UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM10-Q
(Mark One)
For the quarterly period ended September 30, 2022
OR
For the transition period from _____ to _____
Commission File Number: 001-37685
PAVMED INC.
(Exact Name of Registrant as Specified in Its Charter)
(212)949-4319
(Registrant’s Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” , “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(c) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 10, 2022, there were 93,704,719 shares of the registrant’s Common Stock, par value $0.001 per share, issued and outstanding (with such number of shares inclusive of shares of common stock underlying unvested restricted stock awards granted under the PAVmed Inc. 2014 Long-Term Incentive Equity Plan as of such date).
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except number of shares and per share data - unaudited)
See accompanying notes to the unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (DEFICIT)
for the THREE MONTHS ENDED September 30, 2022
for the NINE MONTHS ENDED September 30, 2022
1
for the THREE MONTHS ENDED September 30, 2021
(in thousands, except number of shares and per share data - unaudited)
for the NINE MONTHS ENDED September 30, 2021
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in these accompanying notes are presented in thousands, except number of shares and per-share amounts.)
Note 1 — The Company
Description of the Business
PAVmed Inc and Subsidiaries, referred to herein as “PAVmed” or the “Company,” is comprised of PAVmed Inc. and its wholly-owned subsidiary and its majority-owned subsidiaries, inclusive of Lucid Diagnostics Inc. (“Lucid Diagnostics” or “LUCID”) and Veris Health Inc. (“Veris Health” or “VERIS”).
The Company is organized to advance a broad pipeline of innovative medical technologies from concept to commercialization, employing a business model focused on capital efficiency and speed to market. The Company’s activities have focused on advancing the lead products towards regulatory approval and commercialization, protecting its intellectual property, and building its corporate infrastructure and management team.
The Company’s current operational activities are principally focused on the commercialization of EsoGuard, CarpX and Veris Solar, while its development activities are focused on pursuing FDA approval and clearance of other lead products in our product portfolio pipeline, including EsoGuard IVD, PortIO, EsoCure and digital health technologies acquired by the Company’s majority-owned subsidiary Veris Health Inc.
The ability of the Company to generate revenue depends upon the Company’s ability to successfully advance the commercialization of EsoGuard, CarpX, and Veris Solar while also completing the development and the necessary regulatory approvals of its other products and services. There are no assurances, however, the Company will be able to obtain an adequate level of financial resources required for the long-term commercialization and development of its products and services.
The Company has financed its operations principally through public and private issuances of its common stock, preferred stock, common stock purchase warrants, and debt. The Company is subject to all of the risks and uncertainties typically faced by medical device and diagnostic companies that devote substantially all of their efforts to the commercialization of their initial product and services and ongoing research and development activities and conducting clinical trials. The Company expects to continue to experience recurring losses from operations and will continue to fund its operations with debt and equity financing transactions. Notwithstanding, however, with the cash on-hand as of the date hereof and other debt and equity committed sources of financing, the Company expects to be able to fund its operations and meet its financial obligations as they become due for the one year period from the date of the issue of the Company’s unaudited condensed consolidated financial statements, as included herein in this Quarterly Report on Form 10-Q for the period ended September 30, 2022.
Note 2 — Summary of Significant Accounting Policies
Significant Accounting Policies
The Company’s significant accounting policies are as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on April 6, 2022, except as otherwise noted herein below.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of PAVmed Inc. and Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and applicable rules and regulations of the United States Securities and Exchange Commission (“SEC”), and include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company holds a majority-ownership interest and has controlling financial interest in each of: Lucid Diagnostics Inc., Veris Health Inc., and Solys Diagnostics Inc., with the corresponding noncontrolling interest included as a separate component of consolidated stockholders’ equity (deficit), including the recognition in the unaudited condensed consolidated statement of operations of a net loss attributable to the noncontrolling interest based on the respective minority-interest equity ownership of each majority-owned subsidiary. See Note 15, Noncontrolling Interest, for a discussion of each of the majority-owned subsidiaries noted above. The Company manages its operations as a single operating segment for the purposes of assessing performance and making operating decisions.
As permitted under SEC rules, certain footnotes or other financial information normally required by U.S. GAAP have been condensed or omitted. The balance sheet as of December 31, 2021 has been derived from audited consolidated financial statements at such date. The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements, and in the opinion of management, include all adjustments, consisting only of routine recurring adjustments, necessary for a fair presentation of the Company’s unaudited condensed consolidated financial information.
Note 2 — Summary of Significant Accounting Policies - continued
The consolidated results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the consolidated results to be expected for the year ending December 31, 2022 or for any other interim period or for any other future periods. The accompanying unaudited condensed consolidated financial statements and related unaudited condensed consolidated financial information should be read in conjunction with the PAVmed Inc and Subsidiaries audited consolidated financial statements and related notes thereto as of and for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K as filed with the SEC on April 6, 2022.
All amounts in the accompanying unaudited condensed consolidated financial statements and these notes thereto are presented in thousands of dollars, if not otherwise noted as being presented in millions of dollars, except for shares and per share amounts.
Reclassifications
Certain prior-year amounts have been reclassified to conform to the current year presentation, which includes presenting costs of revenue within operating expenses on the statements of operations, in the unaudited condensed consolidated financial statements and accompanying notes to the unaudited condensed consolidated financial statements. The impact of the reclassifications made to prior year amounts is not material and did not affect net loss.
Use of Estimates
In preparing the unaudited condensed consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and the determination of corresponding carrying value reserve, if any, and liabilities and the disclosure of contingent losses, as of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Significant estimates in these unaudited condensed consolidated financial statements include those related to the estimated fair value of debt obligations, stock-based equity awards, intangible assets and common stock purchase warrants. Other significant estimates include the estimated incremental borrowing rate, the provision or benefit for income taxes and the corresponding valuation allowance on deferred tax assets. Additionally, management’s assessment of the Company’s ability to continue as a going concern involves the estimation of the amount and timing of future cash inflows and outflows. On an ongoing basis, the Company evaluates its estimates and assumptions. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable. Due to inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in these estimates.
Leases
The Company adopted FASB ASC Topic 842, Leases, (“ASC 842”) effective December 31, 2021.
All significant lease agreements and contractual agreements with embedded lease agreements are accounted for under the provisions of ASC 842, wherein, if the contractual arrangement: involves the use of a distinct identified asset; provides for the right to substantially all the economic benefits from the use of the asset throughout the contractual period; and provides for the right to direct the use of the asset. A lease agreement is accounted for as either a finance lease (generally with respect real estate) or an operating lease (generally with respect to equipment). Under both a finance lease and an operating lease, the Company recognizes as of the lease commencement date a lease right-of-use (“ROU”) asset and a corresponding lease payment liability.
A lease ROU asset represents the Company’s right to use an underlying asset for the lease term, and the lease liability represents its contractual obligation to make lease payments. The lease ROU asset is measured at the lease commencement date as the present value of the future lease payments plus initial direct costs incurred. The Company recognizes lease expense of the amortization of the lease ROU asset for an operating lease on a straight-line basis over the lease term; and for financing leases on a straight-line basis unless another basis is more representative of the pattern of economic benefit. The operating ROU asset also includes any lease incentives received for improvements to leased property, when the improvements are lessee-owned. For improvements to leased property that are lessor-owned, the Company includes amounts the Company incurred for the improvements as ROU assets which are amortized on a straight-line basis over the life of the lease.
The lease liability is measured at the lease commencement date with the discount rate generally based on the Company’s incremental borrowing rate (to the extent the lease implicit rate is not known nor determinable), with interest expense recognized using the interest method for financing leases.
Certain leases may include options to extend or terminate the agreement. The Company does not assume renewals in determination of the lease term unless the renewals are deemed to be reasonably certain at lease commencement. As well, an option to terminate is considered unless it is reasonably certain the Company will not exercise the option. The Company elected the practical expedient to not recognize a lease ROU asset and lease payment liability for leases with a term of twelve months or less (“short-term leases”), resulting in the aggregate lease payments being recognized on a straight line basis over the lease term. The Company’s leases with a commencement date prior to January 1, 2022 were short-term leases and therefore did not require recording a ROU asset or lease liability at December 31, 2021. Additionally, the Company elected the practical expedient to not separate lease and non-lease components.
Fair Value Option (“FVO”) Election
Under a Securities Purchase Agreement dated March 31, 2022, the Company issued a Senior Secured Convertible Note dated April 4, 2022, referred to herein as the “April 2022 Senior Convertible Note”, and a Senior Secured Convertible Note dated September 8, 2022, referred to herein as the “September 2022 Senior Convertible Note”, which are accounted under the “fair value option election” as discussed below.
Under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815, Derivative and Hedging, (“ASC 815”), a financial instrument containing embedded features and /or options may be required to be bifurcated from the financial instrument host and recognized as separate derivative asset or liability, with the bifurcated derivative asset or liability initially measured at estimated fair value as of the transaction issue date and then subsequently remeasured at estimated fair value as of each reporting period balance sheet date.
Alternatively, FASB ASC Topic 825, Financial Instruments, (“ASC 825”) provides for the “fair value option” (“FVO”) election. In this regard, ASC 825-10-15-4 provides for the FVO election (to the extent not otherwise prohibited by ASC 825-10-15-5) to be afforded to financial instruments, wherein the financial instrument is initially measured at estimated fair value as of the transaction issue date and then subsequently remeasured at estimated fair value as of each reporting period balance sheet date, with changes in the estimated fair value recognized as other income (expense) in the statement of operations. The estimated fair value adjustment of the April 2022 Senior Convertible Note is presented in a single line item within other income (expense) in the accompanying unaudited condensed consolidated statement of operations (as provided for by ASC 825-10-50-30(b)). Further, as required by ASC 825-10-45-5, to the extent a portion of the fair value adjustment is attributed to a change in the instrument-specific credit risk, such portion would be recognized as a component of other comprehensive income (“OCI”) (for which there was no such adjustment with respect to the April 2022 Senior Convertible Note or the September 2022 Senior Convertible Note).
See Note 10, Financial Instruments Fair Value Measurements, with respect to the FVO election; and Note 11, Debt, for a discussion of the April 2022 Senior Convertible Note and the September 2022 Senior Convertible Note.
Revenue Recognition
Revenues are recognized when the satisfaction of the performance obligation occurs, in an amount that reflects the consideration the Company expects to collect in exchange for those services. The Company’s revenue is primarily generated by its laboratory testing services utilizing its EsoGuard Esophageal DNA tests. The services are completed upon release of a patient’s test result to the ordering healthcare provider. Revenue recognized is inclusive of both variable consideration in connection with an individual patient’s third-party insurance coverage policy and fixed consideration in connection with a contracted services arrangement with an unrelated third party legal entity. To determine revenue recognition for the arrangements that the Company determines are within the scope of ASC 606, Revenue from Contracts with Customers, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
The key aspects considered by the Company include the following:
Contracts—The Company’s customer is primarily the patient, but the Company does not enter into a formal reimbursement contract with a patient. The Company establishes a contract with a patient in accordance with other customary business practices, which is the point in time an order is received from a provider and a patient specimen has been returned to the laboratory for testing. Payment terms are a function of a patient’s existing insurance benefits, including the impact of coverage decisions with Center for Medicare & Medicaid Services (“CMS”) and applicable reimbursement contracts established between the Company and payers. However, when a patient is considered self-pay, the Company requires payment from the patient prior to the commencement of the Company’s performance obligations. The Company’s consideration can be deemed variable or fixed depending on the structure of specific payer contracts, and the Company considers collection of such consideration to be probable to the extent that it is unconstrained.
Performance obligations—A performance obligation is a promise in a contract to transfer a distinct good or service (or a bundle of goods or services) to the customer. The Company’s contracts have a single performance obligation, which is satisfied upon rendering of services, which culminates in the release of a patient’s test result to the ordering healthcare provider. The Company elects the practical expedient related to the disclosure of unsatisfied performance obligations, as the duration of time between providing testing supplies, the receipt of a sample, and the release of a test result to the ordering healthcare provider is far less than one year.
Transaction price—The transaction price is the amount of consideration that the Company expects to collect in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration expected to be collected from a contract with a customer may include fixed amounts, variable amounts, or both.
If the consideration derived from the contracts is deemed to be variable, the Company estimates the amount of consideration to which it will be entitled in exchange for the promised goods or services. The Company limits the amount of variable consideration included in the transaction price to the unconstrained portion of such consideration. In other words, the Company recognizes revenue up to the amount of variable consideration that is not subject to a significant reversal until additional information is obtained or the uncertainty associated with the additional payments or refunds is subsequently resolved.
When the Company does not have significant historical experience or that experience has limited predictive value, the constraint over estimates of variable consideration may result in no revenue being recognized upon delivery of patient EsoGuard test results to the ordering healthcare provider. As such, the Company recognizes revenue up to the amount of variable consideration not subject to a significant reversal until additional information is obtained or the uncertainty associated with additional payments or refunds, if any, is subsequently resolved. Differences between original estimates and subsequent revisions, including final settlements, represent changes in estimated expected variable consideration, with the change in estimate recognized in the period of such revised estimate. With respect to a contracted service arrangement, the fixed consideration revenue is recognized on an as-billed basis upon delivery of the laboratory test report with realization of such fixed consideration deemed probable based upon actual historical experience.
Allocate transaction price—The transaction price is allocated entirely to the performance obligation contained within the contract with a customer on the basis of the relative standalone selling prices of each distinct good or service.
Practical Expedients—The Company does not adjust the transaction price for the effects of a significant financing component, as at contract inception, the Company expects the collection cycle to be one year or less.
Note 3 — Revenue from Contracts with Customers
EsoGuard Commercialization Agreement
The Company, through its majority-owned subsidiary, Lucid Diagnostics Inc., entered into the EsoGuard Commercialization Agreement, dated August 1, 2021, with its former commercial laboratory service provider, ResearchDx Inc. (“RDx”), an unrelated third-party. The EsoGuard Commercialization Agreement was on a month-to-month basis, and was terminated on February 25, 2022 upon the execution of an asset purchase agreement (“APA”) dated February 25, 2022, between LucidDx Labs Inc. (a wholly-owned subsidiary of Lucid Diagnostics Inc.) and RDx, with such agreement further discussed in Note 5, Asset Purchase Agreement and Management Services Agreement.
Revenue Recognized
In the three months and nine months ended September 30, 2022, the Company recognized total revenue of $76 and $265, respectively. For the three month period ended September 30, 2022, the Company recognized revenue resulting from the delivery of patient EsoGuard test results .. Revenue recognized from customer contracts deemed to include a variable consideration transaction price is limited to the unconstrained portion of the variable consideration as the Company did not estimate expected variable consideration given the lack of historical experience and objective reliable actual reimbursement data. In addition to the revenue recognized during the three month period ended September 30, 2022, the Company’s revenue for the nine month period ended September 30, 2022 includes $189 of revenue recognized under the EsoGuard Commercialization Agreement, which represented the minimum fixed monthly fee of $100 for the period January 1, 2022 to the February 25, 2022 termination date as discussed above. The monthly fee was deemed to be collectible for such period as RDx has timely paid the applicable respective monthly fee. In the three and nine months ended September 30, 2021, the Company recognized total revenue of $200 and $200, respectively, under the EsoGuard Commercialization Agreement.
Cost of Revenue
The cost of revenues principally includes the costs related to the Company’s laboratory operations (excluding estimated costs associated with research activities), the costs related to the EsoCheck cell collection device, cell sample mailing kits and license royalties.
In the three months ended September 30, 2022, the cost of revenue was $1,626and was primarily related to costs for our laboratory operations and EsoCheck device supplies. For the nine months ended September 30, 2022, the cost of revenue was $1,996, including $369reflecting costs attributable to delivering the services under the EsoGuard Commercialization Agreement for the period January 1, 2022 to February 25, 2022. In the three and nine months ended September 30, 2021, the cost of revenue was $144 and $144, respectively, which solely related to the EsoGuard Commercialization Agreement.
Note 4 — Related Party Transactions
Case Western Reserve University and Physician Inventors - Amended CWRU License Agreement
Case Western Reserve University (“CWRU”) and each of the three physician inventors (“Physician Inventors”) of the intellectual property licensed under the amended and restated patent license agreement with CWRU, dated August 23, 2021 (the “Amended CWRU License Agreement”), each hold a minority equity ownership interest in Lucid Diagnostics Inc. The expenses incurred with respect to the Amended CWRU License Agreement and the three Physician Inventors, as classified in the accompanying consolidated statement of operations for the periods indicated are summarized as follows:
Schedule of Incurred Expenses of Minority Shareholders
Three Months Ended
September 30,
Nine Months Ended
See Note 12, Stock-Based Compensation, for information regarding each of the “PAVmed Inc. 2014 Long-Term Incentive Equity Plan” and the separate “Lucid Diagnostics Inc 2018 Long-Term Incentive Equity Plan”; and Note 15, Noncontrolling Interest, for a discussion of Lucid Diagnostics Inc. and the corresponding noncontrolling interests.
Other Related Party Transactions
Lucid Diagnostics Inc. previously entered into a consulting agreement with Stanley N. Lapidus, effective June 2020 with such consulting agreement providing for compensation on a contractual rate per hour for consulting services provided. In July 2021, Mr. Lapidus was appointed as Vice Chairman of the Board of Directors of Lucid Diagnostics Inc. Lucid Diagnostics Inc. recognized general and administrative expense of $8 and $21 in the three and nine months ended September 30, 2021 in connection with the consulting agreement.
Effective June 2021, Veris Health Inc. entered into a consulting agreement with Andrew Thoreson, M.D. which provides for compensation on a contractual rate per hour for consulting services provided. Dr. Thoreson holds a partial ownership interest in the legal entity which holds a minority interest in Veris Health Inc. Veris Health Inc. recognized general and administrative expense of $8 and $45 in the three and nine months ended September 30, 2022 in connection with the consulting agreement.
Note 5 — Asset Purchase Agreement and Management Services Agreement
Asset Purchase Agreement - ResearchDx Inc.
LucidDx Labs Inc., a wholly-owned subsidiary of Lucid Diagnostics Inc., entered into an asset purchase agreement (“APA”) dated February 25, 2022, with ResearchDx, Inc. (“RDx”), an unrelated third-party - (“APA-RDx”). Under the APA-RDx, LucidDx Labs Inc. acquired certain assets from RDx which were combined with LucidDx Labs Inc. purchased and leased property and equipment to establish a Company-owned Commercial Lab Improvements Act (“CLIA”) certified, College of American Pathologists (“CAP”) accredited commercial clinical laboratory capable of performing the EsoGuard® Esophageal DNA assay, inclusive of DNA extraction, next generation sequencing (“NGS”) and specimen storage. Prior to February 25, 2022, RDx provided such laboratory services at its owned CLIA-certified, CAP-accredited clinical laboratory.
The total purchase price consideration payable under the APA-RDx is a face value of $3,200 comprised of three contractually specified periodic payments. The APA-RDx is being accounted for as an asset acquisition, with the recognition of an intangible asset of approximately $3,200, which is included in “Intangible assets, net” on the accompanying unaudited condensed consolidated balance sheet, as further discussed in Note 8, Intangible Assets, net. In the three and nine months ended September 30, 2022, a total of $1,000 and $3,200, respectively, of cash was paid with respect to the periodic payments.
Additionally, the APA-RDx requires the Company to pay a total of $3,000 to be paid as twelve (12) equal installment payments commencing May 25, 2022 and then on each three month anniversary thereof, inclusive of a final installment payment on February 25, 2025, with such installment payments recognized as current period expense as incurred. In the three and nine months ended September 30, 2022, as provided for in the APA-RDx, installment payments were settled with the issuances of 82,618 and 199,989 shares of common stock of Lucid Diagnostics Inc., with such shares having fair values of $188 and $427, respectively, (with the fair value measured as the quoted closing price on the dates the shares were issued), which was recognized as a current period expense included in general and administrative expenses in the accompanying unaudited condensed consolidated statement of operations.
The APA-RDx provides for each of an acceleration and a cancellation of the remaining unpaid installment payments, summarized as follows:
Management Services Agreement - Research Dx Inc
LucidDx Labs Inc. and RDx entered into a separate management services agreement (“MSA-RDx”), dated and effective February 25, 2022, with such agreement having a term of three years commencing on the agreement’s effective date, and an initial fee of $150 per quarter. The MSA-RDx provides for the cancellation of the remaining unpaid installment payments upon termination of the MSA-RDx for any reason or no reason by either party thereto.
Note 6 — Prepaid Expenses, Deposits, and Other Current Assets
Prepaid expenses and other current assets consisted of the following as of:
Schedule of Prepaid Expenses and Other Current Assets
Note 7 — Leases
During the nine months ended September 30, 2022, the Company entered into additional lease agreements that have commenced and are classified as operating leases and short-term leases, including for each of: a research and development facility; a commercial clinical laboratory; additional Lucid Test Centers; and for office space.
The Company’s future lease payments as of September 30, 2022, which are presented as operating lease liabilities, current portion and operating lease liabilities, less current portion on the Company’s unaudited condensed consolidated balance sheets are as follows:
Schedule of Future Minimum Lease Payments for Capital Leases
Supplemental disclosure of cash flow information related to the Company’s cash and non-cash activities with its leases are as follows:
Schedule of Supplemental Balance Sheet Information Related to Cash and Non-cash Activities with Leases
As of September 30, 2022, the Company’s right-of-use assets from operating leases are $3,079, which are reporting in right-of-use assets - operating leases in the unaudited condensed consolidated balance sheets. As of September 30, 2022, the Company has outstanding operating lease obligations of $3,025, of which $1,027 is reported in operating lease liabilities, current portion and $1,998 is reporting in operating lease liabilities less current portion in the Company’s unaudited condensed consolidated balance sheets. The Company did not have operating leases as of December 31, 2021. The Company calculates its incremental borrowing rates for specific lease terms, used to discount future lease payments, as a function of the financing terms the Company would likely receive on the open market.
Note 7 — Leases - continued
In September 2022, the Company entered into a lease agreement for its principal corporate offices, in New York, New York. The lease agreement term is from the September 15, 2022 execution date to the date which is seven years and eight months from the lease commencement date, with the rent abated for the first eight months of the lease term. The anticipated lease commencement date is dependent upon the completion of leasehold improvements, which, as of September 30, 2022, is currently expected to be no later than March 31, 2023. The aggregate (undiscounted) rent payments are approximately $ 3.2million over the lease term.
Note 8 — Intangible Assets, net
Intangible assets, less accumulated amortization, consisted of the following as of:
Schedule of Intangible Assets Accumulated Amortization
The defensive technology intangible asset was recognized upon its acquisition of CapNostics, LLC, an unrelated third-party, for total purchase consideration paid on the October 5, 2021 acquisition date of approximately $2.1 million in cash. The CapNostics LLC transaction was accounted for as an asset acquisition, resulting in the recognition of the defensive technology intangible asset. The defensive technology intangible asset is being amortized on a straight-line basis over an expected useful life 60 months commencing on the acquisition date.
The intangible assets recognized under the APA-RDx are the laboratory licenses and certifications, inclusive of a CLIA certification, CAP accreditation, and clinical laboratory licenses for five (5) U.S. States transfer to the Company from RDx, and a laboratory information management software perpetual-use royalty-free license granted under the APA-RDx, with such intangible asset having a useful life of twenty-four months commencing on the APA-RDx February 25, 2022 transaction date.
Amortization expense of the intangible assets discussed above was $505 and $17 for the three month periods ended September 30, 2022 and 2021, respectively, and $1,278 and $23 for the nine month periods ended September 30, 2022 and 2021, respectively, and is included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. As of September 30, 2022, the estimated future amortization expense associated with the Company’s finite-lived intangible assets for each of the five succeeding fiscal years is as follows:
Schedule of Estimated Amortization Expense for Intangible Assets
Note 9 — Commitment and Contingencies
Legal Proceedings
Delaware Court of Chancery Complaint
On November 2, 2020, a stockholder of the Company, on behalf of himself and other similarly situated stockholders, filed a complaint in the Delaware Court of Chancery alleging broker non-votes were not properly counted in accordance with the Company’s bylaws at the Company’s Annual Meeting of Stockholders on July 24, 2020, and, as a result, asserted certain matters deemed to have been approved were not so approved (including matters relating to the increase in the size of the PAVmed Inc. 2014 Long-Term Incentive Equity Plan and the PAVmed Inc. Employee Stock Purchase Plan). The relief sought under the complaint included certain corrective actions by the Company, but did not seek any specific monetary damages. The Company did not believe it was clear the prior approval of these matters was invalid or otherwise ineffective. However, to avoid any uncertainty and the expense of further litigation, on January 5, 2021, the Company’s board of directors determined it would be advisable and in the best interests of the Company and its stockholders to re-submit these proposals to the Company’s stockholders for ratification and/or approval. In this regard, the Company held a special meeting of stockholders on March 4, 2021, at which such matters were ratified and approved. The parties reached agreement on a Settlement Term Sheet Agreement, dated January 28, 2021, to settle the complaint, the terms of which did not contemplate payment of monetary damages to the putative class in the proceeding. In connection with the foregoing, on August 3, 2022, the parties agreed that plaintiff’s counsel would not seek an award from the Court in excess of $450, to be paid by the Company, upon Court approval, as compensation for the benefits conferred by the settlement, and the Company would not object to an award of up to such maximum amount. The settlement and a plaintiff’s fee award of $450were approved by the Court on November 3, 2022. Such award shall become payable within 10 days of December 2, 2022, assuming no appeal is filed prior to such date. As of September 30, 2022, the Company has fully accrued for this settlement, which is included in accrued expenses and other current liabilities on the Company’s unaudited condensed consolidated balance sheets.
Benchmark Investments, Inc. / Benchmark Investments LLC
On December 23, 2020, Benchmark Investments, Inc. filed a complaint against the Company in the U.S. District Court of the Southern District of New York alleging the registered direct offerings of shares of common stock of the Company completed in December 2020 were in violation of provisions set forth in an engagement letter between the Company and Kingswood Capital Markets, a “division” of Benchmark Investments, Inc. On December 16, 2021, the court granted PAVmed’s motion to dismiss the case for lack of subject matter jurisdiction. On February 7, 2022, Benchmark Investments LLC, which claimed to be a successor to Benchmark Investments, Inc., filed a new complaint in the Supreme Court of the State of New York, New York County, asserting claims similar to those in the federal action, and adding to its allegations that financings conducted by the Company in January 2021 and February 2021 also violated the Company’s engagement letter with Kingswood Capital Markets. The Company disagrees with the allegations set forth in the complaint and intends to vigorously contest the complaint.
Other Matters
In the ordinary course of our business, particularly as it begins commercialization of its products, the Company may be subject to certain other legal actions and claims, including product liability, consumer, commercial, tax and governmental matters, which may arise from time to time. Except as otherwise noted herein, the Company does not believe it is currently a party to any other pending legal proceedings. Notwithstanding, legal proceedings are subject-to inherent uncertainties, and an unfavorable outcome could include monetary damages, and excessive verdicts can result from litigation, and as such, could result in a material adverse impact on the Company’s business, financial position, results of operations, and /or cash flows. Additionally, although the Company has specific insurance for certain potential risks, the Company may in the future incur judgments or enter into settlements of claims which may have a material adverse impact on the Company’s business, financial position, results of operations, and /or cash flows.
Note 10 — Financial Instruments Fair Value Measurements
Recurring Fair Value Measurements
The fair value hierarchy table for the reporting date noted is as follows:
Schedule of Financial Liabilities Measured at Fair Value on Recurring Basis
Level-1
Inputs
Level-2
Level-3
Note 10 — Financial Instruments Fair Value Measurements - continued
As discussed in Note 11, Debt, the Company issued Senior Secured Convertible Notes dated April 4, 2022 and September 8, 2022, with an initial $27.5 million face value principal (“April 2022 Senior Convertible Note”) and an initial $11.25 million face value principal (“September 2022 Senior Convertible Note”), respectively. Both convertible notes are accounted for under the ASC 825-10-15-4 fair value option (“FVO”) election, wherein, the financial instrument is initially measured at its issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date.
The estimated fair value of the financial instruments classified within the Level 3 category was determined using both observable inputs and unobservable inputs. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs.
The estimated fair value of the April 2022 Senior Convertible Note as of each of April 4, 2022 and September 30, 2022, and the estimated fair value of the September 2022 Senior Convertible Note as of each of September 8, 2022 and September 30, 2022 were computed using a Monte Carlo simulation of the present value of its cash flows using a synthetic credit rating analysis and a required rate-of-return, using the following assumptions:
Schedule of Fair Value Assumption Used
The estimated fair values reported utilized the Company’s common stock price along with certain Level 3 inputs (as discussed above), in the development of Monte Carlo simulation models, discounted cash flow analyses, and /or Black-Scholes valuation models. The estimated fair values are subjective and are affected by changes in inputs to the valuation models and analyses, including the Company’s common stock price, the Company’s dividend yield, the risk-free rates based on U.S. Treasury security yields, and certain other Level-3 inputs including, assumptions regarding the estimated volatility in the value of the Company’s common stock price. Changes in these assumptions can materially affect the estimated fair values.
Note 11 — Debt
The Company entered into a Securities Purchase Agreement (“SPA”) dated March 31, 2022, with an accredited institutional investor (“Investor”, “Lender”, and /or “Holder”), wherein, the Company agreed to sell, and the Investor agreed to purchase an aggregate of $50.0 million face value principal of debt - comprised of: an initial issuance of $27.5 million face value principal; and up to an additional $22.5 million of face value principal (upon the satisfaction of certain conditions). The debt was issued in a registered direct offering under the Company’s effective shelf registration statement.
Under the SPA dated March 31, 2022, the Company issued a Senior Secured Convertible Note dated April 4, 2022, referred to herein as the “April 2022 Senior Convertible Note”, with such note having a $27.5 million face value principal, a 7.875% annual stated interest rate, a contractual conversion price of $5.00 per share of the Company’s common stock (subject to standard adjustments in the event of any stock split, stock dividend, stock combination, recapitalization or other similar transaction), and a contractual maturity date of April 4, 2024. The April 2022 Senior Convertible Note may be converted into shares of common stock of the Company at the Holder’s election.
Under the same SPA, the Company issued an additional Senior Secured Convertible Note dated September 8, 2022, referred to herein as the “September 2022 Senior Convertible Note”, with such note having a $11.25 million face value principal, a 7.875% annual stated interest rate, a contractual conversion price of $5.00 per share of the Company’s common stock (subject to standard adjustments in the event of any stock split, stock dividend, stock combination, recapitalization or other similar transaction), and a contractual maturity date of September 6, 2024. The September 2022 Senior Convertible Note may be converted into shares of common stock of the Company at the Holder’s election.
Note 11 — Debt - continued
The April 2022 Senior Convertible Note proceeds were $25.0 million after deducting a $2.5 million lender fee; and additionally, the Company incurred total offering costs of approximately $601, inclusive of the payment of a total of $450 placement agent fees. The lender fee and offering costs were recognized as of the April 4, 2022 issue date as a current period expense in other income (expense) in the consolidated statement of operations.
The September 2022 Senior Convertible Note proceeds were $10.2 million after deducting a $1.0 million lender fee; and additionally, the Company incurred total offering costs of approximately $209, inclusive of the payment of a total of $184 placement agent fees. The lender fee and offering costs were recognized as of the September 8, 2022 issue date as a current period expense in other income (expense) in the consolidated statement of operations.
During the period from April 4, 2022 to October 3, 2022, the Company is required to pay interest expense only (on the $27.5 million face value principal), at 7.875% per annum, computed on a 360 day year. The Company paid in cash interest expense of approximately $481 and $1,005for the three and nine month periods ended September 30, 2022, respectively; and approximately $153 subsequent to September 30, 2022 as of November 10, 2022.
During the period from September 8, 2022 to March 6, 2023, the Company is required to pay interest expense only (on the $11.25 million face value principal), at 7.875% per annum, computed on a 360 day year. The Company paid in cash interest expense of approximately $54for both the three and nine month periods ended September 30, 2022; and approximately $76subsequent to September 30, 2022 as of November 10, 2022.
Commencing October 4, 2022, and then on each of the successive first and tenth trading day of each month thereafter through to and including April 1, 2024 (each referred to as an “Installment Date”); and on the April 4, 2024 maturity date, the Company will be required to make a principal repayment of $724 together with accrued interest thereon, with such 38 payments referred to herein as the “Installment Amount”, settled in shares of common stock of the Company, subject to customary equity conditions, including minimum share price and volume thresholds, or at the election of the Company, in cash, in whole or in part.
Commencing March 6, 2023, and then on each of the successive first and tenth trading day of each month thereafter through to and including September 1, 2024 (each referred to as an “Installment Date”); and on the September 6, 2024 maturity date, the Company will be required to make a principal repayment of $296 together with accrued interest thereon, with such 38 payments referred to herein as the “Installment Amount”, settled in shares of common stock of the Company, subject to customary equity conditions, including minimum share price and volume thresholds, or at the election of the Company, in cash, in whole or in part.
In addition to the Installment Amount repayments, the Holder may elect to accelerate the conversion of future Installment Amount repayments, and interest thereon, subject to certain restrictions, as defined, utilizing the then current conversion price of the most recent Installment Date conversion price.
Subject to certain conditions being met or waived, from time to time, one or more additional closings may occur, for up to the remaining $11.25million face value principal, upon five trading days’ notice given by the Company to the Investor. The Investor’s obligation to purchase the additional notes at each additional closing is subject to certain conditions set forth in the SPA dated March 31, 2022, including, among others, contractual closing requirements: minimum price and trading volume thresholds of the Company’s common stock; the maximum ratio of debt to market capitalization (as defined); and minimum market capitalization (as defined), with such requirements being waived by the Investor in its sole discretion.
Additionally, effective March 31, 2023, the Investor may by written notice elect to require the Company to issue additional notes of up to $11.25million in face value principal, so long as in doing so it would not cause the ratio of (a) the outstanding principal amount of the April 2022 Senior Convertible Note and the September 2022 Senior Convertible Note (and any additional notes issued under the SPA dated March 31, 2022), accrued and unpaid interest thereon and accrued and unpaid late charges to (b) our average market capitalization over the prior ten trading days, to exceed 25%. If the Company does not issue the additional notes contemplated by any such written notice, or if the Investor is unable to deliver any such notice prior to March 31, 2024 as a result of the limitation described in the preceding sentence, then the Company will be obligated to pay up to a maximum of a $1.35 million a break-up fee.
The payment of all amounts due and payable under both senior convertible notes are guaranteed by the Company and its subsidiaries, except for Lucid Diagnostics Inc and its subsidiaries; and the obligations under both senior convertible notes are secured by all of the assets of the Company and each guarantor, except in the case of the Lucid Diagnostics Inc. common stock held by PAVmed Inc. only 9.99% of Lucid Diagnostics Inc.’s issued and outstanding common stock is pledged to secure the indebtedness of the convertible notes.
The Company is subject to certain customary affirmative and negative covenants regarding the rank of the notes, along with the incurrence of further indebtedness, the existence of liens, the repayment of indebtedness and the making of investments, the payment of cash in respect of dividends, distributions or redemptions, the transfer of assets, the maturity of other indebtedness, and transactions with affiliates, among other customary matters.
The Company is subject to financial covenants requiring: (i) a minimum of $8.0 million of available cash at all times; (ii) the ratio of (a) the outstanding principal amount of the total senior convertible notes outstanding, accrued and unpaid interest thereon and accrued and unpaid late charges to (b) the Company’s average market capitalization over the prior ten trading days, to not exceed 30% (except that such maximum percentage is 50% for the period from September 8, 2022 through March 5, 2023) (the “Debt to Market Cap Ratio Test”); and (iii) the Company’s market capitalization to at no time be less than $75 million. (the “Market Cap Test” and, together with the Debt to Market Cap Ratio Test, the “Financial Tests”). The Company is in compliance with the above covenants.
The Company and the investor entered into a waiver dated August 9, 2022 whereby the April 2022 Senior Convertible Note was amended to permit the Investor to convert up to $5.0 million of the face value principal of the April 2022 Senior Convertible Note at the then current conversion price as if the date of conversion were an Installment Date, i.e. a price per share of common stock equal to the lower of (i) the fixed conversion price then in effect (currently $5.00) and (ii) 82.5% of the average VWAP of the Company’s common stock for each of the two trading days with the lowest VWAP of the Company’s common stock during the ten consecutive trading day period ending and including the trading day immediately prior to the applicable conversion date, but in the case of clause (ii), not less than $0.18 per share. As contemplated by such amendment, in August 2022, approximately $4,989 of principal repayments along with approximately $11 of interest expense thereon, were settled through the issuance of 5,013,908 shares of common stock of the Company, with such shares having a fair value of approximately $10,112 (with such fair value measured as the respective conversion date quoted closing price of the common stock of the Company). The conversions resulted in a debt extinguishment loss of $5.1 million in the three months ended September 30, 2022. Subsequent to September 30, 2022, as of November 10, 2022, approximately $424 of principal repayments along with approximately $4 of interest expense thereon, were settled through the issuance of 500,857 shares of common stock of the Company, with such shares having a fair value of approximately $536 (with such fair value measured as the respective conversion date quoted closing price of the common stock of the Company).
The fair value and face value principal outstanding of the Senior Convertible Notes as of September 30, 2022 are as follows:
Summary of Outstanding Debt
The Company did not have convertible debt outstanding at December 31, 2021. During the nine month period ended September 30, 2021, the Company recognized debt extinguishment losses of approximately $3,715, in connection with repaying-in-full all remaining convertible notes outstanding at the time.
See Note 10, Financial Instruments Fair Value Measurements, for a further discussion of fair value assumptions.
Note 12 — Stock-Based Compensation
PAVmed Inc. 2014 Long-Term Incentive Equity Plan
The PAVmed Inc. 2014 Long-Term Incentive Equity Plan (the “PAVmed Inc. 2014 Equity Plan”) is designed to enable PAVmed Inc. to offer employees, officers, directors, and consultants, as defined, an opportunity to acquire shares of common stock of PAVmed Inc. The types of awards that may be granted under the PAVmed Inc. 2014 Equity Plan include stock options, stock appreciation rights, restricted stock, and other stock-based awards subject to limitations under applicable law. All awards are subject to approval by the PAVmed Inc. board of directors.
A total of 16,352,807 shares of common stock of PAVmed Inc. are reserved for issuance under the PAVmed Inc. 2014 Equity Plan, with 2,520,927shares available for grant as of September 30, 2022. The share reservation is not diminished by a total of 600,854 PAVmed Inc. stock options and restricted stock awards granted outside the PAVmed Inc. 2014 Equity Plan as of September 30, 2022.
PAVmed Inc. Stock Options
PAVmed Inc. stock options granted under the PAVmed Inc. 2014 Equity Plan and stock options granted outside such plan are summarized as follows:
Schedule of Summarizes Information About Stock Options
Note 12 — Stock-Based Compensation - continued
PAVmed Inc. Restricted Stock Awards
PAVmed Inc. restricted stock awards granted under the PAVmed Inc. 2014 Equity Plan and restricted stock awards granted outside such plan are summarized as follows:
Schedule of Restricted Stock Award Activity
Lucid Diagnostics Inc. 2018 Long-Term Incentive Equity Plan
The Lucid Diagnostics Inc. 2018 Long-Term Incentive Equity Plan (“Lucid Diagnostics Inc. 2018 Equity Plan”) is separate and apart from the PAVmed Inc. 2014 Equity Plan discussed above. The Lucid Diagnostics Inc. 2018 Equity Plan is designed to enable Lucid Diagnostics Inc. to offer employees, officers, directors, and consultants, as defined, an opportunity to acquire shares of common stock of Lucid Diagnostics Inc. The types of awards that may be granted under the Lucid Diagnostics Inc. 2018 Equity Plan include stock options, stock appreciation rights, restricted stock, and other stock-based awards subject to limitations under applicable law. All awards are subject to approval by the Lucid Diagnostics Inc. board of directors.
A total of 9,144,000 shares of common stock of Lucid Diagnostics Inc. are reserved for issuance under the Lucid Diagnostics Inc. 2018 Equity Plan, with 3,754,051 shares available for grant as of September 30, 2022. The share reservation is not diminished by a total of 423,300stock options and 50,000 restricted stock awards granted outside the Lucid Diagnostics Inc. 2018 Equity Plan, as of September 30, 2022.
Lucid Diagnostics Inc. Stock Options
Lucid Diagnostics Inc. stock options granted under the Lucid Diagnostics Inc. 2018 Equity Plan and stock options granted outside such plan are summarized as follows:
Lucid Diagnostics Inc. Restricted Stock Awards
Lucid Diagnostics Inc. restricted stock awards granted under the Lucid Diagnostics Inc. 2018 Equity Plan and restricted stock awards granted outside such plan are summarized as follows:
On January 7, 2022, 320,000 restricted stock awards were granted under the Lucid Diagnostics Inc 2018 Equity Plan, with such restricted stock awards having a single vesting date on January 7, 2025, and an aggregate grant date fair value of approximately $1.4 million, measured as the grant date closing price of Lucid Diagnostics Inc. common stock, with such aggregate estimated fair value recognized as stock-based compensation expense ratably on a straight-line basis over the vesting period, which is commensurate with the service period. The restricted stock awards are subject to forfeiture if the requisite service period is not completed.
Consolidated Stock-Based Compensation Expense
The consolidated stock-based compensation expense recognized by each of PAVmed Inc. and Lucid Diagnostics Inc. for both the PAVmed Inc. 2014 Equity Plan and the Lucid Diagnostics Inc. 2018 Equity Plan, with respect to stock options and restricted stock awards as discussed above, for the periods indicated, was as follows:
Schedule of Stock-Based Compensation Awards Granted
Stock-Based Compensation Expense Recognized by Lucid Diagnostics Inc.
As noted, the consolidated stock-based compensation expense presented above is inclusive of stock-based compensation expense recognized by Lucid Diagnostics Inc., inclusive of each of: stock options granted under the PAVmed Inc. 2014 Equity Plan to the three physician inventors of the intellectual property underlying the CWRU License Agreement (“Physician Inventors”) (as discussed above in Note 4, Related Party Transactions); and stock options and restricted stock awards granted to employees of PAVmed Inc. and non-employee consultants under the Lucid Diagnostics Inc. 2018 Equity Plan. The stock-based compensation expense recognized by Lucid Diagnostics Inc. for both the PAVmed Inc. 2014 Equity Plan and the Lucid Diagnostics Inc. 2018 Equity Plan, with respect to stock options and restricted stock awards as discussed above, for the periods indicated, was as follows:
Schedule of Stock-Based Compensation Expense Classified in Research and Development Expenses
The consolidated unrecognized stock-based compensation expense and weighted average remaining requisite service period with respect to stock options and restricted stock awards issued under each of the PAVmed Inc. 2014 Equity Plan and the Lucid Diagnostics Inc. 2018 Equity Plan, as discussed above, is as follows:
Schedule of Unrecognized Compensation Expense
Stock-based compensation expense recognized with respect to stock options granted under the PAVmed Inc. 2014 Equity Plan was based on a weighted average estimated fair value of such stock options of $1.08 per share and $3.47 per share during the periods ended September 30, 2022 and 2021, respectively, calculated using the following weighted average Black-Scholes valuation model assumptions:
Schedule of Fair Values of Stock Options Granted Using Black-scholes Valuation Model Assumptions
Stock-based compensation expense recognized with respect to stock options granted under the Lucid Diagnostics Inc. 2018 Equity Plan was based on a weighted average estimated fair value of such stock options of $1.61 per share during the period ended September 30, 2022. The stock-based compensation was calculated using the following weighted average Black-Scholes valuation model assumptions:
PAVmed Inc. Employee Stock Purchase Plan (“ESPP”)
A total of 194,240 shares and 203,480 shares of common stock of the Company were purchased for proceeds of approximately $218 and $304, on March 31, 2022 and 2021, respectively under the PAVmed Inc Employee Stock Purchase Plan (“PAVmed Inc ESPP”). A total of191,698 shares and 31,112 shares of common stock of the Company were purchased for proceeds of approximately $140 and $131, on September 30, 2022 and 2021, respectively under the PAVmed Inc ESPP. The September 30, 2022 purchase was settled through the redeployment of treasury stock, and did not reduce the number of shares available-for-issue under the PAVmed Inc ESPP. The PAVmed Inc. ESPP has a total reservation of 1,750,000 shares of common stock of PAVmed Inc. of which 931,841 shares are available-for-issue as of September 30, 2022.
Lucid Diagnostics, Inc Employee Stock Purchase Plan (“ESPP”)
The Lucid Diagnostics Inc Employee Stock Purchase Plan (“Lucid Diagnostics Inc ESPP”), initial six-month stock purchase period was April 1, 2022 to September 30, 2022. A total of 84,030 shares of common stock of Lucid Diagnostics Inc were purchased for proceeds of approximately $109 on September 30, 2022 under the Lucid Diagnostics Inc. ESPP. The Lucid Diagnostics Inc. ESPP has a total reservation of 500,000 shares of common stock of Lucid Diagnostics Inc. of which 415,970 shares are available-for-issue as of September 30, 2022.
Note 13 — Preferred Stock
As of September 30, 2022 and December 31, 2021, there were 1,182,101 and 1,113,919 shares of Series B Convertible Preferred Stock (classified in permanent equity) issued and outstanding, respectively.
Series B Convertible Preferred Stock Dividends
The Series B Convertible Preferred Stock dividends are 8.0% per annum based on the $3.00 per share stated value of the Series B Convertible Preferred Stock, with such dividends compounded quarterly, accumulate, and are payable in arrears upon being declared by the Company’s board of directors, with the dividends earned from April 1, 2018 through October 1, 2021 payable-in-kind (“PIK”) by the issue of additional shares of Series B Convertible Preferred Stock; and after October 1, 2021, dividends may be settled, at the election of the discretion of the board of directors, through any combination of the issue of shares of Series B Convertible Preferred Stock, the issue shares of common stock of the Company, and /or cash payment.
Series B Convertible Preferred Stock Dividends Earned
The Series B Convertible Preferred Stock dividends earned are included in the calculation of basic and diluted net loss attributable to PAVmed Inc. common stockholders for each of the respective corresponding periods presented in the accompanying unaudited condensed consolidated statement of operations, inclusive of dividends earned as of each of March 31, 2022, June 30, 2022, and September 30, 2022, of approximately $71 and $209 in the three and nine months ended September 30, 2022, respectively. The prior year unaudited condensed consolidated statement of operations, inclusive of dividends earned as of each of March 31, 2021, June 30, 2021, and September 30, 2021 of approximately $67and $216 in the three and nine months ended September 30, 2021, respectively.
Series B Convertible Preferred Stock Dividends Declared
The Series B Convertible Preferred Stock dividends are recognized as a dividend payable only upon the dividend being declared payable by the Company’s board of directors. In this regard, in the nine months ended September 30, 2022, the Company’s board-of-directors declared Series B Convertible Preferred Stock dividends of an aggregate of approximately $204, inclusive of approximately $67 earned as of December 31, 2021, and approximately $68 earned as of March 31, 2022, and approximately $69 earned as of June 30, 2022; with each such dividends settled by the issue of an aggregate 68,227 additional shares of Series B Convertible Preferred Stock, inclusive of: 22,291shares issued with respect to the dividends earned as of December 31, 2021; 22,740 shares issued with respect to the dividends earned as of March 31, 2022; and 23,196 shares issued with respect to the dividends earned as of June 30, 2022.
In the nine months ended September 30, 2021, the Company’s board-of-directors declared Series B Convertible Preferred Stock dividends of an aggregate of approximately $221, inclusive of approximately $73 earned as of December 31, 2020; approximately $75 earned as of March 31, 2021; and approximately $74 earned as of June 30, 2021; with each such dividends settled by the issue of an aggregate 73,821additional shares of Series B Convertible Preferred Stock, inclusive of: 24,198 shares issued with respect to the dividends earned as of December 31, 2020; 25,046 shares issued with respect to the dividends earned as of March 31, 2021; and 24,577 shares issued with respect to the dividends earned as of June 30, 2021.
Subsequent to September 30, 2022, in October 2022, the Company’s board-of-directors declared a Series B Convertible Preferred Stock dividend earned as of September 30, 2022 and payable as of October 1, 2022, of approximately $71, to be settled by the issue of an additional23,658 shares of Series B Convertible Preferred Stock (with such dividend not recognized as a dividend payable as of September 30, 2022, as the Company’s board of directors had not declared such dividends payable as of such date). In the prior year October 2021, the Company’s board-of-directors declared a Series B Convertible Preferred Stock dividend earned as of September 30, 2021 and payable as of October 1, 2021, of approximately $67, settled by the issue of an additional 22,471 shares of Series B Convertible Preferred Stock.
Note 14 — Common Stock and Common Stock Purchase Warrants
Common Stock
In June 2022, the Company received shareholder approval to issue up to 250 million shares of its common stock, an increase of 100 million shares.
During the nine months ended September 30, 2022, 299,999 shares of common stock of the Company were issued upon exercise of stock options for cash of approximately $302; and during the nine months ended September 30, 2022 a total of 385,938 shares of common stock of the Company were issued under the PAVmed Inc. Employee Stock Purchase Plan (“ESPP”). See Note 12, Stock-Based Compensation, for a discussion of each of the PAVmed Inc. 2014 Equity Plan and the PAVmed Inc. ESPP.
In August 2022, 5,103,908 shares of the Company’s common stock were issued upon conversion, at the election of the holder, of the April 2022 Senior Convertible Note for $4,989 face value principal repayments, along with approximately $11 of interest thereon, as discussed in Note 11, Debt.
Common Stock Purchase Warrants
As of September 30, 2022 and December 31, 2021, Series Z Warrants outstanding totaled 11,937,450 and 11,937,455, respectively. A Series Z Warrant is exercisable to purchase one share of common stock of the Company at an exercise price of $1.60 per share, and expire April 30, 2024. During the nine months ended September 30, 2022, a total of 5 Series Z Warrants were exercised for cash at $1.60 per share, resulting in the issue of the same number of shares of common stock of the Company.
As of December 31, 2021, Series W Warrants outstanding totaled 377,873. The remaining 377,873 Series W Warrants expired unexercised as ofJanuary 29, 2022.
Note 15 — Noncontrolling Interest
The noncontrolling interest (“NCI”) included as a component of consolidated total stockholders’ equity is summarized for the periods indicated as follows:
Schedule of Noncontrolling Interest of Stockholders' Equity
The consolidated NCI presented above is with respect to the Company’s consolidated majority-owned subsidiaries, inclusive of: Lucid Diagnostics Inc., Veris Health Inc. and Solys Diagnostics Inc., as a component of consolidated total stockholders’ equity as of September 30, 2022 and December 31, 2021; and the recognition of a net loss attributable to the NCI in the unaudited condensed consolidated statement of operations with respect to Lucid Diagnostics Inc. and Solys Diagnostics Inc. for the three and nine months ended September 30, 2022 and 2021; and with respect to Veris Health Inc. for the three and nine months ended September 30, 2022 and from the period of May 28, 2021 to September 30, 2021 (as the Veris Health Inc. inception date was May 28, 2021).
Lucid Diagnostics Inc.
As of September 30, 2022, there were 37,016,225 shares of common stock of Lucid Diagnostics Inc. issued and outstanding, of which, PAVmed Inc. holds 27,927,190 shares, representing a majority ownership equity interest and PAVmed Inc. has a controlling financial interest in Lucid Diagnostics Inc., and accordingly, Lucid Diagnostics Inc. is a consolidated majority-owned subsidiary of PAVmed Inc.
On March 28, 2022, Lucid Diagnostics, Inc. entered into a committed equity facility with an affiliate of Cantor Fitzgerald (“Cantor”). Under the terms of the committed equity facility, Cantor has committed to purchase up to $50 million of Lucid Diagnostics Inc. common stock from time to time at the request of Lucid Diagnostics Inc. While there are distinct differences, the facility is structured similarly to a traditional at-the-market equity facility, insofar as it allows the Company to raise primary equity capital on a periodic basis at prices based on the existing market price. As of September 30, 2022, under the committed equity facility, a total of 680,263 shares of common stock of Lucid Diagnostics Inc. were issued for proceeds of approximately $1,807.
Veris Health Inc.
As of September 30, 2022, there were 8,000,000 shares of common stock of Veris Health Inc. issued and outstanding, of which PAVmed Inc. holds an 80.44% majority-interest ownership and PAVmed Inc. has a controlling financial interest, with the remaining 19.56% minority-interest ownership held by an unrelated third-party. Accordingly, Veris Health Inc. is a consolidated majority-owned subsidiary of the Company, for which a provision of a noncontrolling interest (NCI) is included as a separate component of consolidated stockholders’ equity in the unaudited condensed consolidated balance sheet as of September 30, 2022 along with the recognition of a net loss attributable to the NCI in the unaudited condensed consolidated statement of operations for the period of May 28, 2021 to December 31, 2021, upon its formation and contemporaneous acquisition of Oncodisc Inc.
Solys Diagnostics Inc.
As of each of September 30, 2022 and December 31, 2021, there were 9,189,190 shares of common stock of Solys Diagnostics Inc. issued and outstanding, of which PAVmed Inc. holds a 90.3235% majority-interest ownership and PAVmed Inc. has a controlling financial interest, with the remaining 9.6765% minority-interest ownership held by unrelated third parties.
Note 16 — Net Loss Per Share
The “Net loss per share - attributable to PAVmed Inc. - basic and diluted” and “Net loss per share - attributable to PAVmed Inc. common stockholders - basic and diluted” - for the respective periods indicated - is as follows:
Schedule of Comparison of Basic and Fully Diluted Net Loss Per Share
The common stock equivalents have been excluded from the computation of diluted weighted average shares outstanding as their inclusion would be anti-dilutive, are as follows:
The Series B Convertible Preferred Stock dividends earned as of each of the respective periods noted, are included in the calculation of basic and diluted net loss attributable to PAVmed Inc. common stockholders for each respective period presented. Notwithstanding, the Series B Convertible Preferred Stock dividends are recognized as a dividend payable only upon the dividend being declared payable by the Company’s board of directors.
Basic weighted-average number of shares of common stock outstanding for the periods ended September 30, 2022 and 2021 include the shares of the Company issued and outstanding during such periods, each on a weighted average basis. The basic weighted average number of shares of common stock outstanding excludes common stock equivalent incremental shares, while diluted weighted average number of shares outstanding includes such incremental shares. However, as the Company was in a loss position for all periods presented, basic and diluted weighted average shares outstanding are the same, as the inclusion of the incremental shares would be anti-dilutive. The common stock equivalents excluded from the computation of diluted weighted average shares outstanding are as follows:
Schedule of Antidilutive Securities Excluded from Computation of Diluted Earnings Per Share
The total stock options and restricted stock awards are inclusive of 500,854 stock options as of September 30, 2022 and 2021; and 100,000restricted stock awards as of September 30, 2022, granted outside the PAVmed Inc. 2014 Equity Plan.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our unaudited condensed consolidated financial condition and results of operations should be read together with our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Form 10-K”) as filed with the Securities and Exchange Commission (the “SEC”).
Unless the context otherwise requires, references herein to “we”, “us”, and “our”, and to the “Company” or “PAVmed” are to PAVmed Inc. and Subsidiaries, including its majority-owned subsidiaries, including Lucid Diagnostics Inc. (“Lucid Diagnostics” or “LUCID”) and Veris Health Inc. (“Veris Health” or “VERIS”).
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Form 10-Q”), including the following discussion and analysis of our (unaudited) condensed consolidated financial condition and results of operations, contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Item 1A of Part I of the Form 10-K under the heading “Risk Factors.”
Important factors that may affect our actual results include:
In addition, our forward-looking statements do not reflect the potential impact of any future financings, acquisitions, mergers, dispositions, joint ventures or investments we may make.
We may not actually achieve the plans, intentions, and/or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. You should read this Form 10-Q and the Form 10-K, and the documents we have filed as exhibits to this Form 10-Q and the Form 10-K, completely and with the understanding our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
Overview
The Company is a highly differentiated, multi-product, commercial-stage medical technology company organized to advance a broad pipeline of innovative medical technologies from concept to commercialization, employing a business model focused on capital efficiency and speed to market. Since the Company’s inception on June 26, 2014, its activities have focused on advancing its lead products through regulatory approval, expanding commercial operations, and protecting its intellectual property, while building its corporate infrastructure and management team. The Company has ongoing operations conducted both through PAVmed Inc. and its majority-owned subsidiaries.
The Company operates in one segment as a medical technology company, with the following lines of business: Diagnostics, Medical Devices and Digital Health.
Our products and services in each line of business, as discussed below and in Item 1 of Part I of the Form 10-K under the heading “Business Background and Overview,” are as follows:
We are also pursuing a number of research and development project and product opportunities across these three lines of business, which have either been developed internally or have been presented to us by clinician innovators and academic medical institutions for consideration.
Our products and services are in various phases of development, regulatory approval and commercialization, as follows:
EsoGuard and EsoCheck
Overview- continued
CarpX
Veris Health
Overview - continued
EsoCure
PortIO
Recent Developments
Business
EsoCheck Manufacturing Update
On October 4, 2022, Lucid completed its first full day of manufacturing of EsoCheck at Coastline International, a high-volume manufacturing company. Through mid-2023, we expect to transition from our current manufacturer, Sage Product Development, to Coastline International as the manufacturing process is further optimized.
EsoCheck Cell Collection Device Update
In October 2022, the FDA announced they completed their review of the EsoCheck 510(k) (#K222366) premarket notification of intent to market the device and granted the use of the EsoCheck Cell Collection Device for the collection and retrieval of surface cells of the esophagus in the general population of adults and adolescents, 12 years of age and older. This action by the FDA now expands the targeted US patient population to include adolescents not previously covered by the Company’s initial EsoCheck 510(k) clearance.
Veris Health Update
At the end of August, we moved our software platform from a development environment to a production environment. At the same time, we initiated our HIPAA and SOC2 audits which were completed in October. During the quarter we completed a presubmission meeting with the FDA, outlining a clear regulatory pathway for our first intelligent implantable device.
New Opportunities - Novosound Agreement
In October 2022, PAVmed entered into an option agreement with Novosound Ltd, a Scottish company specializing in the design and manufacturing of ultrasound sensors using a proprietary thin-film technique. Pursuant to the terms of the agreement, PAVmed and Novosound will collaborate on an research and development project leveraging Novosound’s ultrasound platform technology for development of novel intravascular ultrasound (“IVUS”) imaging devices, with PAVmed having the option to license the technology on an exclusive basis for use in intravascular imaging.
Recent Developments- continued
Financing
Securities Purchase Agreement - March 31, 2022 - Senior Secured Convertible Note - April 4, 2022 and Senior Secured Convertible Note - September 8, 2022
Effective as of March 31, 2022, we entered into a Securities Purchase Agreement (“SPA”) with an accredited institutional investor (“Investor”, “Lender”, and /or “Holder”), pursuant to which we agreed to sell, and the Investor agreed to purchase an aggregate of $50.0 million face value principal of Senior Secured Convertible Notes. The SPA provided for the sale to the Investor of an initial Senior Secured Convertible Note with a face value principal of $27.5 million, which closed on April 4, 2022 (the “April 2022 Senior Convertible Note”). The SPA also provided for sales of additional Senior Secured Convertible Notes in one or more additional closings (upon the satisfaction of certain conditions), with an aggregate face value principal of up to an additional $22.5 million. The April 2022 Senior Convertible Note proceeds were $24.4 million after deducting a $2.5 million lender fee and the Company’s offering costs of approximately $0.6 million, inclusive primarily of $0.5 million placement agent fees.
On September 8, 2022, we completed an additional closing under the SPA, in which we sold to the Investor an additional Senior Secured Convertible Note with a face value principal of $11.25 million (the “September 2022 Senior Convertible Note”). The September 2022 Senior Convertible Note proceeds were $10.0 million after deducting a $1.0 million lender fee and the Company’s offering costs of approximately $0.2 million, inclusive primarily of placement agent fees.
See our accompanying unaudited condensed consolidated financial statements Note 11, Debt, for further discussion of the SPA dated March 31, 2022 and the senior convertible notes.
Lucid Diagnostics Inc. - Committed Equity Facility
In March 2022, our majority-owned subsidiary, Lucid Diagnostics, entered into a committed equity facility with an affiliate of Cantor Fitzgerald (“Cantor”). Under the terms of the facility, Cantor committed to purchase up to $50 million of Lucid Diagnostics common stock from time to time upon the request of Lucid Diagnostics. While there are distinct differences, the facility is structured similarly to a traditional at-the-market equity facility, insofar as it allows Lucid Diagnostics to raise primary capital on a periodic basis at prices based on the existing market price. Through September 30, 2022, 680,263 shares of common stock of Lucid Diagnostics were issued under this facility for total proceeds of approximately $1.8 million.
Results of Operations
Revenue
The Company recognized revenue resulting from the delivery of patient EsoGuard test results for which cash collections have occurred or payment was reasonably assured. Additionally, revenue was recognized with respect to the EsoGuard Commercialization Agreement, dated August 1, 2021, between the Lucid Diagnostics Inc. and ResearchDx Inc. (“RDx”), a CLIA certified commercial laboratory service provider. On February 25, 2022, the EsoGuard Commercialization Agreement was terminated upon the execution of an Asset Purchase Agreement between the Company’s wholly-owned subsidiary of LucidDx Labs Inc. and RDx.
Cost of revenue
Cost of revenues recognized from the delivery of patient EsoGuard test results includes costs related to EsoCheck device usage, shipment of test collection kits, royalties and the cost of services to process tests and provide results to physicians. We incur expenses for tests in the period in which the activities occur, therefore, gross margin as a percentage of revenue may vary from quarter to quarter due to costs being incurred in one period that relate to revenues recognized in a later period.
We expect that gross margin for our services will continue to fluctuate and be affected by EsoGuard test volume, our operating efficiencies, patient compliance rates, payer mix, the levels of reimbursement, and payment patterns of payers and patients.
The cost of revenue recognized with respect to the revenue recognized under the EsoGuard Commercialization Agreement is inclusive of: a royalty fee incurred under the Amended CWRU License Agreement; employee related costs of employees engaged in the administration to patients of the EsoCheck cell sample collection procedure (principally at the Lucid Test Centers); the EsoCheck devices and EsoGuard mailers (cell sample shipping costs) distributed to medical practitioners locations and the Lucid Test Centers; and Lucid Test Centers operating expenses, including rent expense and supplies.
Sales and marketing expenses
Sales and marketing expenses consist primarily of salaries and related costs for employees engaged in sales and marketing activities, as well as advertising and promotion expenses. We anticipate our sales and marketing expenses will increase in the future, as we anticipate an increase in payroll and related expenses related to the roll-out of our commercial sales and marketing operations as we execute on our business strategy.
General and administrative expenses
General and administrative expenses consist primarily of salaries and related costs for personnel, travel expenses, facility-related costs, professional fees, accounting and legal services, employees involved in third-party payor reimbursement contract negotiations and consultants and expenses associated with obtaining and maintaining patents within our intellectual property portfolio.
We anticipate our general and administrative expenses will increase in the future, as we anticipate an increase in payroll and related expenses related with the growth and expansion of our business operations objectives. We also anticipate continued expenses related to being a public company, including audit, legal, regulatory, and tax-related services associated with maintaining compliance as a public company, insurance premiums and investor relations costs.
Research and development expenses
Research and development expenses are recognized in the period they are incurred and consist principally of internal and external expenses incurred for the research and development of our products, including:
We plan to incur research and development expenses for the foreseeable future as we continue the development of our existing products as well as new innovations. Our research and development activities, including our clinical trials, are focused principally on obtaining FDA approvals, facilitating insurer reimbursement, encouraging physician adoption and developing product improvements or extending the utility of the lead products in our pipeline, including EsoCheck and EsoGuard and CarpX, along with advancing our Veris Cancer Care Platform and EsoCure and PortIO products.
Other Income and Expense, net
Other income and expense, net, consists principally of changes in fair value of our convertible notes and losses on extinguishment of debt upon repayment of such convertible notes.
Results of Operations - continued
Presentation of Dollar Amounts
All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are presented as dollars in millions, except for per share amounts.
Three months ended September 30, 2022 as compared to three months ended September 30, 2021
In the three months ended September 30, 2022, revenue was $0.1 million as compared to $0.2 million in the corresponding period in the prior year. The $0.1 million decrease principally relates to the termination of the EsoGuard Commercialization Agreement with RDx, as the Company transitioned to its own laboratory operations effective February 25, 2022. The decrease was offset by revenue for our EsoGuard Esophageal DNA Test performed in our own CLIA laboratory for the three months ended September 30, 2022.
In the three months ended September 30, 2022, cost of revenue was approximately $1.6 million as compared to $0.1 million for the corresponding period in the prior year. The $1.5 million increase principally related to:
In the three months ended September 30, 2022, sales and marketing costs were approximately $4.7 million, compared to $2.3 million for the corresponding period in the prior year. The net increase of $2.4 million was principally related to:
In the three months ended September 30, 2022, general and administrative costs were approximately $10.3 million, compared to $6.1 million for the corresponding period in the prior year. The net increase of $4.2 million was principally related to:
In the three months ended September 30, 2022, research and development costs were approximately $6.2 million as compared to $5.3 million for the corresponding period in the prior year. The net increase $0.9 million was principally related to:
Change in fair value of convertible debt
In the three months ended September 30, 2022, the non-cash expense recognized for the change in the fair value of our convertible notes was approximately $0.3 million of income, related to both the April 2022 and September 2022 Senior Convertible Notes. The April 2022 and September 2022 Senior Convertible Notes were initially measured at their issue-date estimated fair value and subsequently remeasured at estimated fair value as of the reporting period date. The Company initially recognized a $0.9 million fair value non-cash expense on the September 2022 Senior Convertible Note issue-date. This initial recognition was more than offset by $1.2 million of decreases in fair value upon remeasurements through September 30, 2022.
Three months ended September 30, 2022 as compared to three months ended September 30, 2021 - continued
Loss on Issue and Offering Costs - Senior Secured Convertible Note
In the three months ended September 30, 2022, in connection with the issue of the September 2022 Senior Convertible Note, we recognized a total of approximately $1.2 million of other expense, inclusive of approximately $1.0 million of lender fee non-cash expense, and approximately $0.2 million of offering costs paid by us.
See our unaudited condensed consolidated financial statements Note 11, Debt, for additional information with respect to the September 2022 Senior Convertible Note.
Loss on Debt Extinguishment
In the three months ended September 30, 2022, a debt extinguishment loss in the aggregate of approximately $5.1 million was recognized in connection with our April 2022 Senior Convertible Note as discussed below.
Nine months ended September 30, 2022 as compared to nine months ended September 30, 2021
In the nine months ended September 30, 2022, revenue was $0.3 million as compared to $0.2 million in the corresponding period in the prior year. The $0.1 million increase principally relates to revenue for laboratory services rendered for our EsoGuard Esophageal DNA Test performed in our own CLIA laboratory. The increase was partially offset by the termination of the EsoGuard Commercialization Agreement, with RDx as the Company transitioned to its own laboratory operations effective February 25, 2022.
In the nine months ended September 30, 2022, cost of revenue was approximately $2.0 million as compared to $0.1 million for the corresponding period in the prior year. The $1.9 million increase principally related to:
In the nine months ended September 30, 2022, sales and marketing costs were approximately $13.6 million, compared to $5.6 million for the corresponding period in the prior year. The net increase of $8.0 million was principally related to:
In the nine months ended September 30, 2022, general and administrative costs were approximately $31.0 million, compared to $16.3 million for the corresponding period in the prior year. The net increase of $14.7 million was principally related to:
Nine months ended September 30, 2022 as compared to nine months ended September 30, 2021 - continued
In the nine months ended September 30, 2022, research and development costs were approximately $18.9 million as compared to $12.9 million for the corresponding period in the prior year. The net increase $6.0 million was principally related to:
Other Income and Expense
In the nine months ended September 30, 2022, the non-cash expense recognized for the change in the fair value of our convertible notes was approximately $1.7 million, related to both the April 2022 and September 2022 Senior Convertible Notes. The April 2022 and September 2022 Senior Convertible Notes were initially measured at its issue-date estimated fair value and subsequently remeasured at estimated fair value as of the reporting period date. The Company initially recognized a $3.5 million fair value non-cash expense on the issue-dates. This initial recognition was partially offset by $1.8 million of decreases in fair value upon remeasurements through September 30, 2022.
In the nine months ended September 30, 2021, the non-cash income (expense) recognized for the change in the fair value of our convertible notes was approximately $1.7 million of other income. The change in the fair value adjustment of the convertible notes is principally related to each of the convertible notes being repaid-in-full during the nine months ended September 30, 2021, as discussed herein below under “Loss from Extinguishment of Debt.”
In the nine months ended September 30, 2022, in connection with the issue of both the April 2022 and September 2022 Senior Convertible Notes, we recognized a total of approximately $4.3 million of other expense, inclusive of approximately $3.5 million of lender fee non-cash expense, and approximately $0.8 million of offering costs paid by us.
Loss from Extinguishment of Debt
In the nine months ended September 30, 2022, a debt extinguishment loss in the aggregate of approximately $5.1 million was recognized in connection with our April 2022 Senior Convertible Note as discussed below.
In the prior year nine months ended September 30, 2021, a debt extinguishment loss in the aggregate of approximately $3.7 million was recognized in connection with the (previous) convertible notes, as discussed below.
See our unaudited condensed consolidated financial statements Note 11, Debt, for additional information with respect to the April 2022 Senior Convertible Note.
Liquidity and Capital Resources
Our current operational activities are principally focused on the commercialization of EsoGuard and CarpX, and our development activities are focused on pursuing FDA approval and clearance of other lead products in our product portfolio pipeline. Our ability to generate revenue depends upon successfully advancing the commercialization of EsoGuard and CarpX while also completing the development and the necessary regulatory approvals of its other products and services. There are no assurances, however, we will be able to obtain an adequate level of financial resources required for the long-term commercialization and development of its products and services.
We have financed our operations principally through the public and private issuances of our common stock, preferred stock, common stock purchase warrants, and debt. We are subject to all of the risks and uncertainties typically faced by medical device and diagnostic and medical device companies that devote substantially all of their efforts to the commercialization of their initial product and services and ongoing R&D and clinical trials. We expect to continue to experience recurring losses from operations, and will continue to fund our operations with debt and/or equity financing transactions. Notwithstanding, however, with the cash on-hand as of the date hereof and other debt and equity committed sources of financing, we expect to be able to fund our future operations for one year from the date of the issue of our unaudited condensed consolidated financial statements, as included in this Form 10-Q.
Issue of Shares of Our Common Stock
During the nine months ended September 30, 2022
Securities Purchase Agreement - March 31, 2022 - Senior Secured Convertible Notes - April 4, 2022 and September 8, 2022
Effective as of March 31, 2022, we entered into the SPA with the Investor, pursuant to which we agreed to sell, and the Investor agreed to purchase an aggregate of $50.0 million face value principal of Senior Secured Convertible Notes. The SPA provided for the sale of the initial Senior Secured Convertible Note with a face value principal of $27.5 million, which closed on April 4, 2022 (referred to as the “April 2022 Senior Convertible Note”). The SPA also provided for sales of additional Senior Secured Convertible Notes in one or more additional closings (upon the satisfaction of certain conditions), with an aggregate face value principal of up to an additional $22.5 million.
The April 2022 Senior Secured Convertible Note has a 7.875% annual stated interest rate, a contractual conversion price of $5.00 per share of the Company’s common stock (subject to standard adjustments in the event of any stock split, stock dividend, stock combination, recapitalization or other similar transaction), and a contractual maturity date of April 4, 2024. The April 2022 Senior Convertible Note may be converted into or otherwise paid in shares of our common stock as described in Note 11, Debt.
On September 8, 2022, we completed an additional closing under the SPA, in which we sold to the Investor an additional Senior Secured Convertible Note with a face value principal of $11.25 million (referred to as the “September 2022 Senior Convertible Note”). The September 2022 Senior Secured Convertible Note has a 7.875% annual stated interest rate, a contractual conversion price of $5.00 per share of the Company’s common stock (subject to standard adjustments in the event of any stock split, stock dividend, stock combination, recapitalization or other similar transaction), and a contractual maturity date of September 6, 2024. The September 2022 Senior Convertible Note may be converted into or otherwise paid in shares of our common stock as described in Note 11, Debt.
The April 2022 Senior Convertible Note proceeds were $24.4 million after deducting a $2.5 million lender fee and the Company’s offering costs of approximately $0.6 million, inclusive primarily of $0.5 million placement agent fees.
The September 2022 Senior Convertible Note proceeds were $10.0 million after deducting a $1.0 million lender fee and the Company’s total offering costs of approximately $0.2 million, inclusive primarily of placement agent fees.
Liquidity and Capital Resources - continued
Under the Senior Convertible Notes and the SPA, we are subject to certain customary affirmative and negative covenants regarding the incurrence of indebtedness, the existence of liens, the repayment of indebtedness and the making of investments, the payment of cash in respect of dividends, distributions or redemptions, the transfer of assets, the maturity of other indebtedness, and transactions with affiliates, among other customary matters. We also are subject to financial covenants requiring that (i) the amount of our available cash equal or exceed $8.0 million at all times, (ii) the ratio of (a) the outstanding principal amount of the notes issued under the SPA, accrued and unpaid interest thereon and accrued and unpaid late charges to (b) our average market capitalization over the prior ten trading days, not exceed 30% (except that such maximum percentage is 50% for the period from September 8, 2022 through March 5, 2023) (the “Debt to Market Cap Ratio Test”), and (iii) that our market capitalization shall at no time be less than $75 million (the “Market Cap Test” and, together with the Debt to Market Cap Ratio Test, the “Financial Tests”). As of September 30, 2022, the Company was in compliance with the Financial Tests. In addition, the Company presently is in compliance with the Financial Tests.
On August 9, 2022, the Company and the Investor also agreed, in connection with the waiver described in Note 11 above, that the Investor may convert up to $5.0 million of the principal amount of the April 2022 Senior Convertible Note at the then current conversion price as if the date of conversion were an Installment Date, i.e. a price per share of common stock equal to the lower of (i) the fixed conversion price then in effect (currently $5.00) and (ii) 82.5% of the average VWAP of the Company’s common stock for each of the two trading days with the lowest VWAP of the Company’s common stock during the ten consecutive trading day period ending and including the trading day immediately prior to the applicable conversion date, but in the case of clause (ii), not less than $0.18 per share. As contemplated by such amendment, in August 2022, approximately $5.0 million of principal repayments along with less than $0.1 million of interest expense thereon, were settled through the issuance of 5,103,908 shares of our common stock.
See Note 11, Debt, for additional information about the SPA and the Senior Secured Convertible Notes.
In March 2022, our majority-owned subsidiary, Lucid Diagnostics, entered into a committed equity facility with Cantor. Under the terms of the committed equity facility, Cantor has committed to purchase up to $50 million of Lucid Diagnostics common stock from time to time at the request of Lucid Diagnostics. While there are distinct differences, the facility is structured similarly to a traditional at-the-market equity facility, insofar as it allows Lucid Diagnostics to raise primary equity capital on a periodic basis at prices based on the existing market price. As of September 30, 2022, under the committed equity facility, a total of 680,263 shares of common stock of Lucid Diagnostics were issued for proceeds of approximately $1.8 million.
Critical Accounting Policies and Significant Judgments and Estimates
The discussion and analysis of our (unaudited) financial condition and consolidated results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, and equity, along with the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of expenses during the corresponding periods. In accordance with U.S. GAAP, we base our estimates on historical experience and on various other assumptions we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies are as disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on April 6, 2022, except as otherwise noted in Note 2, Summary of Significant Accounting Policies and Recent Accounting Standards Updates, of our unaudited condensed consolidated financial statements included herein in this Form 10-Q.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2022. Based on such evaluation, our principal executive officer and principal financial officer concluded our disclosure controls and procedures (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) were effective as of such date to provide reasonable assurance the information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes to Internal Controls Over Financial Reporting
There has been no change in internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our fiscal quarter ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Part II - Other Information
Item 1. Legal Proceedings
See Note 9, Commitment and Contingencies - Legal Proceedings, of the unaudited condensed consolidated financial statements included in this Quarterly Report, for a description of certain material legal proceedings involving the Company, which description is incorporated herein by reference.
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth in the “Exhibit Index” below.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
November 14, 2022
EXHIBIT INDEX