Note
2 — Financial Condition, Going Concern and Management Plans
The Company is subject
to all of the risks and uncertainties typically faced by 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.
The Company expects to continue incurring losses for the foreseeable future. The Company’s existing liquidity is not
sufficient to fund its operations, anticipated capital expenditures and working capital funding until the Company
reaches significant revenues. As such, the Company intends to rely of capital markets to obtain additional equity or debt
financing, especially if the Company experiences downturns in its business that are more severe or longer than anticipated, or
if the Company experiences significant increases in expense levels resulting from being a publicly-traded company or from expansion
of operations. If the Company attempts to obtain additional equity or debt financing, the Company cannot assume that such financing
will be available to the Company on favorable terms, or at all.
As a result of
recurring operating losses and net operating cash flow deficits there is substantial doubt about the Company’s ability to
continue as a going concern within one year from the date of this filing. The unaudited condensed consolidated financial
statements have been prepared assuming that the Company will continue as a going concern, and do not include any adjustments to
reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities
that may result from the outcome of this uncertainty.
Note
3 — Summary of Significant Accounting Policies
Significant
Accounting Policies
Other
than as described below, there have been no material changes in the Company’s significant accounting policies to those previously
disclosed in the Company’s annual report on Form 10-K, which was filed with the SEC on April 14, 2020.
Basis
of Presentation
The accompanying unaudited
condensed consolidated financial statements 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 Lucid Diagnostics Inc. and Solys Diagnostics Inc., with the corresponding
noncontrolling interest included as a separate component of consolidated stockholders’ equity, including the recognition
in the consolidated statement of the net loss attributable to the noncontrolling interest based on the respective minority
ownership interest of each respective entity.
The
condensed consolidated balance sheet as of December 31, 2019, which has been derived from audited consolidated financial
statements, and the unaudited condensed consolidated financial statements, 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”) regarding interim financial reporting. As permitted
under SEC rules, certain footnotes or other financial information normally required by U.S. GAAP have been condensed or omitted,
and accordingly the balance sheet as of December 31, 2019 has been derived from audited consolidated financial statements at such
date but does not include all of the information required by U.S. GAAP for complete consolidated financial statements.
These 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 normal
recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial information. Certain
items have been reclassified to conform to the current period presentation.
The
results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for
the year ending December 31, 2020 or for any other interim period or for any other future periods. The accompanying unaudited
condensed consolidated financial statements and related consolidated financial information should be read in conjunction
with the audited consolidated financial statements and related notes thereto as of and for the year ended December 31,
2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on April 14, 2020.
Use
of Estimates
In
preparing 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 liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements, as well as the reported amounts of expenses during
the reporting period. Due to inherent uncertainty involved in making estimates, actual results reported in future periods may
be affected by changes in these estimates. On an ongoing basis, the Company evaluates its estimates and assumptions. These estimates
and assumptions include valuing equity securities in share-based payment arrangements and estimating the fair value of financial
instruments recorded as liabilities. In addition, 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.
Recent
Accounting Standards
Adoption
of new accounting Standard
On
January 1, 2020, we adopted ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”),
which aligns the accounting for share-based payments to nonemployees for goods and services with the requirements for accounting
for share-based payments to employees under ASC 718 Compensation – Stock Compensation. ASU 2018-07 provides that nonemployee
share-based payments are measured at the grant date at the fair value of the equity instruments to be provided to the nonemployee
when the goods or services have been delivered. Prior to ASU 2018-07 nonemployee share-based payments were measured at the fair
value of the consideration received or the fair value of the equity instruments issued, whichever could be more reliably measured.
The adoption of ASU 2018-07 had no effect on the Company’s consolidated financial statements.
On January 1, 2020, the
Company adopted ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements
for Fair Value Measurement, which modifies the disclosure requirements on fair value measurement. The adoption of ASU 2018-07
had no effect on the Company’s consolidated financial statements.
In November 2018, the
FASB issued ASU No. 2018-18, “Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and
Topic 606”, which requires transactions in collaborative arrangements to be accounted for under ASC 606 if the counterparty
is a customer for a good or service (or bundle of goods and services) that is a distinct unit of account. Additionally, ASU No.
2018-18 precludes entities from presenting consideration from transactions with a collaborator that is not a customer together
with revenue recognized from contracts with customers. The adoption by the Company of ASU 2018-18 on January 1, 2020 had no
effect on its consolidated financial statements.
Note
4 — Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets consisted of the following as of:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Deposits
|
|
$
|
39
|
|
|
$
|
34
|
|
EsoCheck cell collection supplies
|
|
|
133
|
|
|
|
-
|
|
Advanced payments to service providers and suppliers
|
|
|
520
|
|
|
|
294
|
|
Total prepaid expenses and other current assets
|
|
$
|
692
|
|
|
$
|
328
|
|
Note
5 — Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities consisted of the following as of:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Compensation related expenses
|
|
$
|
1,140
|
|
|
$
|
1,075
|
|
EsoGuard License Agreement fee
|
|
|
223
|
|
|
|
223
|
|
Operating Expenses
|
|
|
160
|
|
|
|
89
|
|
Total accrued expenses and other current liabilities
|
|
$
|
1,523
|
|
|
$
|
1,387
|
|
Note
6 — Related Party Transactions
During
the three months ended March 31, 2020 and 2019 the Company incurred the following expenses with the minority shareholders of Lucid
Diagnostics Inc.:
|
|
For the three months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
CWRU patent related fees
|
|
$
|
32
|
|
|
$
|
31
|
|
Clinical supplies - EsoCheck
|
|
|
15
|
|
|
|
-
|
|
EsoGuard Physician Inventors’ consulting agreements
|
|
|
38
|
|
|
|
38
|
|
Stock based compensation expense
|
|
|
6
|
|
|
|
24
|
|
Total
|
|
$
|
91
|
|
|
$
|
93
|
|
Note
7 — Commitment and Contingencies
Office
Leases
Total rent expense
incurred under such office rental agreements was $50 and $33, for the three months ended March 31, 2020 and 2019, respectively.
As of March 31, 2020, the Company’s future minimum lease payments for such office rental agreements are estimated to be
a total of approximately $159 for the period April 1, 2020 to March 31, 2021.
Note
8 — Stock-Based Compensation
PAVmed
Inc. 2014 Long-Term Incentive Equity Plan - Stock Options
Stock
options issued and outstanding under the PAVmed Inc 2014 Long-Term Incentive Equity Plan (PAVmed Inc. 2014 Equity Plan”)
for the period noted is as follows:
|
|
Number
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Remaining
Contractual
Term
(Years)
|
|
Outstanding
stock options at December 31, 2019
|
|
|
5,204
|
|
|
$
|
2.68
|
|
|
|
8.1
|
|
Granted
|
|
|
125
|
|
|
$
|
2.05
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
9.9
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Outstanding stock
options at March 31, 2020
|
|
|
5,329
|
|
|
$
|
2.66
|
|
|
|
8.0
|
|
Vested and exercisable
stock options at March 31, 2020
|
|
|
3,604
|
|
|
$
|
3.30
|
|
|
|
7.7
|
|
The
aggregate intrinsic value of stock options granted under the PAVmed Inc. 2014 Equity as of March 31, 2020 was $2,058 with respect
to such stock options outstanding and $850 with respect to such stock options vested and exercisable. The intrinsic value is computed
as the difference between the quoted price of the PAVmed Inc. common stock on March 31, 2020 and the exercise price of the underlying
PAVmed Inc. stock options, to the extent such quoted price is greater than the exercise price.
PAVmed
Inc 2014 Long-Term Incentive Equity Plan - Restricted Stock Awards
On
March 15, 2019, a total of 700 restricted stock awards were granted to employees under the PAVmed Inc. 2014 Equity Plan, with
such restricted stock awards vesting ratably on an annual basis over a three year period commencing March 15, 2020. The restricted
stock awards are subject to forfeiture if the requisite service period is not completed. On March 15, 2020, approximately 234
of such restricted stock awards vested.
Subsequent
to March 31, 2020, on April 30, 2020, the compensation committee of the board of directors as part of their annual performance
review of management, granted approximately 1.0 million restricted stock awards and 1.1 million stock options to purchase common
stock at an exercise price of $2.19 per share to employees and directors of the company, each under the PAVmed Inc. 2014 Equity
Plan.
PAVmed
Inc Employee Stock Purchase Plan (“ESPP”)
The
PAVmed Inc. Employee Stock Purchase Plan (“ESPP”) provides eligible employees the opportunity to purchase shares of
PAVmed Inc. common stock through payroll deductions during six month periods, wherein the purchase price per share of common stock
is the lower of 85% of the quoted closing price per share of PAVmed Inc. common stock at the beginning or end of each six month
share purchase period. The PAVmed Inc. ESPP share purchase dates are March 31 and September 30. On the March 31, 2020 ESPP purchase
date, 154 shares of PAVmed Inc. common stock were issued for proceeds of approximately $0.1 million.
Lucid
Diagnostics Inc. 2018 Long-Term Incentive Equity Plan - Stock Options
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. Stock options issued and outstanding under the Lucid Diagnostics
Inc. 2018 Equity Plan for the period noted is as follows:
|
|
Number
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Remaining
Contractual
Term
(Years)
|
|
Outstanding stock options
at December 31, 2019
|
|
|
995
|
|
|
$
|
0.86
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Exercised
|
|
|
3
|
|
|
$
|
1.50
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Outstanding stock
options at March 31, 2020
|
|
|
992
|
|
|
$
|
0.86
|
|
|
|
8.7
|
|
Vested and exercisable
stock options at March 31, 2020
|
|
|
574
|
|
|
$
|
0.83
|
|
|
|
8.6
|
|
Stock
options granted under the Lucid Diagnostics Inc. 2018 Equity Plan, have a ten year contractual term from date of grant, and vest
ratably over twelve successive calendar quarters, with first vesting date in the quarter of the date of grant.
During the three months
ended March 31, 2020, 3 stock options issued under the Lucid Diagnostics Inc. 2018 Equity Plan were exercised for cash proceeds
of $5, resulting in the issue of a corresponding number of shares of common stock of Lucid Diagnostics Inc.
Stock-Based Compensation
Expense
Consolidated stock-based
compensation expense recognized 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:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
General and administrative expenses
|
|
$
|
277
|
|
|
$
|
285
|
|
Research and development expenses
|
|
|
67
|
|
|
|
174
|
|
Total
|
|
$
|
344
|
|
|
$
|
459
|
|
As of March 31, 2020,
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:
|
|
Unrecognized
Expense
|
|
|
Remaining
Service
Period
|
|
PAVmed Inc. 2014 Equity Plan
|
|
|
|
|
|
|
|
|
Stock Options
|
|
$
|
1,107
|
|
|
|
1.0
year
|
|
Restricted Stock Awards
|
|
$
|
474
|
|
|
|
1.9
years
|
|
|
|
|
|
|
|
|
|
|
Lucid Diagnostics Inc. 2018 Equity Plan
|
|
|
|
|
|
|
|
|
Stock Options
|
|
$
|
88
|
|
|
|
1.6
years
|
|
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 $0.81 per share and $0.93 per share during the three months ended March
31, 2020 and 2019, respectively, calculated using the following weighted average Black-Scholes valuation model assumptions:
|
|
Three
Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Expected term of stock options
(in years)
|
|
|
5.7
|
|
|
|
5.7
|
|
Expected stock price volatility
|
|
|
51
|
%
|
|
|
50
|
%
|
Risk free interest rate
|
|
|
2.4
|
%
|
|
|
2.3
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Stock-based
compensation expense recognized with respect to stock options granted under the PAVmed Inc. 2014 Equity Plan to non-employees
under the previous provisions FASB ASC 505-50 in the prior year three months ended March 31, 2019, was based on a weighted average
estimated fair value of such stock options of $1.99 per share, calculated using Black-Scholes valuation model weighted-average
assumptions of 8.6 year contractual term, a 60% expected stock price volatility, a 2.4% risk free interest rate, and a 0% expected
dividend rate.
The
restricted stock awards granted to employees under the PAVmed Inc. 2014 Equity Plan are measured at their grant date estimated
fair value based on the date-of-grant quoted price per share of PAVmed Inc. common stock. The 700 restricted stock awards granted
on March 15, 2019 had an aggregate fair value of approximately $742 with such stock-based compensation expense recognized ratably
over the requisite service period, which is the three year vesting period as discussed above. The stock-based compensation expense
recognized with respect to such restricted stock awards was approximately $62 and $21 in the three months ended March 31, 2020
and 2019, respectively, classified in general and administrative expenses, as presented above.
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 $0.30
and $0.39 per share during the three months ended March 31, 2020 and 2019, respectively, and was calculated using the following
weighted average Black-Scholes valuation model assumptions:
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Expected term of stock options (in years)
|
|
|
5.2
|
|
|
|
5.8
|
|
Expected stock price volatility
|
|
|
60
|
%
|
|
|
63
|
%
|
Risk free interest rate
|
|
|
1.9
|
%
|
|
|
2.5
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Stock-based compensation
expense recognized with respect to stock options granted under the Lucid Diagnostics Inc. 2018 Equity Plan to non-employees under
the previous provisions FASB ASC 505-50 in the prior year three months ended March 31, 2019, was based on a weighted average estimated
fair value of such stock options of $0.57 per share, calculated using Black-Scholes valuation model weighted-average assumptions
of 9.3 year contractual term, a 62% expected stock price volatility, a 2.5% risk free interest rate, and a 0% expected dividend
rate.
The
Company uses the Black-Scholes valuation model to estimate the fair value of stock options granted under both the PAVmed Inc.
2014 Equity Plan and the Lucid Diagnostics Inc. 2018 Equity Plan, which requires the Company to make certain estimates and assumptions,
with the weighted-average valuation assumptions for stock-based awards, principally as follows:
|
●
|
The
expected term of stock options represents the period of time stock options are expected to be outstanding, which is the expected
term derived using the simplified method and, through December 31, 2019 for non-employees (under the previous provisions FASB
ASC 505-50), was the remaining contractual term;
|
|
|
|
|
●
|
With
respect to stock options granted under the PAVmed Inc. 2014 Equity Plan, the expected stock price volatility is based on the
historical stock price volatility of PAVmed Inc. common stock (“PAVM”) and the volatilities of similar entities
within the medical device industry over the period commensurate with the expected term, and through December 31, 2019 for
non-employees (under the previous provisions FASB ASC 505-50), was the remaining contractual term of the respective stock option; and, with respect to stock options granted
under the Lucid Diagnostics Inc. 2018 Equity Plan, the expected stock price volatility is based on the historical stock price
volatilities of similar entities within the medical device industry over the period commensurate with the expected term, and
through December 31, 2019 for non-employees (under the previous provisions FASB ASC 505-50), was the remaining contractual
term of the respective stock option;
|
|
|
|
|
●
|
The
risk-free interest rate is based on the interest rate payable on U.S. Treasury securities in effect at the time of grant for
a period commensurate with the expected term of the stock option; and,
|
|
|
|
|
●
|
The
expected dividend yield is based on annual dividends of $0.00 as there has not been a dividend paid to-date, and there is
no plan to pay dividends for the foreseeable future.
|
The
price per share of PAVmed Inc. common stock used in the computation of estimated fair value of stock options granted under the
PAVmed Inc. 2014 Equity Plan is its quoted closing price per share. The price per share of Lucid Diagnostics Inc. common stock
used in the computation of estimated fair value of stock options granted under the Lucid Diagnostics Inc. 2018 Equity Plan was
estimated using a discounted cash flow method applied to a multi-year forecast of its future cash flows.
Note
9 — Financial Instruments Fair Value Measurements
Recurring
Fair Value Measurements
The
fair value hierarchy table for the periods indicated is as follows:
|
|
Fair Value Measurement on a Recurring Basis at Reporting Date Using(1)
|
|
|
|
Level-1
|
|
|
Level-2
|
|
|
Level-3
|
|
|
|
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Total
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Secured Convertible Note December 2018
|
|
|
|
|
|
|
|
|
|
$
|
63
|
|
|
$
|
63
|
|
Senior
Secured Convertible Notes November 2019
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,600
|
|
|
$
|
20,600
|
|
Totals
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,663
|
|
|
$
|
20,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Convertible
Note December 2018
|
|
|
|
|
|
|
|
|
|
$
|
1,700
|
|
|
$
|
1,700
|
|
Senior
Secured Convertible Notes November 2019
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,439
|
|
|
$
|
6,439
|
|
Totals
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,139
|
|
|
$
|
8,139
|
|
(1)
|
As
noted above, as presented in the fair value hierarchy table, Level-1 represents quoted prices in active markets for identical
items, Level-2 represents significant other observable inputs, and Level-3 represents significant unobservable inputs. There
were no transfers between the respective Levels during the three-month period ended March 31, 2020.
|
The
November 2019 Senior Convertible Notes and the December 2018 Senior Secured Convertible Note are each accounted for under the
ASC 825-10-15-4 fair value option (“FVO”) election. Under the FVO election 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. As provided for by ASC 825-10-50-30(b), the estimated fair value adjustment is presented as a single line item within
other income (expense) in the accompanying unaudited condensed consolidated statement of operations.
The following table presents
changes in Level 3 liabilities measured at fair value for the three-month period ended March 31, 2020 and 2019. Both observable
and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3
category. 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:
Three
months ended March 31, 2020:
(ooo’s) except for per-share and percentages amounts
|
|
December 2018 Senior Convertible Note
|
|
|
November 2019 Senior Convertible Notes
|
|
|
Fair Value Balance Sheet Components
|
|
|
Other
Income
(Expense)
|
|
Fair Value at December 31, 2019
|
|
$
|
1,700
|
|
|
$
|
6,439
|
|
|
$
|
8,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash proceeds
|
|
|
-
|
|
|
|
6,300
|
|
|
|
6,300
|
|
|
|
|
|
Loss upon issue lender fees
|
|
|
-
|
|
|
|
700
|
|
|
|
700
|
|
|
|
(700
|
)
|
Fair value adjustment at issue date
|
|
|
-
|
|
|
|
2,561
|
|
|
|
2,561
|
|
|
|
(2,561
|
)
|
Repayments in cash
|
|
|
-
|
|
|
|
(138
|
)
|
|
|
(138
|
)
|
|
|
|
|
Payment of interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Repayments in common stock
|
|
|
(1,646
|
)
|
|
|
-
|
|
|
|
(1,646
|
)
|
|
|
|
|
Change in fair value
|
|
|
9
|
|
|
|
4,738
|
|
|
|
4,747
|
|
|
|
(4,747
|
)
|
Fair Value at March 31, 2020
|
|
$
|
63
|
|
|
$
|
20,600
|
|
|
$
|
20,663
|
|
|
$
|
(8,008
|
)
|
Fair Value Assumptions -
March 31, 2020:
Required rate of return
|
|
|
16%
|
|
|
|
12%
|
Conversion Price
|
|
$
|
1.60
|
|
|
$
|
1.60
|
Expected term (years)
|
|
|
0.04
|
|
|
|
1.52
|
Volatility
|
|
|
52%
|
|
|
|
68%
|
Risk free rate
|
|
|
0%
|
|
|
|
0%
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
Three
months ended March 31, 2019:
(ooo’s) except for per-share
and percentages
amounts
|
|
December
2018
Senior
Convertible
Note
|
|
|
Other
Income
(Expense)
|
|
Fair Value at December 31, 2018
|
|
$
|
7,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash proceeds
|
|
|
—
|
|
|
|
|
|
Loss upon issue lender fees
|
|
|
—
|
|
|
|
|
|
Fair value adjustment at issue date
|
|
|
—
|
|
|
|
|
|
Repayments in cash
|
|
|
(159
|
)
|
|
|
|
|
Payment of interest expense
|
|
|
|
|
|
|
|
|
Repayments in common stock
|
|
|
(52
|
)
|
|
|
|
|
Change in fair value
|
|
|
559
|
|
|
|
(559
|
)
|
Fair Value at March 31, 2019
|
|
$
|
8,251
|
|
|
$
|
(559
|
)
|
Fair Value Assumptions - March 31, 2019:
Required rate of return
|
|
|
11%
|
|
Conversion Price
|
|
$
|
1.60
|
|
Expected term (years)
|
|
|
1.76
|
|
Volatility
|
|
|
50%
|
|
Risk free rate
|
|
|
2%
|
|
Dividend yield
|
|
|
0%
|
|
Note
10 — Outstanding Debt
The
following two tables summarize outstanding debt as of March 31, 2020 and December 31, 2019, respectively:
(ooo’s)
except for per-share amounts
|
|
|
|
|
Maturity
Date
|
|
Stated
Interest
Rate
|
|
|
Conversion
Price
|
|
|
Face
Value
|
|
|
Carrying
Value
|
|
December
2018 Senior Secured Convertible Note
|
|
|
(1
|
)
|
|
12/31/2020
|
|
|
7.875
|
%
|
|
$
|
1.60
|
|
|
$
|
50
|
|
|
$
|
63
|
|
November
2019 Senior Secured Convertible Note
|
|
|
(2),
(3)
|
|
|
9/30/2021
|
|
|
7.875
|
%
|
|
$
|
1.60
|
|
|
|
14,000
|
|
|
|
20,600
|
|
Balance
as of March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,050
|
|
|
$
|
20,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
2018 Senior Secured Convertible Note
|
|
|
(1
|
)
|
|
12/31/2020
|
|
|
7.875
|
%
|
|
$
|
1.60
|
|
|
$
|
1,692
|
|
|
$
|
1,700
|
|
November
2019 Senior Secured Convertible Note
|
|
|
(2
|
)
|
|
9/30/2021
|
|
|
7.875
|
%
|
|
$
|
1.60
|
|
|
|
7,000
|
|
|
$
|
6,439
|
|
Balance
as of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,692
|
|
|
$
|
8,139
|
|
(1)
|
For
the three months ended March 31, 2020 payments of approximately $1.6 million principal were made thru the issuance of approximately
2.0 million shares of common stock with a fair value of approximately $2.8 million resulting in a debt extinguishment loss
of $1.2 million.
|
|
|
(2)
|
For
the three months ended March 31, 2020 non-installment payments at the stated interest rate were made in the amount of approximately
$138 thousand.
|
|
|
(3)
|
On March
30, 2020, the Series B investor notes were prepaid in the full amount of approximately $6.3 million. Upon payment of the
investor note and in accordance with the securities purchase agreement, the Series B notes increased the stated interest
rate from 3.0% to 7.875%. Also as a result of the prepayment, the Series B note terms became identical to the Series A notes and
are accounted for under the fair value option election. For the three months ended March 31, 2020, non-installment payments at
the applicable stated interest rate in the amount of approximately $52,500 were recognized as interest expense,
and additionally, under a separate agreement, the Company recognized an expense in other income (expense) in the accompanying
consolidated statement of operations, approximately $409,500 with respect to the placement agent advisory fee.
|
The
(cash) payment of 3.0% interest on the $7.0 million face value principal of the (unfunded) Series B 2019 Senior Convertible Notes,
resulted in the recognition of $53 of interest expense during the three months ended March 31, 2020, included in other income
(expense) in the accompanying unaudited condensed consolidated statement of operations. There was no such interest expense in
the corresponding prior year period.
Subsequent
to March 31, 2020, with respect to the November 2019 Senior Convertible Notes, a total of $2,066 of Acceleration and Bi-Monthly
Installment Amount face value principal repayments and corresponding non-installment payments of $68, were settled by the
issue of 1,376 shares of common stock of the Company with a fair value of $3,374 (with such fair value measured
as the respective conversion date quoted closing price of the common stock of the Company).
Note 11 — Preferred Stock
In January 2020, the
Company’s board-of-directors declared a Series B Convertible Preferred Stock dividend payment of earned but unpaid dividends
as of December 31, 2019, payable as of January 1, 2020, of $69, with such dividend payment settled by the issue of an additional
23,182 shares of Series B Convertible Preferred Stock in accordance with the PAVmed Inc. Certificate of Designation of Preferences,
Rights, and Limitations of Series B Convertible Preferred Stock (“Series B Convertible Preferred Stock Certificate of Designation”).
In January 2019, the Company’s board-of-directors declared a Series B Convertible Preferred Stock dividend payment of earned
but unpaid dividends as of December 31, 2018, payable as of January 1, 2019, of $64, with such dividend payment settled by
the issue of an additional 21,413 shares of Series B Convertible Preferred Stock in accordance with the Series B Convertible Preferred
Stock Certificate of Designation.
Subsequent to March 31, 2020, in May 2020, the Company’s board-of-directors
declared a Series B Convertible Preferred Stock dividend payment of earned but unpaid dividends as of March 31, 2020, payable as
of April 1, 2019, of $70, with such dividend payment to be settled by the issue of an additional 23,481 shares of Series B Convertible
Preferred Stock in accordance with the Series B Convertible Preferred Stock Certificate of Designation. The April 1, 2020 Series
B Convertible Preferred Stock dividend payment was not recognized as a dividend payable liability as of March 31, 2020 as the Company’s
board of directors had not declared such dividends payable as of such date.
Note 12 — Stockholders’ Equity,
Common Stock Purchase Warrants, and Noncontrolling Interest
As of March 31, 2020,
a total of 17,249,857 common stock purchase warrants were issued and outstanding, with a $1.68 per share weighted average exercise
price; and, as of March 31, 2019, a total of 18,449,240 common stock purchase warrants were issued and outstanding with a $1.57
per share weighted average exercise price. During the three months ended March 31, 2020, 1,199,383 Series S Warrants were exercised
for cash proceeds of $12, resulting in the issue of a corresponding number of shares of common stock of the Company.
Noncontrolling
Interest
The
noncontrolling interest (“NCI”) included as a component of consolidated total stockholders’ equity for the periods
indicated is as follows:
|
|
Three
Months
Ended
March 31, 2020
|
|
|
Year
Ended
December 31, 2019
|
|
NCI
- equity (deficit) - beginning of period
|
|
$
|
(814
|
)
|
|
$
|
(162
|
)
|
Minority
Interest investment in Solys Diagnostics Inc
|
|
|
---
|
|
|
|
889
|
|
Minority
Interest share subscription receivable - Solys Diagnostics Inc.
|
|
|
---
|
|
|
|
(889
|
)
|
Minority
Interest Lucid Diagnostics Inc. 2018 Equity Plan stock option exercise
|
|
|
5
|
|
|
|
---
|
|
Net
loss attributable to NCI - Lucid Diagnostics Inc.
|
|
|
(402
|
)
|
|
|
(801
|
)
|
Net
loss attributable to NCI - Solys Diagnostics Inc.
|
|
|
(34
|
)
|
|
|
(10
|
)
|
Stock-based
compensation expense - Lucid Diagnostics Inc. 2018 Equity Plan
|
|
|
13
|
|
|
|
158
|
|
NCI
- equity (deficit) - end of period
|
|
$
|
(1,232
|
)
|
|
$
|
(814
|
)
|
Note
13 —Loss Per Share
Basic
earnings (loss) per common share is computed by dividing net loss by the weighted average number of common shares outstanding
during the reporting period. Diluted earnings (loss) per common share is computed similar to basic earnings (loss) per common
share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common
stock were exercised or converted into common stock. Diluted weighted average common shares include common stock potentially issuable
under the Company’s convertible notes, preferred stock, warrants and vested and unvested stock options.
The
following table sets forth the computation of earnings (loss) per share attributable to PAVmed Inc. and loss per share attributable
to PAVmed Inc. common stockholders for the respective periods indicated:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2020
|
|
|
2019
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net
loss - before noncontrolling interest
|
|
$
|
(14,911
|
)
|
|
$
|
(3,704
|
)
|
Net
loss attributable to noncontrolling interest
|
|
|
436
|
|
|
|
169
|
|
Net
loss - as reported, attributable to PAVmed Inc.
|
|
$
|
(14,475
|
)
|
|
$
|
(3,535
|
)
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock dividends:
|
|
$
|
(70
|
)
|
|
$
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to PAVmed Inc. common stockholders
|
|
$
|
(14,545
|
)
|
|
$
|
(3,600
|
)
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding basic and diluted
|
|
|
43,500
|
|
|
|
27,149
|
|
|
|
|
|
|
|
|
|
|
Loss
per share
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
|
|
|
|
|
|
Net
loss - as reported, attributable to PAVmed Inc.
|
|
$
|
(0.33
|
)
|
|
$
|
(0.13
|
)
|
Net
loss attributable to PAVmed Inc. common stockholders
|
|
$
|
(0.33
|
)
|
|
$
|
(0.13
|
)
|
The
following common stock equivalents have been excluded from the computation of diluted weighted average shares outstanding as their
inclusion would be anti-dilutive:
|
|
March
31,
|
|
|
|
2020
|
|
|
2019
|
|
PAVmed
Inc. 2014 Equity Plan stock options and restricted stock awards
|
|
|
5,795
|
|
|
|
5,077
|
|
Unit
purchase options - as to shares of common stock
|
|
|
53
|
|
|
|
53
|
|
Unit
purchase options -as to shares underlying Series Z Warrants
|
|
|
53
|
|
|
|
53
|
|
Series
Z Warrants
|
|
|
16,815
|
|
|
|
16,815
|
|
Series
W Warrants
|
|
|
382
|
|
|
|
382
|
|
Series
B Convertible Preferred Stock
|
|
|
1,156
|
|
|
|
1,091
|
|
Total
|
|
|
24,254
|
|
|
|
23,471
|
|
Note
14 — Subsequent Events
Other
Matters
The
Company received approximately $0.3 million of proceeds from the Small Business Administration of the United States of America
(“SBA”) in connection with the CARES Act Payroll Protection Program (“PPP”) related to loans available
to certain companies during the pandemic resulting from “SARS-CoV-2” (severe acute respiratory syndrome coronavirus
2), commonly referred to by its resulting illness as “COVIID-19” (coronavirus disease-2019). The PPP loan proceeds
have been recognized by the Company as a short-term debt obligation, requiring its repayment. Notwithstanding, the CARES Act provides
for PPP loan recipients, including the Company, to apply to have the entire PPP loan repayment obligation forgiven. At this time,
pending approval of the Company’s application for forgiveness, and while no assurance can be provided, the Company’s
understanding of the loan forgiveness criteria indicates its PPP loan will be forgiven in its entirety.
The
Company entered into a Security Purchase Agreement for the issue of a Senior Secured Convertible Note in the principal amount
of $4.1 million, resulting in the Company realizing cash proceeds of approximately $3.7 million, after the deduction of approximately
$0.4 million of lender fees - referred to as the April 2020 Senior Convertible Note. Additionally, under a separate agreement,
the Company incurred an expense of approximately $0.1 million with respect to the placement agent advisory fee. The April 2020
Senior Convertible Note has a 24 month maturity, a 7.875% interest rate per annum, and a voluntary conversion price of $5.00 per
share of the Company’s common stock. On the maturity date, the Company will pay the holder in cash all remaining outstanding
principal and unpaid interest thereon.
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, 2019 (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 its subsidiaries, including its majority-owned subsidiary, Lucid Diagnostics Inc. (“Lucid Diagnostics”
or “Lucid”) and Solys Diagnostics, Inc. (“Solys Diagnostics” or “Solys”).
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
consolidated results of operations and consolidated financial position, our estimates regarding expenses, future
revenue, capital and operating expenditure requirements and needs for additional financing, our business strategy and plans and
the 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 our 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:
|
●
|
our
limited operating history;
|
|
●
|
our
financial performance, including our ability to generate revenue;
|
|
●
|
our
ability to obtain regulatory approval for commercialization of our products;
|
|
●
|
the
ability of our products to achieve market acceptance;
|
|
●
|
our
success in retaining or recruiting, or changes required in, our officers, key employees, or directors;
|
|
●
|
our
potential ability to obtain additional financing when and if needed;
|
|
●
|
our
ability to sustain status as a going concern;
|
|
●
|
our
ability to protect our intellectual property;
|
|
●
|
our
ability to complete strategic acquisitions;
|
|
●
|
our
ability to manage growth and integrate acquired operations;
|
|
●
|
the
liquidity and trading of our securities;
|
|
●
|
our
regulatory or operational risks;
|
|
●
|
cybersecurity
risks;
|
|
●
|
risks
related to the COVID-19 pandemic;
|
|
●
|
the
impact of the material weakness identified by our management;
|
|
●
|
our
estimates regarding expenses, future revenue, capital requirements,
and needs for additional financing; and
|
|
●
|
our
status as an “emerging growth company” under the JOBS Act.
|
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 rely 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
PAVmed
is a highly-differentiated multi-product technology medical device 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 inception on June 26, 2014, the Company’s activities have focused on advancing its lead products towards regulatory
approval and commercialization, protecting its intellectual property, and building its corporate infrastructure and management
team. The Company operates in one segment as a medical device company with four operating divisions which include GI Health, Minimally
Invasive Interventions, Infusion Therapy, and Emerging Innovations. As resources permit, we will continue to explore internal
and external innovations that fulfill our project selection criteria without limiting ourselves to any target specialty or condition.
The Company has ongoing operations conducted in two active majority owned subsidiaries: Lucid Diagnostics Inc., which was
incorporated in May 2018 and Solys Diagnostics Inc., which was incorporated in October 2019.
PAVmed
and its subsidiaries have proprietary rights to the trademarks used herein, including, among others, PAVmed™, Lucid Diagnostics™,
Caldus™, CarpX™, DisappEAR™, EsoCheck™, EsoGuard™, EsoCheck Cell Collection Device™,
EsoCure Esophageal Ablation Device™, NextCath™, NextFlo™, PortIO™, and “Innovating at the Speed
of Life”™. Solely as a matter of convenience, trademarks and trade names referred to herein may or may not be accompanied
with the requisite marks of “™” or “®”, however, the absence of such marks is not intended to
indicate, in any way, PAVmed or its subsidiaries will not assert, to the fullest extent possible under applicable law, their respective
rights to such trademarks and trade names.
Our
multiple products are in various phases of development, regulatory clearances, approvals, and commercialization.
|
●
|
EsoCheck has received
510(k) marketing clearance from the U.S. Food and Drug Administration (“FDA”) as a esophageal cell collection
device. EsoGuard has been established as a Laboratory Developed Test (“LDT”) and was launched commercially in
December 2019 after Clinical Laboratory Improvement Amendment (“CLIA”) and College of American Pathologists (“CAP”)
accreditation of the test at Lucid’s commercial diagnostic laboratory partner ResearchDx Inc. (“ResearchDx”),
headquartered in Irvine, CA.
|
|
|
|
|
●
|
Our CarpX device
was developed as a patented, single-use, disposable, minimally invasive device designed as a precision cutting
tool to treat carpal tunnel syndrome while reducing recovery times. Our CarpX device was cleared by the FDA under section
510(k) on April 20, 2020.
|
|
|
|
|
●
|
Our other products
in development have not yet received clearance or approval to be marketed or sold in the U.S. or elsewhere. We have been granted
patents by the U.S. Patent and Trademark Office (“USPTO”) for CarpX, PortIO, and Caldus and have acquired licenses
to certain patents and intellectual property for DisappEAR from Tufts University and a group of academic centers, for EsoGuard
and EsoCheck from Case Western Reserve University (“CWRU”) and more recently for patents covering infrared technology
to non-invasively detect glucose in tissue within the in-patient field of use from Liquid Sensing, Inc.
|
A
brief description of our key divisions and products is as follows:
GI
Health
EsoGuard,
EsoCheck, and EsoCure
This
product family consists of a patented platform technology (EsoGuard
and EsoCheck) licensed from CWRU to Lucid Diagnostics developed to provide an accurate, non-invasive, patient-friendly screening
test for the early detection of adenocarcinoma of the esophagus (“EAC”) and of Barrett’s Esophagus (“BE”),
including dysplasia, pre-cursors to EAC in patients with chronic gastroesophageal reflux (“GERD”), along with
a technology (EsoCure) developed by PAVmed to treat BE. EsoGuard is a molecular diagnostic esophageal DNA test shown in a published
human study to be highly accurate at detecting BE, as well as EAC. EsoCheck is a non-invasive cell collection device designed
to sample cells from a targeted region of the esophagus in a five-minute office-based procedure, without the need for endoscopy.
Both EsoGuard and EsoCheck are commercially available, as separately marketed products, for physicians to prescribe for U.S. patients.
EsoCure is in development to provide an Esophageal Ablation Device using Caldus Technology to allow a clinician to treat dysplastic
BE before it can progress to EAC, a highly lethal esophageal cancer, and to do so without the need for complex and expensive capital
equipment.
Our
near term strategy, once gastroenterology clinics resume doing elective procedures post COVID-19, is to market EsoGuard
LDT through a network of independent representatives working with our in-house sales management.
Our
longer-term strategy is to secure a specific indication, based on published guidelines, for BE screening in certain at-risk populations
using EsoGuard on samples collected with EsoCheck. This requires having the EsoGuard screening system cleared or approved by the
FDA as an IVD device (“EsoGuard IVD”). In September 2019, we entered into an agreement with a clinical research organization
(“CRO”) in connection with EsoGuard clinical trials. The CRO will assist us with conducting two concurrent clinical
trials, an EsoGuard screening study and an EsoGuard case control study. Although we enrolled our first patients in the trial the
Covid-19 outbreak as curtailed all elective clinic procedures until the clinics are cleared to resume activities.
In
February 2020 we received Breakthrough Device designation from the FDA for our EsoGuard Esophageal DNA Test on esophageal samples
collected using our EsoCheck Cell Collection Device in a prevalent well-defined group of patients at elevated risk for
esophageal dysplasia due to chronic gastroesophageal reflux disease or “GERD” (acid reflux). The FDA Breakthrough
Device Program was created to offer patients more timely access to breakthrough technologies which provide for more effective
treatment or diagnosis of life-threatening or irreversibly debilitating human disease or conditions by expediting their development,
assessment and review through enhanced communications and more efficient and flexible clinical study design, including more favorable
pre/post market data collection balance. Breakthrough Devices receive priority FDA review, and a bipartisan bill before Congress
(H.R. 5333) seeks to require Medicare to temporarily cover all Breakthrough Devices for three years while determining permanent
coverage.
Minimally
Invasive Interventions
CarpX
We
received FDA market clearance under section 510(k) in April 2020 for our CarpX minimally invasive surgical device for use in
the treatment of carpal tunnel syndrome. We believe CarpX will allow the physician to relieve the compression on the
median nerve without an open incision or the need for endoscopic or other imaging equipment. To use CarpX, the operator
first advances a guidewire through the carpal tunnel under the ligament, and then advanced over the wire and positioned
in the carpal tunnel under ultrasonic and/or fluoroscopic guidance. When the CarpX balloon is inflated it creates tension
in the ligament positioning the cutting electrodes underneath it and creates space within the tunnel, providing anatomic separation
between the target ligament and critical structures such as the median nerve. Radiofrequency energy is briefly delivered to the
electrodes, rapidly cutting the ligament, and relieving the pressure on the nerve. We believe CarpX will be significantly
less invasive than existing treatments.
We
expect to commercialize our products through a network of independent U.S. sales representatives and/or inventory-stocking medical
distributors together with our in-house sales management and marketing teams, including a national sales manager with over
20 years of commercial experience in orthopedics. Our focus on CarpX, and other high margin products and services, is
particularly suitable to this mode of distribution. A high gross margin allows us to properly incentivize our distributors, which
in turn allows us to attract the top distributors with the most robust networks in our targeted specialties. Independent distributors
play an even larger role in many parts of Europe, most of Asia and emerging markets worldwide.
We
eventually may, however, choose to build (or obtain through a strategic acquisition) our own sales and marketing team to commercialize
CarpX, along with some or all of our products, if it is in our long-term interests. We may also choose to enter
into distribution agreements with larger strategic partners whereby we take full responsibility for the manufacturing of CarpX
but outsource some or all of its distribution to a partner, particularly outside the United States, with its own robust distribution
channels.
Infusion
Therapy
PortIO
This
product is a novel, patented, implantable, intraosseous vascular medical device which does not require accessing the central venous
system and does not have an indwelling intravascular component. It is designed to be highly resistant to occlusion and may not
require regular flushing. It features simplified, near-percutaneous insertion and removal, without the need for surgical dissection
or radiographic confirmation. It provides a near limitless number of potential access sites and can be used in patients with chronic
total occlusion of their central veins. The absence of an intravascular component will likely result in a very low infection rate.
Based
on encouraging animal data, once the COVID-19 outbreak allows for resumption of clinical trial activities, we are planning a long-term
(60-day implant duration) FIH clinical study in dialysis patients or those with poor venous access in Colombia, South America
and intend to fulfill the likely FDA request for human clinical data with a clinical safety study in the United States following
FDA clearance of a pending Investigational Device Exemption (IDE) submission to begin clinical testing. In addition, we plan
to file for FDA Breakthrough Device Designation for PortIO.
NextFlo
This
product is a patented, disposable, and highly accurate infusion
platform technology including IV infusion sets and disposable infusion pumps (DIP) designed to eliminate the need for complex
and expensive electronic infusion pumps for most of the estimated one million infusions of fluids, medications and other substances
delivered each day in hospitals and outpatient settings in the United States. NextFlo is designed to deliver highly accurate gravity-driven
infusions independent of the height of the IV bag. It maintains constant flow by incorporating a proprietary, passive, pressure-dependent
variable flow-resistor consisting entirely of inexpensive, easy-to-manufacture disposable mechanical parts. NextFlo testing has
demonstrated constant flow rates across a wide range of IV bag heights, with accuracy rates comparable to electronic infusion
pumps.
We
are seeking a long-term strategic partnership or acquiror. We have been running a formal M&A process for NextFlo targeting
strategic and financial partners. The process is active with ongoing discussion with multiple parties.
Emerging
Innovations
Emerging
innovations refers to a diversified and expanding portfolio
of innovative products designed to address unmet clinical needs across a broad range of clinical conditions. We are evaluating
a number of these product opportunities and intellectual property covering a spectrum of clinical conditions, which have either
been developed internally or have been presented to us by clinician innovators and academic medical centers, for consideration
of a partnership to develop and commercialize these products. This collection of products includes, without limitation, initiatives
in noninvasive glucose monitoring, mechanical circulatory support, and pediatric ear tubes. Furthermore, we are exploring other
opportunities to grow our business and enhance shareholder value through the acquisition of pre-commercial or commercial stage
products and/or companies with potential strategic corporate and commercial synergies.
Impact of COVID-19 Pandemic
We have been carefully monitoring the impact on the national economy
and our business of the pandemic resulting from “SARS-CoV-2” (severe acute respiratory syndrome coronavirus 2), commonly
referred to by its resulting illness as “COVIID-19” (coronavirus disease-2019). We expect the significance of the pandemic,
including the extent of its effect on our consolidated financial condition and consolidated operational results and cash flows,
to be dictated by the success of efforts to mitigate the spread and /or containment of the virus and the impact of actions taken
in response. The COVID-19 virus and related mitigation and containment efforts may have an adverse impact on our operations, supply
chains and distribution systems and /or those of our contractors and laboratory partner and increase our and their operating expenses.
In this regard, the ability of our employees or our contractors, laboratory partner, and other service providers, to perform their
work may be adversely affected. In addition, the spread of COVID-19 has disrupted the United States’ healthcare and healthcare
regulatory systems which could divert healthcare resources away from, or materially delay FDA approval with respect to our products.
Furthermore, our clinical trials may be affected by the pandemic, as site initiation and patient enrollment may be delayed, for
example, due to prioritization of hospital resources toward the COVID-19 response, as well as travel restrictions imposed by governments,
and the inability to access clinical test sites for initiation and monitoring. The pandemic may have an adverse impact on the economies
and financial markets of many countries, including the United States, resulting in an economic downturn that could adversely affect
demand for our products and services and /or our product candidates. While we are not able at this time to estimate the impact
of the pandemic on our consolidated financial condition, consolidated results of operations, and /or consolidated cash flows, the
adverse impact could be material.
Results
of Operations
General
and administrative expenses
General
and administrative expenses consist primarily of salaries and related costs for personnel, including travel expenses for our employees
in executive functions, facility-related costs, professional fees, accounting and legal services, 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 to our roll-out of our commercial sales and marketing operations. 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, director and officer insurance premiums and investor relations costs.
In
the three months ended March 31, 2020, general and administrative
costs were approximately $2.6 million, compared to $1.7 million for the three months ended March 31, 2019. The increase
of $0.9 million was principally related to:
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approximately
$0.3 million increase in compensation related costs principally related to sales staffing levels and other costs related to
our commercial launch of EsoGuard;
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approximately
$0.5 million in consulting services related to patents, regulatory compliance, legal processes for contract review, and public
company expenses; and
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approximately
$0.1 million in general business expenses.
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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:
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consulting
costs charged to us by various external contract research organizations we contract with to conduct preclinical studies and
engineering studies;
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salary
and benefit costs associated with our chief medical officer and engineering personnel;
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costs
associated with regulatory filings;
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patent
license fees;
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cost
of laboratory supplies and acquiring, developing, and manufacturing preclinical prototypes;
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product
design engineering studies; and
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rental
expense for facilities maintained solely for research and development purposes.
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We
plan to incur research and development expenses for the foreseeable future as we continue the development of our products. Our
research and development activities are focused principally on obtaining FDA approvals and product improvements or extending utility
of the lead products in our pipeline, including CarpX, EsoCheck and EsoGuard, along with advancing our DisappEAR, PortIO, NextFlo,
and noninvasive glucose monitoring products through their respective development phase.
In
the three months ended March 31, 2020, research and development
costs were approximately $2.6 million, compared to $1.5 million for the three months ended March 31, 2019. The increase
of $1.2 million was principally related to:
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approximately
$1.0 million increased clinical trial costs related principally to EsoGuard;
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approximately
$0.1 million increased compensation related costs related to increased staff levels; and
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approximately
$0.1 million increased consulting services.
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Other
Income and Expense
Change
in fair value of convertible debt
In the three months
ended March 31, 2020, the (non-cash) expense recognized for the change in the fair value of our senior secured convertible
notes (see Note 9 of our unaudited condensed consolidated financial statements) was approximately $8.0 million as
compared to $0.6 million for the corresponding period in the prior year, with the increase of $7.4 million was
principally related to:
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an
increase in the face principal amount of our senior secured convertible notes of approximately $7.0 million,
inclusive of $0.7 million in lender fees; and
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among
other fair value input assumptions, a substantive increase in the Company’s common stock price between the periods resulting
in a higher estimated fair value of the senior secured convertible notes.
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Loss
from Extinguishment of Debt
In the
three months ended March 31, 2020, the non-cash loss from debt extinguishment as a result of the issue of shares of our
common stock upon (partial) conversions of our senior secured convertible notes (see Note 10 of our unaudited
condensed consolidated financial statements) was approximately $1.2 million, compared to $0.0 million for the three
months ended March 31, 2019. Debt extinguishment costs are incurred when the fair value of the common stock issued to the
debt holder exceeds the value of the debt as of the conversion date. The increase of $1.2 million was principally related
to:
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principal
and interest of approximately $1.6 million converted into
approximately 2.0 million common shares for the three months ended March 31, 2020, compared to a de minimis amount
for the same period in 2019.
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Lender
Fee
In the
three months ended March 31, 2020, the loss from lender fees in connection with the issuance of our senior secured
convertible notes on March 30, 2020 (see Note 10 of our unaudited condensed consolidated financial statements) was
approximately $0.4 million, compared to $0.0 million for the three months ended March 31, 2019.
Interest
Expense
In
the three months ended March 31, 2020, interest expense of approximately
$0.1 million reflects the cost incurred on the Series B November 2019 Senior Convertible Notes (see “—Going
Concern, Liquidity, and Capital Resources” below) during the period prior to the Company receiving the cash proceeds
for such notes. There was no corresponding interest expense incurred for the three months ended March 31, 2019.
Going
Concern, Liquidity, and Capital Resources
We
have experienced recurring losses from operations since inception. We have not yet established an ongoing source of revenues and
must fund our operating expenses through debt and equity financings to allow us to continue as a going concern. Our ability
to continue as a going concern depends on the ability to obtain adequate capital to fund operating losses until we generate adequate
cash flows from operations to fund our operating costs and obligations. If we are unable to obtain adequate capital, we could
be forced to cease operations.
We
depend upon our ability, and will continue to attempt, to secure equity and/or debt financing. We cannot be certain that additional
funding will be available on acceptable terms, or at all. Our management determined that there was substantial doubt about
our ability to continue as a going concern within one year after the unaudited condensed consolidated financial statements
were issued, and management’s concerns about our ability to continue as a going concern within the year following this report
persist.
As
at March 31, 2020 and December 31, 2019, we had cash in the aggregate amount of $8.7 million and $6.2 million, respectively.
In
November 2019, we sold Senior Secured Convertible Notes with an aggregate initial principal amount of $14.0 million (the
“November 2019 Senior Convertible Notes”) to certain accredited investors in a private placement, generating cash
proceeds of approximately $12.6 million. The November 2019 Senior Convertible Notes were sold in two series, Series A (for
which the cash proceeds were delivered by the investors at the closing) and Series B (for which the cash proceeds were
received in March 2020, upon payment in full of promissory notes delivered by the investors at the closing). The November
2019 Senior Convertible Notes mature on September 30, 2021, subject to extension, and accrue interest at 7.875% per annum,
except that the Series B November 2019 Senior Convertible Notes accrued interest at 3.0% per annum until receipt of the cash
proceeds in March 2020 as described above. At the election of the holder, the November 2019 Senior Convertible Notes may be
converted into shares of common stock of the Company at a fixed conversion price of $1.60 per share, subject to adjustment.
Installments of principal totaling approximately $0.4 million, along with all accrued interest and any late charges, are due
on March 30, 2020, the 15th day of the month and the last trading day of the month, and on the maturity date. We
may settle the installment amounts through the conversion of such amounts into shares of our common stock, subject to
customary equity conditions (including minimum price and volume thresholds), at 100% of the installment amount, or otherwise
(or at our election, in whole or in part) in cash at 115% of the installment amount.
Subsequent to March 31, 2020, on April 30, 2020, we issued a Senior Secured Convertible Note with an initial
principal amount of $4.1 million (the “April 2020 Senior Convertible Note”) to an accredited investor in a private
placement, resulting in cash proceeds of approximately $3.7 million. The April 2020 Senior Convertible Note matures on April 30,
2022, subject to extension, and accrues interest at 7.875% per annum. At the election of the holder, the April 2020 Senior Convertible
Note may be converted into shares of common stock of the Company at a fixed conversion price of $5.00 per share, subject to adjustment.
Interest is payable monthly in cash.
Under
the November 2019 Senior Convertible Notes and the April 2020 Senior Convertible Note, we are subject to certain customary affirmative
and negative covenants regarding the incurrence of indebtedness, the existence of liens, the repayment of indebtedness, the payment
of cash in respect of dividends, distributions or redemptions, and the transfer of assets, among other matters, as well as a financial
covenant that requires us to maintain available cash in the amount of approximately $1.8 million at the end of each fiscal quarter.
As of March 31, 2020, we were in compliance with this financial covenant.
Critical
Accounting Policies and Significant Judgments and Estimates
The
discussion and analysis of our consolidated 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. Please see our accompanying unaudited condensed consolidated
financial statement Note 2, Summary of Significant Accounting Policies, of our unaudited condensed consolidated financial
statements included in this Form 10-Q, for a summary of significant accounting policies. In addition, reference is made
to Part I, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation”
in the Form 10-K, for a summary of our critical accounting policies and significant judgments and estimates. There
have been no other material changes to our critical accounting policies or judgments and estimates since the Form
10-K.