Note 11 — Financial Instruments Fair Value Measurements

Recurring Fair Value Measurements

The fair value hierarchy table for the periods indicated is as follows:

Fair Value Option Election - Senior Secured Convertible Notes Issued November 4 2019 and December 27, 2018

The Company has issued each of Senior Secured Convertible Notes issued November 4, 2019 with an aggregate original face value principal of $14.0 million and the Senior Secured Convertible Note issued December 27, 2018 with an original face value of $7.75 million. The Senior Secured Convertible Notes issued November 4, 2019 were further sub-divided into a Series A and Series B, each having a face value principal of $7.0 million, with each referred to herein as the “Series A November 2019 Senior Convertible Note” and the “Series B November 2019 Senior Convertible Note”. Under the Series A November 2019 Senior Convertible Note, the investors delivered to the Company cash proceeds of $6.3 million on November 4, 2019, after deducting $0.7 million of lender fees. Subsequent to December 31, 2019, with respect to the Series B November 2019 Senior Convertible Note, the investors, at their election under the prepayment provisions of such note, delivered to the Company cash proceeds of $6.3 million on March 30, 2020 after deducting $0.7 million of lender fees.

The Series A November 2019 Senior Convertible Note and the Senior Secured Convertible Note issued December 27, 2018, are each accounted for under the ASC 825-10-15-4 fair value option (“FVO”) election. (As well, the Series B November 2019 Senior Convertible Note will also be accounted for under the FVO election.) Under the FVO election the financial instrument is initially measured at its issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date. As provided for by ASC 825-10-50-30(b), the estimated fair value adjustment is presented as a single line item within other income (expense) in the accompanying consolidated statement of operations.

Fair Value Option Election - Senior Secured Convertible Notes Issued November 4 2019 and December 27, 2018 - continued

Senior Secured Convertible Notes - November 2019 - Series A

As discussed above, under the ASC-825 FVO election the Series A November 2019 Senior Convertible Note was initially measured at its estimated fair value on its issue date of November 4, 2019, summarized as follows:

The Series A November 2019 Senior Convertible Note estimated fair value and face value principal, and the corresponding changes in estimated fair value and face value principal payable, as of each of the respective dates noted, are as follows:

The Series A November 2019 Senior Convertible Note fair value adjustment on the November 4, 2019 issue date and at December 31, 2019 of $475,250 was recognized as a current period income in the year ended December 31, 2019 (as no portion of such fair value adjustments resulted from instrument-specific credit risk of such note as of such dates).

The estimated fair value of the Senior Convertible Note Series A as of its November 4, 2019 issue date and as of December 31, 2019, was computed using a Monte Carlo simulation of the present value of its cash flows using a synthetic credit rating analysis and a required rate of return, using the following assumptions:

Senior Secured Convertible Note Issued December 27, 2018

As discussed above, under the ASC-825 FVO election, the December 2018 Senior Convertible Note was initially measured at its estimated fair value on its issue date of December 27, 2018, summarized as follows:

The December 2018 Senior Convertible Note estimated fair value and face value principal, and the corresponding changes in estimated fair value and face value principal payable, as of each of the respective dates noted, is summarized as follows:

The December 2018 Senior Convertible Note fair value adjustments of $333,849 and $153,000 in the years ended December 31, 2019 and 2018, respectively, were recognized as a current period income in the respective accompanying consolidated statement of operations (as no portion of such fair value adjustments resulted from instrument-specific credit risk of such note as of such dates).

The estimated fair value as of December 31, 2019, December 31, 2018 and on issue date of December 27, 2018 of the December 2018 Senior Secured Convertible Note was computed using a combination of the present value of the Senior Secured Convertible Note cash flows using a synthetic credit rating analysis’ required rate of return and the Black-Scholes option pricing model, using the following assumptions:

Series A and Series A-1 Exchange Offer - March 15, 2018

On March 15, 2018, the “Series A and Series A-1 Exchange Offer” was completed, wherein, two shares of Series B Convertible Preferred Stock were issued-upon-exchange of one share of Series A Convertible Preferred Stock, and five Series Z Warrants were issued-upon-exchange of one Series A Warrant; and, 1.33 shares of Series B Convertible Preferred Stock were issued-upon-exchange of one share of Series A-1 Convertible Preferred Stock, and five Series Z Warrants were issued-upon-exchange of one Series A-1 Warrant. Collectively, such exchanges are referred to as the “Series A and Series A-1 Exchange Offer” and the “March 15, 2018 Exchange Date”. The Series A and Series A-1 Exchange Offer was offered to and accepted by all holders of the Series A Convertible Preferred Stock and Series A Warrants and the Series A-1 Convertible Preferred Stock and Series A-1 Warrants.

On the March 15, 2018 Exchange Date: (i) a total of 975,568 shares of Series B Convertible Preferred Stock were issued-upon-exchange, including 499,334 shares of Series B Convertible Preferred Stock issued-upon-exchange of 249,667 shares of Series A Convertible Preferred Stock and 476,234 shares of Series B Convertible Preferred Stock issued-upon-exchange of 357,259 shares of Series A-1 Convertible Preferred Stock; and, (ii) a total of 2,739,190 Series Z Warrants were issued-upon-exchange, including 1,340,005 Series Z Warrants issued-upon-exchange of 268,001 Series A Warrants and 1,399,185 Series Z Warrants issued-upon-exchange of 279,837 Series A-1 Warrants.

As of the March 15, 2018 Exchange Date of the Series A and Series A-1 Exchange Offer, there were no issued and outstanding shares of Series A Convertible Preferred Stock and Series A Warrants, nor shares of Series A-1 Convertible Preferred Stock and Series A-1 Warrants, as each were fully exchanged-upon-issue of shares of Series B Convertible Preferred Stock and Series Z Warrants, respectively. Additionally, each of the corresponding Series A Warrants derivative liability and the Series A Convertible Preferred Stock conversion option derivative liability were each fully extinguished-upon-exchange as of the March 15, 2018 Exchange Date of the Series A and Series A-1 Exchange Offer.

See Note 13, Preferred Stock, for further information with respect to Series B Convertible Preferred Stock, Series A-1 Convertible Preferred Stock, and Series A Convertible Preferred Stock, and Note 14, Stockholders’ Equity and Common Stock Purchase Warrants, for further information with respect to Series Z Warrants, Series A-1 Warrants, and Series A Warrants.

Series A and Series A-1 Exchange Offer - March 15, 2018 -

Series B Convertible Preferred Stock Issued-Upon-Exchange of Series A Convertible Preferred Stock

Series Z Warrants Issued-Upon-Exchange Of Series A Warrants

As noted above, the Series A and Series A-1 Exchange Offer resulted in the extinguishment of: 249,667 shares of Series A Convertible Preferred Stock along with the corresponding (bifurcated) conversion option derivative liability, and, 268,001 Series A Warrants, each resulting from the issue-upon-exchange of: 499,334 shares of Series B Convertible Preferred Stock and 1,340,005 Series Z Warrants, respectively, each as discussed herein below.

Series A and Series A-1 Exchange Offer - March 15, 2018

Series B Convertible Preferred Stock Issued-Upon-Exchange of Series A Convertible Preferred Stock

The March 15, 2018 Exchange Date estimated fair value of the consideration given of $873,835 of the 499,334 shares of the equity-classified Series B Convertible Preferred Stock issued-upon-exchange, as compared to the (temporary equity) carrying value of 249,667 shares of Series A Convertible Preferred Stock and the estimated fair value of the corresponding conversion option derivative liability of $147,304, resulted in incremental estimated fair value of $726,531 recognized as a deemed dividend charged to accumulated deficit on the March 15, 2018 Exchange Date, with such deemed dividend included as a component of “net loss attributable to PAVmed Inc. common stockholders”, summarized as follows:

The March 15, 2018 Exchange Date estimated fair value of $873,835 of the 499,334 shares of Series B Convertible Preferred Stock issued-upon-exchange of 249,667 Series A Convertible Preferred Stock was computed using a combination of the present value of its cash flows using a synthetic credit rating analysis’ required rate of return and the Black-Scholes option pricing model, using the following assumptions:

The Series A Convertible Preferred Stock was classified in temporary equity in the consolidated balance sheet and had a carrying value of $0 resulting from the issuance date initial estimated fair values of the Series A Warrant derivative liability and the Series A Convertible Preferred Stock conversion option derivative liability being in excess of the Series A Preferred Stock Units private placement issuance gross proceeds, with such excess recognized as a current period loss in the consolidated statement of operations. See Note 13, Preferred Stock, for a further discussion of the Series A Preferred Stock Units private placement and the Series A Convertible Preferred Stock.

Series A and Series A-1 Exchange Offer - March 15, 2018 -

Series Z Warrants Issued-Upon-Exchange of Series A Warrants

The Series Z Warrants issued-upon-exchange of Series A Warrants in the Series A and Series A-1 Exchange Offer, as discussed above, resulted in the recognition of a modification expense under the analogous guidance with respect to stock option modification under FASB ASC 718, wherein an exchange of warrants is deemed to be a modification of the initial warrant agreement by the replacement with a revised warrant agreement, requiring the incremental estimated fair value, measured as the difference between the estimated fair value immediately after the modification as compared to the estimated fair value immediately before the modification, to the extent an increase, recognized as a modification expense. In this regard, the March 15, 2018 Exchange Date adjustment of the estimated fair value of the Series A Warrants derivative liability resulted in the recognition of a net expense of $96,480 comprised of: (i) income of $246,561 upon the Series A Warrant derivative liability being adjusted to its March 15, 2018 Exchange Date estimated fair value of $514,562, as noted above, and (ii) an expense of $343,041 resulting from the incremental estimated fair value of the consideration given of $857,603 of the 1,340,005 Series Z Warrants issued-upon-exchange as compared to the estimated fair value of $514,562 of the 268,001 Series A Warrants derivative liability extinguished-upon-exchange, summarized as follows:

The March 15, 2018 Exchange Date estimated fair value of $857,603 of the 1,340,005 Series Z Warrants issued-upon-exchange of 268,001 Series A Warrants was computed using a Black-Scholes valuation model, using the following assumptions:

Series A and Series A-1 Exchange Offer - March 15, 2018 -

Series B Convertible Preferred Stock Issued-Upon-Exchange of Series A-1 Convertible Preferred Stock

Series Z Warrants Issued-Upon-Exchange of Series A-1 Warrants

As noted above, the Series A and Series A-1 Exchange Offer resulted in the extinguishment of: 357,259 shares of Series A-1 Convertible Preferred Stock and, 279,837 Series A-1 Warrants, resulting from the issue-upon-exchange of 476,234 shares of Series B Convertible Preferred Stock and 1,399,185 Series Z Warrants, respectively, each as discussed herein below.

Series A and Series A-1 Exchange Offer - March 15, 2018

Series B Convertible Preferred Stock Issued Upon Exchange of Series A-1 Convertible Preferred Stock

The March 15, 2018 Exchange Date estimated fair value of the consideration given of $833,410 of the equity-classified 476,234 shares of Series B Convertible Preferred Stock issued-upon-exchange, was less than the carrying value of $1,032,650 of the equity-classified 357,259 shares Series A-1 Convertible Preferred Stock, resulting in an increase to additional paid in capital of $199,241 on the March 15, 2018 Exchange Date, with such amount included as a component of “net loss attributable to PAVmed Inc. common stockholders”, summarized as follows:

The March 15, 2018 Exchange Date estimated fair value of $833,410 of the 476.234 shares of Series B Convertible Preferred Stock issued-upon-exchange of 357,259 shares of Series A-1 Convertible Preferred Stock was computed using a combination of the present value of its cash flows using a synthetic credit rating analysis required rate of return and the Black-Scholes option pricing model, using the following assumptions:

Series Z Warrants Issued-Upon-Exchange of Series A-1 Warrants

The “Series Z Warrants issued-upon-exchange of Series A-1 Warrants” in the Series A and Series A-1 Exchange Offer, as discussed above, resulted in the recognition of a modification expense under the analogous guidance with respect to stock option modification under FASB ASC 718, wherein an exchange of warrants is deemed to be a modification of the initial warrant agreement by the replacement with a revised warrant agreement, requiring the incremental estimated fair value, measured as the difference between the estimated fair value immediately after the modification as compared to the estimated fair value immediately before the modification, to the extent an increase, recognized as a modification expense. In this regard, the March 15, 2018 Exchange Date estimated fair value of $895,478 of the equity-classified 1,399,185 Series Z Warrants issued-upon-exchange as compared to the estimated fair value of $545,682 of the equity-classified 279,837 Series A-1 Warrants extinguished-upon-exchange, resulted in an incremental estimated fair value of $349,796 recognized as a modification expense included in other income (expense) in the consolidated statement of operations, with a corresponding increase to additional paid in capital, summarized as follows:

The March 15, 2018 Exchange Date estimated fair value of $895,478 of the 1,399,185 Series Z Warrants issued-upon-exchange of 279,837 Series A-1 Warrants was computed using a Black-Scholes valuation model, using the following assumptions:

The March 15, 2018 Exchange Date estimated fair value of $545,682 of the 279,837 Series A-1 Warrants extinguished-upon-exchange for 1,399,185 Series Z Warrants was computed using a Black-Scholes valuation model, using the following assumptions:

Non-recurring Fair Value Measurements

In addition to the Senior Secured Convertible Debt, the Series A and Series A-1 Exchange Offer on March 15, 2018, and the Series A Exchange Offer on November 17, 2017, each as discussed above, the other issue-date and /or date-of-occurrence non-recurring estimated fair values include: the Series W Warrants Exchange Offer on April 5, 2018, the Series Z Warrant exercise price adjustment on June 1, 2018, and the UPO Exchange Offer on August 22, 2018; along with the Series A Preferred Stock Units private placement during the three months ended March 31, 2017, the Senior Secured Note and Series S Warrants issued in connection with the Note and Security Purchase Agreement between the Company and Scopia Holdings LLC on July 3, 2017; the Series A-1 Preferred Stock Units private placement on August 4, 2017; the Series A-1 Warrants Agreement Amendment No. 1 on October 18, 2017, and the conversion of shares of Series A Convertible Preferred Stock into shares of common stock of the Company in November 2017 and December 2017.

See the following Notes herein for further information regarding these non-recurring estimated fair values, including Note 12, Debt, Note 13, Preferred Stock, and, Note 14, Stockholders’ Equity and Common Stock Purchase Warrants.

The recurring and non-recurring estimated fair values discussed herein, utilize the Company’s common stock price along with certain Level 3 inputs, as discussed below, in the development of Monte Carlo simulation models, discounted cash flow analyses, and /or Black-Scholes valuation models.

The recurring and non-recurring estimated fair values presented herein are subjective and are affected by changes in inputs to the valuation models /analyses, including the Company’s common stock price, the Company’s dividend yield, the risk-free rates based on U.S. Treasury security yields, and certain other Level-3 inputs including, assumptions regarding the estimated volatility in the value of the Company’s common stock price and /or probabilities associated with the likelihood and timing of future dilutive transactions. Changes in these assumptions can materially affect the estimated fair values.