Annual report pursuant to Section 13 and 15(d)

Financial Instruments Fair Value Measurements

v3.19.1
Financial Instruments Fair Value Measurements
12 Months Ended
Dec. 31, 2018
Fair Value Disclosures [Abstract]  
Financial Instruments Fair Value Measurements

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 Measurement on a Recurring Basis at Reporting Date Using(1)  
    Level-1
Inputs
    Level-2
Inputs
    Level-3
Inputs
    Total  
December 31, 2018                                
Senior Secured Convertible Note   $     —     $     $ 7,903,000     $ 7,903,000  
Series A Warrants derivative liability(2)                 —              
Series A Convertible Preferred Stock
conversion option derivative liability(2)
                       
Totals   $     $     $     $  
                                 
December 31, 2017                                
Series A Warrants derivative liability   $     $     $ 761,123     $ 761,123  
Series A Convertible Preferred Stock conversion option derivative liability                 212,217       212,217  
Totals   $     $     $ 973,340     $ 973,340  

 

  (1) As noted above, as presented in the fair value hierarchy table, Level-1 represents quoted prices in active markets for identical items, Level-2 represents significant other observable inputs, and Level-3 represents significant unobservable inputs.
     
  (2) The Series A Warrants derivative liability and the Series A-1 Convertible Preferred Stock conversion option derivative liability were fully extinguished-upon-exchange on the March 15, 2018 Exchange Date of the Series A and Series A-1 Exchange Offer, as discussed herein below.

 

Senior Secured Convertible Note -

 

In a private placement transaction with an institutional investor - referred to herein as “Investor”, “Lender”, and /or “Holder” - on December 27, 2018, the Company entered into a Securities Purchase Agreement under which was issued a Senior Secured Convertible Note Agreement, with such agreement 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 - the “Senior Convertible Note”. At the election of the Holder, the Senior Convertible Note may be converted into shares of common stock of the Company. The Senior Convertible Note proceeds were $7.0 million after payment of $750,000 of lender fees.

 

The Senior Convertible Note requires bi-monthly payments, with such payments due and payable on each of the 15th calendar day of each month and the Last Trading Day of each month, with the first bi-monthly payment date of January 15, 2019 and the last bi-monthly payment date of December 31, 2020. The bi-monthly payments have two components: a bi-monthly “Installment Repayment” which commences June 28, 2019 through Dec 31, 2020, and a bi-monthly “Non-Installment Payment” which commences Jan 15, 2019 through the Dec 31, 2020. The bi-monthly Installment Repayments are prescribed and the bi-monthly Non-Installment Repayments are a function of the remaining Senior Convertible Note face value principal outstanding. See Note 12, Debt, for further information with respect to the Senior Convertible Note.

 

The Senior Convertible Note is principally a debt financial instrument host containing embedded features and /or options which would otherwise be required to be bifurcated from the debt host and recognized as separate derivative liabilities subject to initial and subsequent periodic estimated fair value measurements under ASC 815, Derivatives and Hedging. Notwithstanding, the Senior Convertible Note is being afforded the guidance of the “fair value option (“FVO”) of ASC 825, Financial Instruments, specifically, the FVO election provided for under ASC 825-10-15-4. As such, the Senior Convertible Note will be initially measured at its December 27, 2018 issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date.

 

Senior Secured Convertible Note - continued

 

The Senior Convertible Note estimated fair value as of the December 27, 2018 issue date is as follows:

 

Senior Secured Convertible Note - Issue Date - December 27, 2018   Fair Value  
Face value principal payable - issue date December 27, 2018   $ 7,750,000  
Lender fees paid - issue date December 27, 2018     (750,000 )
Proceeds, net - issue date December 27, 2018   $ 7,000,000  
Fair value adjustment - December 27, 2018     750,000  
Fair value - issue date December 27, 2018   $ 7,750,000  

 

The Senior Convertible Note estimated fair value, changes in fair value, face value principal payable, and changes in face value principal payable, as of December 31, 2018 is as follows:

 

Senior Secured Convertible Note - December 31, 2018   Fair Value    

Face Value

Principal Payable

 
Fair Value /Face Value Principal Payable - issue date December 27, 2018   $ 7,750,000     $ 7,750,000  
Less: bi-monthly Installment Repayments - as of December 31, 2018            
Less: bi-monthly Non-Installment Payments - as of December 31, 2018            
Fair Value /Face Value Principal Payable - before fair value adjustment     7,750,000       7,750,000  
Fair value adjustment - December 31, 2018     153,000        
Fair Value /Face Value Principal Payable - December 31, 2018   $ 7,903,000     $ 7,750,000  

 

The estimated fair value adjustment of the Senior Convertible Note, as required by ASC 825-10-45-5, is recognized as a component of other comprehensive income (OCI) with respect to the portion of the fair value adjustment attributed to a change in the instrument-specific credit risk, with the remaining amount of the fair value adjustment recognized as other income (expense) in the consolidated statement of operations. The “other income (expense) component” of the Senior Convertible Note fair value adjustment is presented in a single line in the consolidated statement of operations, as provided for by ASC 825-10-50-30(b). The total fair value adjustment of $903,000 of each of the fair value adjustments of December 27, 2018 issue date of and December 31, 2018, as presented above, was recognized as an expense in other income (expense) in the consolidated statement of operations, as no portion of such fair value adjustment resulted from instrument-specific credit risk of the Senior Convertible Note, as of the dates noted.

 

The estimated fair value of the Senior Convertible Note as of the December 27, 2018 issue date and as of December 31, 2018, 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:

 

Fair Value Assumptions
Senior Secured Convertible Note
  Issue Date
December 27, 2018
    December 31, 2018  
Fair value   $ 7,750,000     $ 7,903,000  
Face value principal payable   $ 7,750,000     $ 7,750,000  
Required rate of return     13.2 %     13.1 %
Conversion price   $ 1.60     $ 1.60  
Value of common stock   $ 0.92     $ 0.96  
Expected term (years)     2.0       2.0  
Volatility     46 %     50 %
Risk free rate     2.5 %     2.5 %
Dividend yield     0 %     0 %

 

Series A Preferred Stock Units

 

The Series A Preferred Stock Units issued in a private placement in the three months ended March 31, 2017 were each comprised of one share of Series A Convertible Preferred Stock and one Series A Warrant, wherein, at the option of their respective holder, may be converted into /exercised for shares of common stock of the Company. 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, and, Note 14, Stockholders’ Equity and Common Stock Purchase Warrants, for a further discussion of the Series A Warrants.

 

The Series A Warrant and the Series A Convertible Preferred Stock conversion option were each determined to be a derivative liability under FASB ASC Topic 815, Derivative and Hedging (ASC 815), as the Series A Warrant exercise price and the Series A Convertible Preferred Stock common stock exchange factor denominator, were each subject to potential adjustment resulting from future financing transactions, under certain conditions, along with certain other provisions which may result in required or potential full or partial cash settlement. Through the March 15, 2018 Exchange Date of the Series A and Series A-1 Exchange Offer, as such exchange offer is discussed herein below, the respective Series A Warrants and the Series A Convertible Preferred Stock conversion option derivative liability were each classified as a current liability in the consolidated balance sheet, and each were initially measured at estimated fair value at the time of issuance and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date, with changes in estimated fair value recognized as other income or expense in the consolidated statement of operations.

 

The number of Series A Warrants and shares of Series A Convertible Preferred Stock issued and outstanding as of December 31, 2018 is as follows:

 

Issued and Outstanding - December 31, 2018   Series A
Warrants
    Series A
Convertible
Preferred Stock
 
Issued and outstanding as of December 31, 2017     268,001       249,667  
Series A and Series A-1 Exchange Offer - March 15, 2018     (268,001 )     (249,667 )
Issued and outstanding as of December 31, 2018            

 

As of the Series A and Series A-1 Exchange Offer - March 15, 2018 Exchange Date, as discussed below, there were no issued and outstanding Series A Warrants and shares of Series A Convertible Preferred Stock, as each were fully exchanged for Series Z Warrants and shares Series B Convertible Preferred Stock, respectively.

 

The reconciliation of each of the Series A Warrants and the Series A Convertible Preferred Stock conversion option derivative liability as of December 31, 2018 is as follows:

 

Derivative Liability - December 31, 2018   Series A
Warrants
   

Series A

Convertible
Preferred Stock
Conversion Option

 
Balance at December 31, 2017   $ 761,123     $ 212,217  
Change in fair value - March 15, 2018 Exchange Date     (246,561 )     (64,913 )
Series A and Series A-1 Exchange Offer - March 15, 2018     (514,562 )     (147,304 )
Balance at December 31, 2018   $     $  

 

As noted above, the Series A Warrants derivative liability and the Series A-1 Convertible Preferred Stock conversion option derivative liability were each initially measured at fair value at the time of issuance and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date, with changes in estimated fair value recognized as other income or expense.

 

The Series A Warrants derivative liability and the Series A-1 Convertible Preferred Stock conversion option derivative liability were fully extinguished-upon-exchange on the March 15, 2018 Exchange Date of the Series A and Series A-1 Exchange Offer, as discussed below. Accordingly, the final estimated fair value of each respective derivative liability was as of the March 15, 2018 Exchange Date, with such change in estimated fair value resulting in the respective recognition of income of $246,561 and $64,913, with a corresponding decrease in each of the Series A Warrants and the Series A Convertible Preferred Stock conversion option derivative liability, respectively, during the year ended December 31, 2018.

 

Series A Preferred Stock Units - continued

 

Series A Warrants and shares of Series A Convertible Preferred Stock issued and outstanding as of December 31, 2017 was as follows:

 

Issued and Outstanding - December 31, 2017   Series A
Warrants
    Series A
Convertible
Preferred Stock
 
Issued and outstanding as of December 31, 2016        
Issued in Series A Preferred Stock Units private placement     422,838       422,838  
Conversion of Series A Convertible Preferred Stock           (18,334)  
Series A Exchange Offer - November 17, 2017     (154,837 )     (154,837 )
Issued and outstanding as of December 31, 2017     268,001       249,667  

 

The reconciliation of each of the Series A Warrants and the Series A Convertible Preferred Stock conversion option derivative liability as of December 31, 2017 is as follows:

 

Derivative Liability - December 31, 2017   Series A
Warrants
    Series A
Convertible
Preferred Stock
Conversion Option
 
Balance at December 31, 2016   $     $  
Initial fair value on dates of issuance     4,050,706       1,221,963  
Change in fair value     (1,942,501 )     (643,318 )
Conversion of Series A Convertible Preferred Stock           (27,335 )
Series A Exchange Offer - November 17, 2017     (1,347,082 )     (339,093 )
Balance at December 31, 2017   $ 761,123     $ 212,217  

 

The change in estimated fair value resulted in the respective recognition of income of $1,942,501 and $643,318, with a corresponding decrease in each of the Series A Warrants and the Series A Convertible Preferred Stock conversion option derivative liability, respectively, during the year ended December 31, 2017.

 

Fair Value Assumptions - Derivative Liability - Series A Warrants and Series A Convertible Preferred Stock Conversion Option

 

The initial issue date and subsequent recurring reporting period date estimated fair value of each of the Series A Warrants derivative liability and the Series A Convertible Preferred Stock conversion option derivative liability, were estimated using a Monte Carlo simulation valuation model using 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 to take into account the probabilities of certain events occurring over their respective life, including, assumptions regarding the estimated volatility in the value of the Company’s common stock price and the likelihood and timing of future dilutive transactions, as applicable, using the following assumptions as of the dates indicated:

 

Fair Value Assumptions
Series A Warrants Derivative Liability
  March 15, 2018(1)     December 31, 2017  
Calculated aggregate estimated fair value   $ 514,562     $ 761,123  
Series A Warrants outstanding     268,001       268,001  
Value of common stock   $ 1.70     $ 2.29  
Exercise price per share - Series A Warrant   $ 6.61     $ 6.61  
Exercise price per share - Series X Warrant   $ 6.00     $ 6.00  
Expected term (years)     6.1       6.3  
Volatility     59 %     55 %
Risk free rate     2.7 %     2.2 %
Dividend yield     0 %     0 %

 

Fair Value Assumptions

Series A Convertible Preferred Stock
Conversion Option Derivative Liability

  March 15, 2018(1)     December 31 2017  
Calculated aggregate estimated fair value   $ 147,304     $ 212,217  
Series A Convertible Preferred Stock shares     249,667       249,667  
Value of common stock   $ 1.70     $ 2.29  
Common stock exchange factor numerator   $ 6.00     $ 6.00  
Common stock exchange factor denominator   $ 4.97     $ 4.97  
Expected term (years)     6.1       6.3  
Volatility     59 %     55 %
Risk-free interest rate     2.7 %     2.2 %
Dividend yield     0 %     0 %

 

  (1) As the Series A Warrants and shares of Series A Convertible Preferred Stock were each fully exchanged on the March 15, 2018 Exchange Date of the Series A and Series A-1 Exchange Offer, the final estimated fair value of each respective derivative liability was as of the March 15, 2018 Exchange Date of the Series A and Series A-1 Exchange Offer discussed below.

 

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:

 

Series B Convertible Preferred Stock Issued-Upon-Exchange

Series A Convertible Preferred Stock and Conversion Option Derivative Liability Extinguished-Upon-Exchange

Deemed Dividend Charged to Accumulated Deficit

 

Series A

Series A-1

Exchange Offer

March 15, 2018

Exchange Date

 
Fair value - 499,334 shares of Series B Convertible Preferred Stock issued-upon-exchange   $ 873,835  
Less: Fair value - Series A Convertible Preferred Stock conversion option derivative liability extinguished-upon-exchange     147,304  
Less: Carrying value - 249,667 shares of Series A Convertible Preferred Stock extinguished-upon-exchange      
Deemed dividend charged to accumulated deficit   $ 726,531  

 

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:

 

Fair Value Assumptions Series B Convertible Preferred Stock  

Series A

Series A-1

Exchange Offer
March 15, 2018
Exchange Date

 
Aggregate fair value   $ 873,835  
Series B Convertible Preferred Stock shares     499,334  
Required rate of return     27.0 %
Common stock conversion factor numerator   $ 3.00  
Common stock conversion factor denominator   $ 3.00  
Value of common stock   $ 1.70  
Expected term (years)     6.1  
Volatility     59 %
Risk free rate     2.7 %
Dividend yield     0 %

 

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 B Convertible Preferred Stock and Series Z Warrants - Series A and Series A-1 Exchange Offer - March 15, 2018 - continued

 

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:

 

Series Z Warrants Issued Upon Exchange of Series A Warrants - March 15, 2018   Series A Warrants Derivative Liability     Series Z Warrants Additional Paid In Capital Equity     Fair Value Change Series A Warrant Derivative Liability Other Income (Expense)  
Series A Warrants derivative liability - December 31, 2017   $ 761,123     $     $  
Series A Warrants derivative liability change in fair value - March 15, 2018     (246,561 )             246,561  
Sub-Total: Series A Warrants derivative liability - March 15, 2018 Exchange Date     514,562             246,561  
Series Z Warrants issued-upon-exchange of Series A Warrants - estimated fair value     (514,562 )     857,603       (343,041 )
Series Z Warrants issued-upon-exchange of Series A Warrants - March 15, 2018   $     $ 857,603     $ (96,480 )

 

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:

 

Fair Value Assumptions

Series Z Warrants issued upon exchange of Series A Warrants

  March 15, 2018
Exchange Date
 
Aggregate fair value   $ 857,603  
Series Z Warrants issued upon exchange of Series A Warrants     1,340,005  
Exercise price per share - Series Z Warrant   $ 3.00  
Value of common stock   $ 1.70  
Expected term (years)     6.1  
Volatility     59 %
Risk free rate     2.7 %
Dividend yield     0 %

 

Series B Convertible Preferred Stock and Series Z Warrants - Series A and Series A-1 Exchange Offer - March 15, 2018 - continued

 

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:

 

Series B Convertible Preferred Stock Issued-Upon-Exchange

Series A-1 Convertible Preferred Stock Extinguished-Upon-Exchange

Increase - Additional Paid-In Capital

 

Series A

Series A-1
Exchange Offer

March 15, 2018

Exchange Date

 
Fair value - 476,234 shares of Series B Convertible Preferred Stock issued-upon-exchange   $ 833,410  
Less: Carry value - 357,259 shares - Series A-1 Convertible Preferred Stock extinguished-upon-exchange     1,032,650  
Increase - additional paid-in capital   $ 199,241  

 

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:

 

Fair Value Assumptions

Series B Convertible Preferred Stock - issued upon exchange of Series A-1 Convertible

Preferred Stock

 

Series A

Series A-1
Exchange Offer

March 15, 2018

Exchange Date

 
Aggregate fair value   $ 833,410  
Series B Convertible Preferred Stock shares     476,234  
Required rate of return     27.0 %
Common stock conversion factor numerator   $ 3.00  
Common stock conversion factor denominator   $ 3.00  
Value of common stock   $ 1.70  
Expected term (years)     6.1  
Volatility     59 %
Risk free rate     2.7 %
Dividend yield     0 %

 

Series B Convertible Preferred Stock and Series Z Warrants - Series A and Series A-1 Exchange Offer - March 15, 2018 - continued

 

Series A and Series A-1 Exchange Offer - March 15, 2018 (continued)

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:

 

    Series A  
    Series A-1  
    Exchange Offer  
    March 15, 2018  
Series Z Warrants - issued-upon-exchange of Series A-1 Warrants - March 15, 2018     Exchange Date  
Fair value - 1,399,185 Series Z Warrants issued-upon-exchange   $ 895,478  
Less: fair value - 279,837 Series A-1 Warrants extinguished-upon-exchange     545,682  
Modification expense /increase to additional paid in capital     349,796  
Carry value - 279,837 Series A-1 Warrants extinguished-upon-exchange - equity classified     1,879,532  
Carry value - Series Z Warrants issued-upon-exchange of Series A-1 Warrants - equity classified   $ 2,229,328  

 

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:

 

Fair Value Assumptions   March 15, 2018  
Series Z Warrants - issued upon exchange of Series A-1 Warrants   Exchange Date  
Aggregate fair value   $ 895,478  
Series Z Warrants issued upon exchange of Series A-1 Warrants     1,399,185  
Exercise price per share - Series Z Warrant   $ 3.00  
Value of common stock   $ 1.70  
Expected term (years)     6.1  
Volatility     59 %
Risk free rate     2.7 %
Dividend yield     0 %

 

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:

 

Fair Value Assumptions   March 15, 2018  
Series A-1 Warrants - exchanged for Series Z Warrants   Exchange Date  
Aggregate fair value   $ 545,682  
Series A-1 Warrants exchanged for Series Z Warrants     279,837  
Exercise price per share - Series A-1 Warrant   $ 6.67  
Series W Warrants     1,399,185  
Exercise price per share - Series W Warrant     5.00  
Value of common stock   $ 1.70  
Expected term (years)     3.9  
Volatility     67 %
Risk free rate     2.5 %
Dividend yield     0 %

 

Series A Exchange Offer - November 17, 2017

 

On November 17, 2017, the “Series A Exchange Offer” was completed, wherein 1.5 shares of Series A-1 Convertible Preferred Stock were issued-upon-exchange of one share of Series A Convertible Preferred Stock, and one Series A-1 Warrant was issued-upon-exchange of one Series A Warrant, with such exchanges referred to as the “Series A Exchange Offer” and the “November 17, 2017 Exchange Date”. The Series A Exchange Offer was offered to all 28 holders and accepted by 13 holders of the Series A Convertible Preferred Stock and Series A Warrants.

 

On the November 17, 2017 Exchange Date, a total of 232,259 shares of Series A-1 Convertible Preferred Stock were issued-upon-exchange of 154,837 shares of Series A Convertible Preferred Stock and a total of 154,837 Series A-1 Warrants were issued-upon-exchange of 154,837 Series A Warrants.

 

Consequently, as of the November 17, 2017 Exchange Date, 154,837 shares of Series A Convertible Preferred Stock and 154,837 Series A Warrants were fully extinguished-upon-exchange for shares of Series A-1 Convertible Preferred Stock and Series A-1 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 extinguished-upon-exchange as of the November 17, 2017 Exchange Date of the Series A Exchange Offer.

 

Series A Exchange Offer - November 17, 2017

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

 

The November 17, 2017 Exchange Date estimated fair value of the equity-classified 232,259 shares of Series A-1 Convertible Preferred Stock issued-upon-exchange was $843,100, with such fair value recognized as the carrying value of the issued shares of Series A-1 Convertible Preferred Stock. The fair value of the consideration given in the form of the issued shares of Series A-1 Convertible Preferred Stock of $843,100, as compared to the extinguishment of both the carrying value of the Series A Convertible Preferred Stock and the estimated fair value of the corresponding conversion option derivative liability, resulted in $504,007 of incremental estimated fair value recognized as a deemed dividend charged to accumulated deficit in the consolidated balance sheet on the November 17, 2017 Exchange Date, with such deemed dividend included as a component of “net loss attributable to PAVmed Inc. common stockholders”, summarized as follows:

 

    Series A  
Series A-1 Convertible Preferred Stock Issued-Upon-Exchange   Exchange Offer  
Series A Convertible Preferred Stock and Conversion Option Derivative Liability Extinguished-Upon-Exchange Deemed Dividend Charged to Accumulated Deficit  

November 17, 2017

Exchange Date

 
Fair value - 232,259 shares of Series A-1 Convertible Preferred Stock issued-upon-exchange   $ 843,100  
Less: Fair value - Series A Convertible Preferred Stock conversion option derivative liability extinguished-upon-exchange     339,093  
Less: Carry value - 154,837 shares of Series A Convertible Preferred Stock extinguished-upon-exchange      
Deemed dividend charged to accumulated deficit   $ 504,007  

 

The November 17, 2017 Exchange Date estimated fair value of $843,100 of the 232,259 shares of Series A-1 Convertible Preferred Stock issued-upon-exchange of 154,837 shares of 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:

 

       
Fair Value Assumptions - Series A-1 Convertible Preferred Stock issued upon exchange of Series A Convertible Preferred Stock  

November 17, 2017

Exchange Date

 
Aggregate fair value   $ 843,100  
Series A-1 Convertible Preferred Stock shares     232,259  
Required rate of return     27.0 %
Common stock conversion factor numerator   $ 4.00  
Common stock conversion factor denominator   $ 4.00  
Value of common stock   $ 4.33  
Expected term (years)     6.45  
Volatility     53 %
Risk free rate     2.2 %
Dividend yield     0 %

 

Series A Exchange Offer - November 17, 2017 (continued)

Series A-1 Convertible Preferred Stock Issued Upon Exchange of Series A Convertible Preferred Stock (continued)

 

The November 17, 2017 Exchange Date estimated fair value of $339,093 of the extinguished-upon-exchange Series A Convertible Preferred Stock conversion option derivative liability was estimated using a Monte Carlo simulation valuation model, using the Company’s common stock price and certain other Level-3 inputs to take into account the probabilities of certain events occurring over their respective life, using the following assumptions.

 

Fair Value Assumptions -   November 17, 2017  
Series A Convertible Preferred Stock Conversion Option Derivative Liability   Exchange Date  
Aggregate fair value   $ 339,093  
Series A Convertible Preferred Stock shares     154,837  
Value of common stock   $ 4.33  
Common stock exchange factor numerator   $ 6.00  
Common stock exchange factor denominator   $ 4.97  
Expected term (years)     6.45  
Volatility     53 %
Risk-free interest rate     2.2 %
Dividend yield     0 %

 

The Series A Convertible Preferred Stock is classified in temporary equity in the consolidated balance sheet and has a carrying value of $0 resulting from the issuance date initial 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 Exchange Offer - November 17, 2017

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

 

As of the November 17, 2017 Exchange Date, the Series A Warrants derivative liability estimated fair value was adjusted, with the resulting change in such estimated fair value recognized as other income (expense) in the consolidated statement of operations. Further, the estimated fair value of the 154,837 Series A Warrant derivative liability extinguished-upon exchange were further adjusted to the November 17, 2017 Exchange Date estimated fair value of $1,347,082 of the 154,837 Series A-1 Warrants issued-upon-exchange (i.e. the consideration given), with the resulting change in such estimated fair value recognized as other income (expense) in the consolidated statement of operations. Immediately thereafter, such November 17, 2017 adjusted estimated fair value of $1,347,082 of the 154,837 Series A Warrants derivative liability extinguished-upon-exchange was derecognized, along with a corresponding recognition of such amount in additional paid-in capital of the equity-classified 154,837 Series A-1 Warrants issued-upon-exchange.

 

The November 17, 2017 Exchange Date estimated fair value of $1,347,082 of the 154,837 Series A-1 Warrants issued-upon-exchange of the 154,837 Series A Warrants extinguished-upon-exchange was computed using a Black-Scholes valuation model assuming the exchange of one Series A-1 Warrant for five Series W Warrants, using the following assumptions:

 

Fair Value Assumptions   November 17, 2017  
Series A-1 Warrants - issued upon exchange of Series A Warrants   Exchange Date  
Aggregate fair value   $ 1,347,082  
Exercise price per share - Series W Warrant   $ 5.00  
Value of common stock   $ 4.33  
Expected term (years)     4.2  
Volatility     57 %
Risk free rate     2.0 %
Dividend yield     0 %

 

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.