Annual report pursuant to Section 13 and 15(d)

Debt

v3.19.1
Debt
12 Months Ended
Dec. 31, 2018
Debt Disclosure [Abstract]  
Debt

Note 12 — Debt

 

Senior Secured Convertible Note

 

On December 27, 2018, the Company completed a private placement transaction with an institutional investor - with such institutional investor referred to herein as “Investor”, “Lender”, and /or “Holder” - wherein the Company entered into a Securities Purchase Agreement under which on such date, it issued to the Investor a Senior Secured Convertible Note, having a face value principal payable of $7.75 million, a stated interest rate of 7.875% per annum, and a maturity date of December 31, 2020 - 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 Holder does not have voting rights.

 

The Senior Convertible Note proceeds were $7.0 million after payment of $750,000 of lender fees. 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 consolidated statement of operations. Additionally, concurrent with the Senior Convertible Note Closing 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, as further discussed below.

 

Conversion

 

As noted, at the election of the Holder, at any time after the December 27, 2018 issue date, the 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. The conversion price per share is subject-to adjustment for the effect of stock dividends, stock splits, or similar events affecting the common stock of the Company - i.e. “plain vanilla standard anti-dilution provisions”. The conversion price may also be adjusted: if the Company issues or agrees to issue any variable rate securities, in which case the Holder shall be entitled to substitute the variable price for the initial stated conversion price; or if certain Events of Default occur, as defined, in which case the Holder is entitled to convert all or a portion of the Senior Convertible Note at the lower of (i) the actual conversion price then in effect or (ii) 80% of the market price of the Company’s common stock, as defined, but not lower than a floor price of $0.19 per share.

 

Additionally, the Senior Convertible Note provides for a “Voluntary Adjustment” of the conversion price by at the discretion of the Company, with the consent of the Holder, wherein during the term of the 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 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. Under such guidelines, any such Senior Convertible Note Voluntary Adjustment of the conversion price may not be lower than the previous day’s closing price per share of the common stock of the Company, may not apply to more than one million shares of common stock of the Company converted during a Voluntary Adjustment period, and may not extend for a period of time greater than 21 days for each occurrence of a respective Voluntary Adjustment of the conversion price.

 

Subsequently, consistent with the “Voluntary Adjustment of the conversion price” discussed above, the Company initiated a Voluntary Adjustment of the Senior Convertible Note conversion price from the current $1.60 per share to the greater of $1.00 per share or the prior trading day closing price per share, with such Voluntary Adjustment of the conversion price effective for the period March 20, 2019 through April 9, 2019. The Sr Convertible Note holder tendered a conversion notice dated March 20, 2019 for the conversion of a total of $51,545, inclusive of $51,500 face value principal and earned but unpaid interest thereon, at conversion price of $1.03 per share, resulting in the issue of 50,044 shares of common stock of the Company.

 

Bi-Monthly Payments

 

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,summarized as follows:

 

* The bi-monthly “Installment Repayments” reduce Senior Convertible Note face value principal, and are comprised of: a total of 35 bi-monthly payments of $193,750 starting on the bi-monthly due date of June 28, 2019 through the bi-monthly due date of November 30, 2020; and, a payment on each of December 15, 2020 of $484,375, and December 31, 2020 of $432,875, with the December 31, 2020 bi-monthly payment reduced by $51,500 resulting from the conversion on March 20, 2019, as discussed above.
   
* The bi-monthly “Non-Installment Payment” computed as 7.875% per annum periodic rate applied to the unpaid Senior Convertible Note face value principal payable, and commences with the bi-monthly due date of January 15, 2019 through the bi-monthly due date of December 31, 2020. Upon an Event of Default, as define, the annual interest rate is 18.0% until the Event of Default is cured.

 

At the Company’s election, the “Non-Installment Payment” bi-monthly payments from January 15, 2019 to June 15, 2019 may be either paid in cash or paid by the issue of shares of common stock of the Company at a price per share equal to the lower of (i) the conversion price in effect, or (ii) 82.5% of the volume weighted average price of the Company’s common stock, as defined, but no lower than a floor price of $0.19 per share. In this regard, subsequently, the Company has cash paid a total of $159,190 of Non-Installment Payments for the bimonthly due dates from January 15, 2019 to March 29, 2019, for the period December 27, 2018 to March 31, 2019.

 

Commencing with the bi-monthly payment due on June 28, 2019 through the bi-monthly payment due on December 31, 2020, the Company, at its election, may pay each of the bi-monthly Installment Repayment and /or the Non-Installment Payment in cash - referred to as an “Installment Redemption” - or by issue of shares of common stock of the Company - referred to as an “Installment Conversion” - with the number of such shares issued resulting from the dollar amount of the Installment Repayment and /or Non-Installment Payment divided by a conversion price per share computed as the lower of (i) the stated contractual conversion price per share then in effect or (ii) a conversion price per share computed as 82.5% of the volume weighted average price per share of the common stock of the Company, as defined. Notwithstanding, such conversion price per share shall not be less-than a floor price of $0.19 per share.

 

Further, if the Company elects to issue shares of common stock, then the Holder may elect either: (a) to defer all or a portion of such conversion until a subsequent Installment Repayment bi-monthly date, with such (future) bi-monthly date set by the Holder, or (b) to accelerate the conversion of future Installment Repayments to such bi-monthly date of the Company’s Installment Redemption election, subject to certain restrictions.

 

Moreover, if the Company lacks the ability to issue shares of common stock underlying an Installment Conversion, the Holder can require the Company to either (i) redeem the Installment Repayment in cash equal to 115%, or (ii) void its Installment Conversion election and obtain the right to convert the Installment Repayment at the lesser of the conversion price per share then in effect on the such “void date” or the conversion price per share as of the date of the Installment Conversion.

 

Redemption Rights

 

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

 

  * Event of Default - Upon the occurrence of an Event of Default, as defined, the Holder has the option to require the Company to redeem all or a portion of the Senior Convertible Note face value principal then unpaid /outstanding for cash at a price equal to the greater of (a) 115% of the then unpaid /outstanding Senior Convertible Note face value principal, plus earned-but-unpaid Non-Installment Payments, and late charge fees, or (b) the market value of the common stock of the Company underlying the Senior Convertible Note.
     
  * Change of Control - Upon the occurrence of a Change of Control, the Holder has the option to require the Company to redeem all or a portion of the Senior Convertible Note for cash at a price equal to the greater of: (a) 115% of the then unpaid /outstanding Senior Convertible Note face value principal plus earned-but-unpaid Non-Installment Payments, and late charge fees; (b) 115% of the market value of the common stock of the Company underlying the Senior Convertible Note; or, (c) 115% of the aggregate cash consideration payable in respect of the common stock of the Company underlying the Senior Convertible Note.
     
  * Bankruptcy - Upon occurrence of a Bankruptcy Event of Default, as defined, the Company must immediately pay cash to the Holder equal to 115% of the sum of (a) Senior Convertible Note unpaid /outstanding face value principal, (b) earned-but-unpaid Non-Installment Payments, and (c) late charge fees. Notwithstanding, the Holder may waive the right to receive such payment and retain the conversion and payment rights.

 

Covenants and Other Provisions

 

Under the Senior Secured Convertible Debt Agreement, 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, the following provisions and covenants:

 

  * Through June 28, 2019, to the extent any portion of the Senior Convertible Note face value principal remains outstanding, the Company we may not consummate the sale of any equity or equity-linked security at a price per share less than the initial conversion price of the Senior Convertible Note, without the consent of the Holder. After June 28, 2019, if any portion of the Senor Convertible Note remains outstanding, the Company may consummate the sale of any equity or equity-linked security provided the price per share is equal to or greater than the initial conversion price of the Senior Convertible Note and the aggregate consideration is less than or equal to $5.0 million and compliance with the terms and conditions of the Senior Convertible Note as to the acceleration of Installment Repayments after giving effect to such issuance.
     
  * The Company agreed to hold a stockholder meeting by no later than June 28, 2019 to approve stockholder resolutions with respect to each of: approving an increase in the authorized shares of common stock of the Company to 100 million shares from the current 75 million shares; and approving the issuance of shares of common stock of the Company in connection with the Senior Convertible Note for the purposes of compliance with the stockholder approval rules of The Nasdaq Stock Market (“Nasdaq”). The Company will be obligated to continue to seek stockholder approval quarterly until such approval is obtained.
     
  * If at any time the number of shares of common stock of the Company authorized and reserved for issuance under the Senior Convertible Note is not sufficient to meet the minimum required reserve amounts of such shares specified in the Securities Purchase Agreement, then the Company will promptly take all corporate action necessary to authorize and reserve the minimum required reserve amount of such shares, including, without limitation, calling a special meeting to obtain stockholder approval of an increase in the number authorized shares of common stock of the Company.
     
  * During the three year period ended December 27, 2021, the Senior Convertible Note private placement investor may participate up to 50%, in future equity and equity-linked securities offered by the Company. The Company will not effect or enter an agreement to effect any variable rate transaction.

 

Guaranty Agreement

 

The payment of all amounts due and payable under the Senior Convertible Note are guaranteed by PAVmed Inc. and its majority-owned subsidiary Lucid Diagnostics Inc., and the obligations under the 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 Senior Secured Convertible Note private placement discussed above. The Lender may transfer or assign all or any part of the 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.

 

Fair Value Option - Senior Secured 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 measurement and recognition is under 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, with changes in estimated fair value recognized as current period income or expense.

 

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:

 

          Face Value  
          Principal  
Senior Secured Convertible Note - December 31, 2018   Fair Value     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 total fair value adjustment of $903,000 resulting from each of the fair value adjustments as of the December 27, 2018 issue date and as of 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. See Note 11, Financial Instruments Fair Value Measurements, for further detail regarding the estimated fair value with respect to the Senior Convertible Note for the dates noted.

 

Registration Statement - Form S-3 - File No 333-229372

 

In connection with the Senior Convertible Note private placement, the Company filed with the Securities and Exchange Commission (‘SEC”) an effective registration statement on Form S-3 - File No. 333- 229372 - referred to as the “Senior Convertible Note Registration Statement” - registering for resale the maximum number of shares of common stock of the Company issuable upon conversion of the Senior Convertible Note and the shares issued in connection with the repayment of the Senior Secured Note. The Company timely filed with SEC the initial Senior Convertible Note Registration Statement on January 25, 2019 and such registration statement became effective on February 14, 2019, with each such date consistent with the requirements of the registration rights agreement entered into in connection with the Senior Secured Convertible Note private placement discussed above. If the Senior Convertible Note Registration Statement effectiveness is not maintained, then, the Company is required to make payments of 1% of the Senior Convertible Note face value principal payable on the date of such event, and every thirty days thereafter until the effectiveness failure is cured.

 

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 Sr 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 and $5,188,542, as of December 27, 2018 and December 31, 2017, respectively, 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 and December 31, 2017, respectively.

 

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 and $724,684, for the year ended December 31, 2018 and 2017, respectively, was comprised of $786,145 and $377,083, respectively, resulting from the 15% interest expense and $1,606,302 and $347,601, respectively, resulting from the amortization of the debt discount. The Senior Secured Note remaining unamortized debt discount was $1,637,972 as of December 27, 2018 and $3,244,274 as of December 31, 2017.

 

As noted above, on the December 27, 2018 repayment date, the Company recognized as other income (expense), 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 of December 27, 2018, as follows:

 

Senior Secured Note - Debt Extinguishment   December 27, 2018  
Cash payment   $ 5,000,000  
Fair value - 600,000 shares of common stock issued     550,440  
Debt reacquisition price Senior Secured Note   $ 5,550,440  
         
Senior Secured Note - original principal   $ 5,000,000  
Senior Secured Note - additional principal - unpaid interest expense     780,116  
Senior Secured Note - total principal   $ 5,780,116  
Less: Senior Secured Note - remaining unamortized debt discount     (1,637,972 )
Senior Secured Note - debt carrying value, net   $ 4,142,144  
         
Debt extinguishment loss   $ (1,408,296 )

 

The Note and Security Purchase Agreement with Scopia had provided for, to the extent the Lender held at least 50% of the aggregate remaining unpaid principal balance of the Senior Secured Note, the Lender had the ability to nominate one individual to the Company’s board of directors, provided the board of directors had the right to reject any such Lender nominee if it determined in good faith such Lender nominee was not reasonably acceptable. In this regard, on August 3, 2017, the Lender nominee was appointed to the Company’s board of directors, with such individual currently continuing to serve as a member of the board of directors after repayment of the Senior Secured Note.

 

Payment of all amounts due and payable under the Senior Secured Note were guaranteed by the Company, and the obligations under the Senior Secured Note were secured by all of the assets of the Company pursuant to the terms of a Note and Guaranty Security Agreement. The Lender may transfer or assign all or any part of the Senior Secured 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 in the Senior Secured Note. Notwithstanding, the Company obtained from Scopia a Waiver Letter regarding the Company’s compliance with both: the “subsidiary guaranty” provision of the Note and Guaranty Security Agreement with respect to the Company’s majority-owned subsidiary Lucid Diagnostics Inc.; and Case Western Reserve University (“CWRU”) having the right, in its sole discretion under the “EsoCheck™ License Agreement”, 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 PAVmed Inc., if Lucid Diagnostics Inc. does not meet certain milestones listed in the EsoCheck™ License Agreement. See Note 7, Agreements Related to Acquired Intellectual Property Rights, for information regarding the “EsoCheck™ License Agreement”.

 

The Senior Secured Note had an estimated fair value of $4.6 million as of December 31. 2017. The Senior Secured Note July 3, 2017 issue-date fair value of $4.1 million was estimated using a discounted cash flow analysis with a required rate of return of 25.5%, with such rate of return determined through a synthetic credit rating analysis involving a comparison of market yields on publicly-traded secured corporate debentures with characteristics similar to those of the Senior Secured Note. The Series S Warrants issue-date fair value of $10.0 million was estimated using a Black-Scholes valuation model using the following assumptions:

 

    Issue  
Series S Warrants   Date  
Exercise price per share   $ 0.01  
Value of common stock   $ 4.50  
Expected term (years)     15.0  
Volatility     48 %
Risk free rate     2.4 %
Dividend yield     0 %