UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                    to                   

 

Commission File Number: 001-37685

 

 

 

PAVMED INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   47-1214177

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

 

One Grand Central Place

Suite 4600

New York, NY

(Address of Principal Executive Offices)

 

10165

(Zip Code)

 

(212) 949-4319

(Registrant’s Telephone Number, Including Area Code)

 

 

 

Securities registered under Section 12(b) of the Exchange Act:

 

Title of each class   Name of each exchange on which registered
Common Stock, $0.001 par value per share   The NASDAQ Stock Market LLC
Series Z Warrants, each to purchase one share of Common Stock   The NASDAQ Stock Market LLC
Series W Warrants, each to purchase one share of Common Stock   The NASDAQ Stock Market LLC

 

Securities registered under Section 12(g) of the Exchange Act: None

 

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 [X] 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 [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] Smaller reporting company [X]
    Emerging growth company [X]

 

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(a) 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 [X]

 

As of November 12, 2018 there were 26,542,979 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

 

 

 

 
 

 

TABLE OF CONTENTS

 

Page
PART I FINANCIAL INFORMATION  
     
Item 1 Unaudited Condensed Consolidated Financial Statements 1
     
  Unaudited Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 1
     
  Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017 2
     
  Unaudited Condensed Consolidated Statements of Changes in Series A Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the nine months ended September 30, 2018 3
     
  Unaudited Condensed Consolidated Statements of Changes in Series A Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the year ended December 31, 2017 4
     
  Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 5
     
  Notes to Unaudited Condensed Consolidated Financial Statements 6
     
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 56
     
Item 4 Controls and Procedures 96
     
PART II OTHER INFORMATION  
     
Item 5 Other Information 97
     
Item 6 Exhibits 97
     
SIGNATURES 98

 

i
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PAVMED INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30, 2018  

December 31, 2017

 
   (unaudited)     
Assets        
Current assets          
Cash  $9,241,534   $1,535,022 
Prepaid expenses and other current assets   119,980    88,467 
Total current assets   9,361,514    1,623,489 
Equipment, net   36,671    16,191 
Total assets  $9,398,185   $1,639,680 
           
Liabilities, Preferred Stock, and Stockholders’ Deficit          
Current liabilities          
Accounts payable  $1,638,262   $863,465 
Accrued expenses and other current liabilities   738,291    706,964 
Accrued interest expense - Senior Secured Note   201,867     
Senior Secured Note, net of $2,126,959 unamortized debt discount   3,256,153     
Series A Warrants derivative liability       761,123 
Series A Convertible Preferred Stock conversion option derivative liability       212,217 
Total current liabilities   5,834,573    2,543,769 
           
Senior Secured Note, net of $3,244,274 unamortized debt discount       1,944,268 
           
Total liabilities  $5,834,573   $4,488,037 
           
COMMITMENTS AND CONTINGENCIES (NOTE 9)          
           
Series A Convertible Preferred Stock          
Preferred stock, par value $0.001, 20,000,000 shares authorized; Series A Convertible Preferred Stock, par value $0.001, 0 shares and 249,667 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively        
           
Stockholders’ Equity (Deficit)          
Preferred stock, par value $0.001, 20,000,000 shares authorized;          
           
Series B Convertible Preferred Stock, par value $0.001, 1,048,288 and 0 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively   1,966,948     
           
Series A-1 Convertible Preferred Stock, par value $0.001, 0 and 357,259 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively       1,032,650 
           
Common stock, par value $0.001; 50,000,000 shares authorized,
26,542,979 and 14,551,234 shares issued and outstanding as of September 30, 2018
and December 31, 2017, respectively
   26,543    14,551 
           
Additional paid-in capital   31,756,890    14,012,053 
           
Accumulated deficit   (30,096,200)   (17,907,611)
Total PAVmed Inc. Stockholders’ Equity (Deficit)   3,654,181    (2,848,357)
           
Noncontrolling interest in majority-owned subsidiary   (90,569)    
           
Total Stockholders’ equity (deficit)   3,563,612    (2,848,357)
           
Total Liabilities, Series A Convertible Preferred Stock, and Stockholders’ Equity (Deficit)  $9,398,185   $1,639,680 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

1
 

 

PAVMED INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
Revenue  $    $    $    $  
                 
General and administrative expenses   1,397,500    1,263,122    4,369,323    4,082,366 
Research and development expenses   1,171,324    704,866    2,881,988    2,063,319 
Total operating expenses   2,568,824    1,967,988    7,251,311    6,145,685 
                     
Loss from operations   (2,568,824)   (1,967,988)   (7,251,311)   (6,145,685)
                     
Other income (expense)                    
Interest expense - Senior Secured Note   (707,714)   (362,142)   (1,708,322)   (362,142)
                     
Series A and Series A-1 Exchange Offer - March 15, 2018 - incremental fair value - Series Z Warrants issued-upon-exchange of Series A-1 Warrants           (349,796)    
                     
Series W Warrants Exchange Offer - April 5, 2018 - incremental fair value - Series Z Warrants issued-upon-exchange of Series W Warrants                 (766,456 )      
                     
Unit Purchase Options (UPOs) Exchange Offer - August 22, 2018 - incremental fair value - UPO-Z issued-upon-exchange of UPO-W   (2,120)       (2,120)    
                     
Modification of the Series Z Warrant Agreement           (1,140,995)    
                     
Loss on Series A Preferred Stock Units issued in a private placement               (3,124,285)
                     
Change in fair value - Series A Warrants derivative liability       (2,215,671)   (96,480)   (680,851)
                     
Change in fair value - Series A Convertible Preferred Stock conversion option derivative liability           (583,517 )     64,913       (76,150 )
                     
Other income (expense), net   (709,834)   (3,161,330)   (3,999,256)   (4,243,428)
                     
Loss before provision for income tax   (3,278,658)   (5,129,318)   (11,250,567)   (10,389,113)
                     
Provision for income taxes                
                     
Net loss - before noncontrolling interest   (3,278,658)   (5,129,318)   (11,250,567)   (10,389,113)
                     
Add back: Net loss attributable to noncontrolling interest   32,431        113,631     
                     
Net loss - attributable to PAVmed Inc.   (3,246,227)   (5,129,318)   (11,136,936)   (10,389,113)
                     
Less: Series B Convertible Preferred Stock dividends   (64,897)       (138,926)    
Less: Series A-1 Convertible Preferred Stock dividends       (6,196)   (25,148)   (6,196)
Less: Series A Convertible Preferred Stock dividends       (52,299)   (26,487)   (130,010)
                     
Deemed dividend Series A-1 Convertible Preferred Stock       (182,500)       (182,500)
                     
Series A and Series A-1 Exchange Offer - March 15, 2018 - deemed dividend - incremental fair value - Series B Convertible Preferred Stock issued-upon-exchange of Series A Convertible Preferred Stock           (726,531)    
                     
Series A and Series A-1 Exchange Offer - March 15, 2018 - increase to additional paid-in capital - incremental fair value - Series B Convertible Preferred Stock issued-upon-exchange of Series A-1 Convertible Preferred Stock           199,241     
                     
Net loss attributable to PAVmed Inc. common stockholders  $(3,311,124)  $(5,370,313)  $(11,854,787)  $(10,707,819)
                     
Net loss per share - attributable to PAVmed Inc. - basic and diluted  $(0.12)  $(0.38)  $(0.53)  $(0.78)
                     
Net loss per share - attributable to PAVmed Inc. common stockholders - basic and diluted  $(0.12)  $(0.40)  $(0.57)  $(0.80)
                     
Weighted average common shares outstanding - basic and diluted   26,538,632    13,332,629    20,827,519    13,331,585 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

2
 

 

PAVMED INC.

and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

SERIES A CONVERTIBLE PREFERRED STOCK

and STOCKHOLDERS’ EQUITY (DEFICIT)

for the NINE MONTHS ENDED SEPTEMBER 30, 2018

(unaudited)

 

   PAVmed Inc. Stockholders         
           PAVmed Inc. Stockholders’ Equity (Deficit)         
   Series A   Series B   Series A-1           Additional             
   Convertible   Convertible   Convertible           Paid-In   Accumulated   Noncontrolling     
   Preferred Stock   Preferred Stock   Preferred Stock   Common Stock   Capital   Deficit   Interest   Total 
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount                 
                                                 
Balance at December 31, 2017   249,667   $       $    357,259   $1,032,650    14,551,234   $14,551   $14,012,053   $(17,907,611)  $   $(2,848,357)
                                                             
Common stock issued -underwritten public offering, net of offering cost                                 2,649,818    2,650    4,272,011              4,274,661 
                                                             
Equity Subscription Rights Offering, net of offering cost                                 9,000,000    9,000    9,199,326              9,208,326 
                                                             
Common stock issued - exercise of warrants, net of offering costs                                 308,602    309    20,604              20,913 
                                                             
Series A and Series A-1 Exchange Offer - March 15, 2018   (249,667)       975,568    1,707,244    (357,259)   (1,032,650)             1,406,640    (726,531)        1,354,703 
                                                             
Series W Warrant Exchange Offer - April 5, 2018                                          766,456              766,456 
                                                             
Series Z Warrant Modification                                          1,140,995              1,140,995 
                                                             
Exchange Offer - Unit Purchase Options                                           2,120              2,120 
                                                             
Common stock issued - conversion Series B Convertible Preferred Stock             (33,325)   (58,319)             33,325    33    58,286               
                                                             
Dividends - Series B Convertible Preferred Stock             106,045    318,023                             (318,023)         
                                                             
Dividends - Series A Convertible Preferred Stock                                                (7,099)        (7,099)
                                                             
Common stock of majority-owned subsidiary issued                                                     1,812    1,812 
                                                             
Stock-based compensation of PAVmed Inc                                           869,437              869,437 
                                                             
Stock-based compensation of majority-owned subsidiary                                           8,962         21,250    30,212 
                                                             
Net loss                                                (11,136,936)   (113,631)   (11,250,567)
                                                             
Balance at September 30, 2018      $        —    1,048,288   $1,966,948       $    26,542,979   $26,543   $31,756,890   $(30,096,200)  $(90,569)  $3,563,612 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3
 

 

PAVMED INC.

and SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

SERIES A CONVERTIBLE PREFERRED STOCK

and STOCKHOLDERS’ EQUITY (DEFICIT)

for the YEAR ENDED DECEMBER 31, 2017

(unaudited)

 

           PAVmed Inc. Stockholders’ Equity (Deficit) 
   Series A   Series A-1           Additional         
   Convertible   Convertible           Paid-In   Accumulated     
   Preferred Stock   Preferred Stock   Common Stock   Capital   Deficit   Total 
   Shares   Amount   Shares   Amount   Shares   Amount             
                                     
Balance at December 31, 2016      $       $    13,330,811   $13,331   $7,369,437   $(7,701,835)  $(319,067)
                                              
Series A Convertible Preferred Stock issued in a in a private placement   422,838                                       
                                              
Series A-1 Convertible Preferred Stock and Series A-1 Warrants issued in a private placement             125,000    7,050              492,950         500,000 
                                              
Series A Exchange Offer   (154,837)       232,259    843,100              1,347,082    (504,007)   1,686,175 
                                              
Series A-1 Convertible Preferred Stock deemed dividend                  182,500                   (182,500)    
                                              
Modification of Series A-1 Warrant Agreement                                 222,000         222,000 
                                              
Series S Warrants issued in connection with Senior Secured Note payable                                 3.434,452         3,434,452 
                                              
Common stock issued upon exercise of warrants                       1,193,330    1,198    70,692         71,890 
                                              
Common stock issued upon conversion of Series A Convertible Preferred Stock   (18,334)                 22,093    22    27,313         27,335 
                                              
Stock-based compensation                                 1,048,127         1,048,127 
                                              
Net loss                                      (9,519,269)   (9,519,269)
                                              
Balance at December 31, 2017   249,667   $    357,259   $1,032,650    14,551,234   $14,551   $14,012,053   $(17,907,611)  $(2,848,357)

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

4
 

 

PAVMED INC.

and SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   Nine Months Ended September 30, 
   2018   2017 
Cash flows from operating activities          
Net loss - before noncontrolling interest (“NCI”)  $(11,250,567)  $(10,389,113)
           
Adjustments to reconcile net loss - before NCI to net cash used in operating activities          
Depreciation expense   6,244    5,307 
Stock-based compensation   899,649    799,281 
           
Interest expense added to principal of Senior Secured Note   194,570     
Accrued interest expense - Senior Secured Note   201,867    187,500 
Amortization of discount - Senior Secured Note   1,117,315    174,642 
           
Series A and Series A-1 Exchange Offer - March 15, 2018 - incremental fair value of Series Z Warrants issued issued-upon-exchange of Series A-1 Warrants   349,796     
           
Series W Warrants Exchange Offer - April 5, 2018 - incremental fair value of Series Z Warrants issued-upon-exchange of Series W Warrants   766,456     
           
Unit Purchase Options Exchange Offer August 22, 2018   2,120     
           
Modification expense - Series Z Warrant   1,140,995     
           
Loss on issuance of Preferred Stock Units       3,124,285 
Change in fair value - Series A Warrants derivative liability   96,480    680,851 
Change in fair value - Series A Convertible Preferred Stock conversion option derivative liability   (64,913)   76,150 
           
Changes in operating assets and liabilities:          
Prepaid expenses and other current assets   (31,513)   52,218 
Accounts payable   771,537    42,280 
Accrued expenses and other current liabilities   31,327    225,465 
Net cash flows used in operating activities   (5,768,637)   (5,021,134)
           
Cash flows from investing activities          
Purchase of equipment   (23,464)   (5,301)
Net cash flows used in investing activities   (23,464)   (5,301)
           
Cash flows from financing activities          
Proceeds - issue of units in an equity subscription rights offering   9,437,000     
Payment - offering costs - equity subscription rights offering   (228,674)    
           
Proceeds - issue of common stock in an underwritten public offering   4,388,099     
Payment - offering costs - underwritten public offering   (113,438)    
           
Proceeds - issue of common stock of majority-owned subsidiary   1,812     
           
Proceeds - issue of Senior Secured Note       4,842,577 
           
Proceeds - issue of Series A Preferred Stock Units private placement       2,537,012 
Payment - offering costs - Series A Preferred Stock Units private placement       (388,628)
           
Proceeds - issue of Series A-1 Preferred Stock Units private placement       500,000 
           
Proceeds - issue of common stock upon exercise of warrants, net   20,913    61,250 
           
Payment - Series A Convertible Preferred Stock Dividends   (7,099)    
Net cash flows provided by financing activities   13,498,613    7,552,211 
           
Net increase in cash  $7,706,512   $2,525,776 
Cash, beginning of period   1,535,022    585,680 
Cash, end of period  $9,241,534   $3,111,456 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5
 

 

PAVMED INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 — The Company and Description of the Business

 

PAVmed Inc. (“PAVmed” or the “Company”) 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. The Company is 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 was organized under the laws of the State of Delaware on June 26, 2014 (inception), originally under the name of PAXmed Inc., and on April 19, 2015, changed its name to PAVmed Inc. The Company operates in one segment as a medical device company.

 

Under a registration statement on Form S-1 (File No. 333-203569) declared effective January 29, 2016, the Company’s initial public offering (IPO) was consummated on April 28, 2016, resulting in $4.2 million of net cash proceeds, after deducting cash selling agent discounts and commissions and offering expenses, from the issuance of 1,060,000 units at an offering price of $5.00 per unit, with each such unit comprised of one share of common stock of the Company and one warrant to purchase a share of common stock of the Company, with such warrant referred to as a “Series W Warrant” - see Note 14, Stockholders’ Equity and Common Stock Purchase Warrants, for a discussion of the common stock of the Company and the Series W Warrant.

 

On May 8, 2018, Lucid Diagnostics Inc., a majority-owned subsidiary of the Company, was incorporated in the State of Delaware. On May 12, 2018, Lucid Diagnostics Inc. entered into the “EsoCheck™ License Agreement” with Case Western Reserve University (“CWRU”), with respect to the “EsoCheck™ Technology”. See Note 7, Agreements Related to Acquired Intellectual Property Rights, for a discussion of the “EsoCheck™ License Agreement” and corresponding “EsoCheck™ Technology”.

 

To date, the Company has not recognized revenue. The ability to generate revenue depends upon the Company’s ability to successfully complete the development, obtain regulatory approval, and to initiate commercialization of its product candidates. Currently, the Company’s activities are focused principally on obtaining FDA clearance and initializing commercialization of the lead product candidates, including CarpX™ and PortIO™, and to commence preparing the EsoCheckTM Technology for FDA submission, along with advancing the DisappEAR™ and NextFloTM product candidates through their respective research and development phase. The Company will also engage in research and development activities on other product candidates commensurate with the Company’s available capital resources. The Company plans to incur research and development expenses for the foreseeable future from the continued development of its current and future product candidates.

 

The Company has financed its operations principally through the issuances of its common stock, preferred stock, warrants, and debt, including: proceeds from private offerings of its common stock and common stock purchase warrants prior to the April 8, 2016 closing of its IPO; proceeds from the April 28, 2016 closing of the IPO; and, subsequent issue of shares of convertible preferred stock and common stock purchase warrants in private placements, the issue of shares of common stock of the Company and common stock purchase warrants under effective registration statements; and the issue of a senior secured note along with common stock purchase warrants. See Note 12, Note and Securities Purchase Agreement, Senior Secured Note, and Series S Warrants, for a further discussion of the issue of a senior secured note and common stock purchase warrants; Note 13, Preferred Stock, for a discussion of the convertible preferred stock; and Note 14, Stockholders’ Equity and Common Stock Purchase Warrants, for a discussion of the issue of common stock of the Company and common stock purchase warrants.

 

Collectively, PAVmed Inc. and Lucid Diagnostics Inc. have proprietary rights to the trademarks used herein, including, among others, PAVmed™, Lucid Diagnostics™, Caldus™, CarpX™, DisappEAR™, EsoCheck™, NextCath™, NextFlo™, PortIO™, and “Innovating at the Speed of Life” ™, among others. 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, each of PAVmed Inc. and /or Lucid Diagnostics Inc. will not assert, to the fullest extent possible under applicable law, its rights or the rights to such trademarks and trade names.

 

6
 

 

Note 2 — Summary of Significant Accounting Policies

 

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., 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 noncontrolling interest ownership interest in Lucid Diagnostics Inc. See Note 14, Stockholders’ Equity and Common Stock Purchase Warrants, for a discussion of the Company’s majority-owned subsidiary Lucid Diagnostics Inc. and the corresponding noncontrolling interest.

 

The condensed balance sheet as of December 31, 2017, which has been derived from audited financial statements, and the unaudited interim 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, 2017 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 financial statements. These unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual 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 financial information. Certain items have been reclassified to conform to the current period presentation.

 

The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any other interim period or for any other future periods. The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and related notes thereto as of and for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make accounting estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant estimates in these unaudited condensed consolidated financial statements include those related to the fair value of warrants, the fair value of derivative liabilities, stock-based compensation, research and development expenses, the provision or benefit for income taxes and the corresponding valuation allowance on deferred tax assets. 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. On an ongoing basis, the Company evaluates its estimates, judgements, and methodologies. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable. Due to the inherent uncertainty involved in making such accounting estimates and assumptions, the actual financial statement results could differ materially from such accounting estimates and assumptions.

 

JOBS Act Accounting Election

 

The Company is an “emerging growth company” or “EGC”, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, an EGC can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has irrevocably elected to avail itself of this exemption from new or revised accounting standards, and, therefore, will not be subject to the same new or revised accounting standards as public companies who are not an EGC.

 

Segment Data

 

The Company manages its operations as a single operating segment for the purposes of assessing performance and making operating decisions. No revenue has been generated since inception, and all tangible assets are held in the United States.

 

7
 

 

Note 2 — Summary of Significant Accounting Policies (continued)

 

Going Concern

 

The provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements - Going Concern (ASC 205-40) requires management to assess an entity’s ability to continue as a going concern within one year of the date of the financial statements are issued. In each reporting period, including interim periods, an entity is required to assess conditions known and reasonably knowable as of the financial statement issuance date to determine whether it is probable an entity will not meet its financial obligations within one year from the financial statement issuance date. Substantial doubt about an entity’s ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate it is probable the entity will be unable to meet its financial obligations as they become due within one year after the date the financial statements are issued.

 

The Company is an early stage and emerging growth company and is subject-to the corresponding risk of such companies. Since inception the Company has not generated any revenues and has incurred losses and negative cash flows from operating activities. The Company does not expect to generate positive cash flows from operating activities in the near future until it completes the development process and regulatory approvals of its products, and thereafter begins to commercialize and achieve substantial marketplace acceptance for its products.

 

The Company incurred a net loss attributable to PAVmed Inc. common stockholders of $11,854,787 and net cash flows used in operating activities of $5,768,637 for the nine months ended September 30, 2018. As of September 30, 2018, the Company had an accumulated deficit of $30,096,200, working capital of $1,399,982, with such working capital inclusive of the $5,383,112 principal balance of the Sr Secured Note as of September 30, 2018 classified as a current liability in the accompanying September 30, 2018 unaudited condensed consolidated balance sheet due to a maturity date of June 30, 2019.

 

The Company anticipates incurring operating losses and does not expect to experience positive cash flows from operating activities and may continue to incur operating losses for the next several years as it completes the development of its products, seeks regulatory approvals and clearances of such products, and begin to commercially market such products. These factors, which have existed since inception, are expected to continue for the foreseeable future, and raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the accompanying unaudited condensed consolidated financial statements are issued.

 

The Company’s ability to fund its operations is dependent upon management’s plans, which include raising additional capital, refinance the debt upon maturity, obtaining regulatory approvals for its products currently under development, commercializing and generating revenues from products currently under development, and continuing to control expenses. However, there is no assurance the Company will be successful in these efforts.

 

A failure to raise sufficient capital, refinance the debt upon maturity, obtain regulatory approvals and clearances for the Company’s products, generate sufficient product revenues, or control expenditures, among other factors, will adversely impact the Company’s ability to meet its financial obligations as they become due and payable and to achieve its intended business objectives, and therefore, raises substantial doubt of the Company’s ability to continue as a going concern within one year after the date the unaudited condensed consolidated financial statements are issued.

 

The Company’s unaudited condensed consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities should the Company be unable to continue as a going concern.

 

8
 

 

Note 2 — Summary of Significant Accounting Policies (continued)

 

Cash

 

The Company maintains its cash at a major financial institution with high credit quality. At times, the balance of its cash deposits may exceed federally insured limits. The Company has not experienced and does not anticipate any losses on deposits with commercial banks and financial institutions which exceed federally insured limits.

 

Equipment

 

Equipment is stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Maintenance and repairs are charged to operations as incurred. Upon sale or retirement of assets, the cost and related accumulated depreciation are removed from the balance sheet and resulting gain or loss, if any, is included in the unaudited condensed consolidated statement of operations. The useful lives of equipment are as follows:

 

Research and development equipment   5 years
Computer equipment   3 years

 

Long-Lived Assets

 

The Company evaluates its long-lived assets, including equipment, for impairment whenever events or changes in circumstances indicate the carrying value of these assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the asset is considered impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired assets. The Company has not recorded impairment of any long-lived assets in the periods presented.

 

Offering Costs

 

Offering costs consist of certain legal, accounting, and other advisory fees incurred related to the Company’s efforts to raise debt and equity capital. Offering costs in connection with equity financing are recognized as either an offset against the financing proceeds to extent the underlying security is equity classified or a current period expense to extent the underlying security is liability classified. Offering costs, lender fees, and warrants issued in connection with debt financing are recognized as debt discount, which reduces the reported carrying value of the debt, and amortized as interest expense, generally over the contractual term of the debt agreement, to result in a constant rate of interest. Offering costs associated with in-process capital financing are accounted for as deferred offering costs.

 

Research and Development Expenses

 

Research and development expenses are recognized as incurred and include the salary and stock-based compensation of employees engaged in product research and development activities, and the costs related to the Company’s various contract research service providers, suppliers, engineering studies, supplies, and outsourced testing and consulting, as well as rental costs for equipment and access to certain facilities of contract research service providers.

 

Patent Costs and Purchased Patent License Rights

 

Patent related costs in connection with filing and prosecuting patent applications and patents filed by the Company are expensed as incurred and are included in the line item captioned “general and administrative expenses” in the accompanying unaudited condensed consolidated statements of operations. Patent fee reimbursement expense incurred under the patent license agreement agreements are included in the line item captioned “research and development expenses” in the accompanying unaudited condensed consolidated statements of operations. The purchase of patent license rights for use in research and development activities, including product development, are expensed as incurred and are classified as research and development expense.

 

9
 

 

Note 2 — Summary of Significant Accounting Policies (continued)

 

Stock-Based Compensation

 

Stock-based awards are made to employees, members of its board of directors, and non-employees, under each of the PAVmed Inc. 2014 Long-Term Incentive Equity Plan and the Lucid Diagnostics Inc. 2018 Long-Term Incentive Equity Plan. Stock-based awards to employees and members of the Company’s board of directors are accounted for in accordance with FASB ASC Topic 718, Stock Compensation, (“ASC 718”) and stock-based awards to non-employees are accounted for in accordance with FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees (“ASC 505-50”). See herein below for a discussion of “ASU 2018-07” with respect to ASC 505-50 non-employee stock-based compensation.

 

The Company measures the compensation expense of stock-based awards granted to employees and members of its board of directors using the grant-date fair value of the award and recognizes compensation expense for stock-based awards on a straight-line basis over the requisite service period, which is generally the vesting period of the respective stock-based award.

 

The Company measures the expense of stock-based awards granted to non-employees on a vesting date basis, fixing the fair value of vested non-employee stock options as of their respective vesting date. The fair value of vested non-employee stock options is not subject-to-change at subsequent reporting dates. The estimated fair value of the unvested non-employee stock options is remeasured to then current fair value at each subsequent reporting date. The expense of non-employee stock options is recognized on a straight-line basis over the service period, which is generally the vesting period of the respective non-employee stock-based award.

 

On June 20, 2018, the FASB issued its Accounting Standards Update (“ASU”) 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07), which, upon the effective date, will result in non-employee stock-based compensation to be within the scope of ASC-718, and will supersede ASC 505-50. A principal change of the new guidance is to eliminate the ASC 505-50 required periodic fair value remeasure (“mark-to-market”) and use of the “contractual term” as an input to the Black-Scholes option pricing model to calculate the estimated fair value of stock options issued to non-employees, in favor of the ASC 718 one-time measurement of the grant date fair value and use of an “expected term” as such valuation input, for non-employee stock-based compensation expense, as is currently done for employee stock-based compensation expense.

 

The amended ASC-718 non-employee stock-based compensation provisions are effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within such fiscal year, and for all other companies for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than a company’s adoption of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606). With respect to the Company and its majority-owned subsidiary, the amended ASC-718 non-employee stock-based compensation provisions are required to be adopted by no later than January 1, 2020, resulting from the Company’s “JOBS Act EGC Election” as discussed herein above. Additionally, the Company, under its “JOBS Act EGC Election”, is required to adopt ASC 606 by no later than January 1, 2019, which is the current required adoption date of ASC 606 for private companies. As such, at this time, the Company and its majority-owned subsidiary continue to apply the guidance of ASC-505-50 with respect to non-employee stock-based compensation, subject-to the future adoption date(s) of ASC-606 and the ASU 2018-07 amended ASC 718.

 

10
 

 

Note 2 — Summary of Significant Accounting Policies (continued)

 

Financial Instruments Fair Value Measurements

 

The Company evaluates its financial instruments to determine if those instruments or any embedded components of those instruments potentially qualify as derivatives that need to be separately accounted for in accordance with FASB ASC Topic 815, Derivatives and Hedging (ASC 815). The accounting for warrants issued to purchase shares of common stock of the Company is based on the specific terms of the respective warrant agreement, and are generally classified as equity, but may be classified as a derivative liability if the warrant agreement provides required or potential full or partial cash settlement. A warrant classified as a derivative liability, or a bifurcated embedded conversion or settlement option classified as a derivative liability, is initially measured at its issue-date fair value, with such fair value subsequently adjusted at each reporting period, with the resulting fair value adjustment recognized as other income or expense. If upon the occurrence of an event resulting in the derivate liability being subsequently classified as equity or otherwise derecognized, the fair value of the derivative liability will be adjusted on such date-of-occurrence, with such date-of-occurrence fair value adjustment recognized as other income or expense, and then the derivative liability will be derecognized at such date-of-occurrence fair value.

 

FASB ASC Topic 820, Fair Value Measurement, (ASC 820) defines fair value as the price which would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a transaction measurement date. The ASC 820 three-tier fair value hierarchy prioritizes the inputs used in the valuation methodologies, as follows:

 

  Level 1 Valuations based on quoted prices for identical assets and liabilities in active markets.
     
  Level 2 Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets which are not active, or other inputs observable or can be corroborated by observable market data.
     
  Level 3 Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

 

As of September 30, 2018 and December 31, 2017, the carrying values of cash, accounts payable, and accrued expenses, approximate their respective fair value due to the short-term nature of these financial instruments.

 

The Company evaluates its financial instruments to determine if those instruments or any potential embedded components of those instruments qualify as derivatives that need to be separately accounted for in accordance with FASB ASC Topic 815, Derivatives and Hedging (ASC 815). Warrants are classified as either equity or a derivative liability depending on the specific terms of the respective warrant agreement. The Series A Warrants are accounted for as a derivative liability, as such warrants have an exercise price adjustment provision. Warrants containing a cash settlement provision are accounted for as a derivative liability. A warrant classified as a liability, or a bifurcated embedded derivative classified as a liability, is initially measured at its issue-date fair value, with such fair value subsequently adjusted at each reporting period, with the resulting adjustment recognized as other income or expense. If upon the occurrence of an event resulting in the warrant liability or the embedded derivative liability being subsequently classified as equity, the fair value will be adjusted on such date-of-occurrence, with such date-of-occurrence fair value adjustment recognized as other income or expense, and then it will be classified as equity at such date-of-occurrence adjusted fair value.

 

11
 

 

Note 2 — Summary of Significant Accounting Policies (continued)

 

Income Taxes

 

The Company accounts for income taxes using the asset and liability method, as required by FASB ASC Topic 740, Income Taxes, (ASC 740). Current tax liabilities or receivables are recognized for the amount of taxes estimated to be payable or refundable for the current year. Deferred tax assets and liabilities are recognized for estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, along with net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. See Note 6, Income Taxes, for a discussion of the “Tax Cuts and Jobs Act of 2017”, enacted on December 22, 2017, which resulted in a change to future years’ statutory federal corporate tax rate applicable to taxable income. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes.

 

Under ASC 740, a “more-likely-than-not” criterion is applied when assessing the estimated realization of deferred tax assets through their utilization to reduce future taxable income, or with respect to a deferred tax asset for tax credit carryforward, to reduce future tax expense. A valuation allowance is established, when necessary, to reduce deferred tax assets, net of deferred tax liabilities, when the assessment indicates it is more-likely-than-not, the full or partial amount of the net deferred tax asset will not be realized. As a result of the evaluation of the positive and negative evidence bearing upon the estimated realizability of net deferred tax assets, and based on a history of operating losses, it is more-likely-than-not the deferred tax assets will not be realized, and therefore a valuation allowance reserve equal to the full amount of the deferred tax assets, net of deferred tax liabilities, has been recognized as a charge to income tax expense as of September 30, 2018 and December 31, 2017.

 

The Company recognizes the benefit of an uncertain tax position it has taken or expects to take on its income tax return if such a position is more-likely-than-not to be sustained upon examination by the taxing authorities, with the tax benefit recognized being the largest amount having a greater than 50% likelihood of being realized upon ultimate settlement. As of September 30, 2018 the Company does not have any unrecognized tax benefits resulting from uncertain tax positions.

 

The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision. There were no amounts accrued for penalties or interest as of September 30, 2018 and December 31, 2017 or recognized during the three or nine months ended September 30, 2018 and 2017. The Company is not aware of any issues under review to potentially result in significant payments, accruals, or material deviations from its position.

 

Net Loss Per Share

 

The net loss per share is computed by dividing each of the respective net loss by the number of “basic weighted average common shares outstanding” and diluted weighted average shares outstanding” for the reporting period indicated. The basic weighted-average shares common shares outstanding are computed on a weighted average based on the number of days the shares of common stock of the Company are issued and outstanding during the respective reporting period indicated. The diluted weighted average common shares outstanding are the sum of the basic weighted-average common shares outstanding plus the number of common stock equivalents’ incremental shares on an if-converted basis, computed using the treasury stock method, computed on a weighted average based on the number of days potentially issued and outstanding during the period indicated, if dilutive. The Company’s common stock equivalents include: stock options, unit purchase options, convertible preferred stock, and common stock purchase warrants.

 

Notwithstanding, as the Company has a net loss for each reporting period presented, each of the basic and diluted net loss per share for each period presented is computed using only the basic weighted average common shares outstanding for each respective reporting period, as the inclusion of common stock equivalents incremental shares would be anti-dilutive.

 

Accordingly, as presented in the accompanying unaudited condensed consolidated statement of operations, basic weighted average common shares outstanding are used to compute the basic and diluted net loss per share attributable to PAVmed Inc. and the basic and diluted net loss per share attributable to PAVmed Inc. common stockholders, for each reporting period presented.

 

12
 

 

Note 2 — Summary of Significant Accounting Policies (continued)

 

Recent Accounting Pronouncements

 

In August 2018, the FASB issued 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 guidance is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, and early adoption is permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) - Part I - Accounting for Certain Financial Instruments with Down-Round Features, and Part II - Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Principally, ASU 2017-11 amendments simplify the accounting for certain financial instruments with down-round features. The amendments require companies to disregard the down-round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the down-round feature when triggered (i.e., when the exercise price of the related equity-linked financial instrument is adjusted downward because of the down-round feature) and will also recognize the effect of the trigger within equity. Additionally, ASU 2017-11 also addresses “navigational concerns” within the FASB ASC related to an indefinite deferral available to private companies with mandatorily redeemable financial instruments and certain noncontrolling interests, which has resulted in the existence of significant “pending content” in the ASC. The FASB decided to reclassify the indefinite deferral as a scope exception, which does not have an accounting effect. The guidance of ASU 2017-11 is effective for public business entities, as defined in the ASC Master Glossary, for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and for all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Earlier adoption is permitted for all entities as of the beginning of an interim period for which financial statements (interim or annual) have not been issued or have not been made available for issuance. The Company is evaluating the impact of this guidance on its unaudited condensed consolidated financial statements.

 

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) - Scope of Modification Accounting. In ASU 2017-09, the FASB provides guidance on determining which changes to the terms and conditions of stock-based compensation arrangements require the application of “modification accounting” under ASC 718. Generally, ASC 718 modification accounting is not applicable if the stock-based arrangement immediately before and after the modification has the same fair value, vesting conditions, and balance sheet classification. The guidance of ASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities, as defined in the ASC Master Glossary, for periods for which financial statements have not yet been issued, and for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The Company adopted this guidance as of April 1, 2017, and it did not have an effect on the Company’s unaudited condensed consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which amends the guidance of FASB ASC Topic 805, Business Combinations (ASC 805) adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (disposals) of assets or businesses. The objective of ASU 2017-01 is to narrow the definition of what qualifies as a business under Topic 805 and to provide guidance for streamlining the analysis required to assess whether a transaction involves the acquisition (disposal) of a business. ASU 2017-01 provides a screen to assess when a set of assets and processes do not qualify as a business under Topic 805, reducing the number of transactions that need to be considered as possible business acquisitions. ASU 2017-01 also narrows the definition of output under Topic 805 to make it consistent with the description of outputs under Topic 606. The guidance of ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and early adoption is permitted under certain circumstances. The adoption of this guidance as of January 1, 2018 did not have an effect on the Company’s unaudited condensed consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, which amended the guidance of FASB ASC Topic 230, Statement of Cash Flows (ASC 230) on the classification of certain cash receipts and payments. The primary purpose of ASU 2016-15 is to reduce the diversity in practice which has resulted from a lack of consistent principles on this topic, including to add or clarify guidance on eight specific cash flow issues, including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The adoption of this guidance as of January 1, 2018 did not have an effect on the Company’s unaudited condensed consolidated financial statements.

 

13
 

 

Note 2 — Summary of Significant Accounting Policies (continued)

 

Recent Accounting Pronouncements (continued)

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and subsequently issued additional updates amending the guidance contained in Topic 606 (ASC 606), thereby affecting the guidance contained in ASU 2014-09. ASU 2014-09 and the subsequent ASC 606 updates will supersede and replace nearly all existing U.S. GAAP revenue recognition guidance. The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount equal to the consideration to which the entity expects to be entitled for those goods and services. ASU 2014-09 defines a five step process to achieve this core principle, and in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2017, including interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which includes additional footnote disclosures). To date, since its inception, the Company has not generated any revenue, as such, the provisions of ASC 606 have not impacted the Company’s unaudited condensed consolidated results of operations or financial condition.

 

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”). The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and adding additional illustrative examples to assist in the application of the guidance. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. The guidance is effective for the Company beginning January 1, 2018, although early adoption is permitted beginning January 1, 2017. To date, since its inception, the Company has not generated any revenue, as such, the provisions of ASC 606 have not impacted the Company’s unaudited condensed consolidated results of operations or financial condition.

 

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”). The amendments in ASU 2016-10 clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. The guidance is effective for the Company beginning January 1, 2018, although early adoption is permitted beginning January 1, 2017. To date, since its inception, the Company has not generated any revenue, as such, the provisions of ASC 606 have not impacted the Company’s unaudited condensed consolidated results of operations or financial condition.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which establishes a right-of-use (“ROU”) model requiring a lessee to recognize a ROU asset and a lease liability for all leases with terms greater-than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods with those fiscal years. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of this guidance on its unaudited condensed consolidated financial position, results of operations, and cash flows.

 

14
 

 

Note 3 — Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consisted of the following as of:

 

   September 30, 2018   December 31, 2017 
Security deposits  $14,250   $14,250 
Prepaid insurance   138    33,175 
Advanced payments to suppliers   105,592    41,042 
Total prepaid expenses and other current assets  $119,980   $88,467 

 

Note 4 — Equipment, Net

 

   September 30, 2018   December 31, 2017 
Research and development equipment  $40,380   $13,656 
Computer equipment   13,438    13,438 
Equipment, gross   53,818    27,094 
Less: accumulated depreciation   (17,147)   (10,903)
Equipment, net  $36,671   $16,191 

 

Depreciation expense of $2,639 and $6,244 was recognized for the three and nine months ended September 30, 2018, respectively, and $1,802 and $5,307 for the three and nine months ended September 30, 2017, respectively. The purchases of research and development equipment during the nine months ended September 30, 2018 include $3,260 of such purchases included in accounts payable as of September 30, 2018 in the accompanying unaudited condensed consolidated balance sheet.

 

Note 5 — Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consisted of the following as of:

 

   September 30, 2018   December 31, 2017 
Bonus  $171,553   $459,451 
Payroll   145,937    125,088 
Vacation   71,270    28,722 
EsoCheck™ License Agreement fee   222,553     
Fees - board of directors   71,667    82,500 
Operating expenses   55,311    11,203 
Total accrued expenses and other current liabilities  $738,291   $706,964 

 

The accrued bonus as of September 30, 2018 represents the estimated amount recognized on a pro rata basis during 2018 of the guaranteed bonus payment to the Company’s Chief Executive Officer (“CEO”) under the CEO Employment Agreement. At December 31, 2017, the accrued bonus represents the guaranteed bonus payment to the CEO and discretionary bonus payments to other employees.

 

Accrued payroll represents earned but unpaid salary payable to the Company’s CEO under the terms of the Note and Security Purchase Agreement, including the corresponding Senior Secured Note, between the Company and Scopia Holdings LLC, wherein the CEO agreed to the payment of a reduced salary of $4,200 per month for the period July 1, 2017 through January 31, 2018, with such earned but unpaid amount to be paid to the CEO only upon the Senior Secured Note first being repaid-in-full. See Note 12 — Note and Securities Purchase Agreement, Senior Secured Note, and Series S Warrants, for a discussion of the Note and Security Purchase Agreement with Scopia Holdings LLC.

 

The accrued board of director fees at September 30, 2018 and December 31, 2017 represent amounts payable to all non-executive members of the board of directors, including $5,000 and $10,000 as of September 30, 2018 and December 31, 2017, respectively, payable to two former board members each previously deemed to be a related party.

 

The EsoCheck™ License Agreement fee is the remaining unpaid balance of such fee incurred in connection with the EsoCheck™ License Agreement, as discussed in Note 7, Agreements Related to Acquired Intellectual Property Rights.

 

15
 

 

Note 6 — Income Taxes

 

In the three and nine months ended September 30, 2018 and 2017, the Company recognized a deferred tax benefit which was fully offset by a corresponding valuation allowance.

 

Under ASC 740, a “more-likely-than-not” criterion is applied when assessing the estimated realization of deferred tax assets through their utilization to reduce future taxable income, or with respect to a deferred tax asset for tax credit carryforward, to reduce future tax expense. A valuation allowance is established, when necessary, to reduce deferred tax assets, net of deferred tax liabilities, when the assessment indicates it is more-likely-than-not, the full or partial amount of the net deferred tax asset will not be realized. As a result of the evaluation of the positive and negative evidence bearing upon the estimated realizability of net deferred tax assets, and based on a history of operating losses, it is more-likely-than-not the deferred tax assets will not be realized, and therefore a valuation allowance reserve equal to the full amount of the deferred tax assets, net of deferred tax liabilities, has been recognized as a charge to income tax expense as of September 30, 2018 and December 31, 2017.

 

Deferred tax assets and deferred tax liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of the change in the tax rate is recognized as income or expense in the period of the enacted change in tax rate. Changes in deferred tax assets and deferred tax liabilities are recorded in the provision for income taxes.

 

The “Tax Cuts and Jobs Act of 2017” (Public Law No. 115-97), enacted on December 22, 2017, is a comprehensive revision to federal tax law which makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35% to 21%, eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; creating a new limitation on deductible interest expense; changing rules related to uses and limitations of net operating loss (“NOL”) carryforwards created in tax years beginning after December 31, 2017; and limitations on the deductibility of certain executive compensation.

 

In December 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses situations where the accounting is incomplete for the income tax effects of the Tax Cuts and Jobs Act of 2017. SAB 118 directs taxpayers to consider the impact of the Tax Cuts and Jobs Act of 2017 as “provisional” when the Company does not have the necessary information available, prepared, or analyzed, including computations, to finalize the accounting for the changes resulting from the Tax Cuts and Jobs Act of 2017. Companies are provided a measurement period of up to one year to obtain, prepare, and analyze information necessary to finalize the accounting for provisional amounts or amounts that cannot be estimated as of December 31, 2017.

 

The Tax Cuts and Jobs Act of 2017 impact on the tax provision of the Company for year ending December 31, 2017, resulted in the Company recognizing the provisional impact of the revaluation of deferred tax assets and deferred tax liabilities to 21% from 35%, resulting in an estimated $1.6 million tax expense, which was fully offset by a credit in the same amount resulting from the corresponding change in the valuation allowance applied to the net deferred tax assets.

 

The Company files income tax returns in the United States in federal and applicable state and local jurisdictions. The Company’s tax filings for the years 2017, 2016, 2015 each remain subject to examination by taxing authorities.

 

16
 

 

Note 7 — Agreements Related to Acquired Intellectual Property Rights

 

Patent License Agreement - Case Western Reserve University - EsoCheck™ Technology

 

On May 12, 2018, Lucid Diagnostics Inc., a majority-owned subsidiary of the Company, entered into a patent license agreement with Case Western Reserve University (“CWRU”), referred to herein as the “EsoCheck™ License Agreement”. See Note 14, Stockholders’ Equity and Common Stock Purchase Warrants, for a discussion of the Company’s majority-owned subsidiary Lucid Diagnostics Inc. and the corresponding noncontrolling interest.

 

The EsoCheck™ License Agreement provides for the exclusive worldwide license of the intellectual property rights of the proprietary technologies of two distinct components - the “EsoCheck™ Cell Collection Device™” or the “EsoCheck™ CCD™”, and the EsoCheck™ DNA Biomarkers or the “EsoCheck™ DX™”, and together are collectively referred to as the “EsoCheck™ Technology”.

 

Under the EsoCheck™ License Agreement, Lucid Diagnostics Inc. incurred a payment obligation to CWRU of approximately $273,000, referred to as the “EsoCheck™ License Agreement Fee”. The Company has made a $50,000 initial payment of the EsoCheck™ License Agreement, and with required future quarterly payments of $50,000 until such fee is paid-in-full, provided, however, the commencement of such quarterly payments is subject to Lucid Diagnostics Inc. consummation of a bona fide financing with an unrelated third-party in excess of $500,000.

 

On the May 12, 2018 effective date of the EsoCheck™ License Agreement, the EsoCheck™ License Agreement fee was recognized as a current period research and development expense in the unaudited condensed statement of operations, with the remaining unpaid balance included in accrued expenses and other current liabilities in the unaudited condensed consolidated balance sheet. The EsoCheck™ License Agreement was determined to not meet the “business combination” criteria under FASB ASC Topic 805, Business Combinations (“ASC 805”), as such license agreement did not meet the ASC 805 definition of a business, as the transaction resulted in an intangible asset of acquired intellectual property rights only, and the Company did not acquire any employees or tangible assets, or any processes, protocols, or operating systems. Accordingly, the transaction was determined to be to be an asset acquisition under ASC 805. Further, as noted, the cost of the acquired intellectual property rights were recognized as a current period research and development expense, as required under FASB ASC Topic 730, Research and Development (ASC 730), as the acquired intellectual property rights were purchased from others for use in a research and development activity, and for which there are no alternative future uses.

 

The EsoCheck™ License Agreement also provides for potential payments upon the achievement of certain product development and regulatory clearance milestones. If Lucid Diagnostics Inc. does not meet certain milestones listed in the EsoCheck™ License Agreement, then CWRU has the right, in its sole discretion, to require the Company to transfer to CWRU a percentage, varying up to 100%, of the shares of common stock of Lucid Diagnostics Inc. held by the Company. Lucid Diagnostics Inc. will also be required to pay a minimum annual royalty commencing the year after the first commercial sale of products resulting from the commercialization of the EsoCheck™ Technology, with the minimum amount rising based on net sales of such product(s), if any. Such contingent milestone and /or royalty payments, if any, will be recognized in the period in which such payment obligations are incurred. Patent fee reimbursement under the EsoCheck™ License Agreement recognized as research and development expense was $10,877 in the three and nine months ended September 30, 2018.

 

The EsoCheck™ License Agreement terminates upon the expiration of certain related patents, or on May 12, 2038 in countries where no such patents exist, or upon expiration of any exclusive marketing rights granted by the FDA or other U.S. government agency, whichever comes later.

 

The three physician inventors of the EsoCheck™ Technology, each entered into consulting agreements with Lucid Diagnostics Inc. to continue to support the development of the EsoCheck™ Technology. In addition to cash compensation based on a contractual rate per hour, additional compensation under each such consulting agreement includes: the grant of stock options under the Lucid Diagnostics Inc. 2018 Long-Term Incentive Equity Plan to each individual to purchase 100,000 shares of common stock of Lucid Diagnostics Inc. at an exercise price of $0.50 per share of such common stock; and, the grant under the PAVmed Inc. 2014 Long-Term Incentive Plan of stock options to each individual to purchase 25,000 shares of PAVmed Inc. common stock at an exercise price of $1.59 per share of such common stock. See Note 10, Stock-Based Compensation, for information regarding the “PAVmed Inc. 2014 Long-Term Incentive Plan” and the separate “Lucid Diagnostics Inc 2018 Long-Term Incentive Equity Plan”, with respect to the stock options granted as discussed above.

 

17
 

 

Note 7 — Agreements Related to Acquired Intellectual Property Rights (continued)

 

Patent License Agreement - Case Western Reserve University - EsoCheck™ Technology (continued)

 

In June 2018, Lucid Diagnostics Inc. entered into a contract development and manufacturing organization (CDMO) agreement with an unrelated third-party for the supply of the “EsoCheck™ Cell Collection Device™”, principally for use in research and development activities - referred to herein as the “EsoCheck™ Device CDMO Supply Agreement”. The EsoCheck™ Device CDMO Supply Agreement contains a firm price per unit, and a contractual device purchase minimum quantity, is cancellable with 10 day notice, among other routine and customary provisions. With respect to the device purchase contractual minimum quantity, if Lucid Diagnostics Inc. terminates the EsoCheck™ Device CDMO Supply Agreement without “good reason”, as defined, prior to placing purchase orders for 5,000 units of the EsoCheck™ Cell Collection Device™, then Lucid Diagnostics Inc. will make a single one-time $50,000 payment to the unrelated third-party CDMO. The minimum quantity contingent payment, if any, will be recognized as a current period expense if and when such payment obligation is incurred.

 

In June 2018 Lucid Diagnostics Inc. entered into a separate consulting agreement with the owner of the CDMO discussed above, with the sole compensation under such consulting agreement being the June 2018 issue of 75,000 Lucid Diagnostics Inc. stock options with an exercise price of $1.00 per share of common stock of Lucid Diagnostics Inc. See Note 10, Stock-Based Compensation, for information regarding the separate “Lucid Diagnostics Inc 2018 Long-Term Incentive Equity Plan”.

 

Patent License Agreement - Tufts University - Antimicrobial Resorbable Ear Tubes

 

In November 2016, the Company executed a Patent License Agreement (the “Tufts Patent License Agreement”) with Tufts University and its co-owners, the Massachusetts Eye and Ear Infirmary and Massachusetts General Hospital (the “Licensors”). Pursuant to the Tufts Patent License Agreement, the Licensors granted the Company the exclusive right and license to certain patents in connection with the development and commercialization of antimicrobial resorbable ear tubes based on a proprietary aqueous silk technology conceived and developed by the Licensors.

 

Upon execution of the Tufts Patent License Agreement, the Company paid the Licensors an upfront non-refundable fee of $50,000, with such fee recognized as of the transaction date as a current period research and development expense in the unaudited condensed statement of operations. The Tufts Patent License Agreement was determined not to be meet the “business combination” criteria under FASB ASC Topic 805, Business Combinations (“ASC 805”), as such license agreement did not meet the ASC 805 definition of a business, as the transaction resulted in an intangible asset of acquired intellectual property rights only, and the Company did not acquire any employees or tangible assets, or any processes, protocols, or operating systems. Accordingly, the transaction was determined to be to be an asset acquisition under ASC 805. Further, the cost of the acquired intellectual property rights were recognized as a current period research and development expense, as required under ASC Topic 730, Research and Development (ASC 730), as the acquired intellectual property rights were purchased from others for use in a research and development activity, and for which there are no alternative future uses.

 

The Tufts Patent License Agreement also provides for potential payments from the Company to the Licensors upon the achievement of certain product development and regulatory clearance milestones as well as royalty payments on net sales upon the commercialization of products developed utilizing the licensed patents. The Company will recognize as a current period expense for contingent milestone payments or royalties in the period in which such payment obligations are incurred, if any. Patent fee reimbursement under the Tufts Patent License Agreement recognized as research and development expense was $34,578 and $96,291 in the three and nine months ended September 30, 2018, respectively, and $21,945 and $42,496 in the three and nine months ended September 30, 2017, respectively.

 

18
 

 

Note 8 — Related Party Transactions

 

Effective October 31, 2018, a management services agreement, previously effective October 2015, with HCP/Advisors LLC, an affiliate of a former director of the Company, expired and was not renewed by the Company. Under such agreement, the Company paid HCP/Advisors LLC an initial first month’s fee of $35,000 commencing as of November 1, 2015, and thereafter, a monthly fee of $25,000 through October 31, 2018. The Company incurred an expense of $75,000 and $225,000 in each of the three and nine months ended September 30, 2018 and 2017, respectively, included in “general and administrative expenses” in the accompanying unaudited condensed consolidated statements of operations.

 

Previously, effective September 2016, the Company and HCFP/Strategy Advisors LLC, an affiliate of certain former directors and current officers of the Company, entered into a management consulting agreement referred to as the “HCFP Strategic Advisory Agreement”, which expired on May 14, 2017, as discussed below. Under the HCFP Strategic Advisory Agreement, HCFP/Strategy Advisors LLC had been engaged for an initial term of five months from September 14, 2016 to February 14, 2017, to provide various management consulting advisory services, including: to provide strategic business planning, to identify and assist with potential sources of financing arrangements, to promote the Company to various potential investors, and to provide strategic advisory services as reasonably requested by the Company. The HCFP Strategic Advisory Agreement provided for an initial total fee of $110,000, with $30,000 paid upon execution of the agreement and four payments of $20,000 per month from October 2016 to January 2017. Subsequently, on February 17, 2017, the Company and HCFP/Strategy Advisors LLC executed an extension of the HCFP Strategic Advisory Agreement, effective as of February 15, 2017, extending the services from February 15, 2017 to May 14, 2017, and obligating the Company to make payments of $20,000 per month in each of February, March, and April 2017. The Company did not further renew the HCFP Strategic Advisory Agreement after its May 14, 2017 expiration date. Previously, at December 31, 2016, the Company recognized a $10,000 estimated accrued expense liability for HCFP/Strategy Advisors LLC asserted out-of-pocket expenses under the HCFP Strategic Advisory Agreement in effect as of December 31, 2016, with such estimated accrued expense liability reversed as of June 30, 2017, as supporting documentation had not been provided by HCFP/Strategy Advisors LLC. Accordingly, as of June 30, 2017, the Company had made all contractually obligated payments, and disclaimed any further payment obligations, under the HCFP Strategic Advisory Agreement.

 

Separately, at June 30, 2017, the Company recognized a $10,000 accrued expense liability in connection with a HCFP/Strategy Advisors LLC vendor invoice dated June 30, 2017 in the amount of $10,000 for professional services fees related to separate discrete discussions between the Company’s management and HCFP /Strategy Advisors LLC conducted between the period of May 15, 2017 to May 31, 2017 regarding corporate matters. Such discussions were separate and apart from the previously expired HCFP Strategic Advisory Agreement. The Company incurred total expense of $0 and $80,000 in the three and nine months ended September 30, 2017, respectively, under the HCFP Strategic Advisory Agreement and the discrete invoice dated June 30, 2017, each as noted above, which is included in “General and administrative expenses” in the accompanying unaudited condensed consolidated statements of operations.

 

Previously, in January 2017, the Company entered into an agreement with Xzerta Trading LLC d/b/a HCFP/Capital Markets (“HCFP/Capital Markets”), an affiliate of certain former directors and current officers of the Company, which has since expired, for HCFP/Capital Markets to be the Company’s exclusive placement agent for the Series A Preferred Stock Units private placement transaction (“the HCFP/Capital Markets Placement Agent Agreement”), wherein, HCFP/Capital Markets was paid a fee of $177,576 representing 7.0% of the gross proceeds realized in such offering, with such fee included in the line item captioned “Loss on issuance of Series A Preferred Stock Units issued in a private placement” as a component of other income (expense) in the accompanying unaudited condensed consolidated statements of operations. See Note 13, Preferred Stock, for a further discussion of the Series A Preferred Stock Units private placement.

 

Previously, effective June 30, 2017, the Company and Michael J. Glennon, Vice Chairman and member of the board of directors, agreed to terminate the consulting agreement in effect since October 1, 2016. The Company did not incur any expense or payment obligation under this consulting agreement, as effective as of December 31, 2016, Mr. Glennon waived his right to compensation under the consulting agreement for the year ended December 31, 2016, and, effective as of March 31, 2017, Mr. Glennon further waived his right to compensation under the consulting agreement for the six months ended June 30, 2017.

 

Previously, effective November 2016, the Company entered into a consulting agreement with Patrick Glennon, a related-party as the brother of Michael J. Glennon, Vice Chairman and a member of the Company’s board of directors (the “Patrick Glennon Consulting Agreement”), wherein, Mr. Patrick Glennon will provide consulting support and advice with respect to the development and commercialization of resorbable ear tubes. The sole compensation for such services is the issuance on November 28, 2016 of stock options to purchase 20,000 shares of common stock of the Company, with an exercise price of $9.50 per share, and vesting ratably on a quarterly basis commencing December 31, 2016 and ending on September 30, 2019.

 

19
 

 

Note 9 — Commitments and Contingencies

 

Lease

 

The Company’s corporate office lease is on a month-to-month basis, with a 5% per annum increase in the monthly lease payment effective February 1 of each year, and the lease agreement may be cancelled with three months written notice. Total rent expense incurred under the corporate office space lease arrangement was $31,421 and $93,765 for the three and nine months ended September 30, 2018, respectively, and $33,863 and $117,351 for the three and nine months ended September 30, 2017, respectively. As of September 30, 2018, the Company’s future minimum lease payments, for the corporate office lease on a month-to-month basis, are estimated to be $129,874 for the period October 1, 2018 to September 30, 2019.

 

Legal Proceedings

 

On July 2, 2018, a former financial advisor to the Company filed a complaint in New York State court of a claim of breach of contract based on the Company’s purported failure to pay certain compensation claimed to be owed to the former financial advisor and seeking monetary damages to be determined at trial of not less than $125,400. The Company believes the claim is without merit and intends to vigorously defend itself. The outcome of this claim and /or a reasonable estimate of an amount to be paid by the Company, if any, is uncertain at this time, and, therefore, the Company has not recognized a provision for such contingent loss in the unaudited condensed consolidated financial statements as of September 30, 2018 with respect to this matter. Notwithstanding, if in the future the outcome of the matter is probable and a reasonable estimated amount can be determined, such loss will be recognized as an accrued expense liability in such future period.

 

In the ordinary course of our business, particularly as we begin commercialization of our 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.

 

Employment Agreements - Severance Compensation Payments

 

The Company has entered into employment agreements with each of: Dr. Lishan Aklog, M.D., Chief Executive Officer, with an annual base salary of $431,000 and an expiration date of December 31, 2019; Mr. Dennis M. McGrath, Executive Vice President - Chief Financial Officer, with an annual base salary of $345,000 and an expiration date of March 20, 2019; and, Dr. Brian J. deGuzman, M.D., Chief Medical Officer, with an annual base salary of $305,000 and an expiration date of June 30, 2021. Under the terms of the respective employment agreements, if the Company terminates employment without cause, or if such executive officer terminates his employment with the Company for good reason, each as defined in the respective employment agreement, then, Dr. Aklog may receive severance compensation payments equal to 150% of his base salary in effect at the time of the employment termination from the initial date of employment termination through the expiration date of his respective employment agreement; Mr. McGrath may receive 100% of the base salary in effect at the time of employment termination from the initial date of employment termination through six months thereafter; and, Dr. deGuzman may receive 100% of the base salary in effect at the time of the employment termination from the initial date of employment termination through the expiration date of his respective employment agreement. The contingent severance compensation payment(s) obligations, if any, will be recognized as a current period expense if and when such payment obligation is incurred.

 

20
 

 

Note 10 — 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”), adopted by the Company’s board of directors and stockholders in November 2014, is designed to enable the Company to offer employees, officers, directors, and consultants, as defined, an opportunity to acquire a proprietary interest in the Company. 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 compensation committee of the Company’s board of directors. Stock options outstanding under the PAVmed Inc. 2014 Equity Plan is summarized as follows:

 

       Weighted     
   Number   Average   Aggregate 
   Stock   Exercise   Intrinsic 
PAVmed Inc. 2014 Equity Plan  Options   Price   Value1 
Outstanding at December 31, 2017   1,936,924   $5.19      
Granted   1,535,324   $2.04      
Exercised      $      
Forfeited   (195,108)  $5.00      
Outstanding at September 30, 2018   3,277,140   $3.72   $ 
Vested and exercisable at September 30, 2018   1,620,310   $4.52   $ 
Unvested at September 30, 2018   1,656,830   $2.95   $ 

 

1 The aggregate intrinsic value is computed as the difference between the quoted price of the PAVmed Inc. common stock on September 30, 2018 and the exercise price of the underlying PAVmed Inc. stock options, to the extent such quoted price is greater than the exercise price.

 

As of September 30, 2018, under the PAVmed Inc. 2014 Equity Plan, the weighted average remaining contractual term was 8.5 years for stock options outstanding and 7.9 years for stock options vested and exercisable.

 

As noted above, during the nine months ended September 30, 2018, an aggregate of 1,535,324 stock options were granted under the PAVmed Inc. 2014 Equity Plan, each with a ten year contractual term from date-of-grant, including:

 

January 2018 - 175,000 PAVmed Inc. stock options were granted to the Company’s VP Technology and Product Development, having an exercise price of $2.96 per share of common stock of PAVmed Inc. and vesting ratably on a quarterly basis over a three year period commencing March 31, 2018 and ending December 31, 2020;

 

February 2018 - a total of 500,000 PAVmed Inc. stock options were granted to non-executive members of the Company’s board of directors, and a total of 590,216 PAVmed Inc. stock options were granted to employees, each having an exercise price of $2.01 per share of common stock of PAVmed Inc. and vesting ratably on a quarterly basis over a three year period commencing March 31, 2018 and ending December 31, 2020; and,

 

May 2018 - a total of 75,000 PAVmed Inc. stock options were granted, including 25,000 stock options granted to each of the three non-employee “EsoCheck™ Technology” physician inventors under each of their respective consulting agreements with Lucid Diagnostics Inc., having an exercise price of $1.59 per share of common stock of PAVmed Inc. and vesting ratably on a quarterly basis over a three year period commencing June 30, 2018 and ending March 31, 2021. See Note 7, Agreements Related to Acquired Intellectual Property Rights, for a discussion of the “EsoCheck™ Technology” and the corresponding “EsoCheck™ License Agreement” between Lucid Diagnostics Inc. and Case Western Reserve University and the consulting agreements between the three individual physicians and Lucid Diagnostics Inc.

 

July 2018 - 195,108 PAVmed Inc. stock options were granted to the Company’s Chief Commercial Officer, having an exercise price of $1.58 per share of common stock of PAVmed Inc. and vesting ratably on a quarterly basis over a three year period commencing September 30, 2018 and ending June 30, 2021.

 

In February 2018, a total of 195,108 stock options, previously granted under the PAVmed Inc. 2014 Equity Plan, were forfeited in connection with the resignation of two members from the Company’s board of directors.

 

As a result of shareholder approval of an additional 3.0 million shares on October 1, 2018, there are a total of 5,951,081 shares of common stock of PAVmed Inc. reserved for issuance under the PAVmed Inc. 2014 Equity Plan, of which, 3,174,795 shares are available for grant under the PAVmed Inc. 2014 Equity Plan, with such number of shares excluding PAVmed Inc. stock options granted outside the PAVmed Inc. 2014 Equity Plan, including 250,000 in 2017 and 250,854 in 2016.

 

21
 

 

Note 10 — Stock-Based Compensation (continued)

 

Lucid Diagnostics Inc. 2018 Long-Term Incentive Equity Plan

 

The Lucid Diagnostics Inc. 2018 Long-Term Incentive Equity Plan (the “Lucid Diagnostics Inc. 2018 Equity Plan”) became effective on May 12, 2018 and is separate 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. The following table summarizes information about stock options outstanding under the Lucid Diagnostics Inc. 2018 Equity Plan for the period presented below:

 

       Weighted 
   Number   Average 
   Stock   Exercise 
Lucid Diagnostics Inc. 2018 Equity Plan   Options    Price 
Outstanding at December 31, 2017      $ 
Granted   375,000   $0.60 
Exercised      $ 
Forfeited      $ 
Outstanding at September 30, 2018   375,000   $0.60 
Vested and exercisable at September 30, 2018   56,250   $0.56 
Unvested at September 30, 2018   318,750   $0.61 

 

As of September 30, 2018, the weighted average remaining contractual term was 9.6 years for both stock options outstanding and stock options vested and exercisable under the Lucid Diagnostics Inc. 2018 Equity Plan.

 

As noted above, during the nine months year ended September 30, 2018, an aggregate of 375,000 Lucid Diagnostics Inc. stock options were granted under the Lucid Diagnostics Inc. 2018 Equity Plan, each with a ten year contractual term from date-of-grant, including:

 

May 2018 - 100,000 Lucid Diagnostics Inc. stock options were granted to each of the three non-employee “EsoCheck™ Technology” physician inventors under their respective consulting agreements with Lucid Diagnostics Inc., having an exercise price of $0.50 per share of common stock of Lucid Diagnostics Inc. and vesting ratably on a quarterly basis over a three year period commencing June 30, 2018 and ending March 31, 2021. See Note 7, Agreements Related to Acquired Intellectual Property Rights, for a discussion of the “EsoCheck™ Technology” and the corresponding “EsoCheck™ License Agreement” between Lucid Diagnostics Inc. and Case Western Reserve University; and the consulting agreements between the three individual physicians and Lucid Diagnostics Inc; and,
   
June 2018 - 75,000 Lucid Diagnostics Inc. stock options were granted as sole compensation under a consulting agreement between Lucid Diagnostics Inc. and the unrelated third party owner of the manufacturing firm of the “EsoCheck™ Device CDMO Supply Agreement”, having an exercise price of $1.00 per share of common stock of Lucid Diagnostics Inc. and vesting ratably on a quarterly basis over a three year period commencing September 30, 2018 and ending June 30, 2021. See Note 7, Agreements Related to Acquired Intellectual Property Rights, for a discussion of each of the separate consulting agreement and the EsoCheck™ Device CDMO Supply Agreement.

 

A total of 2,000,000 shares of common stock of Lucid Diagnostics Inc. are reserved for issuance under the Lucid Diagnostics Inc. 2018 Equity Plan. In this regard, as of September 30, 2018, 1,625,000 shares of common stock of Lucid Diagnostics Inc. were available for grant under the Lucid Diagnostics Inc. 2018 Equity Plan.

 

22
 

 

Note 10 — Stock-Based Compensation (continued)

 

Stock-Based Compensation Expense

 

The stock-based compensation expense related to stock options granted to employees and directors is based on the grant-date fair value, and for stock options granted to non-employees is based on the vesting date fair value, with the expense recognized on a straight-line basis over the award’s requisite service period. Consolidated stock-based compensation expense recognized for both the PAVmed Inc. 2014 Equity Plan and the Lucid Diagnostics Inc. 2018 Equity Plan, for the periods indicated, was as follows:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
General and administrative expenses  $247,818   $241,401   $701,174   $707,588 
Research and development expenses   76,655    30,900    198,475    91,693 
Total  $324,473   $272,301   $899,649   $799,281 

 

As presented above, stock-based compensation recognized by Lucid Diagnostics Inc. included $5,329 and $8,962 in the three and nine months ended September 30, 2018, respectively, with respect to stock options granted under the PAVmed Inc. 2014 Equity Plan to non-employees providing services to Lucid Diagnostics Inc., and $12,973 and $21,250 in the three and nine months ended September 30, 2018, respectively, with respect to stock options granted under the Lucid Diagnostics Inc. 2018 Equity Plan to non-employees providing services to Lucid Diagnostics Inc. - with each such stock based compensation expense classified in research and development expense in the corresponding periods. There was no such Lucid Diagnostics Inc. stock-based compensation expense recognized for the prior year periods.

 

As of September 30, 2018, under the PAVmed Inc. 2014 Equity Plan, total unrecognized stock-based compensation expense of approximately $1.7 million is expected to be recognized over the weighted average remaining requisite service period of 1.5 years; and, under the Lucid Diagnostics Inc. 2018 Equity Plan, total unrecognized stock-based compensation expense of approximately $0.1 million is expected to be recognized over the weighted average remaining requisite service period of 2.6 years.

 

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, as follows: weighted-average 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 assumed expected option term; expected term of stock options represents the period of time stock options are expected to be outstanding, which for employees is the expected term derived using the simplified method and for non-employees is the contractual term; expected stock price volatility is based on historical stock price volatilities of similar entities within the Company’s industry over the period commensurate with the expected term of the stock option; and, expected dividend yield is based on annual dividends of $0.00 as the Company has not historically paid, and does not expect for the foreseeable future to pay, a dividend.

 

Stock-based compensation expense recognized for stock options granted to employees and members of the board of directors under the PAVmed Inc. 2014 Equity Plan was based on a weighted average fair value of $1.22 per share and $1.57 per share, during the nine months ended September 30, 2018 and 2017, respectively, calculated using the following weighted average Black-Scholes valuation model assumptions:

 

   Nine Months Ended
September 30,
 
   2018   2017 
Risk free interest rate   2.1%   1.5%
Expected term of stock options (in years)   5.8    5.8 
Expected stock price volatility   50%   50%
Expected dividend yield   0%   0%

 

Stock-based compensation expense recognized for stock options granted to non-employees under the PAVmed Inc. 2014 Equity Plan was based on a weighted average fair value of $2.07 per share and $4.32 per share, during the nine months ended September 30, 2018 and 2017, respectively, calculated using the following weighted average Black-Scholes valuation model assumptions:

 

   Nine Months Ended
September 30,
 
   2018   2017 
Risk free interest rate   2.7%   2.2%
Expected term of stock options (in years)   8.8    9.0 
Expected stock price volatility   60%   60%
Expected dividend yield   0%   0%

 

23
 

 

Note 10 — Stock-Based Compensation (continued)

 

Stock-Based Compensation Expense (continued)

 

Stock-based compensation expense recognized for stock options granted to non-employees under the Lucid Diagnostics Inc. 2018 Equity Plan was based on a weighted average fair value of $0.40 per share during the nine months ended September 30, 2018, calculated using the following weighted average Black-Scholes valuation model assumptions:

 

   Nine Months Ended 
   September 30, 2018 
Risk free interest rate   3.0%
Expected term of stock options (in years)   9.7 
Expected stock price volatility   66%
Expected dividend yield </