Note 12 — Debt

Senior Secured Convertible Notes - Issued November 4 2019

On November 3, 2019, the Company entered into a Securities Purchase Agreement (“SPA”) with two institutional investors (“Investors”, “Lender”, and /or “Holders”), and pursuant to the SPA, on November 4, 2019 the Company consummated the sale of a Senior Secured Convertible Notes in a private placement with a $14.0 million aggregate face value principal, referred to herein as the “November 2019 Senior Convertible Notes”. At the election of the holder, the November 2019 Senior Convertible Notes may be converted into shares of common stock of the Company, as discussed below.

The November 2019 Senior Convertible Notes 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”. The Series A and Series B November 2019 Senior Convertible Notes each provide for the payment of a $700,000 lender fee, with such lender fee deducted from the cash proceeds when funded by the investors, and additionally under a separate agreement, the Company is obligated to pay a financial advisory fee to the placement agent of 6.5% of the cash proceeds of each such note upon their receipt.

With respect to the Series A November 2019 Senior Convertible Note, on November 4, 2019, the investors delivered to the Company cash proceeds of $6.3 million, after deducting $0.7 million of lender fees (which were recognized as a current period expense on such date), and the Company incurred total offering costs of $550,254, with such offering costs recognized as an expense in other income (expense) in the accompanying consolidated statement of operations. The Series A November 2019 Senior Convertible Note has a contractual maturity date of September 30, 2021, a face value principal of $7.0 million, and a stated interest rate of 7.875% per annum.

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, delivered to the Company cash proceeds of $6.3 million on March 30, 2020, after deducting $0.7 million of lender fees (which were recognized as a current period expense on such date), and the Company paid an advisory fee of $409,500 to the placement agent. The Series B November 2019 Senior Convertible Note has a contractual maturity date of September 30, 2021, a face value principal of $7.0 million, and a stated interest rate of 7.875% per annum.

As noted, the Series A and Series B Senior Convertible Notes have a stated interest rate of 7.875% per annum, to the extent the investor has funded the cash proceeds of each such respective note. During the period November 4, 2019 to March 29, 2020, the Company incurred interest expense of 3.0% per annum on the $7.0 million face value principal of the Series B November 2019 Senior Convertible Note, during such period when such note was not funded by the investors.

The SPA contains certain representations and warranties, covenants, and indemnities customary for similar transactions. The Notes are senior secured obligations of the company secured by a lien on all assets.

Bi-Monthly Payments and Conversion

With respect to the Series A and Series B November 2019 Senior Convertible Notes, a bi-monthly principal repayment and corresponding interest payment will be due commencing March 30, 2020, and then on each of the successive 15th day of the month and the last trading day of the month, and on the maturity date (each, an “Installment Date”). On each bi-monthly Installment Date, the Company will be required to settle a principal repayment totaling $378,380 for the Series A and Series B November 2019 Senior Convertible Notes together with interest thereon, referred to herein as the “Installment Amount”, which shall be satisfied in shares of common stock of the Company, subject to customary equity conditions (including minimum price and volume thresholds), at 100% of the Installment Amount (an “Installment Conversion”), or otherwise (or at the election of the Company, in whole or in part) in cash at 115% of the Installment Amount (an “Installment Redemption”).

At the election of the Holder, commencing March 30, 2020, the Series A and Series B November 2019 Senior Convertible Notes may be converted into shares of common stock of the Company at an initial contractual conversion price of $1.60 per share, with such conversion price subject to standard adjustments in the event of any stock split, stock dividend, stock combination, recapitalization or other similar transaction.

In addition to the bi-monthly Installment Amount, the Holder may elect to accelerate the conversion of future bi-monthly Installment Amounts, and interest thereon, referred to herein as an Acceleration Installment Amount, utilizing the then current conversion price of the most recent bi-monthly Installment Conversion, with such Accelerated Installment Amount subject to certain restrictions, as defined.

Measurement and Recognition

The Series A November 2019 Senior Convertible Note fair value adjustment totaled $475,250 and was recognized as 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), and was inclusive of the fair value adjustment on the November 4, 2019 issue date and the fair value adjustment as of December 31, 2019.

The (cash) payment of 3.0% interest on the $7.0 million face value principal of the (unfunded) Series B November 2019 Senior Convertible Note, as such interest is discussed above, resulted in the recognition of $32,667 during the period November 4, 2019 through December 31, 2019, with such interest expense included in other income (expense) in the accompanying consolidated statement of operations.

See Note 11, Financial Instruments Fair Value Measurements, for Series A November 2019 Senior Convertible Debt November 4, 2019 issue date and December 31, 2019 estimated fair value and face value principal and corresponding changes in fair value and face value principal payable.

Redemption Rights

The Holder has the option to require the Company to redeem all or a portion of the November 2019 Senior Convertible Notes face value principal then unpaid /outstanding, as follows:

Covenants and Other Provisions

Under the November 2019 Senior Secured Convertible Notes, the Company is subject to certain customary affirmative and negative covenants regarding the incurrence of indebtedness, the existence of liens, the repayment of indebtedness, the payment of cash in respect of dividends, distributions or redemptions, and the transfer of assets, and to have an unrestricted cash balance of at least $2.0 million at each quarterly balance sheet date, among other matters, including, under the Securities Purchase Agreement, the following provisions and covenants:

Guaranty Agreement

The payment of all amounts due and payable under the November 2019 Senior Convertible Notes (Series A and Series B) are guaranteed by the Company and its majority-owned subsidiary Lucid Diagnostics Inc., and the obligations under the November 2019 Senior Convertible Notes are secured by all of the assets of these entities pursuant to the terms of a Guaranty Agreement executed in connection with the November 2019 Senior Secured Convertible Notes private placement discussed above. The Lender may transfer or assign all or any part of the November 2019 Senior Convertible Notes to any person with the prior written consent of the Company, provided no consent shall be required from the Company for any transfer to an affiliate of the Lender, or upon the occurrence and during the continuance of an Event of Default, as defined.

Senior Secured Convertible Note - Issued December 27, 2018

In a private placement transaction with an institutional investor (“Investor”, “Lender”, and /or “Holder”) on December 27, 2018, the Company entered into a Securities Purchase Agreement under which it issued the December 2018 Senior Secured Convertible Note, having an issue date of December 27, 2018, a contractual maturity date of December 31, 2020, a face value principal of $7.75 million, and a stated interest rate of 7.875% per annum - referred to herein as the “December 2018 Senior Convertible Note”. At the election of the Holder, the December 2018 Senior Convertible Note may be converted into shares of common stock of the Company, as discussed below.

The December 2018 Senior Convertible Note proceeds were $7.0 million after deducting $0.750 million of lender fees (which were recognized as a current period expense on the issue date), and the Company incurred total offering costs of $614,940, inclusive of the payment of $455,000 placement agent fee and legal fees, with such offering costs recognized as an expense in other income (expense) in the accompanying consolidated statement of operations. Additionally, concurrent with the December 2018 Senior Convertible Note, on December 27, 2018 a $5.0 million payment was made with respect to the repayment of the Company’s previously issued Senior Secured Note (between the Company and Scopia Holdings LLC), as further discussed below.

Bi-Monthly Payments & Conversion

The December 2018 Senior Convertible Note requires bi-monthly payments on the 15th calendar day and the last trading day of the month, commencing January 15, 2019 and ending December 31, 2020, including a contractually stated face value principal repayment, referred to as a bi-monthly Installment Amount, and a payment based on the outstanding face value principal and the 7.875% annual interest rate, referred to herein as a bi-monthly non-installment payment. The bi-monthly payments of January 15, 2019 through June 15, 2019 were non-installment payments only, and the bi-monthly payments from June 28, 2019 through December 31, 2020 include both the Installment Amount and the non-installment payment.

As originally structured, the December 2018 Senior Convertible Note Installment Amount included 35 bi-monthly payments of $193,750 from June 28, 2019 through November 30, 2020, and two final payments of $484,375 on each of December 15, 2020 and December 31, 2020, with such bi-monthly dates referred to as Installment Dates. Notwithstanding, future contractual Installment Amounts are reduced by additional face value principal repayments, with the reductions applied in reverse order of maturity of the bi-monthly Installment Amounts, starting with the final December 31, 2020 bi-monthly Installment Amount. In this regard, as of December 31, 2019, the future bi-monthly Installment Amounts have been reduced by an aggregate of $4,330,500 resulting from conversions in excess of the contractual bi-monthly Installment Amount, including a series of “conversion price voluntary adjustments” and the “Accelerated Installment Amount”, each as discussed below.

At the election of the Holder, at any time after the December 27, 2018 issue date, the December 2018 Senior Convertible Note may be converted into shares of common stock of the Company at an initial contractual conversion price of $1.60 per share. As amended on April 11, 2019, commencing with the June 28, 2019 bi-monthly payment, the bi-monthly Installment Amount and non-installment payment will be paid by the issue of shares of common stock of the Company, subject to the satisfaction of customary equity conditions, including minimum price and volume thresholds, referred to as an Installment Conversion.

In addition to the bi-monthly Installment Amount, the Holder may elect to accelerate the conversion of future bi-monthly Installment Amounts, and interest thereon, referred to herein as an Acceleration Installment Amount, utilizing the then current conversion price of the most recent bi-monthly Installment Conversion, with such Accelerated Installment Amount subject to certain restrictions, as defined.

The December 2018 Senior Convertible Note provides for a voluntary adjustment of the conversion price at the discretion of the Company, with the consent of the Holder, wherein during the term of the December 2018 Senior Convertible Note, the Company may at any time reduce the then current conversion price to any amount and for any period of time deemed appropriate by the board of directors of the Company. The Company’s board of directors have adopted guidelines surrounding such a December 2018 Senior Convertible Note voluntary adjustment of the conversion price, if any, to be implemented by management when favorable market conditions exist for the Company to orderly and effectively reduce its outstanding debt to the investor. See below for a discussion of the conversion price voluntary adjustments.

Measurement and Recognition

The December 2018 Senior Convertible Note fair value adjustments resulted in the recognition of current period expense of $333,849 and $153,000 in the years ended December 31, 2019 and 2018, respectively (as no portion of such fair value adjustments resulted from instrument-specific credit risk of such note as of such dates).

As presented above in Note 11, Financial Instruments Fair Value Measurements, the December 2018 Senior Convertible Note had a fair value of $1,700,000 and a face value principal payable of $1,692,000; and in the year ended December 31, 2019, aggregate principal repayments of $6,058,000 and corresponding non-installment payments of $199,847 were settled by the issue of a total of 7,773,110 shares of common stock of the Company with a fair value of $8,089,163, resulting in a debt extinguishment loss in the year ended December 31, 2019 of $1,831,316, summarized as follows:

The fair value of the shares of common stock of the Company issued was measured as the respective issue date quoted closing price per share of the common stock of the Company.

December 2018 Senior Convertible Note - Subsequent to December 31, 2019

Subsequent to December 31, 2019, with respect to the December 2018 Senior Convertible Note, a total of $1,642,000 of Acceleration Installment Amount face value principal repayments and corresponding non-installment payments of $3,963, were settled by the issue of 2,042,901 shares of common stock of the Company with a fair value of $2,833,579 (with such fair value measured as the respective issue date quoted closing price per share of the common stock of the Company). As provided for in the December 2018 Senior Secured Convertible Note, the Holder elected to defer the bi-monthly Installment Amount repayments for each of the months January, February, and March 2020.

Redemption Rights

The Holder has the option to require the Company to redeem all or a portion of the December 2018 Senior Convertible Note face value principal then unpaid /outstanding, as follows:

Covenants and Other Provisions

Under the December 2018 Senior Secured Convertible Note, the Company is subject to certain customary affirmative and negative covenants regarding the incurrence of indebtedness, the existence of liens, the repayment of indebtedness, the payment of cash in respect of dividends, distributions or redemptions, and the transfer of assets, and to have an unrestricted cash balance of at least $1.75 million at each quarterly balance sheet date, among other matters, including, under the Securities Purchase Agreement, as follows:

Guaranty Agreement

The payment of all amounts due and payable under the December 2018 Senior Convertible Note are guaranteed by PAVmed Inc. and its majority-owned subsidiary Lucid Diagnostics Inc., and the obligations under the December 2018 Senior Convertible Note are secured by all of the assets of these entities pursuant to the terms of a Guaranty Agreement executed in connection with the December 2018 Senior Secured Convertible Note private placement discussed above. The Lender may transfer or assign all or any part of the December 2018 Senior Convertible Note to any person with the prior written consent of the Company, provided no consent shall be required from the Company for any transfer to an affiliate of the Lender, or upon the occurrence and during the continuance of an Event of Default, as defined.

Senior Secured Note and Series S Warrants -

In July 2017, the Company and Scopia Holdings LLC (“Scopia” or the “Lender”) previously entered into a Note and Security Purchase Agreement, whereupon Scopia delivering to the Company $4.8 million in net cash proceeds, the Company issued to Scopia and its designees, a Senior Secured Note with an initial principal of $5.0 million (“Senior Secured Note”), and 2,660,000 Series S Warrants to purchase a corresponding number of shares of common stock of the Company.

On December 27, 2018, concurrent with the issue of the Senior Convertible Note as discussed above, the Company repaid-in-full the previously issued Senior Secured Note, inclusive of the total outstanding principal payable and the accrued but unpaid interest expense payable as of December 27, 2018, with such repayment comprised of a $5.0 million cash payment and the issue to Scopia of 600,000 shares of common stock of the Company. The Senior Secured Note repayment was executed under a Notice of Prepayment agreement dated December 27, 2018. The Senior Secured Note had a contractual maturity date of June 30, 2019, with such maturity date not subject-to any early repayment provisions. The Company recognized as other income (expense), a debt extinguishment loss of $1.4 million, as discussed below.

The Senior Secured Note annual interest rate was 15.0%, with interest payable semi-annually in arrears on June 30 and December 30 of each calendar year, commencing December 30, 2017 (“15% interest expense”). At its sole discretion, the Company was able to defer payment of up to 50% of each of the semi-annual 15% interest expense payable, with such deferred amount added to the outstanding interest-bearing principal balance of the Senior Secured Note. In this regard, the Senior Secured Note principal balance was $5,780,116, as of December 27, 2018 with each such principal amount comprised of the initial principal of $5.0 million and the total unpaid semi-annual interest as of December 27, 2018.

The Senior Secured Note and the Series S Warrants are freestanding financial instruments, as the Series S Warrants were immediately legally detachable from the Senior Secured Note and were immediately exercisable. The Series-S Warrants are equity classified in the consolidated balance sheet. See Note 14, Stockholders’ Equity and Common Stock Purchase Warrants, for a further discussion of the Series S Warrants.

The $4.8 million of cash proceeds, which were net of the Lender’s issue costs, were allocated to the Senior Secured Note and the Series S Warrants based on their respective relative fair value, as discussed below, resulting in an allocation of $1,408,125 to the Senior Secured Note and $3,434,452 to the Series S Warrants, with the resulting difference of $3,591,875 recognized as Senior Secured Note debt discount, amortized as interest expense over the term of the Senior Secured Note.

The Senior Secured Note total interest expense of $2,392,447, for the year ended December 31, 2018, was comprised of $786,145 resulting from the 15% interest expense and $1,606,302 resulting from the amortization of the debt discount. The Senior Secured Note had remaining unamortized debt discount $1,637,972 on the December 27, 2018 date of extinguishment.

On the December 27, 2018 repayment date, the Company recognized a debt extinguishment loss of $1.4 million resulting from the difference between a $5.5 million debt reacquisition price and a $4.1 million debt carrying value, net, of the Senior Secured Note as follows: