Annual report pursuant to Section 13 and 15(d)

Stockholders' Equity and Common Stock Purchase Warrants

v3.19.1
Stockholders' Equity and Common Stock Purchase Warrants
12 Months Ended
Dec. 31, 2018
Equity [Abstract]  
Stockholders' Equity and Common Stock Purchase Warrants

Note 14 — Stockholders’ Equity and Common Stock Purchase Warrants

 

Common Stock

 

As of December 31, 2018, the Company is authorized to issue up to 75.0 million shares of common stock, par value of $0.001 per share. There were 27,142,979 and 14,551,234 shares of common stock issued and outstanding, as of December 31, 2018 and 2017, respectively, summarized as follows:

 

Shares of Common Stock Issued and Outstanding      
Issued and outstanding as of December 31, 2017     14,551,234  
Equity Subscription Rights Offering     9,000,000  
Underwritten public offering     2,649,818  
Repayment of debt - Senior Secured Note     600,000  
Series W Warrant exercises     34,345  
Series S Warrant exercises     274,257  
Series B Convertible Preferred Stock conversion     33,325  
Issued and outstanding as of December 31, 2018     27,142,979  
         
Issued and outstanding as of December 31, 2016     13,330,811  
Series W Warrant exercises     12,250  
Series S Warrant exercises     1,186,080  
Series A Convertible Preferred Stock conversion     22,093  
Issued and outstanding as of December 31, 2017     14,551,234  

 

On December 27, 2018, 600,000 shares of common stock of the Company were issued in connection with the repayment of the Senior Secured Note debt. See Note 12, Debt, for further information with respect to the Senior Secured Note repayment.
   
The Company completed an equity subscription rights offering on the June 7, 2018 expiration date of the equity subscription period, with such transaction having a June 12, 2018 close date - referred to herein as the “June 12, 2018 Equity Subscription Rights Offering” - and was completed under a registration statement on Form S-1 - File No. 333-222581 - declared effective by the SEC on May 23, 2018.

 

  The June 12, 2018 Equity Subscription Rights Offering - “ESRO” - involved the Company distributing one non-transferable equity subscription for each of the 17,509,654 issued and outstanding shares of common stock of the Company, as of the record date of May 21, 2018, subject-to the acceptance by the Company of a maximum of 9,000,000 fully-paid equity subscriptions tendered as of the June 7, 2018 expiration date of the equity subscription period. The equity subscription provided for the purchase of a common stock unit at a $1.15 per unit, with each such unit comprised of one share of common stock of the Company and one Series Z Warrant, and immediately separated upon issue into its underlying components.
   
  The June 12, 2018 ESRO resulted in approximately $10.4 million of gross cash proceeds, before approximately $1.0 million of commissions and fees to the dealer-managers, and approximately $0.2 million of offering costs incurred by the Company, upon the issue on June 12, 2018 of 9.0 million common stock units, comprised of one share of common stock of the Company and one Series Z Warrant, as noted above. The June 12, 2018 ESRO proceeds after the dealer-manager commissions and fees and the offering costs incurred by the Company, were allocated based on relative fair value of approximately $7.1 to the shares of common stock par value and additional paid-in capital and approximately $2.1 million to additional paid-in capital with respect to the Series Z Warrants.

 

In January 2018, the Company conducted an underwritten public offering resulting in the issue of a total of 2,649,818 shares of common stock of the Company pursuant to its previously filed and effective shelf registration statement on SEC Form S-3 - File No. 333-220549 - declared effective October 6, 2017, along with a corresponding prospectus supplement dated January 19, 2018. On January 19, 2018, the Company entered into an underwriting agreement with Dawson James Securities, Inc., as sole underwriter, under which the Company agreed to issue to the underwriter at $1.80 per share, 2,415,278 shares of common stock on a firm commitment basis and up to an additional 362,292 shares solely to cover underwriter over-allotments, if any, at the option of the underwriter, exercisable within 45 calendar days from January 19, 2018. On January 23, 2018, 2,415,278 shares of common stock of the Company were issued, and on January 25, 2018, an additional 234,540 shares of common stock of the Company were issued under the underwriter’s over-allotment, resulting in cash proceeds, net of the underwriter’s discount of $4,388,099, before $113,438 of offering costs incurred by the Company.
   
On February 8, 2018, the Company issued at total 34,345 shares of common stock from the exercise of a corresponding number of Series W Warrants, at temporary exercise price of $2.00 per share, resulting in $68,690 of cash proceeds, before offering costs of $50,520. See herein below for a discussion of the “Series W Warrants Offer-to-Exercise”.
   
In March 2018, 274,257 shares of common stock of the Company were issued, resulting from a corresponding number of Series S Warrants exercised for $2,743 of cash proceeds.

 

 

In July 2018, 33,325 shares of common stock of the Company were issued upon the conversion of a corresponding number of shares of Series B Convertible Preferred Stock.
   
In March and September 2017, 400 shares and 11,850 shares of common stock of the Company were issued, resulting from a corresponding number of Series W Warrants exercised for $2,000 and $59,250 of cash proceeds, respectively.
   
In October 2017, 532,000 shares of common stock of the Company were issued, resulting from a corresponding number of Series S Warrants exercised for $5,320 of cash proceeds; in November 2017, 122,080 shares of common stock of the Company were issued, resulting from the cashless exercise of 122,360 Series S Warrants; and, in November 2017, 532,000 shares of common stock of the Company were issued, resulting from a corresponding number of Series S Warrants exercised for $5,320 of cash proceeds.
   
In November and December 2017, 10,021 and 12,072 shares of common stock of the Company were issued upon the conversion of 8,334 and 10,000 shares of Series A Convertible Preferred Stock, respectively.

 

As discussed in Note 12, Debt, 50,044 shares of common stock of the Company were subsequently issued in March 2019, in connection with the Senior Convertible Note Voluntary Adjustment of the conversion price.

 

Common Stock Purchase Warrants

 

The following table summarizes outstanding warrants to purchase common stock of the Company at the dates indicated:

 

    Common Stock Purchase Warrants Issued and Outstanding at
    December 31, 2018     Weighted Average Exercise
Price /Share
    December 31, 2017     Weighted Average Exercise Price     Expiration
Date
Equity classified warrants                                    
Series Z Warrants     16,815,039     $ 1.60           $     April 2024
UPO - Series Z Warrants     53,000     $ 1.60           $     January 2022
Series W Warrants     381,818     $ 5.00       10,567,845     $ 5.00     January 2022
UPO - Series W Warrants         $       53,000     $ 5.00     January 2022
Series S Warrants     1,199,383     $ 0.01       1,473,640     $ 0.01     June 2032
Series A-1 Warrants         $       279,837     $ 6.67     April 2024
                                     
Liability classified warrants                                    
Series A Warrants         $       268,001     $ 6.61     April 2024
                                     
Total     18,449,240     $ 1.57       12,642,323     $ 4.49      

 

Series Z Warrants

 

There were 16,815,039 Series Z Warrants issued and outstanding as of December 31, 2018, including: the initial issue of 2,739,190 Series Z Warrants on the March 15, 2018 Exchange Date of the Series A and Series A-1 Exchange Offer, as such exchange offer is discussed above; the issue of 5,075,849 Series Z Warrants on the April 5, 2018 Exchange Date of the “Series W Warrants Exchange Offer”, as such exchange offer is discussed below; and the issue of 9,000,000 Series Z Warrants on the June 12, 2018 close date of the Equity Subscription Rights Offering, as such offering is discussed above.

 

Upon issue, a Series Z Warrant is exercisable to purchase one share of common stock of the Company at an exercise price of $1.60 per share, effective June 1, 2018. The Series Z Warrant exercise price was initially $3.00 per share through May 31, 2018. On May 15, 2018, the Company’s board of directors approved a reduction to the Series Z Warrant exercise price to $1.60 per share, effective June 1, 2018, upon completion of the period-of-notice to the holders of Series Z Warrants then issued and outstanding. See herein below for further information with respect to the modification expense recognized in connection with the Series Z Warrant exercise price adjustment. The Series Z Warrant $1.60 exercise price is not subject-to further adjustment, unless by action of the PAVmed Inc board of directors, or the effect of stock dividends, stock splits or similar events affecting the common stock of the Company. Under no circumstances will the Company be required to net cash settle the Series Z Warrants, nor to pay any liquidated damages in lieu of delivery of shares of common stock of the Company resulting from a failure to satisfy any obligations under the Series Z Warrant, and, the Series Z Warrants expire after the close of business on April 30, 2024, if not earlier redeemed by the Company, as discussed below.

 

Series Z Warrants - continued

 

Commencing on May 1, 2019, the Company may redeem the outstanding Series Z Warrants, at the Company’s option, in whole or in part, at a price of $0.01 per Series Z Warrant at any time while the Series Z Warrants are exercisable, upon a minimum of 30 days’ prior written notice of redemption, if, and only if, the volume weighted average closing price of the common stock of the Company equals or exceeds $9.00 (subject to adjustment) for any 20 out of 30 consecutive trading days ending three business days before the Company issues its notice of redemption, and provided the average daily trading volume in the common stock of the Company during such 30-day period is at least 20,000 shares per day; and if, and only if, there is a current registration statement in effect with respect to the shares of Common Stock underlying such Series Z Warrants.

 

As noted above, on April 5, 2018, a total of 5,075,849 Series Z Warrants were issued-upon-exchange of 10,151,682 Series W Warrants, referred to as the “Series W Warrants Exchange Offer” and the “April 5, 2018 Exchange Date”. In this regard, pursuant to an offer-to-exchange letter dated February 20, 2018, as included in a Tender Offer Statement on Schedule TO filed with the SEC on February 20, 2018, the Company offered to issue one Series Z Warrant in exchange for two Series W Warrants. Such Series W Warrants Exchange Offer commenced on February 20, 2018 and had April 2, 2018 expiration date. The Series W Warrants Offer-to-Exchange was completed after expiration of the guaranteed delivery period on April 5, 2018.

 

The Series Z Warrant exercise price adjustment to $1.60 per share from $3.00 per share, as discussed above, resulted in the recognition of a modification expense on the June 1, 2018 effective date of the Series Z Warrant exercise price adjustment, under the analogous guidance with respect to stock option modification under FASB ASC Topic 718, Stock-Based Compensation (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 fair value, measured as the difference between the fair value immediately after the modification as compared to the fair value immediately before the modification, to the extent an increase, recognized as a modification expense. In this regard, the Series Z Warrant June 1, 2018 exercise price adjustment resulted in the recognition of a current period modification expense of $1,140,995 included in other income (expense) in the consolidated statement of operations, with a corresponding increase to additional paid-in capital in the consolidated balance sheet. The modification expense incremental fair value was estimated using a Black-Scholes valuation model, using the following assumptions:

 

Fair Value Assumptions - June 1, 2018
Series Z Warrant Exercise Price Adjustment
  Immediately After Modification     Immediately Before Modification  
Calculated aggregate estimated fair value   $ 3,477,692     $ 2,336,697  
Series Z Warrants - issued and outstanding - June 1, 2018     7,815,039       7,815,039  
Value of common stock per share   $ 1.00     $ 1.00  
Exercise price per share - Series Z Warrant   $ 1.60     $ 3.00  
Expected term - years     5.9       5.9  
Volatility     58 %     58 %
Risk free interest rate     2.8 %     2.8 %
Dividend yield     0 %     0 %

 

Additionally, the Series Z Warrants issued in both the Series A and Series A-1 Exchange Offer on March 15, 2018 and the Series W Warrants Exchange Offer on April 5, 2018, as each exchange offer is discussed above, were issued under the (original) “Series Z Warrant Agreement”. The Company’s board of directors approved Amendment No. 1 to the original Series Z Warrant Agreement, resulting in the “Amended and Restated Series Z Warrant Agreement”, dated June 8, 2018, referred to as the Amended Series Z Warrant Agreement. The principal provisions of the Series Z Warrant Agreement Amendment No. 1, include among other items: to provide for a “late delivery fee” for shares issued outside of the “standard delivery period”, including delivery of shares upon Series Z Warrant exercise for open market or other purchase transactions - i.e. “buy-in fee”, with each such payment, if any, in addition to and not in lieu of delivery of shares, and, to provide for a standard provision (“plain vanilla”) in the event the Company engages in a “Fundamental Transaction”, as defined, wherein the Series Z Warrant may participate pari passu with common stockholders in the consideration paid by an acquiror for the Company’s shares, with such payment, if any, made by the acquiring entity and not paid by the Company as issuer. The Series Z Warrant Agreement Amendment No. 1, was evaluated under the analogous guidance with respect to stock option modification under FASB ASC 718, as discussed above, but did not result in the recognition of a modification expense as there was no incremental increase in the estimated fair value as described above.

 

Series W Warrants

 

There were 381,818 and 10,567,845 Series W Warrants issued and outstanding as of December 31, 2018 and 2017, respectively. The Series W Warrants have an exercise price of $5.00 per share, with such exercise price not subject to further adjustment, except in the event of stock dividends, stock splits or similar events affecting the common stock of the Company, and became exercisable on October 28, 2016 and expire on January 29, 2022, or earlier upon redemption by the Company, as discussed below. Under no circumstances will the Company be required to net cash settle the Series W Warrants, nor to pay any liquidated damages resulting from a failure to satisfy any obligations under the Series W Warrant.

 

Previously, a total of 1,060,000 Series W Warrants were issued on the April 28, 2016 closing date of the Company’s IPO, and on the same April 28, 2016 IPO closing date, there were 9,560,295 remaining unexercised warrants previously issued in private placements before the IPO, with such warrants automatically converted into identical Series W Warrants issued in the IPO, and are therefore aggregated with the Series W Warrants issued in the IPO, and together are collectively referred to as “Series W Warrants”.

 

The Series W Warrant Exchange Offer, as discussed above, resulted in the recognition of a modification expense on the April 5, 2018 Exchange Date, under the analogous guidance with respect to stock option modification under FASB ASC 718, as described above with respect to the “Series Z Warrant June 1, 2018 exercise price adjustment”. In this regard, the Series W Warrants exchanged-upon-issue of the Series Z Warrants resulted in the recognition of a current period modification expense of $766,456 included in other income (expense) in the consolidated statement of operations, with a corresponding increase to additional paid-in capital, resulting from the incremental estimated fair value of the consideration given of $3,304,377 of the 5,075,849 Series Z Warrants issued-upon-exchange as compared of the $2,537,921 estimated fair value of the 10,151,682 Series W Warrants extinguished-upon-exchange. The April 5, 2018 Exchange Date estimated fair values of each of the Series Z Warrants and Series W Warrants noted above, were each computed using the Black-Scholes option pricing model, using the following assumptions:

 

Fair Value Assumptions
April 5, 2018 Exchange Date
  Series Z Warrants     Series W Warrants  
Calculated aggregate estimated fair value   $ 3,304,377     $ 2,537,921  
Series Z Warrants issued-upon-exchange     5,075,849        
Series W Warrants extinguished-upon-exchange           10,151,682  
Value of common stock   $ 1.66     $ 1.66  
Exercise price per share   $ 3.00     $ 5.00  
Expected term (years)     2.7       3.8  
Volatility     55 %     55 %
Risk free rate     2.7 %     2.5 %
Dividend yield     0 %     0 %

 

On January 11, 2018, the Company filed with the SEC a Tender Offer Statement on Schedule TO offering Series W Warrants holders a temporary exercise price of $2.00 per share, with such offer having an expiry of February 8, 2018, referred to as the “Series W Warrants Offer-to-Exercise”. As of the February 8, 2018 expiry date, a total of 34,345 Series W Warrants were exercised at the temporary exercise of $2.00 per share, resulting in $68,690 of cash proceeds, before offering costs of $50,520.

 

In March 2017 and September 2017, 400 and 11,850 Series W Warrants were exercised for cash proceeds of $2,000 and $59,250, respectively, resulting in the issuances of a corresponding number of shares of common stock of the Company.

 

Commencing April 28, 2017, the Company may redeem the outstanding Series W Warrants (other than those outstanding prior to the IPO held by the Company’s management, founders, and members thereof, but including the warrants held by the initial investors), at the Company’s option, in whole or in part, at a price of $0.01 per warrant: at any time while the warrants are exercisable; upon a minimum of 30 days’ prior written notice of redemption; if, and only if, the volume weighted average price of the Company’s common stock equals or exceeds $10.00 (subject-to adjustment) for any 20 consecutive trading days ending three business days before the Company issues its notice of redemption, and provided the average daily trading volume in the stock is at least 20,000 shares per day; and, if, and only if, there is a current registration statement in effect with respect to the shares of common stock of the Company underlying such warrants. The right to exercise will be forfeited unless the Series W Warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of an Series W Warrant will have no further rights except to receive the redemption price for such holder’s Series W Warrant upon its surrender.

 

Series S Warrants

 

There were 1,199,383 and 1,473,640 Series S Warrants issued and outstanding as of December 31, 2018 and 2017, respectively. Previously, under the Note and Security Purchase Agreement with Scopia, the Company issued a total of 2,660,000 Series S Warrants to Scopia and its designees, which were immediately exercisable upon issuance and each may be exercised for one share of common stock of the Company at an exercise price of $0.01 per share, with such exercise price not subject to further adjustment, except for the effect of stock dividends, stock splits or similar events affecting the common stock of the Company. The Series S Warrants may be exercised for cash or on a cashless basis. Any Series S Warrants outstanding on the June 30, 2032 expiration date will be automatically exercised on a cashless basis.

 

In March 2018, a total of 274,257 Series S Warrants exercised for $2,743 of cash proceeds, resulting in the issue of a corresponding number of a shares of common stock of the Company. In each of October 2017 and November 2017, 532,000 (or a total of 1,064,000) Series S Warrants were exercised for total cash proceeds of $10,640, resulting in the issuance of a corresponding number of shares of common stock of the Company, and in November 2017, a total of 122,360 Series S Warrants were exercised on a cashless basis, resulting in the issuance of a total of 122,080 shares of common stock of the Company.

 

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. Under no circumstances will the Company be required to net cash settle the Series S Warrants, nor to pay any liquidated damages resulting from a failure to satisfy any obligations under the Series S Warrant. The Series-S Warrants are classified as equity in the consolidated balance sheet. The Senior Secured Note net cash proceeds were allocated to the Senior Secured Note and the Series S Warrants based on their respective relative fair value, resulting in an allocation of $1,408,125 to the Senior Secured Note and $3,434,452 to the Series S-Warrants. See Note 12, Debt, for further information regarding the Note and Security Purchase Agreement with Scopia, including the non-recurring issue-date fair values of the Senior Secured Note and Series S Warrants.

 

Series A-1 Warrants

 

As noted above, there were 0 and 279,837 Series A-1 Warrants issued and outstanding as of December 31, 2018 and December 31, 2017, respectively.

 

Previously, the initial issue of 125,000 Series A-1 Warrants occurred in connection with the close of the “Series A-1 Preferred Stock Units private placement” on August 4, 2018, as discussed above. The November 17, 2017 Series A Exchange Offer resulted in 154,837 Series A-1 Warrants issued-upon-exchange of 154,837 Series A Warrants. As of December 31, 2017, there were 279,837 Series A-1 Warrants issued and outstanding. The Series A and Series A-1 Exchange Offer resulted in the 279,837 Series A-1 Warrants being exchanged-upon-issue of 1,399,185 Series Z Warrants. Accordingly, as of the March 15, 2018 Exchange Date of the Series A and Series A-1 Exchange Offer, there we no Series A-1 Warrants issued and outstanding. See above for further information regarding the Series Z Warrant. See Note 11, Financial Instruments Fair Value Measurements, for further detail regarding the March 15, 2018 Series A and Series A-1 Exchange Offer and the November 17, 2017 Series A Exchange Offer.

 

The Series A-1 Warrants were immediately exercisable upon issuance and would have expired after the close of business on April 30, 2024, and each were exercisable for one share of common stock of the Company at an exercise price of $6.67 per share, with such exercise price not subject to further adjustment, except for the effect of stock dividends, stock splits or similar events affecting the common stock of the Company. Additionally, through April 30, 2024, each Series A-1 Warrant, at the option of the holder, may be exchanged into either five Series W Warrants of four Series X-1 Warrants. The Series W Warrants or Series X-1 Warrants issued upon the exchange of a Series A-1 Warrant are discussed below. No Series A-1 Warrants had been exchanged for Series W Warrants nor Series X-1 Warrants as of the Series A and Series A-1 Exchange Offer March 15, 2018 Exchange Date and December 31, 2017.

 

The Series A-1 Warrants were not subject to redemption, and under no circumstances was the Company be required to net cash settle the Series A-1 Warrants. The Series A-1 Warrants have been accounted for as equity-classified warrants, with an issue-date allocated fair value of $310,450, as discussed above. During the time the Series A-1 Warrants are outstanding, the holders were entitled to participate in dividends or other distributions on a pro rata basis based upon the equivalent number of common shares that would have been outstanding had the warrants been fully exercised.

 

As discussed in Note 13, Preferred Stock, the Series A-1 Warrant Agreement Amendment No.1 provided for a Series A-1 Warrant to be exchanged for four Series X-1 Warrants, or additionally, exchanged for five Series W Warrants. The Series X-1 Warrants replaced the previous election to exchange one Series A-1 Warrant for four Series X Warrants. Notwithstanding, the Series X-1 Warrants are substantively equivalent to the Series X Warrants with respect to material contractual terms and conditions, including the same $6.00 per share exercise price, and dates of exercisability and expiry.

 

The Series A-1 Warrant Agreement Amendment No.1, as discussed in Note 13, Preferred Stock, resulted in a current period recognition of a modification expense on the Amendment No. 1 October 17, 2017 effective date, under the analogous guidance with respect to stock option modification under FASB ASC 718, as described above with respect to the “Series Z Warrant June 1, 2018 exercise price adjustment”. In this regard, the Series A-1 Warrant Agreement Amendment No.1 resulted in the recognition of a modification expense of $222,000 included in other income (expense) in the consolidated statement of operations, with a corresponding increase to additional paid-in capital in the consolidated balance sheet. The modification expense incremental estimated fair value was estimated using a Black-Scholes valuation model, assuming the exchange of one Series A-1 Warrant for five Series W Warrants after the Series A-1 Warrant modification, as compared to an exchange of one Series A-1 Warrant for four Series X Warrants before such modification, using the following assumptions:

 

    Series A-1 Amendment No. 1  
    Series A-1 Warrants Modification  
    Fair Value - October 18, 2017  
    Immediately     Immediately  
Fair Value Assumptions - October 18, 2017   After     Before  
Series A-1 Warrant Agreement - Amendment No. 1   Modification     Modification  
Calculated aggregate estimated fair value   $ 1,531,000     $ 1,309,000  
Series A-1 Warrants - issued and outstanding - October 18, 2017     125,000       125,000  
Value of common stock per share   $ 5.40     $ 5.40  
Exercise price per share - Series W Warrant   $ 5.00        
Exercise price per share - Series X Warrant   $     $ 6.00  
Expected term - years     4.3     $ 6.5  
Volatility     55 %     52 %
Risk free interest rate     1.9 %     2.1 %
Dividend yield     0 %     0 %

 

Series A Warrants

 

As noted above, as of September 30, 2018 and December 31, 2017, there were 0 and 268,001 Series A Warrants issued and outstanding, respectively.

 

Previously, a total of 422,838 Series A Warrants were issued in the Series A Preferred Stock private placement in the three months ended March 31, 2017, as discussed herein above. The November 17, 2017 Series A Exchange Offer resulted in 154,837 Series A Warrants exchanged-upon-issue of 154,837 Series A-1 Warrants. As of December 31, 2017, there were 268,001 Series A Warrants issued and outstanding. The Series A and Series A-1 Exchange Offer resulted in 268,001 Series A Warrants being exchanged-upon-issue of 1,340,005 Series Z Warrants. Accordingly, as of the March 15, 2018 Exchange Date of the Series A and Series A-1 Exchange Offer, there were no Series A Warrants issued and outstanding. See above for further information regarding the Series Z Warrant. See Note 11, Financial Instruments Fair Value Measurements, for further detail regarding the March 15, 2018 Series A and Series A-1 Exchange Offer and the November 17, 2017 Series A Exchange Offer.

 

The Series A Warrants became exercisable on May 21, 2017 upon stockholder approval of the Series A Preferred Stock Units private placement, with such approval obtained in accordance with Nasdaq Stock Market Rule 5635(d) and expire after the close of business on April 30, 2024. The Series A Warrants are not subject to redemption.

 

The Series A Warrants were exercisable for one share of common stock of the Company at an exercise price of $6.61 per share, subject-to adjustment. In this regard, the Series A Warrant exercise price, initially $8.00 per share, was subject to further reduction by a prescribed formula on a weighted average basis in the event the Company issues common stock, options, or convertible securities at a price lower than the exercise price of Series A Warrants immediately prior to such securities issuance.

 

Additionally, through April 30, 2024, each Series A Warrant, at the election of the holder, could be exchanged for four Series X Warrants, with such warrants exercisable for one share of common stock of the Company at $6.00 per share, with such exercise price not subject to further adjustment, except in the event of stock dividends, stock splits or similar events affecting the common stock of the Company. The Series X Warrants were exercisable commencing on the first trading day following October 31, 2018 and would have expired April 30, 2024.

 

The Series A Warrants are accounted for as a derivative liability under FASB ASC 815, as, along with other provisions, the conversion price is subject to potential adjustment resulting from future financing transactions, under certain conditions. The Series A Warrant was classified as a current liability in the consolidated balance sheet, initially measured at its issue-date fair value, with such fair value subsequently remeasured at each reporting period, with the resulting fair value adjustment recognized as other income or expense in the consolidated statement of operations. See Note 11, Financial Instruments Fair Value Measurements, and Note 13, Preferred Stock, for further detail regarding the Series A Warrants derivative liability.

 

Unit Purchase Options

 

Previously, on the April 28, 2016 closing date of the Company’s IPO, a total of 53,000 unit purchase options were issued to the IPO selling agents, with each such unit purchase option issued on April 28, 2016 referred to as an “UPO-W”. The UPO-W, with an exercise price of $5.50 per unit, could have been exercised to purchase the same unit issued in the Company’s IPO, with such unit comprised of one share of common stock of the Company and one Series W Warrant to purchase one share of common stock of the Company at an exercise price of $5.00 per share, along with the other provisions of the Series W Warrant as discussed above. The UPO-W had a January 29, 2021 expiration date. The issue of the UPO-W to the IPO selling agents was recognized as an offering cost of the Company’s IPO, with an estimated fair value of $105,100, determined using a Black-Scholes option pricing model with the following assumptions: fair value of the underlying unit of $5.00, expected volatility of 50%, risk free rate of 1.28%, remaining contractual term of 4.6 years, and a dividend yield of 0%.

 

On August 22, 2018, the “UPO Exchange Offer” was completed, wherein, 53,000 “UPO-Z” were issued-upon-exchange of all the previously issued and outstanding 53,000 UPO-W. The UPO-Z, with an exercise price of $5.50 per unit, may be exercised to purchase a unit comprised of one share of common stock of the Company and one Series Z Warrant to purchase one share of common stock of the Company at an exercise price of $1.60 per share, along with the other provisions of the Series Z Warrant as discussed above. The UPO-Z has a January 29, 2021 expiration date.

 

The UPO Exchange Offer resulted in the recognition of a modification expense under the analogous guidance with respect to stock option modification under FASB ASC 718, as described above with respect to the “June 1, 2018 Series Z Warrant exercise price adjustment”. In this regard, the UPO-Z issued-upon-exchange of the UPO-W resulted in the recognition of a modification expense of $2,120 included in other income (expense) in the consolidated statement of operations, with a corresponding increase to additional paid-in capital in the consolidated balance sheet, resulting from the incremental estimated fair value of the consideration given of $3,180 of the 53,000 UPO-Z issued-upon-exchange as compared to the estimated fair value of $1,060 of the 53,000 UPO-W extinguished-upon-exchange. The August 22, 2018 estimated fair values of each of the UPO-Z and UPO-W were each computed using the Black-Scholes option pricing model, using the following assumptions:

 

Fair Value Assumptions

August 22, 2018 UPO Exchange Offer Exchange Date

  UPO-Z     UPO-W  
Calculated aggregate estimated fair value   $ 3,180     $ 1,060  
UPO-Z issued-upon-exchange /UPO-W extinguished-upon-exchange     53,000       53,000  
Value of common stock   $ 1.38     $ 1.38  
Value of Series Z Warrant /Series W Warrants   $ 0.53     $ 0.05  
Exercise price per unit - UPO-Z /UPO-W   $ 5.50     $ 5.50  
Expected term (years)     2.4       2.4  
Volatility     42 %     42 %
Risk free rate     2.6 %     2.6 %
Dividend yield     0 %     0 %

 

Registration Statement - Form S-3 - File No. 333-227718

 

The Company has filed with the SEC an effective registration statement on Form S-3 - File No. 333-227718 - declared effective on October 17, 2018, which registers for resale (i) the 257,776 shares of common stock of the Company underlying the Series W Warrants privately issued prior to the Company’s IPO, (ii) the 4,638,818 shares of common stock of the Company underlying the Series Z Warrants privately issued prior to the Company’s IPO, (iii) the 53,000 shares of common stock of the Company underlying the UPOs issued to the selling agent and its designees in connection with the Company’s IPO, the 53,000 Series Z Warrants underlying the UPOs and the 53,000 shares of common stock of the Company issuable upon exercise of the Series Z Warrants underlying the UPOs, (iv) the 2,739,190 shares of common stock of the Company underlying the Series Z Warrants privately issued-upon-exchange of each of the Series A Warrants and Series A-1 Warrants, and (v) the 2,659,720 shares of common stock of the Company issued or issuable upon exercise of the Series S Warrants. The registration statement also registers the initial issuance by the Company of 124,042 shares of common stock of the Company upon exercise of publicly held Series W Warrants and 437,031 shares of common stock of the Company upon exercise of publicly held Series Z Warrants, as well as all of the shares of common stock of the Company underlying the Series W Warrants and Series Z Warrants listed in clauses (i) to (iv) of the preceding sentence to the extent such Series W Warrants and Series Z Warrants are publicly transferred prior to their exercise.

 

Noncontrolling Interest

 

The noncontrolling interest (“NCI”) included as a component of consolidated total stockholders’ equity for the periods indicated is as follows:

 

   

Year Ended

December 31, 2018

 
NCI - equity (deficit) - beginning of period   $  
Investment in majority-owned subsidiary     1,812  
Payment of share Subscription Receivable      
Net loss attributable to NCI     (204,072 )
Increase in additional paid-in capital of Lucid Diagnostics Inc. - stock-based compensation - Lucid Diagnostics Inc 2018 Equity Plan     40,748  
NCI - equity (deficit) - end of period   $ (161,512 )

 

The noncontrolling interest presented above is with respect to Lucid Diagnostics Inc., a majority-owned subsidiary of PAVmed Inc. Lucid Diagnostics Inc. was incorporated in the State of Delaware on May 8, 2018, and on May 12, 2018, under separate share Subscription Agreements between Lucid Diagnostics Inc. and each of the respective common stock purchasers, Lucid Diagnostics Inc. issued a total of 10.0 million shares of its common stock for a purchase price of $0.001 per share, including: the issue of 8,187,499 shares to PAVmed Inc.; the issue of 943,464 shares to Case Western Reserve University (“CWRU”); and, the issue of 289,679 shares to each of the three individual physician inventors of the “EsoCheck™ Technology”. As of December 31, 2018, Lucid Diagnostics Inc. had received payment-in-full of each of the respective purchasers’ share Subscription Agreement. See Note 7, Agreements Related to Acquired Intellectual Property Rights, for a discussion of the “EsoCheck™ Technology” and the corresponding “EsoCheck™ License Agreement” between Lucid Diagnostics Inc. and CWRU.

 

As of December 31, 2018, there were 10.0 million shares of common stock of Lucid Diagnostics Inc. issued and outstanding, of which PAVmed Inc. holds a 81.875% majority-interest ownership and has a controlling financial interest, with the remaining 18.125% minority-interest ownership held by CWRU and each of the three physician inventors of the “EsoCheck™ Technology”. Accordingly, Lucid Diagnostics Inc. is a fully-consolidated majority-owned subsidiary of the Company, for which a provision of a noncontrolling interest (NCI) is included as a separate component of consolidated stockholders’ equity in the consolidated balance sheet as of December 31, 2018, along with the recognition of a net loss attributable to the NCI in the consolidated statement of operations in the year ended December 31, 2018. As Lucid Diagnostics Inc. was incorporated on May 8, 2018, there is no such NCI in the corresponding prior year period.

 

The stock-based compensation expense recognized in the consolidated financial statements includes: 12,485 during the year ended December 31, 2018 recognized by Lucid Diagnostics Inc. with respect to stock options granted under the PAVmed Inc. 2014 Equity Plan to non-employees providing services to Lucid Diagnostics Inc., and $40,748 during the year ended December 31, 2018 recognized by Lucid Diagnostics Inc. with respect to stock options granted under the Lucid Diagnostics Inc. 2018 Equity Plan to non-employees providing services to Lucid Diagnostics Inc. - with each such stock based compensation expense classified in research and development expense. There was no such Lucid Diagnostics Inc. stock-based compensation expense recognized for the prior year period. See Note 10, Stock-Based Compensation, for further information with respect to the PAVmed Inc. 2014 Equity Plan, the Lucid Diagnostics Inc. 2018 Equity Plan, and the corresponding consolidated stock-based compensation expense recognized by the Company.