losses. Management expects that significant on-going operating expenditures will
be necessary to successfully implement the Company’s business plan and develop and market its products. These circumstances raise
substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these consolidated
financial statements are issued. Implementation of the Company’s plans and its ability to continue as a going concern will depend
upon the Company’s ability to develop PV-10, PH-10, and/or any other halogenated xanthene-based drug products, and to raise additional
capital.
The
Company plans to access capital resources through possible public or private equity offerings, including the 2021 Financing (as defined
in Note 5), exchange offers, debt financings, corporate collaborations, or other means. In addition, the Company continues to explore
opportunities to strategically monetize its lead drug candidates, PV-10 and PH-10, through potential co-development and licensing transactions,
although there can be no assurance that the Company will be successful with such plans. The Company has historically been able to raise
capital through equity and debt offerings, although no assurance can be provided that it will continue to be successful in the future.
If the Company is unable to raise sufficient capital, it will not be able to pay its obligations as they become due.
The
primary business objective of management is to build the Company into a commercial-stage biotechnology company; however, the Company
cannot assure that it will be successful in co-developing, licensing, and/or commercializing PV-10, PH-10, and/or any other halogenated
xanthene-based drug candidate developed by the Company or entering into any financial transaction. Moreover, even if the Company is successful
in improving its current cash flow position, the Company nonetheless plans to seek additional funds to meet its long-term requirements
in 2022 and beyond. The Company anticipates that these funds will otherwise come from the proceeds of private placement transactions,
the exercise of existing warrants and outstanding stock options, or public offerings of debt or equity securities. While the Company
believes that it has a reasonable basis for its expectation that it will be able to raise additional funds, the Company cannot provide
assurance that it will be able to complete additional financing in a timely manner. In addition, any such financing may result in significant
dilution to stockholders.
3.
Significant Accounting Policies
Principles
of Consolidation
Intercompany
balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”)
requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. The Company’s significant estimates and assumptions include the recoverability
and useful lives of long-lived assets, stock-based compensation, accrued liabilities and the valuation allowance related to the Company’s
deferred tax assets.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. As of
December 31, 2021 and 2020, the Company’s cash equivalents consist of Treasury bills.
Restricted
Cash
Restricted
cash consists of a grant award of $2,500,000
received in cash from the State of Tennessee less payments
to vendors for expenses and deposits in the amount of $76,042.
See Note 14. Grants.
Cash
Concentrations
Cash,
cash equivalents, and restricted cash are
maintained at financial institutions and, at times, balances may exceed federally insured limits of $250,000, although the Company seeks
to minimize this through treasury management. The Company has never experienced any losses related to these balances although no assurance
can be provided that it will not experience any losses in the future. As of December 31, 2021 and 2020, the Company had cash,
cash equivalent, and restricted cash balances in excess of FDIC insurance limits of $2,856,942
and $0,
respectively.
Equipment
and Furnishings, net
Equipment
and furnishings are stated at cost less accumulated depreciation. Depreciation of equipment is provided for using the straight-line method
over the estimated useful lives of the assets. Computers and office equipment are being depreciated over five years; furniture and fixtures
are being depreciated over ten years. Leasehold improvements are amortized over the lesser of (a) the useful life of the asset; or (b)
the remaining lease term. Maintenance and repairs are charged to operations as incurred. The Company capitalizes cost attributable to
the betterment of property and equipment when such betterment extends the useful life of the assets.
Long-Lived
Assets
The
Company reviews the carrying values of its long-lived assets for possible impairment whenever an event or change in circumstances indicates
that the carrying amount of the assets may not be recoverable. Any long-lived assets held for disposal are reported at the lower of their
carrying amounts or fair value less cost to sell. Management has determined there to be no impairment during the years ended December
31, 2021 and 2020.
Patent
Costs, net
Internal
patent costs are expensed in the period incurred. Patents purchased are capitalized and amortized over the remaining estimated useful
life of the patent.
The
patents are fully amortized as of December 31, 2021 and 2020. Patent amortization was $0 and $228,107
during the years ended December 31, 2021 and
2020, respectively.
Related
Party Receivables
Management
estimates the reserve for uncollectibility based on existing economic conditions, the financial conditions of the current and former
employees, and the amount and age of past due receivables. Receivables are considered past due if full payment is not received by the
contractual due date. Past due amounts are generally written off against the reserve for uncollectibility only after all collection attempts
have been exhausted. See Note 8 – Short-term Receivables.
Grant
Income
Grant
income is recognized when qualifying costs are incurred and there is reasonable assurance that 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 other income
when qualifying costs are incurred.
Research
and Development
Research
and development costs are charged to expense when incurred. An allocation of payroll expenses to research and development is made based
on a percentage estimate of time spent. The research and development costs include the following: payroll, consulting and contract labor,
lab supplies and pharmaceutical preparations, insurance, rent and utilities, and depreciation and amortization.
Leases
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard related to leases to increase transparency
and comparability among organizations by requiring the recognition of operating lease right-of-use (“ROU”) assets and lease
liabilities on the balance sheet (“ASC 842”) with amendments issued in 2018. Most prominent among the changes in the standard
is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard,
disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty
of cash flows arising from leases. The Company is also required to recognize and measure new leases at the adoption date and recognize
a cumulative-effect adjustment in the period of adoption using a modified retrospective approach, with certain practical expedients available.
The
Company adopted ASC 842 effective January 1, 2019 and elected to apply the available practical expedients. The standard had an impact
on the Company’s consolidated balance sheets but did not have a material impact on the Company’s consolidated statements
of operations or cash flows upon adoption. The most significant impact was the recognition of ROU assets and lease liabilities for operating
leases.
Income
Taxes
The
Company accounts for income taxes under the liability method in accordance with Accounting Standards Codification (“ASC”)
740 “Income Taxes”. Under this method, deferred income tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. A valuation allowance is established if it is more likely than not that all, or some portion,
of deferred income tax assets will not be realized. The Company has recorded a full valuation allowance to reduce its net deferred income
tax assets to zero. In the event the Company were to determine that it would be able to realize some or all its deferred income tax assets
in the future, an adjustment to the deferred income tax asset would increase income in the period such determination was made.
The
Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained upon an examination.
Any recognized income tax positions would be measured at the largest amount that is greater than 50% likely of being realized. Changes
in recognition or measurement would be reflected in the period in which the change in judgment occurs. The Company would recognize any
corresponding interest and penalties associated with its income tax positions in income tax expense. There were no income taxes, interest
or penalties incurred in 2021 or 2020.
Convertible
Instruments
The
Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative
financial instruments to be separately accounted for in accordance with ASC Topic 815: Derivatives and Hedging. The accounting
treatment of derivative financial instruments requires that the Company record qualifying embedded conversion options and any related
freestanding instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance
sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance
sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification
changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.
Embedded conversion options classified as derivative liabilities and any related equity classified freestanding instruments are recorded
as a discount to the host instrument.
If
the instrument is determined to not be a derivative liability, the Company then evaluates for the existence of a beneficial conversion
feature by comparing the commitment date fair value to the effective conversion price of the instrument.
Preferred
Stock
The
Company applies the accounting standards for distinguishing liabilities from equity when determining the classification and measurement
of its preferred stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at
fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within
the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control)
are classified as temporary equity. At all other times, preferred shares are classified as stockholders’ deficiency.
Basic
and Diluted Loss Per Common Share
Basic
loss per common share is computed by dividing net loss by the weighted average number of vested common shares outstanding during the
period. Diluted earnings per share reflects the potential dilution that could occur if securities or other instruments to issue common
stock were exercised or converted into common stock. The following securities are excluded from the calculation of weighted average dilutive
common shares because their inclusion would have been anti-dilutive:
Schedule of Securities Excluded from Calculation of Weighted Average Dilutive Common Shares
| | |
December 31, | |
| | |
2021 | | |
2020 | |
| Warrants | |
| 512,500 | | |
| 87,264,164 | |
| Options | |
| 3,625,000 | | |
| 4,800,000 | |
| Convertible preferred stock | |
| 104,557,737 | | |
| 65,663 | |
| | |
| | | |
| | |
| Total potentially dilutive shares | |
| 108,695,237 | | |
| 92,129,827 | |
Fair
Value of Financial Instruments
The
Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and
Disclosures” (“ASC 820”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. The Company determines the estimated fair value of amounts presented in these consolidated financial statements
using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data
to develop the estimates of fair value. The estimates presented in the financial statements are not necessarily indicative of the amounts
that could be realized in a current exchange between buyer and seller. The use of different market assumptions and/or estimation methodologies
may have a material effect on the estimated fair value amounts. These fair value estimates were based upon pertinent information available
as of December 31, 2021 and 2020. The carrying amounts of the Company’s financial assets and liabilities, such as cash and cash
equivalents, restricted cash, receivables, other current assets, accounts payable, unearned grant income, and accrued expenses approximate
fair values due to the short-term nature of these instruments.
The
carrying amounts of our credit obligations approximate fair value because the effective yields on these obligations, which include contractual
interest rates are comparable to rates of returns for instruments of similar credit risk.
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
| Level
1 |
|
Inputs
use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. |
| |
|
|
| Level
2 |
|
Inputs
use directly or indirectly observable inputs. These inputs include quoted prices for similar assets and liabilities in active markets
as well as other inputs such as interest rates and yield curves that are observable at commonly quoted intervals. |
| |
|
|
| Level
3 |
|
Inputs
are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the
related asset or liability. |
In
instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements
in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment
of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset
or liability.
Both
observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category.
As a result, the unrealized gains and losses for assets within the Level 3 category may include changes in fair value that were attributable
to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company data) inputs. Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar
techniques and at least one significant model assumption or input is unobservable.
Foreign
Currency Translation
The
Company’s reporting currency is the United States Dollar. The functional currencies of the Company’s operating subsidiaries
are their local currencies (United States Dollar and Australian Dollar). Australian Dollar denominated assets and liabilities are translated
into the United States Dollar at the balance sheet date ($22,053
and $407,851
at December 31, 2021 and $10,552
and $332,446
at December 31, 2020, respectively), and expense
and other income accounts are translated at a weighted average exchange rate for the years then ended ($85,052
and $44,994
for the years ended December 31, 2021 and 2020,
respectively). Equity is translated at historical rates and the resulting foreign currency translation adjustments are included as a
component of accumulated other comprehensive loss (“AOCL”), which is a separate component of stockholders’ deficiency.
Therefore, the U.S. dollar value of the non-equity translated items in the Company’s consolidated financial statements will
fluctuate from period to period, depending on the changing value of the U.S. dollar versus these currencies.
The
Company engages in foreign currency denominated transactions with its Australian subsidiary. At the date that the transaction is recognized,
each asset, liability, revenue, expense, gain or loss arising from the transaction is measured and recorded in the functional currency
of the recording entity using the exchange rate in effect at that date. At each balance sheet date, recorded monetary balances denominated
in a currency other than the functional currency are adjusted using the exchange rate at the balance sheet date, with gains or losses
recorded in other income or other expense.
Stock-Based
Compensation
The
Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. The
fair value of the award is measured on the grant date and then is recognized over the period during which services are required to be
provided in exchange for the award, usually the vesting period. The Company computes the fair value of equity-classified warrants and
options granted using the Black-Scholes option pricing model. Option valuation models require the input of highly subjective assumptions
including the expected volatility factor of the market price of the Company’s common stock which is determined by reviewing its
historical public market closing prices.
Recently
Issued Accounting Pronouncements
In
August 2020, FASB issued Accounting Standards Update (“ASU”) No. 2020-06, “Debt—Debt with Conversion
and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting
for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”). Under ASU 2020-06,
the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features
that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for
as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized
cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted
method to be applied for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including
interim periods within those fiscal years, with early adoption permitted. Adoption of the standard requires using either a modified retrospective
or a full retrospective approach. The Company is currently evaluating the effect of the adoption of ASU 2020-06 will have on its consolidated
financial statements and related disclosures.
In
October 2020, the FASB issued ASU 2020-10 “Codification Improvements”, which improves consistency by amending the
Codification to include all disclosure guidance in the appropriate disclosure sections and clarifies application of various provisions
in the Codification by amending and adding new headings, cross referencing to other guidance, and refining or correcting terminology.
The guidance is effective for the Company beginning in the first quarter of fiscal year 2022 with early adoption permitted. The Company
adopted this standard on January 1, 2022 and it did not have a material effect on its consolidated financial statements.
On
May 3, 2021, the FASB issued ASU
2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock
Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s
Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides
clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified
written call options (such as warrants) that remain equity classified after modification or exchange. This standard is effective for
fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Issuers should apply the new standard
prospectively to modifications or exchanges occurring after the effective date of the new standard. Early adoption is permitted, including
adoption in an interim period. If an issuer elects to early adopt the new standard in an interim period, the guidance should be applied
as of the beginning of the fiscal year that includes that interim period. The Company adopted this standard on January 1, 2022 and
it did not have a material effect on its consolidated financial statements.
Recent
Adopted Accounting Pronouncements
In
December 2019, the FASB issued ASU 2019-12,
Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 simplify the accounting for income taxes by removing
certain exceptions to the general principles in Accounting Standards Codification (“ASC”) Topic 740, Income Taxes.
The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing
guidance. The Company adopted ASU 2019-12 on January 1, 2021 and there was no material impact on the Company’s consolidated
financial statements or disclosures.
In
January 2020, the FASB issued ASU 2020-01, “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures
(Topic 323), and Derivatives and Hedging (Topic 815).” ASU 2020-01 states any equity security transitioning from the alternative
method of accounting under Topic 321 to the equity method, or vice versa, due to an observable transaction will be remeasured immediately
before the transition. In addition, the ASU clarifies the accounting for certain non-derivative forward contracts or purchased call options
to acquire equity securities stating such instruments will be measured using the fair value principles of Topic 321 before settlement
or exercise. 20 The Company adopted ASU 2020-01 on a prospective basis on January 1, 2021 and there was no material impact on the Company’s
consolidated financial statements or disclosures.
In
March 2020, the FASB issued ASU No.
2020-03, “Codification Improvements to Financial Instruments” (“ASU 2020-03”). There are seven issues
addressed in this update. Issues 1 – 5 were clarifications and codifications of previous updates. Issue 3 relates only to depository
and lending institutions and therefore would not be applicable to the Company. Issue 6 was a clarification on determining the contractual
term of a net investment in a lease for purposes of measuring expected credit losses, an issue not applicable to the Company. Issue 7
relates to the regaining control of financial assets sold and the recordation of an allowance for credit losses. The amendment related
to issues 1, 2, 4 and 5 became effective immediately upon adoption of the update. Issue 3 becomes effective for fiscal years beginning
after December 15, 2019. Issues 6 and 7 become effective on varying dates that relate to the dates of adoption of other updates. The
Company adopted the applicable provisions within ASU 2020-03 which became effective during fiscal 2020 and 2021 and this adoption did
not have a material impact on the Company’s consolidated financial statements and financial statement disclosures.
4.
Other Accrued Expenses
The
following table summarizes the other accrued expenses at December 31, 2021 and 2020:
Schedule
of Other Accrued Expenses
| | |
2021 | | |
2020 | |
| | |
For The Years Ended | |
| | |
December 31, | |
| | |
2021 | | |
2020 | |
| Accrued payroll and taxes | |
$ | 174,533 | | |
$ | 31,504 | |
| Accrued vacation | |
| 42,871 | | |
| 25,452 | |
| Accrued directors’ fees | |
| 1,560,589 | | |
| 1,175,589 | |
| Accrued PPP interest | |
| - | | |
| 438 | |
| Accrued other expenses | |
| 224,493 | | |
| 267,799 | |
| Total Other Accrued Expenses | |
| 2,002,486 | | |
| 1,500,782 | |
5.
Convertible Notes Payable
The
following summarizes convertible note activity during the years ended December 31, 2021 and 2020:
Schedule
of Convertible Notes Payable
| | |
2017 Notes | | |
2020 Notes | | |
2021 Notes | | |
Total | |
| Balance at January 1, 2020 | |
$ | 20,067,000 | | |
$ | 100,000 | | |
$ | - | | |
$ | 20,167,000 | |
| Issuances | |
| - | | |
| 3,225,000 | | |
| - | | |
| 3,225,000 | |
| Balance at December 31, 2020 | |
| 20,067,000 | | |
| 3,325,000 | | |
| - | | |
| 23,392,000 | |
| Issuances | |
| - | | |
| 1,700,000 | | |
| 1,460,000 | | |
| 3,160,000 | |
| Conversions | |
| (20,067,000 | ) | |
| (5,025,000 | ) | |
| - | | |
| (25,092,000 | ) |
| Balance at December 31, 2021 | |
$ | - | | |
$ | - | | |
$ | 1,460,000 | | |
$ | 1,460,000 | |
2021
Financing
On
August 13, 2021, the Board approved a Financing Term Sheet (the “2021 Term Sheet”), which set 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.
Pursuant
to the 2021 Term Sheet, the 2021 Notes will either 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 is 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 Preferred Stock at a price per share equal to $2.8620. The Series D-1 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. |
The
embedded conversion options associated with the 2021 Notes do not require bifurcation and treatment as a derivative liability and they
do not represent a beneficial conversion feature because the effective conversion price is not at a discount to the commitment date market
price.
As
of December 31, 2021, the Company had received 2021 Notes (defined above) proceeds of $1,460,000, of which $200,000
is from a related party investor (an officer
of the Company).
2020
Financing
On December 31, 2019, the Board approved a Definitive
Financing Term Sheet (the “2020 Term Sheet”), which sets forth the terms of a financing in the form of secured convertible
loans from investors that were evidenced by convertible promissory notes (the “2020 Notes”), which bear interest at the rate
of eight percent (8%) per annum.
The
outstanding principal amount and interest payable under the 2020 was convertible into shares of a new series of preferred stock
at a price per share equal to $2.8620,
either (a) at any time after the new series of preferred stock is designated, at the sole discretion of the investors; or (b) automatically
on June 20, 2021, subject to certain exceptions. See 2021 Conversions of Notes into Preferred Stock below.
Over
time, the Company received 2020 Notes proceeds of $5,025,000, of which $100,000 is from a related party investor, an officer of the Company.
2017
Financing
On
March 23, 2017, the Company entered into an exclusive Definitive Financing Commitment Term Sheet with a group of the Company’s
stockholders (the “PRH Group”), which was amended and restated effective as of March 19, 2017 (the “2017 Term Sheet”)
that set forth the terms of a financing in the form of secured convertible loans from the PRH Group or other investors that were evidenced
by convertible promissory notes (the “2017 Notes”), which bore interest at the rate of eight percent (8%)
per annum.
The
outstanding principal amount and interest payable under the 2017 Notes were convertible into shares of a new series of preferred
stock at a price per share equal to $0.2862,
either (a) at any time after the new series of preferred stock is designated, at the sole discretion of the investors; or (b) automatically
at the eighteen-month anniversary of the funding of the final tranche of 2017 Notes, subject to certain exceptions. See 2021 Conversions
of Notes into Preferred Stock below.
Over
time, the Company received 2017 Notes proceeds of $20,067,000, of which $6,670,000 is from related party investors. Officers of the Company
invested $3,050,000 and Board of Director members invested $3,620,000.
Firm
Commitment
Previously,
the Company had not designated the new series of preferred stock into which the 2017 Notes and the 2020 Notes (collectively the “Notes”)
were convertible into. As a result, the Company did not analyze the Notes for a potential beneficial conversion feature, as the definition
of a firm commitment had not been met since the Notes were not yet convertible. On June 17, 2021, the required Certificates of Designation
were filed with the Delaware Secretary of State. Accordingly, a firm commitment was achieved. The Company analyzed the Notes for a beneficial
conversion feature and determined that there was none because the Notes have an effective conversion price of $0.2862 per share of underlying
common stock, which exceeds the $0.07 per share commitment date closing market price of the common stock.
2021
Conversions of Notes into Preferred Stock
The
following summarizes the conversion activity during the year ended December 31, 2021:
Schedule
of Conversion of Notes into Preferred Stock
| | |
2021 Conversions Into Preferred
Stock | |
| | |
Series D | | |
Series D-1 | | |
Total | |
| Principal converted | |
$ | 2,712,000 | | |
$ | 22,380,000 | | |
$ | 25,092,000 | |
| Accrued interest converted | |
| 829,222 | | |
| 4,651,858 | | |
| 5,481,080 | |
| Total converted | |
$ | 3,541,222 | | |
$ | 27,031,858 | | |
$ | 30,573,080 | |
| Conversion price | |
$ | 0.2862 | | |
$ | 2.8620 | | |
| | |
| Shares | |
| 12,373,247 | | |
| 9,440,594 | | |
| 21,813,841 | |
Any
fractional shares issuable pursuant to the formula were rounded up to the next whole share of Series D and Series D-1 Preferred Shares.
The
2017 Notes originally provided that they were convertible into a new series of preferred stock at a price per share equal to $0.2862
(the “Original Conversion Price”).
In
order to ensure that the Company had sufficient authorized shares of preferred stock into which the 2017 Notes would convert, yet keep
the economic terms of the 2017 Notes substantially equivalent, on February 26, 2019, the Company entered into amendments (the
“Amendments”) to the 2017 Notes (as amended, the “Amended 2017 Notes”) with a large majority of the holders of
2017 Notes to increase the conversion price by 10 times from $0.2862
to $2.8620
(the “New Conversion Price”) and
to change the conversion ratio by providing that one share of Preferred Stock would be convertible into 10 shares of common stock (the
“New Conversion Ratio”). The impact of the Amendments was to reduce by 10 times the number of shares of preferred stock into
which the 2017 Notes would convert, while keeping the economic terms the same. The 2020 Notes had substantially similar terms to the
Amended 2017 Notes, including being convertible into preferred stock at the New Conversion Price, with the Preferred Stock being convertible
into Common Stock at the New Conversion Ratio.
In
order to (i) address the fact that a small minority of the holders of 2017 Notes did not execute the Amendments and (ii) ensure economic
fairness for all of the holders of the 2017 Notes and 2020 Notes, on June 17, 2021, the Company designated two separate series
of preferred stock into which the 2017 Notes and 2020 Notes would convert: (i) the Company’s Series D Convertible Preferred Stock,
par value $0.001
per share was designated for the holders of 2017
Notes who did not execute the Amendments and (ii) the Company’s Series D-1 Convertible Preferred Stock, par value $0.001
per share was designated for the holders of Amended
2017 Notes and the holders of the 2020 Notes.
On
June 20, 2021, principal and interest in the aggregate amount of $3,541,222,
representing all of the outstanding non-amended 2017 Notes, was converted into 12,373,247
shares of Series D Convertible Preferred Stock
at the Original Conversion Price of $0.2862.
Further on June 20, 2021, principal and interest in the aggregate amount of $27,031,858,
representing all of the outstanding Amended 2017 Notes and outstanding 2020 Notes was converted into 9,440,594
shares of Series D-1 Convertible Preferred Stock
at the New Conversion Price of $2.862.
Any fractional shares issuable pursuant to the formula were rounded up to the next whole share of Series D and Series D-1 Preferred
Shares. See Note 9. Stockholders’ Deficiency for additional information on the Series D and Series D-1 Convertible Preferred
Stock.
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.
6.
Notes Payable
On April 20, 2020, the
Company received a $62,500
loan under the CARES Act PPP (the “PPP Loan”). The
PPP provides for loans to qualifying businesses for amounts of up to 2.5 times certain of the borrower’s average monthly payroll
expenses. On May 20, 2021, the Company applied for forgiveness of the PPP Loan. On June 2, 2021, the Company was awarded full
forgiveness of the PPP Loan and accrued interest. During the year ended December 31, 2021, the Company recognized a gain on forgiveness
of the PPP loan of $62,500
and interest of $594.
The
Company obtained short-term financing from AFCO Insurance Premium Finance for our commercial insurance policies. As of December 31, 2021
and December 31, 2020, the balance of the note payable was $238,452 and $212,790, respectively.
7.
Related Party Transactions
During
the years ended December 31, 2021 and 2020, the Company paid Mr. Bruce Horowitz (Capital Strategists) consulting fees of $169,600
and $254,400,
respectively, for services rendered. Director fees for Mr. Horowitz for the year ending December 31, 2021 and 2020 were
$75,000
and $75,000,
respectively. Accrued director fees for Mr. Horowitz as of December 31, 2021 and 2020 were $281,250
and $206,250,
respectively. Total amount owed to Capital Strategist as of December 31, 2021 and 2020 were $127,200
and $42,400,
respectively. Mr. Horowitz serves as both COO and
a Director.
See
Note 5 and Note 8 for details of other related party transactions.
Director
fees during the years ended December 31, 2021 and 2020 were $385,000 and $383,065, respectively. Accrued directors’ fees as of
December 31, 2021 and 2020 were $1,560,589 and $1,175,589, respectively.
8.
Short-term Receivables
Receivables
at December 31, 2021 and 2020, include the Australian VAT tax credit and approximately $2,100,000
that
is owed from Peter Culpepper. The Company has established a reserve of approximately $2,100,000
as of December 31, 2021 and 2020,
which represents the amount Culpepper owes to the Company under the Derivative Lawsuit Settlement (excluding the amount of attorneys’
fees incurred in enforcing the terms of the Derivative Lawsuit Settlement).
9.
Stockholders’ Deficiency
Authorized
Capital
As
of December 31, 2021, the Company was authorized to issue 1,000,000,000 shares of common stock, $0.001 par value, and 25,000,000 shares
of preferred stock, $0.001 par value. The holders of the Company’s common stock are entitled to one vote per share. The preferred
stock is designated as follows: 240,000 shares to Series B Convertible Preferred Stock (the “Series B Preferred Stock”),
12,374,000 shares to Series D Convertible Preferred Stock (the “Series D Preferred Stock”), and 9,441,000 shares of Series
D-1 Convertible Preferred Stock (the “Series D-1 Preferred Stock”) and 2,945,000 shares undesignated.
Series
B Preferred Stock
On
August 25, 2016, the Company filed the Series B Certificate of Designation with the Delaware Secretary of State. The Series B Certificate
of Designation provides for the issuance of the Series B Preferred Stock with a par value $0.001 per share and a stated value of $25.00
per share. The Series B Preferred Stock has no voting rights. The holders of Series B Preferred Stock are entitled to receive cumulative
dividends at the rate 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, at which time the Series B Preferred Stock automatically converts into common stock at the adjusted conversion price
of $0.0533.
During
the year ended December 31, 2021, 100
shares of outstanding Series B Preferred Stock
automatically converted, at the fifth-year anniversary of their issuance, into 65,666
shares of common stock, which represents $3,500
($2,500
of stated value plus $1,000
of cumulative dividends) divided by the adjusted
conversion price.
Series
D and Series D-1 Preferred Stock
The
rights, preferences and privileges of the Series D Preferred Stock and Series D-1 Preferred Stock (collectively, the “D-Series
Preferred Stock”) are set forth in their respective Certificates of Designation. The Board of Directors of the Company approved
each of the Certificates of Designation on June 14, 2021, and each Certificate of Designation was filed with the Delaware Secretary
of State on June 17, 2021. The Series D Certificate of Designation established and designated 12,374,000
shares of Series D Preferred Stock. The Series
D-1 Certificate of Designation established and designated 9,441,000
shares of Series D-1 Preferred Stock.
On
June 20, 2021, the Company issued 12,373,247
shares of Series D Preferred Stock upon the conversion
of all of the outstanding 2017 Notes at the Original Conversion Price of $0.2862
and
issued 9,440,594
shares of Series D-1 Preferred Stock upon the
conversion of all outstanding Amended 2017 Notes and 2020 Notes at the New Conversion Price of $2.862.
See Note 5. Convertible Notes Payable for additional information on the conversion.
During
the year ended December 31, 2021, the Company received consideration of $150,000
from an investor in exchange for an aggregate
of 52,411
shares of restricted Series D-1 Preferred Stock
that have not yet been issued.
During
the year ended December 31, 2021, a holder of 222,145 shares of Series D-1 Preferred Stock voluntarily converted the Preferred Stock
into 2,221,450 shares of common stock.
Rank
The
Series D Preferred Stock and the Series D-1 Preferred Stock rank pari passu with each other. The D-Series Preferred Stock rank
senior to the Common Stock and any other class or series of the Company’s capital stock, the terms of which do not provide that
shares of such class rank senior to, or pari passu with, the D-Series Preferred as to dividends and distributions upon a change
of control transaction, or the liquidation, winding-up and dissolution of the Company.
Dividends
The
D-Series Preferred Stock does not have any dividend preference but are entitled to receive, on a pari passu basis, dividends,
if any, that are declared and paid on the common stock and any other class of the Company’s capital stock that ranks junior or
on par to the D-Series Preferred Stock.
Liquidation
Preference
Upon
the occurrence of the liquidation, winding-up or dissolution of the Company or certain mergers, corporate reorganizations or sales of
the Company’s assets (each, a “Company Event”), holders of D-Series Preferred Stock will be entitled to receive a liquidation
preference before any distributions are made to holders of any other class or series of the Company’s capital stock junior to the
D-Series Preferred Stock. If a Company Event occurs within two years of June 20, 2021 (the “Date of Issuance”), the holders
of D-Series D Preferred Stock will receive, for each share of D-Series Preferred Stock, an amount in cash equal to the Original Issue
Price (as defined in the respective Certificates of Designation) multiplied by four. If a Company Event occurs from and after the second
anniversary of the Date of Issuance, the holders of D-Series Preferred Stock will receive, for each share of D-Series Preferred Stock,
an amount in cash equal to the Original Issue Price multiplied by six. The Original Issue Price for the Series D Preferred Stock is $0.2862,
and the Original Issue Price for the Series D-1 Preferred Stock is $2.862.
Voting
Rights
Holders
of shares of D-Series Preferred Stock will vote together with the holders of common stock as a single class. Each share of Series D Preferred
Stock carries the right to one vote per share. Each share of Series D-1 Preferred Stock carries the right to ten votes per share.
The
Company is not permitted to amend, alter or repeal its Certificate of Incorporation or Bylaws in a manner adverse to the relative rights,
preferences, qualifications, limitations or restrictions of the D-Series Preferred Stock without the affirmative vote of a majority of
the votes entitled to be cast by holders of outstanding shares of D-Series Preferred Stock, voting together as a single class with each
share of D-Series Convertible Preferred Stock having a number of votes equal to the number of shares of common stock then issuable upon
conversion of such share of D-Series Preferred Stock.
Conversion
The
Series D Preferred Stock is convertible at the option of the holders thereof into shares of common stock based on a one-for-one conversion
ratio. The Series D-1 Preferred Stock is convertible at the option of the holders thereof into shares of common stock based on a one-for-ten
conversion ratio. The conversion ratio of the D-Series Preferred Stock is subject to adjustment for stock splits and combinations, recapitalizations,
reclassifications, reorganizations, mergers, and consolidations. The D-Series Preferred Stock will automatically convert into shares
of common stock upon the fifth anniversary of the date of issuance.
Common
Stock Issuances
During
the year ended December 31, 2020, the Company issued 1,062,500
shares of immediately vested restricted common
stock with an aggregate issuance date value of $69,088,
which was recognized immediately as stock compensation within general and administrative expenses on the accompanying consolidated statements
of operations.
The
following summarizes the Common Stock Issuances activity during the year ended December 31, 2020:
Schedule
of Common Stock Issuance Activity
| Type | |
Date | |
Stock Issuance | | |
Grant Date Value | |
| Contractor | |
4/1/2020 | |
| 25,000 | | |
$ | 1,150 | |
| Advisory Board Member | |
7/31/2020 | |
| 25,000 | | |
| 1,800 | |
| Advisory Board Member | |
8/31/2020 | |
| 12,500 | | |
| 1,013 | |
| Advisory Board Member | |
10/26/2020 | |
| 25,000 | | |
| 1,750 | |
| Contractor | |
11/10/2020 | |
| 25,000 | | |
| 1,625 | |
| Employee | |
11/10/2020 | |
| 50,000 | | |
| 3,250 | |
| Board of Director | |
11/10/2020 | |
| 100,000 | | |
| 6,500 | |
| Board of Director/Officer | |
11/10/2020 | |
| 800,000 | | |
| 52,000 | |
| Total | |
| |
| 1,062,500 | | |
$ | 69,088 | |
During
the year ended December 31, 2021, the Company issued an aggregate of 300,000
shares of immediately vested restricted common
stock with a grant date fair value of $23,199
for services.
During
the year ended December 31, 2021, the Company issued 2,221,450 shares of common stock upon the voluntary conversion of Series D-1 Convertible
Preferred Stock.
10.
Stock Incentive Plan and Warrants
The
2017 Amendment and Restatement of the Provectus Biopharmaceuticals, Inc. 2014 Equity Compensation Plan (the “2017 Equity Compensation
Plan”) provides for the issuance of up to 20,000,000 shares of common stock pursuant to stock options for the benefit of eligible
employees and directors of the Company. Options granted under the 2017 Equity Compensation Plan are either “incentive stock options”
within the meaning of Section 422 of the Internal Revenue Code or options which are not incentive stock options. The stock options are
exercisable over a period determined by the Board of Directors (through its Compensation Committee), but generally no longer than 10
years after the date they are granted. As of December 31, 2021, there were 16,437,500 shares available for issuance under the 2017 Equity
Compensation Plan.
There
were no stock options granted during the year ended December 31, 2021.
During
the year ended December 31, 2020, the Company issued 2,425,000
five-year
immediately vested stock options to an officer/director 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 as stock compensation within general and administrative expenses on the accompanying consolidated
statements of operations.
During
the year ended December 31, 2020, the Company issued 100,000
five-year
immediately vested stock options to a director 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 as stock compensation within general and administrative expenses on the accompanying consolidated
statements of operations.
Stock
options granted during the year ended December 31, 2020 were valued using the Black Scholes Model, with the following assumptions used:
Schedule of Stock Options Granted Valued Using Black Scholes Model
| Expected terms (years) | |
| 2.50 | |
| Expected volatility | |
| 93 | % |
| Risk-free interest rate | |
| 0.23 | % |
| Expected dividend | |
| 0.00 | % |
The
following table summarizes option activity during the year ended December 31, 2021 and 2020:
Summary of Option Activity
| | |
| | |
Weighted Average | |
| | |
Shares | | |
Exercise Price | |
| | |
| | |
| |
| Outstanding and exercisable at January 1, 2020 | |
| 3,000,000 | | |
$ | 0.88 | |
| | |
| | | |
| | |
| Granted | |
| 2,525,000 | | |
| 0.20 | |
| Forfeited | |
| (725,000 | ) | |
| 0.88 | |
| Outstanding and exercisable at December 31, 2020 | |
| 4,800,000 | | |
$ | 0.46 | |
| Forfeited | |
| (1,175,000 | ) | |
| 0.89 | |
| Outstanding and exercisable at December 31, 2021 | |
| 3,625,000 | | |
$ | 0.32 | |
As
of December 31, 2021, the intrinsic value of outstanding and exercisable options was $0.
The
following table summarizes information about stock options outstanding at December 31, 2021:
Summary of Stock Options Outstanding
| Options Outstanding | |
Options Exercisable |
| Exercise Price | | |
Outstanding Number of Options | |
Weighted Average Remaining Life In Years | |
Exercisable Number of Options |
| | | |
| |
| |
|
| $ | 0.12 | | |
2,425,000 | |
3.90 | |
2,425,000 |
| $ | 0.29 | | |
100,000 | |
3.90 | |
100,000 |
| $ | 0.67 | | |
200,000 | |
1.60 | |
200,000 |
| $ | 0.75 | | |
550,000 | |
3.90 | |
550,000 |
| $ | 0.84 | | |
150,000 | |
0.50 | |
150,000 |
| $ | 0.88 | | |
150,000 | |
2.60 | |
150,000 |
| $ | 0.93 | | |
50,000 | |
0.40 | |
50,000 |
| | | | |
3,625,000 | |
3.55 | |
3,625,000 |
Warrants
During
the year ended December 31, 2020, holders of warrants exercised warrants to purchase 7,855,062 shares of common stock at a price of $0.053
per share. In connection with the exercises, the Company received cash proceeds of $418,677 and issued 7,855,062 shares of common stock.
During
the year ended December 31, 2021, holders of warrants exercised warrants to purchase 18,052,966 shares of common stock at a price of
$0.053 per share. In connection with the exercises, the Company received cash proceeds of $962,223 and issued 18,052,966 shares of common
stock. On August 30, 2021, a total of 68,723,698 of August 2016 warrants expired.
During
the year ended December 31, 2020, the Company issued 62,500
three-year immediately vested warrants to board
members to purchase an aggregate of 62,500
shares of common stock with an exercise price
of $0.2862
per share. The warrants had an aggregate grant
date fair value of $1,372,
which was recognized immediately as stock compensation within general and administrative expenses on the accompanying consolidated
statements of operations.
During
the year ended December 31, 2021, the Company issued 25,000
three-year immediately vested warrants to an
advisory board member to purchase an aggregate of 25,000
shares of common stock with exercise price of
$0.28620
per share. The warrants had an aggregate
grant date fair value of $488,
which was recognized immediately within stock compensation in general and administrative expenses.
In
applying the Black-Scholes option pricing model to warrants granted, the Company used the following assumptions:
Schedule of Assumptions of Warrants
| | |
For the Years Ended | |
| | |
December 31, | |
| | |
2021 | | |
2020 | |
| Contractual terms (years) | |
| 3.00 | | |
| 3.00 | |
| Expected volatility | |
| 92 | % | |
| 93%-95 | % |
| Risk-free interest rate | |
| 0.35 | % | |
| .011%-0.18 | % |
| Expected dividend | |
| 0.00 | % | |
| 0.00 | % |
The
following table summarizes warrant activity during the year ended December 31, 2021 and 2020:
Summary of Warrant Activity
| | |
Number of | | |
Weighted Average | |
| | |
Warrants | | |
Exercise Price | |
| | |
| | |
| |
| Outstanding and exercisable at January 1, 2020 | |
| 126,109,532 | | |
$ | 0.29 | |
| Granted | |
| 62,500 | | |
| 0.29 | |
| Exercised | |
| (7,855,062 | ) | |
| 0.05 | |
| Forfeited | |
| (31,052,806 | ) | |
| 1.06 | |
| Outstanding and exercisable at December 31, 2020 | |
| 87,264,164 | | |
$ | 0.02 | |
| Granted | |
| 25,000 | | |
| 0.29 | |
| Exercised | |
| (18,052,966 | ) | |
| 0.05 | |
| Forfeited | |
| (68,723,698 | ) | |
| 0.05 | |
| Outstanding and exercisable at December 31, 2021 | |
| 512,500 | | |
$ | 0.92 | |
As of December 31, 2021, the intrinsic value of
outstanding and exercisable warrants was $0.
The
following table summarizes information about warrants outstanding at December 31, 2021:
Summary of Warrants Outstanding
| Warrants Outstanding | | |
Warrants Exercisable | |
| Exercise Price | | |
Outstanding Number of Warrant | | |
Weighted Average Remaining Life In Years | | |
Exercisable Number of Warrants | |
| | | |
| | |
| | |
| |
| $ | 0.29 | | |
| 125,000 | | |
| 1.49 | | |
| 125,000 | |
| $ | 1.00 | | |
| 18,000 | | |
| 2.39 | | |
| 18,000 | |
| $ | 1.12 | | |
| 366,000 | | |
| 2.39 | | |
| 366,000 | |
| $ | 2.00 | | |
| 3,500 | | |
| 2.39 | | |
| 3,500 | |
| | | | |
| | | |
| | | |
| | |
| | | | |
| 512,500 | | |
| 2.17 | | |
| 512,500 | |
Holders
of the outstanding warrants are not entitled to vote and the exercise prices of such warrants are subject to customary anti-dilution
provisions.
11.
Income Taxes
The
domestic and foreign components of loss before income taxes from operations for the years ended December 31, 2021 and 2020 are as follows:
Schedule of Domestic and Foreign Loss Before Income Taxes
| | |
2021 | | |
2020 | |
| | |
Years ended December 31 | |
| | |
2021 | | |
2020 | |
| Domestic | |
$ | (5,454,489 | ) | |
$ | (6,632,593 | ) |
| Foreign | |
| (85,053 | ) | |
| (44,994 | ) |
The
income tax provision (benefit) consists of the following:
Summary of Income Tax Provision (Benefit)
| | |
| | |
Years ended December 31 | |
| | |
| | |
2021 | | |
2020 | |
| Federal: | |
| | | |
| | | |
| | |
| Current | |
| | | |
$ | - | | |
$ | - | |
| Deferred | |
| 21.00 | % | |
| 295,524 | | |
| 221,598 | |
| | |
| | | |
| | | |
| | |
| State and local: | |
| | | |
| | | |
| | |
| Current | |
| | | |
| - | | |
| - | |
| Deferred | |
| 5.14 | % | |
| 72,262 | | |
| 54,186 | |
| | |
| 26.14 | % | |
| 367,786 | | |
| 275,784 | |
| Change in valuation allowance | |
| | | |
| (367,786 | ) | |
| (275,784 | ) |
| Income tax provision (benefit) | |
| | | |
$ | - | | |
$ | - | |
The
reconciliations between the statutory federal income tax rate and the Company’s effective tax rate are as follows:
Schedule of Statutory Federal Income Tax Rate and Effective Tax Rate
| | |
2021 | | |
2020 | |
| | |
Years Ended December 31 | |
| | |
2021 | | |
2020 | |
| | |
| | |
| |
| Tax benefit at federal statutory rate | |
| (21.0 | )% | |
| (21.0 | )% |
| State income taxes, net of federal benefit | |
| (5.1 | )% | |
| (5.1 | )% |
| Permanent differences | |
| (0.9 | )% | |
| (0.7 | )% |
| Change in valuation allowance | |
| (7.2 | )% | |
| (4.1 | )% |
| Prior year true-up | |
| 2.4 | % | |
| 23.1 | % |
| Expiration of state net operating loss carryforwards | |
| 6.8 | % | |
| 4.5 | % |
| Expiration of warrants and options | |
| 3.6 | % | |
| 3.5 | % |
| Conversion of accrued interest to preferred stock | |
| 21.4 | % | |
| 0.0 | % |
| Miscellaneous | |
| 0.0 | % | |
| 0.0 | % |
| Effective income tax rate | |
| 0.0 | % | |
| 0.0 | % |
The
components of the Company’s deferred income taxes are summarized below:
Schedule of Components of Deferred Income Taxes
| | |
2021 | | |
2020 | |
| | |
December 31 | |
| | |
2021 | | |
2020 | |
| Deferred Tax Assets: | |
| | | |
| | |
| Net operating loss carryforwards | |
$ | 43,453,746 | | |
$ | 42,779,590 | |
| Stock-based compensation | |
| 186,772 | | |
| 428,726 | |
| Intangible assets | |
| 227,397 | | |
| 94,296 | |
| Research and development credit carryovers | |
| 3,049,608 | | |
| 2,985,215 | |
| Contribution carryovers | |
| 10,062 | | |
| 10,062 | |
| Accrued liabilities | |
| 505,038 | | |
| 1,503,190 | |
| Gross deferred tax assets | |
| 47,432,623 | | |
| 47,801,079 | |
| | |
| | | |
| | |
| Deferred Tax Liabilities: | |
| | | |
| | |
| Intangible assets | |
| - | | |
| - | |
| Prepaid expenses | |
| (82,179 | ) | |
| (82,839 | ) |
| Other | |
| (40,604 | ) | |
| (40,603 | ) |
| Gross deferred tax liabilities | |
| (122,783 | ) | |
| (123,442 | ) |
| | |
| | | |
| | |
| Valuation allowance | |
| (47,309,840 | ) | |
| (47,677,637 | ) |
| | |
| | | |
| | |
| Deferred tax asset, net of valuation allowance | |
$ | - | | |
$ | - | |
| | |
| | | |
| | |
| Change in valuation allowance | |
$ | 367,786 | | |
$ | 275,784 | |
A
valuation allowance against deferred tax assets is required if, based on the weight of available evidence, it is more likely than not
that some or all of the deferred tax assets may not be realized. The Company is in the early stages of development and realization of
the deferred tax assets is not considered more likely than not. As a result, the Company has recorded a full valuation allowance for
the net deferred tax asset.
Since
inception of the Company on January 17, 2002, the Company has generated federal, state, and Australian tax net operating losses
of approximately $170
million, $150
million, and $139
thousand,
respectively. Under the Tax Cuts and Jobs Act, federal net operating losses incurred after December 31, 2017 may be carried forward
indefinitely. The tax loss carryforwards of the Company may be subject to limitation by Section 382 of the Internal Revenue Code
with respect to the amount utilizable each year. This limitation could reduce the Company’s ability to utilize net operating loss
carryforwards. Federal net operating losses (“NOLS”) totaling $151.4
million expire in various amounts between 2022
and 2037. Federal NOLS totaling $18.6 million
do not expire.
Schedule of Net Operating Loss
| Year | |
Year of | |
| |
| Generated | |
Expiration | |
Amount | |
| 2002 | |
2022 | |
$ | 5,794,541 | |
| 2003 | |
2023 | |
| 1,520,649 | |
| 2004 | |
2024 | |
| 3,571,227 | |
| 2005 | |
2025 | |
| 5,530,815 | |
| 2006 | |
2026 | |
| 7,192,407 | |
| 2007 | |
2027 | |
| 10,218,952 | |
| 2008 | |
2028 | |
| 7,017,372 | |
| 2009 | |
2029 | |
| 9,573,948 | |
| 2010 | |
2030 | |
| 10,344,298 | |
| 2011 | |
2031 | |
| 11,225,047 | |
| 2012 | |
2032 | |
| 11,193,882 | |
| 2013 | |
2033 | |
| 10,273,181 | |
| 2014 | |
2034 | |
| 9,075,738 | |
| 2015 | |
2035 | |
| 17,455,417 | |
| 2016 | |
2036 | |
| 19,710,699 | |
| 2017 | |
2037 | |
| 11,703,175 | |
| 2018 | |
N/A | |
| 6,255,067 | |
| 2019 | |
N/A | |
| 4,085,063 | |
| 2020 | |
N/A | |
| 4,167,397 | |
| 2021 | |
N/A | |
| 4,166,084 | |
| Total NOLS | |
| |
$ | 170,074,959 | |
State
NOLS totaling $150 million expire in various years between 2022 and 2036.
| Year | |
Year of | |
| |
| Generated | |
Expiration | |
Amount | |
| 2007 | |
2022 | |
$ | 10,318,963 | |
| 2008 | |
2023 | |
| 7,106,425 | |
| 2009 | |
2024 | |
| 9,680,770 | |
| 2010 | |
2025 | |
| 10,440,651 | |
| 2011 | |
2026 | |
| 11,362,120 | |
| 2012 | |
2027 | |
| 11,311,394 | |
| 2013 | |
2028 | |
| 10,381,763 | |
| 2014 | |
2029 | |
| 9,278,510 | |
| 2015 | |
2030 | |
| 18,547,287 | |
| 2016 | |
2031 | |
| 20,166,661 | |
| 2017 | |
2032 | |
| 12,131,850 | |
| 2018 | |
2033 | |
| 6,455,113 | |
| 2019 | |
2034 | |
| 4,211,210 | |
| 2020 | |
2035 | |
| 4,234,755 | |
| 2021 | |
2036 | |
| 4,166,084 | |
| Total NOLS | |
| |
$ | 149,793,556 | |
Australia
NOLS totaling $138,540
do not expire.
| Year Generated | |
Year of Expiration | |
Amount
| |
| 2017 | |
N/A | |
$ | 861 | |
| 2018 | |
N/A | |
| 54,101 | |
| 2019 | |
N/A | |
| 13,843 | |
| 2020 | |
N/A | |
| 13,384 | |
| 2021 | |
N/A | |
| 56,351 | |
| Total NOLS | |
| |
$ | 138,540 | |
The
Company has determined that there are no uncertain tax positions as of December 31, 2021 or 2020.
The
Company files income tax returns in the U.S. federal jurisdiction and the state of Tennessee. The Company intends to permanently reinvest
earnings in its foreign subsidiary.
To
date, the Company’s operations conducted by its Australian subsidiary consist primarily of research and development activities.
As of December 31, 2021, there were no accumulated earnings and profits in the Company’s foreign subsidiary. At current tax rates,
no additional Federal income taxes (net of available tax credits) would be payable if such earnings were to be repatriated.
12.
Leases
Leases
The
Company currently leases 4,500
square feet of corporate office space in Knoxville,
Tennessee through an operating lease agreement for a term of five
years ending on June
30, 2022. Payments are approximately $6,100
per month.
On
August 13, 2021, the Company negotiated a reduced rent from July 1, 2021 through December 31, 2021 in the amount of $6,100 per month.
Total
expense for operating leases for the year ended December 31, 2021 was $86,545,
of which, $57,697
was included within research and development
and $28,848
was included within general and administrative
expenses on the consolidated statements of operations. Total expense for operating leases for the year ended December 31, 2020
was $90,821,
of which, $60,547
was included within research and development
and $30,274
was included within general and administrative
expenses on the consolidated statements of operations.
As
of December 31, 2021, the Company had no leases that were classified as a financing lease. As of December 31, 2021, the Company did not
have additional operating and financing leases that have not yet commenced.
A
summary of the Company’s right-of-use assets and liabilities is as follows:
Schedule of Right-of-use Assets and Liabilities
| | |
For The Years Ended | |
| | |
December 31, | |
| | |
2021 | | |
2020 | |
| | |
| | |
| |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
| Operating cash flows used in operating leases | |
$ | 82,678 | | |
$ | 91,605 | |
| | |
| | | |
| | |
| Right-of-use assets obtained in exchange for lease obligations: | |
| | | |
| | |
| Operating leases | |
$ | - | | |
$ | - | |
| | |
| | | |
| | |
| Weighted Average Remaining Lease Term | |
| | | |
| | |
| Operating leases | |
| 0.50
Years | | |
| 1.50
Years | |
| | |
| | | |
| | |
| Weighted Average Discount Rate | |
| | | |
| | |
| Operating leases | |
| 8.0 | % | |
| 8.0 | % |
Future
minimum payments under non-cancellable lease as of December 31, 2021 were as follows:
Schedule of Future Minimum Payments Under Non-cancellable Lease
| Years | |
Amount | |
| | |
| |
| 2022 | |
| 46,687 | |
| Total future minimum lease payments | |
| 46,687 | |
| Less: amount representing imputed interest | |
| (1,070 | ) |
| Total | |
$ | 45,617 | |
13.
401(K) Profit Sharing Plan
The
Company maintains a retirement plan under Section 401(k) of the Internal Revenue Code, which covers all eligible employees. All employees
with U.S. source income are eligible to participate in the plan immediately upon employment. There was no contribution made by the Company
in 2021 or 2020.
14.
Grants
On
October 25, 2021, the Company received a grant award of $2,500,000
from the State of Tennessee for the study of
animal cancers and dermatological disorders for the period October 15, 2021 to June 30, 2022. As of December 31, 2021, the grant award is recorded as unearned grant revenue liability on the accompanying consolidated balance sheets.
15.
Commitments, Contingencies and Litigation
The
Company may, from time to time, be involved in litigation arising in the ordinary course of business or which may be expected to be covered
by insurance. The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material
adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
16.
Subsequent Events
The
Company has evaluated events that have occurred after the balance sheet date and through the date the financial statements were
issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required
adjustment or disclosure in the financial statements, except as disclosed below.
On February 23,
2022, the Company negotiated a continued reduced rent from January 1, 2022 through June 30, 2022 in the amount of $6,100 per month.
