UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______to _______
Commission File Number: 001-37685
PAVMED INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
One Grand Central Place
60 E. 42nd Street
Suite 4600
New York, NY 10165
(Address of Principal Executive Offices)
47-1214177
(IRS Employer
Identification No.)
10165
(Zip Code)
(212) 949-4319
(Registrant’s Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each Class
Name of each Exchange on which Registered
Common Stock, $0.001 par value per share
The NASDAQ Stock Market LLC
Series W Warrants, each to purchase one share of Common Stock
The NASDAQ Stock Market LLC
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Non-accelerated filer [ ] ()
Do not check if a smaller reporting company
Accelerated filer
Smaller reporting company
Emerging Growth Company (EGC)
[ ]
[X]
[X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s voting stock held by
non-affiliates was approximately $21.3 million, based on the last reported sales price per share of the registrant’s common stock on such date.
As of March 12, 2018 there were 17,235,397 shares of the registrant’s Common Stock, par value $0.001 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2018 annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K where indicated.
Such definitive proxy statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the year ended December 31, 2017.
TABLE OF CONTENTS
PART I
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Property
Legal Proceedings
Selected Financial Data
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART II
Item 10. Directors, Executive Officers, and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accountant Fees and Services
PART III
Item 15. Exhibits and Financial Statement Schedules
PART IV
i
1
24
42
42
42
42
43
43
44
74
74
74
74
75
76
76
76
76
76
77
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K of PAVmed Inc. (“we”, “us”, “our” or “PAVmed” or “the Company”) contains forward-looking statements that involve substantial risks
and uncertainties. All statements, other than statements of historical facts, contained in this Annual Report on Form 10-K, including statements regarding our future results of
operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “may,” “will,”
“should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the
negative of these terms or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying
words. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Item 1A of Part I of this Form 10-K under the heading
“Risk Factors,” which are incorporated herein by reference.
Important factors that may affect our actual results include:
●
our limited operating history;
●
our financial performance, including our ability to generate revenue;
●
ability of our products to achieve market acceptance;
●
success in retaining or recruiting, or changes required in, our officers, key employees or directors;
●
potential ability to obtain additional financing when and if needed;
●
ability to protect our intellectual property;
●
ability to complete strategic acquisitions;
●
ability to manage growth and integrate acquired operations;
●
potential liquidity and trading of our securities;
●
regulatory or operational risks;
●
our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; and
●
the time during which we will be an Emerging Growth Company (“EGC”) under the Jumpstart Our Business Startups Act of 2012, or JOBS Act.
We may not actually achieve the plans, intentions, and /or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-
looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have
included important factors in the cautionary statements included in this Annual Report on Form 10-K, particularly in the “Risk Factors” section, that could cause actual results
or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future financings,
acquisitions, mergers, dispositions, joint ventures or investments we may make.
You should read this Annual Report on Form 10-K and the documents we have filed as exhibits to this Annual Report on Form 10-K completely and with the understanding
our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by applicable law.
ii
Item 1. Business
Background and Overview
PART I
PAVmed is a highly-differentiated multi-product medical device company organized to advance a broad pipeline of innovative medical technologies we believe address
unmet clinical needs and possess attractive market opportunities to commercialization. Our goal is to enhance and accelerate value creation by employing a business model
focused on capital efficiency and speed to market. Since our inception on June 26, 2014, our activities have focused on advancing the lead products in our pipeline towards
regulatory approval and commercialization, while protecting our intellectual property, and strengthening our corporate infrastructure and management team. As resources
permit, we will continue to explore internal and external innovations that fulfill our project selection criteria without limiting ourselves to any target specialty or condition.
Since our inception in June 2014, we have financed our operations principally through issuances of common stock, preferred stock, warrants, and debt. Prior to our April
2016 IPO, we raised approximately $2.1 million of net cash proceeds from private offerings of our common stock and warrants. Our April 28, 2016 IPO resulted in
approximately $4.2 million of net cash proceeds. During 2017, we have raised a total of approximately $7.5 million of net cash proceeds from: a Note and Security Purchase
Agreement with Scopia Holdings LLC, (“Scopia” or the “Lender”) including the issuance of a $5.0 million Senior Secured Note and Series S Warrants; the Series A-1 Preferred
Stock Units private placement; and the Series A Preferred Stock Units private placement, each as summarized in “—Recent Events” below. In January 2018, the Company
raised $4,3 million of net cash proceeds in an underwritten public offering of shares of common stock of the Company, pursuant to its previously filed effective shelf
registration statement on SEC Form S-3 (File No. 333-220549), each as summarized in “—Recent Events” below.
The following is a brief overview of the products currently in our pipeline, including our lead products of CarpX™, PortIO™, and DisappEAR™. These products are all in
various phases of development and have not yet received regulatory approval. Among other things:
● We have filed final nonprovisional patent applications for PortIO™ and CarpX™, and entered into a licensing agreement with a group of academic centers securing the
worldwide rights in perpetuity to a family of patents and patent applications underlying our DisappEAR™ product.
● We have advanced, in partnership with our design and contract manufacturing partners, our CarpX™ product from concept to working prototypes, completed successful
benchtop and cadaver testing confirming the device consistently cuts the transverse carpal ligament, as well as commercial design and development, and performed pre-
submission verification and validation testing. On November 27, 2017 we filed a 510(k) premarket notification submission with the Federal Food and Drug Administration
(“FDA”) for CarpX™ using a commercially available carpel tunnel release device as a predicate. We have received promising initial feedback from the FDA and are
working to provide additional non-clinical support for our application. In addition, we are preparing to submit for CE Mark clearance in Europe and a first-in-man clinical
series outside of the United States. We are exploring commercialization strategies in the United States and commercialization partnerships worldwide.
● We have advanced, in partnership with our design and contract manufacturing partners, our PortIO™ product from concept to working prototypes, benchtop, animal, and
cadaver testing, commercial design and development, verification and validation testing, and an initial submission to the FDA for 510(k) market clearance for use in
patients requiring 24-hour emergency type vascular access. After further discussion with the FDA, we have decided to pursue a broader clearance for use in patients with a
need for vascular access up to seven days under section 513(f)2 of the Federal Food, Drug and Cosmetic Act, also referred to as de novo classification. We have filed a de
novo pre-submission package with the FDA, which was followed by an in-person meeting on January 9, 2018 to discuss the risk assessment and proposed mitigation for the
de novo application. Based on FDA recommendations, we will initiate a seven-day animal study, having successfully completed a pilot animal study which showed
excellent function of the device over the seven-day implant period and on explant. In anticipation of having to follow-up the animal study with a human clinical safe trial,
we have accelerated our strategic partnership efforts to include the pre-clearance phase.
● We have advanced, in partnership with our design and contract manufacturing partners and our academic partners at Tufts University and Harvard Medical School, our
DisappEAR™. Our efforts have focused on sourcing commercially ready aqueous silk and optimizing manufacturing processes consistent with the necessary cost of good
for the commercial product.
● Although we have focused the majority of our resources on our lead products, we have additional products in our pipeline which are currently in different stages of
development. We have completed initial design work on the first product in the NextCath™ product line, completed head-to-head testing of retention forces, comparing our
working prototype to several competing products, which has validated our approach and advanced the commercial design and development process focusing on optimizing
the self-anchoring helical portion as well as cost of materials and manufacturing processes.
1
Background and Overview (continued)
● We have advanced the design and development of the NextFlo™ device, including a redesign which dramatically simplifies the product, lowers the projected cost of goods
and expands its application to routine inpatient infusion sets. We have completed benchtop testing of a working prototype demonstrating constant flows across the range of
pressures encountered in clinical situations. We will be able to quickly move NextCath™ and NextFlo™ into the commercial and regulatory pathway when resources
become available.
● We are evaluating which initial applications for our Caldus™ disposable tissue ablation technology to pursue from a clinical and commercial point-of-view, and will
reinitiate development activity on this product once resources are available.
● We remain actively engaged with our full-service regulatory consulting partner who is working closely with our contract design, engineering and manufacturing partners as
our products advance towards regulatory submission, clearance, and commercialization.
● We are evaluating a number of product opportunities and intellectual property covering a spectrum of clinical conditions, which have been presented to us by clinician
innovators and academic medical centers, for consideration of a partnership to develop and commercialize these products; we are also exploring opportunities to partner
with larger medical device companies to commercialize our lead products as they move towards regulatory clearance and commercialization; we are evaluating strategic
merger and acquisition opportunities which synergize with our growth strategy.
● We are exploring other opportunities to grow our business and enhance shareholder value through the acquisition of pre-commercial or commercial stage products and /or
companies with potential strategic corporate and commercial synergies.
We have proprietary rights to the trademarks used herein, including, among others, PAVmed™, PortIO™, Caldus™, CarpX™, DisappEAR™, NextCath™, NextFlo™, and
“Innovating at the Speed of Life”™, among others. Solely as a matter of convenience, trademarks and trade names referred to herein may or may not be accompanied with the
requisite marks of “™” and /or “®”, however, the absence of such marks is not intended to indicate, in any way, we will not assert, to the fullest extent possible under
applicable law, our rights or the rights to such trademarks and trade names.
Corporate History
The Company was incorporated on June 26, 2014 in the State of Delaware. On April 19, 2015, our name was changed to PAVmed Inc. from PAXmed Inc., which was the
Company’s initial name.
Our business address is One Grand Central Place, 60 East 42nd Street, Suite 4600, New York, New York 10165, and our telephone number is (212) 949-4319. Our corporate
website is www.PAVmed.com.
Our founders are three accomplished medical device entrepreneurs, including: Dr. Lishan Aklog M.D., Michael J. Glennon, and Dr. Brian J. deGuzman, M.D. Together, they
founded: in 2007, Pavilion Holdings Group (“PHG”), a medical device holding company, and in 2009, Pavilion Medical Innovations (“PMI”), a venture-backed medical device
incubator. Between 2008 and 2013, PHG and PMI founded the following four distinct, single-product medical device companies:
● Vortex Medical Inc. was founded in 2008 with $3.5 million in capital. It created the AngioVac system, designed to remove large volume clots and other undesirable
intravascular material. It received its initial U.S. Food and Drug Administration (“FDA”) clearance in 16 months after the company was founded. AngioVac was first
commercialized at Brigham and Women’s Hospital in December 2009. Vortex Medical marketed the AngioVac system across the United States until it was acquired in
October 2012 by AngioDynamics Inc. (NASDAQ: ANGO) for $55.0 million in guaranteed consideration. At the time of its acquisition the company was cash-flow positive,
carried no debt and its sole funding source was $3.5 million of capital raised.
●
Saphena Medical Inc. was founded in 2013 with $3.0 million in capital. It created the VenaPax next-generation endoscopic vessel harvest device for use during coronary
artery bypass surgery, which received FDA clearance in 18 months after the company was founded. VenaPax was first commercialized at Massachusetts General Hospital in
October 2014. VenaPax is currently being marketed across the United States.
● Cruzar Medsystems Inc. was founded in 2013 with $2.5 million in capital. It has created a novel peripheral chronic total occlusion (CTO) device for use in peripheral
arterial disease, which received its initial FDA 510(k) clearance in December 2015. It was first commercialized in May 2016 and is currently being marketed across the
United States.
● Kaleidoscope Medical LLC was founded in 2013 with $1.5 million in capital. It has created a novel, reversible inferior vena caval filter which was submitted to the FDA for
510(k) clearance in 16 months. It is currently seeking additional capital to complete a clinical safety study.
PAVmed was created to adapt this model to a multi-product company with access to public capital markets. We believe this model allows us to conceive, develop and
commercialize our pipeline of medical device products using significantly less capital and time than a typical medical device company, and provide a streamlined pathway to
incorporate outside innovations.
2
Corporate History (continued)
Initial Public Offering
Under a registration statement on Form S-1 (File No. 333-203569) declared effective January 29, 2016, the Company’s initial public offering (“IPO”) was consummated on
April 28, 2016, resulting in $4.2 million of net cash proceeds, after deducting cash selling agent discounts and commissions and offering expenses, from the issuance of
1,060,000 units at an offering price of $5.00 per unit, referred to as an “IPO Unit”, comprised of one share of the Company’s common stock and one warrant to purchase a share
of common stock of the Company. On April 28, 2016, upon the issuance of the IPO Units, the 9,560,295 remaining unexercised warrants previously issued in private
placements before the IPO, were converted into warrants identical to those issued in the Company’s IPO. We refer to all such warrants collectively as “Series W Warrants”,
inclusive of those issued in private placements prior to those issued in our IPO. 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, are currently exercisable, and expire on January
29, 2022 or earlier upon redemption by the Company, under certain conditions.
The IPO Units were initially listed on the Nasdaq Capital Market (“Nasdaq”) under the symbol “PAVMU”, until July 27, 2016, when the PAVMU IPO Units ceased to be
quoted and traded on Nasdaq, and the shares of common stock and the Series W Warrants which comprised the PAVMU IPO Units, began separate trading on Nasdaq, under
their own individual symbols of “PAVM” for the shares of common stock and “PAVMW” for the Series W Warrants.
As of December 31, 2017 and 2016, there were 14,551,234 and 13,330,811 shares of common stock and 10,567,845 and 10,580,095 Series W Warrants issued and
outstanding, respectively. Subsequently, in January 2018, the Company issued to-date, a total of 2,649,818 shares of common stock in an underwritten public offering under a
previously filed and effective shelf registration statement, and in February 2018, issued 34,345 shares of common stock upon the exercise of a corresponding number of Series
W Warrants, each as discussed herein below in “— Recent Events - Financing Transactions”, under the captions “ Issue of Common Stock - Underwritten Public Offering -
January 2018” and “Series W Warrants Offer-to-Exercise”, respectively. Accordingly, as of the date hereof, there were 17,235,397 shares of common stock and 10,533,500
Series W Warrants issued and outstanding.
Recent Events
Regulatory Events
On November 27, 2017 we filed a 510(k) premarket notification submission with the FDA for our CarpX™ minimally invasive device designed to treat carpal tunnel
syndrome, using a commercially available carpal tunnel release device as a predicate. We have received promising initial feedback from the FDA and are working to provide
additional non-clinical support for our application.
On December 17, 2016, we filed a 510(k) premarket notification submission with the FDA for our first product, the PortIO™ Intraosseous Infusion System relying upon
substantial equivalence to a previously approved predicate device with an indication for use for up to 24 hours. The Company engaged with the FDA on the issue of substantial
equivalence, including an in-person meeting in July 2017, and had submitted a response based on the FDA’s feedback which included narrower indications and inclusion of a
needle in the kit. After further discussion with the FDA, we decided to pursue a broader clearance for use in patients with a need for vascular access up to seven days under
section 513(f)2 of the Federal Food, Drug and Cosmetic Act, also referred to as de novo classification. We filed a de novo pre-submission package with the FDA which was
followed by an in-person meeting on January 9, 2018 to discuss the risk assessment and proposed mitigation testing for the de novo application. Based on their
recommendations we will initiate a seven-day animal study, having successfully completed a pilot animal study which showed excellent function of the device over the seven-
day implant period and on explant. In anticipation of having to follow up the animal study with a human clinical safety trial, we have accelerated our strategic partnership efforts
to include the pre-clearance phase.
Financing Transactions
Shareholders’ Rights Offering
On January 17, 2018, we filed an initial registration statement on Form S-1 (File No. 333-222581), currently under SEC review, related to a proposed offering wherein, as
currently proposed, we will distribute one transferable equity subscription right for each issued and outstanding share of common stock of the Company as of a record date to be
determined by our Board of Directors (“Equity Subscription Rights Offering” or “Rights Offering”). As currently proposed, the Rights Offering is to commence upon an
effective registration statement. Further, as currently proposed, for a period of 30 days from their distribution date, the transferable equity subscription right may be exercised
for $2.25 per unit to purchase a common stock unit comprised of one share of common stock of the Company and one Series Z Warrant. As currently proposed, the common
stock unit will trade for up to 90 days, after which it will separate into its underlying components of one share of common stock of the Company and one Series Z Warrant. The
Series Z Warrant may be exercised for one share of common stock of the Company at an exercise price of $3.00 per share, with such exercise price and the number of
underlying shares not subject to further adjustment, except for the effect of stock dividends, stock splits or similar events affecting the common stock. The Series Z Warrants
will expire after the close of business on April 30, 2024, and are redeemable by the Company under certain conditions.
3
Recent Events (continued)
Financing Transactions (Continued)
Issue of Common Stock - Underwritten Public Offering
In January 2018, we conducted an underwritten public offering pursuant to a 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, we entered into an underwriting
agreement with Dawson James Securities, Inc., as sole underwriter, under which we 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. The Company issued the 2,415,278 shares on January 23, 2018, and on January 25, 2018, issued 234,540 shares of common stock, under
the underwriter’s over-allotment, resulting in net cash proceeds of $4,263,099, after deduction of both underwriting discounts of $381,574 and estimated offering costs.
Series A and Series A-1 Exchange Offer - Series B Convertible Preferred Stock and Series Z Warrants
On February 14, 2018, we initiated an exchange offer to the holders of both the Series A Convertible Preferred Stock and Series A Warrants, and the Series A-1 Convertible
Preferred Stock and Series A-1 Warrants (“Series A and Series A-1 Exchange Offer”), as follows: (i) one share of Series A Convertible Preferred Stock exchanged for two
shares of Series B Convertible Preferred Stock, and one Series A Warrant exchanged for five Series Z Warrants; and (ii) one share of Series A-1 Convertible Preferred Stock
exchanged for 1.33 shares of Series B Convertible Preferred Stock, and one Series A-1 Warrant exchanged for five one Series Z Warrants. A condition of the Series A and
Series A-1 Exchange Offer is for all outstanding shares of Series A Convertible Preferred Stock and all Series A Warrants, and all shares of Series A-1 Convertible Preferred
Stock and all Series A-1 Warrants, must be tendered. If not all are tendered, then the Company reserves the right to not accept any tenders. The Series A and Series A-1
Exchange Offer is scheduled to expire on March 15, 2018, unless extended, at our sole discretion.
The Series B Convertible Preferred Stock has a par value of $0.001 per share, no voting rights, a stated value of $3.00 per share, and is immediately convertible upon its
issuance. At the holders’ election, one share of Series B Convertible Preferred Stock is convertible into one share of common stock of the Company, based on a common stock
conversion exchange factor equal to a numerator of $3.00 and a denominator of $3.00, with such denominator not subject to further adjustment, except for the effect of stock
dividends, stock splits or similar events affecting the Company’s common stock. The Series B Convertible Preferred Stock shall not be redeemed for cash and under no
circumstances shall the Company be required to net cash settle the Series B Convertible Preferred Stock.
The Series B Convertible Preferred Stock provides for dividends at a rate of 8% per annum on the stated value of the Series B Convertible Preferred Stock, with such
dividends compounded quarterly, accumulate, and payable in arrears upon being declared by the Company’s Board of Directors. The Series B Convertible Preferred Stock
dividends from April 1, 2018 through October 1, 2021 are payable-in-kind (“PIK”) in additional shares of Series B Convertible Preferred Stock. The dividends may be settled
after October 1, 2021, at the option of the Company, through any combination of the issuance of additional Series B Convertible Preferred Stock, shares of common stock, and
/or cash payment.
The Series Z Warrants issued in the Series A and Series A-1 Exchange Offer will be immediately exercisable upon issuance and expire after the close of business on April 30,
2024, and each may be exercised for one share of common stock of the Company at an exercise price of $3.00 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. The Series Z Warrants are redeemable by the Company under
certain conditions.
Series W Warrants Offer-to-Exercise
On January 11, 2018, we 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
(“Series W Warrants Offer-to-Exercise”). As of the February 8, 2018 expiry of the Series W Warrants Offer-to-Exercise, 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, and the issue of a corresponding number of shares of common stock of the Company.
Series W Warrants Offer-to-Exchange
On February 20, 2018, we filed with the SEC a Tender Offer Statement on Schedule TO offering to exchange two Series W Warrants for one Series Z Warrant, with such
exchange offer expiring on March 19, 2018 (“Series W Warrants Offer-to-Exchange”). The Series Z Warrants issued upon exchange of the Series W Warrants will be
immediately exercisable upon issuance and expire after the close of business on April 30, 2024, and each may be exercised for one share of common stock of the Company at
an exercise price of $3.00 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. The Series Z Warrants are redeemable by the Company under certain conditions.
4
Recent Events (continued)
Financing Transactions (Continued)
Note and Security Purchase Agreement with Scopia Holdings LLC
The Company and Scopia Holdings LLC (“Scopia or the Lender”) entered into a Note and Security Purchase Agreement, under which, upon Scopia delivering to the
Company $4.8 million in net cash proceeds on July 3, 2017, the Company issued to Scopia and its designees, a Senior Secured Note with an initial principal amount of $5.0
million (“Senior Secured Note”), and 2,660,000 Series S Warrants to purchase shares of common stock of the Company.
The Senior Secured Note bears interest at a fixed annual rate of 15.0%, with interest payable semi-annually in arrears on June 30 and December 30 of each calendar year,
commencing on December 30, 2017. The Company may elect, at its sole discretion, to defer payment of up to 50% of the semi-annual interest payment, with such deferred
amount added to and increasing the outstanding interest-bearing principal balance of the Senior Secured Note by such amount. As of December 31, 2017, the Senior Secured
Note principal balance is $5,188,542, including $188,542 of deferred interest payment. The aggregate remaining unpaid principal balance of the Senior Secured Note is due on
June 30, 2019.
The Series S Warrants were immediately exercisable upon issuance, have an exercise price of $0.01 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, may be exercised for cash or on a cashless basis, and expire June 30, 2032,
with any Series S Warrants outstanding on the expiration date automatically exercised on a cashless basis. In each of October 2017 and November 2017, 532,000 (or a total of
1,064,00) 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. Accordingly, at December 31, 2017, there were 1,473,640 Series S Warrants issued and outstanding.
See Liquidity and Capital Resources herein below for further information regarding the Note and Security Purchase Agreement with Scopia Holdings LLC.
Series A-1 Preferred Stock Units Private Placement
On August 3, 2017, our board of directors authorized the issuance of up to 150,000 Series A-1 Preferred Stock Units, comprised of one share of Series A-1 Convertible
Preferred Stock convertible into a share of common stock of the Company, and one Series A-1 Warrant exercisable for a share of common stock of the Company, or the Series
A-1 Warrant may be exchanged for five Series W Warrants or four Series X-1 Warrants each of which is exercisable for a share of common stock of the Company.
On, August 4, 2017, we entered into a Securities Purchase Agreement, as amended, pursuant to which the Company may issue up to an aggregate of $600,000 (subject to
increase) of Series A-1 Preferred Stock Units at a price of $4.00 per unit, in a private placement transaction (Series A-1 Preferred Stock Units private placement), and on such
date, issued a total of 125,000 Series A-1 Preferred Stock Units for aggregate proceeds of $500,000. The Company did not incur placement agent fees in connection with the
Series A-1 Preferred Stock Units private placement.
On November 17, 2017 (“November 17, 2017 Exchange Date”), the Company completed an exchange offer initiated on October 20, 2017 to the 28 holders of the Series A
Convertible Preferred Stock and Series A Warrants - to exchange one share Series A Convertible Preferred Stock for 1.5 shares of Series A-1 Convertible Preferred Stock, and,
one Series A Warrant for one Series A-1 Warrant (“Series A Exchange Offer”) - resulting in 154,837 shares of Series A Convertible Preferred Stock exchanged for 232,259
shares of Series A-1 Convertible Preferred Stock, and 154,837 Series A Warrants exchanged for 154,837 Series A-1 Warrants, by 13 holders on the November 17, 2017
Exchange Date. Accordingly, as of December 31, 2017, 357,259 shares of Series A-1 Convertible Preferred Stock and 279,837 Series A-1 Warrants were each issued and
outstanding.
See Liquidity and Capital Resources herein below for further information regarding the Series A-1 Preferred Stock Units private placement, Series A-1 Convertible Stock,
and Series A-1 Warrants.
5
Recent Events (continued)
Financing Transactions (Continued)
Series A Preferred Stock Units Private Placement
Our board of directors authorized the issuance of up to a total of 1.25 million Series A Preferred Stock Units, including authorizing 500,000 units on January 21, 2017 and
750,000 units on May 10, 2017. A Series A Preferred Stock Unit was comprised of one share of Series A Convertible Preferred Stock convertible into a share of common stock
of the Company, and one Series A Warrant exercisable for a share of common stock of the Company, or one Series A Warrant may be exchanged for four Series X Warrants,
each of which is exercisable for a share of common stock of the Company.
On January 26, 2017, the Company entered into a Securities Purchase Agreement pursuant to which the Company may issue up to an aggregate of $3,000,000 (subject to
increase) of Series A Preferred Stock Units at a price of $6.00 per unit, in a private placement transaction (Series A Preferred Stock Units private placement). On the January
26, 2017 initial closing date of the Series A Preferred Stock Units private placement, and at subsequent closings on January 31, 2017 and March 8, 2017, a total of 422,838
Series A Preferred Stock Units were issued for aggregate gross proceeds of approximately $2.5 million and net proceeds of approximately $2.2 million, after payment of
placement agent fees and closing costs.
In addition to the 154,837 shares of Series A Convertible Preferred Stock exchanged for 232,259 shares of Series A-1 Convertible Preferred Stock, and the 154,837 Series A
Warrants exchanged for 154,837 Series A-1 Warrants in the Series A Exchange Offer, a total of 18,334 shares of Series A Convertible Preferred Stock were converted into a
total of 22,093 shares of common stock of the Company during the year ended December 31, 2017. Accordingly, as of December 31, 2017, 249,667 shares of Series A
Convertible Preferred Stock and 268,001 Series A Warrants were each issued and outstanding.
See Liquidity and Capital Resources herein below for further information regarding the Series A-1 Preferred Stock Units private placement, Series A-1 Convertible Stock,
and Series A-1 Warrants.
Other Events
Nasdaq Notice
On March 5, 2018, we received a notice from the Nasdaq Listing Qualifications Department stating that, for the prior 30 consecutive business days through March 2, 2018,
the market value of our listed securities (“MVLS”) had been below the minimum of $35 million required for continued inclusion on the Nasdaq Capital Market under Nasdaq
Listing Rule 5550(b)(2). The notification letter stated we would be afforded 180 calendar days, or until September 4, 2018, to regain compliance. In order to regain compliance,
our MVLS must remain at or above $35 million for a minimum of ten consecutive business days. The notification letter also states in the event we do not regain compliance
within the 180-day-period, our securities may be subject to delisting. In the event we receive a delisting determination, we may appeal such determination to a Nasdaq Hearings
Panel.
Tufts Patent License Agreement - Antibiotic-Eluting Resorbable Ear Tubes
In November 2016, we executed the Tufts Patent License Agreement with the Licensors. Pursuant to the Tufts Patent License Agreement, the Licensors granted us the
exclusive right and license to certain patents owned or controlled by the Licensors in connection with the development and commercialization of antibiotic-eluting resorbable
ear tubes based on a proprietary aqueous silk technology. Upon execution of the Tufts Patent License Agreement, we paid the Licensors a $50,000 up-front non-refundable
payment. The Tufts Patent License Agreement also provides for payments by us to the Licensors upon the achievement of certain product development and regulatory clearance
milestones as well as royalty payments on net sales upon the commercialization of products developed utilizing the licensed patents.
6
Our Business Model
In contrast to pharmaceuticals and other life science technologies, which typically require long and capital-intensive paths to translate cellular or biochemical processes into
commercially-viable therapeutics or diagnostics, we believe that medical devices have the potential to move much more rapidly from concept to commercialization with
significantly less capital investment. Many commercially successful medical devices are often elegant solutions to important and prevalent clinical problems. Most medical
device companies, however, are not structurally or operationally equipped to fulfill this potential. According to a report by Josh Makower, M.D., Consulting Professor of
Medicine at Stanford University, the typical medical device company will spend over $31.0 million and take approximately five years to develop and commercialize a product
through the FDA’s 510(k) pathway and over $100.0 million and seven or more years through the FDA’s Premarket Approval (“PMA”) pathway.
Prior to forming PAVmed, our leadership team established a model to realize this potential in single-product companies by advancing medical device products from concept
to commercialization using significantly less capital and time than a typical medical device company. When previously applied to single-product venture backed companies, the
model utilized a virtual business structure. PAVmed’s structure enables us to retain the model’s tight focus on capital and time efficiency and the core elements which drive that
efficiency, including limited infrastructure and low fixed costs, while taking advantages of the economies of scale and flexibility inherent in a multi-product company.
Project Selection
A key element of our model is the project selection process. We choose projects to develop and commercialize based on characteristics which contribute to a strong
commercial opportunity. We place a heavy emphasis on medical device products with the potential for high-margins and high-impact in attractive markets without regard to the
target specialty or clinical area.
Our project selection process begins with the identification of an unmet clinical need. We seek prevalent medical conditions where we believe an opportunity exists to
advance the care of the patient through improvements in existing technologies or the introduction of new platform technologies. In the current healthcare environment, this
usually means that our products have to be less invasive and more cost effective. We select projects which we believe have the potential to lessen procedural invasiveness
and/or the opportunity to shift care from the surgical operating room to lower-cost venues such as the interventional suite or the ambulatory setting. We expect our products to
decrease complications, hospital stays, recovery times and indirect costs associated with a patient’s loss of productivity.
For example, at the time of its introduction, Vortex Medical’s AngioVac system was a new platform technology which for the first time allowed physicians to remove large
blood clots from patients without the need for open surgery or clot-dissolving medications. This allowed AngioVac to command premium pricing using surgical reimbursement
codes, achieve high gross margins and enter a large addressable market consisting of hundreds of thousands of patients who previously did not have a non-surgical /-non-
thrombolytic treatment option. On the other hand, Saphena Medical’s VenaPax system is an improvement to existing endoscopic vessel harvesting tools which promises to
shorten procedure times and decrease vessel trauma at a lower overall cost, providing it an opportunity to capture market share based on price and efficacy.
Additional characteristics which impact a project’s commercial opportunity are its technology, regulatory and reimbursement profiles. We typically select projects with
strong intellectual property position, low to moderate technological complexity, low to moderate manufacturing costs and primarily disposable products that do not require
significant capital equipment.
One of the most important features we consider is the project’s regulatory pathway, both in the U.S. and internationally. The FDA’s less arduous 510(k) pathway requires us
to demonstrate that our product is safe and substantially equivalent to FDA-cleared predicates. The FDA’s more costly and prolonged PMA pathway requires us to demonstrate
that our product is safe and effective through randomized clinical studies. A product which is eligible for the 510(k) pathway will require substantially less capital and time than
one that requires full PMA clearance. With all of our products we are very aggressive about identifying what we believe are the quickest paths to regulatory clearance, paying
very careful attention to selection of the best predicates and references as well as careful attention to precisely crafting the primary indications for use language. Although we
favor products eligible for the FDA’s 510(k) pathway, with or without clinical safety studies, we may also pursue PMA pathway products with large addressable markets, or in
the case of one of our lead products, PortIO™, pursue classification under section 513(f)(2) of the Federal Food, Drug, and Cosmetic Act, also referred to as de novo
classification, which could be more rigorous than the 510(k) pathway, but generally require substantially less time and resources than a PMA pathway. We have a variety of
options to commercialize such products more efficiently by initially, or even exclusively, targeting European or emerging markets which have shorter, less costly regulatory
pathways for such projects. We also attempt to identify narrower applications and indications with lower regulatory hurdles that will allow us to start commercializing our
product, while broader applications and indications with higher hurdles move through the regulatory process.
The project’s reimbursement profile, both in the U.S. and internationally, is another very important component of the project’s commercial opportunity. We prefer projects
with existing reimbursement codes, the opportunity to seek reimbursement under higher-value surgical procedure codes or the potential to seek reimbursement under narrow,
product-specific codes as opposed to bundled procedure codes.
7
Development and Commercialization Processes
Once we add a project to our pipeline, we map out development and commercialization processes specifically tailored to the product seeking to optimize capital and time
efficiency and maximize value creation. The model emphasizes parallel development processes, such as engineering, quality, regulatory, supply chain, and manufacturing,
utilizing outsourced, best-in-class process experts on an as-needed basis. We initially select the shortest, most-efficient path to commercialization of a safe and effective first-
generation product. We then proceed with iterative product development based on real-life product performance and user feedback.
We intend to continue to utilize outsourced best-in-class process experts. We have strong relationships with a network of experts in design engineering, regulatory affairs,
quality systems, supply chain management and manufacturing, including many with highly specialized skills in areas critical to our current and future pipeline. We will not be
reluctant, however, to in-source certain heavily utilized process experts when and if we decide that such a move will enhance our ability to execute on our strategy. As we grow,
we expect to maintain a lean management infrastructure while expanding our bandwidth primarily with skilled project managers.
Although the PHG and PMI companies were created with a credible path to self-commercialization, they were fundamentally “built to sell.” We believe our structure will
enhance our flexibility to commercialize our products compared to these and other single-product, development-stage companies. Each of our products generally follow one of
three commercialization pathways. For certain products with one or more natural strategic acquirers such as PortIO, we may seek an early acquisition of the product prior to or
soon after regulatory clearance, providing us with a source of non-dilutive capital. For certain groundbreaking high-margin products with large market opportunities such as
CarpX, we retain the flexibility to fully commercialize our products for the foreseeable future. For certain other high-volume, lower sale price products such as DisappEAR, we
may seek to co-market them with strategic partners through sales and distribution agreements. We may also choose to monetize products through licensing agreements or the
sale of the products’ underlying technology if consistent with our broader business strategy. For products we choose to commercialize ourselves, we may do through a network
of independent U.S. medical distributors. We eventually may, however, choose to build (or obtain through a strategic acquisition) our own sales and marketing team, initially
utilizing a hybrid model with national /regional sales management of independent distributors moving towards direct sales as warranted. As our pipeline grows, we may choose
to jointly commercialize subsets of related products which target certain medical specialties or healthcare locations
Research and development expenses are recognized in the period they are incurred and consist principally of internal and external expenses incurred for the research and
development of our products. We incurred approximately $4.8 million in cumulative research and development expenses from June 26, 2014 (inception) through December 31,
2017, inclusive of approximately $2.6 million and $1.7 million in each of the years ended December 31, 2017 and 2016, respectively. We plan to increase our research and
development expenses for the foreseeable future as we continue development of our products. Our current research and development activities are focused principally on
obtaining FDA approval and clearance and initializing commercialization of the lead products in our product portfolio pipeline - PortIO™ and CarpX™ - and advancing our
DisappEAR™ product through its initial development phase. The research and development activities on the other portfolio products is commensurate with available sufficient
capital resources. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Results of Operations, herein below, for a
further discussion of research and development expenses.
Our Products Pipeline
Since our inception, we have conceived and developed a pipeline of products which fulfill our selection criteria. Our initial five products focused on hand surgery, medical
infusion, and tissue ablation. Our sixth product, whose underlying technology we licensed from a group of academic centers, is focused on pediatric ear infections. We will need
to receive regulatory clearance in order to commercialize these products. Additional capital will be required for us to commercialize these products and/or pursue additional
regulatory clearances. Further, there is no assurance any of our products will ever be commercialized or, if commercialized, will achieve the results we expect. In December
2016, we filed a 510(k) premarket notification submission with the FDA for our first product, PortIO™, and in October 2017 decided instead to pursue classification under
section 513(f)(2) of the Federal Food, Drug, and Cosmetic Act, also referred to as de novo classification under a broader indication, for up to seven days and consequently filed
its de novo pre-submission package with the FDA for PortIO™ on October 30, 2017. Furthermore, on November 27, 2017 we filed a 510(k) premarket notification submission
with the FDA for our CarpX™ minimally invasive device designed to treat carpal tunnel syndrome. We anticipate additional submissions in 2018 and beyond for the products
in our pipeline.
Our products pipeline is dynamic, and we adjust our development and commercialization plans based on real-time progress, changes in market conditions, commercial
opportunity and availability of resources. As such, we have designated CarpX™, PortIO™ and DisappEAR™ as lead products which are moving aggressively towards
regulatory clearance and commercialization.
We have proprietary rights to the trademarks used herein, including, among others, PAVmed™, PortIO™, Caldus™, CarpX™, DisappEAR™, NextCath™, NextFlo™, and
“Innovating at the Speed of Life”™, among others. Solely as a matter of convenience, trademarks and trade names referred to herein may or may not be accompanied with the
requisite marks of “™” and /or “®”, however, the absence of such marks is not intended to indicate, in any way, we will not assert, to the fullest extent possible under
applicable law, our rights or the rights to such trademarks and trade names.
8
Our Products Pipeline (Continued)
CarpX™ - Percutaneous Device to Treat Carpal Tunnel Syndrome
The Market. Carpal tunnel syndrome (“CTS”) is the most common cumulative trauma disorder and accounts for over half of all occupational injuries. The carpal tunnel is an
anatomic compartment in the wrist through which tendons and the median nerve pass. Cumulative trauma leads to inflammation which manifests itself clinically through its
compressive effect on the median nerve, resulting in motor and sensory dysfunction in the hand. A survey published in the Journal of the American Medical Association
reported that 2.5% of U.S. adults, or approximately five million individuals, have CTS and about 350,000 surgical procedures are performed annually for CTS. According to the
CDC, CTS accounts for two million office visits per year. According to the Agency for Health Care Policy and Research CTS costs the U.S. over $20.0 billion in annual
workers’ compensation costs.
Current Devices and their Limitations. Patients who have failed to improve with physical therapy or other non-invasive treatments are candidates for interventions which seek
to relieve the compression of the median nerve by cutting the transverse carpal ligament, which forms the superficial wall of the carpal tunnel. Traditional surgical approaches
are effective, but invasive and must be performed in a surgical operating room. Endoscopic approaches are less invasive, but are more technically challenging, more expensive
and have been associated with higher complication rates. These approaches still require a surgical incision and some surgical dissection before the endoscope is passed into the
carpal tunnel. Two less-invasive devices are currently on the market. One device attempts to use transillumination to guide blind passage of a protected knife and the other
passes a saw-like device blindly or by ultrasound guidance. Technical limitations have hindered market acceptance of these devices.
Our Solution. We are developing a completely minimally invasive device to treat CTS. We believe our device will allow the physician to relieve the compression on the
median nerve without an open incision or the need for endoscopic or other imaging equipment. To use our device, the operator first advances a guidewire through the carpal
tunnel under the ligament. Our device is then advanced over the wire and positioned in the carpal tunnel under ultrasonic and/or fluoroscopic guidance. When the balloon is
inflated it creates tension in the ligament positioning the cutting electrodes underneath it and creates space within the tunnel, providing anatomic separation between the target
ligament and critical structures such as the median nerve. Radiofrequency energy is briefly delivered to the electrodes, rapidly cutting the ligament and relieving the pressure on
the nerve. We believe our device will be significantly less invasive than existing treatments. We also believe it will allow for more extensive lateral dissection within the tunnel
and more reliable division of the ligament, resulting in lower recurrence rates than some of the endoscopic approaches. We have filed a nonprovisional patent application and
advanced, in partnership with our design and contract manufacturing partners, our CarpX™ product from concept to working prototypes, completed successful benchtop and
cadaver testing confirming the device consistently cuts the transverse carpal ligament, as well as commercial design and development, and performed pre-submission
verification and validation testing. On November 27, 2017 we filed a 510(k) premarket notification submission with the Food and Drug Administration (“FDA”). Once this
product is commercialized, we believe it will have the potential to (i) decrease procedural costs by shifting the procedure from the operating room to an office setting while
retaining similar reimbursement to traditional surgical approaches, (ii) reduce post-operative pain, (iii) accelerate the patient’s return to full activity and (iv) lower the threshold
for intervention for patients “suffering in silence” who chose to delay surgery until symptoms become debilitating. Our device may also be applicable to other clinical situations
where percutaneous division of a fibrous structure can be used for therapeutic effect such as plantar fasciitis and extremity compartment syndromes resulting from trauma or
ischemia.
9
Our Products Pipeline (Continued)
PortIO™ - Implantable Intraosseous Vascular Access Device
The Market. Vascular access devices, including peripheral intravenous catheters, central venous lines, peripherally inserted central catheters, tunneled catheters or implanted
ports, are used to deliver various medications, fluids, blood products, nutrition or other therapeutic agents to patients with a wide variety of clinical conditions over multiple
episodes spanning a period of days to weeks to months. A report by iData Research Group estimates the market for such devices to be several billion dollars annually. The
market is moderately fragmented and highly commoditized, with slight premium pricing for modest features, including anti-infective coating, anti-thrombotic properties, tip
location and power injector compatibility.
Current Devices and their Limitations Many chronically ill patients requiring long-term vascular access devices have poor or no central venous access as a result of repeated
instrumentation of the veins or the presence of pacemaker and defibrillator leads, resulting in thrombosis or scarring. In addition, patients with renal failure need preservation of
their peripheral and central veins for future dialysis access. The decades-old core technologies underlying currently available long-term vascular access devices have several
limitations which relate directly to the intravascular component of the device. Up to 10% of such devices become infected, which can lead to costly and severe complications
and even death (van de Wetering, Cochrane Database 2013). Since they are in constant contact with the blood stream, current devices require regular flushes to clear stagnant
blood and prevent thrombus formation and occlusion. Despite these maneuvers, up to one-third of long-term vascular access devices become occluded at some point during
their implantation period (Baskin, et al., Lancet 2009) and the resulting clot can dislodge as an embolism causing further downstream complications. This complication requires
treatment with clot-dissolving agents or removal and implantation of a new device at an alternative site which in turn can lead to additional complications. Finally, most long-
term vascular access devices require surgical insertion and removal, radiographic confirmation of tip placement and careful handling by trained clinicians to prevent the
introduction of air into the circulation.
Our Solution. The intraosseous route provides a means for infusing fluids, medications and other substances directly into the bone marrow cavity which communicates with
the central venous circulation via nutrient and emissary veins. This route is well established, having been used for decades in a variety of settings including trauma, especially
military trauma, and pediatric emergencies. It has been shown to be bioequivalent to the intravenous route. Complication rates are low and there are few contraindications.
Recently, physicians have expanded the use of the intraosseous route to non-emergent clinical scenarios. Currently available intraosseous devices pass through the skin into the
bone and are therefore limited to short term use. We have developed a novel, implantable intraosseous vascular access device which does not require accessing the central
venous system and does not have an indwelling intravascular component. It is designed to be highly resistant to occlusion and, we believe, may not require regular flushing. It
features simplified, near-percutaneous insertion and removal, without the need for surgical dissection or radiographic confirmation. It provides a near limitless number of
potential access sites and can be used in patients with chronic total occlusion of their central veins. We believe the absence of an intravascular component will result in a very
low infection rate. We have filed a final nonprovisional patent application and advanced, in partnership with our design and contract manufacturing partners, our PortIO™
product from concept to working prototypes, benchtop, animal, and cadaver testing, commercial design and development, verification and validation testing, and an initial
submission to the FDA for 510(k) market clearance for use in patients requiring 24-hour emergency type vascular access. After further discussion with the FDA, we decided to
pursue a broader clearance for use in patients with a need for vascular access up to seven days under section 513(f)2 of the Federal Food, Drug and Cosmetic Act, also referred
to as de novo classification. We filed a de novo pre-submission package with the FDA which was followed by an in-person meeting on January 9, 2018 to discuss the risk
assessment and proposed mitigation testing for the de novo application. Based on their recommendations we will initiate a seven-day animal study, having successfully
completed a pilot animal which showed excellent function of the device over the seven-day implant period and on explant. In anticipation of having to follow up the animal
study with a human clinical safe trial, we have accelerated our strategic partnership efforts to include the pre-clearance phase. Our long-term regulatory strategy is focused on
expanded, longer-term indications and other clinical applications. Once this product is commercialized, we believe it will have lower cost-of-goods than existing implantable
vascular access devices and premium pricing based on improved outcomes and reduced costs.
10
Our Products Pipeline (Continued)
DisappEAR™ - Antimicrobial Resorbable Ear Tubes
The Market. Each year up to one million children, generally between the ages of 2 and 5, with persistent ear infections (otitis media) or middle ear fluid collections (effusions)
undergo placement of metal, plastic or latex bilateral ear tubes to ventilate and drain the middle ear. This procedure, formally known as bilateral tympanostomy, is the most
common pediatric surgical procedure in the United States. The procedure is performed under general anesthesia. After the procedure, the patients are typically treated with a
one-week course of antibiotic ear drops administered twice a day. The tubes are regularly monitored and allowed to remain in place for at least one year until the natural
drainage pathway of the middle ear (the Eustachian tube) opens up as the child grows and the surrounding tonsillar tissue regresses. A second procedure, again under general
anesthesia, is often needed to remove the tubes once they are no longer needed or if they become dislodged and do not fall out of the ear canal on their own. Although the tubes
themselves are marketed as a moderately priced item, the antibiotics course can cost $300 or more. Thus, there is a significant market opportunity of up to $300 million for a
system which can replace the post-operative antibiotic drops and reduce the need for future procedures.
Current Devices and their Limitations. As noted, the currently available pediatric ear tubes require general anesthesia for insertion and removal and a course of antibiotic ear
drops. The ear drops can be quite difficult for parents to administer in children of younger age which can lead to poor compliance. Furthermore, tube dislodgement is not
uncommon. When the tube dislodges into the ear canal it can get embedded in wax and lead to inflammation, obscured visualization of the ear drum, pain and bleeding. When
the tube dislodges into the middle ear, where the fragile bones that transduce sound to the inner ear reside, parents and physicians become concerned about long-term damage
and hearing loss. As a result, both situations usually require a second procedure, again under general anesthesia. Up to 50% of patients undergoing ear tube placement require a
second procedure.
Our Solution. In November 2016, we entered in a licensing agreement with a group of leading academic institutions, including Tufts University and two Harvard Medical
School teaching hospitals - Massachusetts Eye and Ear Infirmary and Massachusetts General Hospital. The agreement provides PAVmed with an exclusive worldwide license
for the life of the underlying patents to develop and commercialize antimicrobial resorbable ear tubes based on a proprietary aqueous silk technology conceived and developed
at these institutions. One of the visionaries behind this technology, Christopher J. Hartnick, M.D., Professor of Otolaryngology at Harvard Medical School and Chief of
Pediatric Otolaryngology at Massachusetts Eye and Ear Infirmary and Massachusetts General Hospital, joined our Medical Advisory Board in October 2016. We are working
closely with Dr. Hartnick and Dr. David Kaplan, Stern Family Professor of Engineering, Chair of the Department of Biomedical Engineering and Director of Bioengineering
and Biotechnology Center at Tufts University. We have committed to a timeline with certain milestones on the path to commercialization. Once commercialized, the institutions
will receive royalties based on revenue and a portion of certain additional proceeds from the sale or sublicensing of the technology to a third party. We believe the resorbable ear
tubes will eliminate the need for a second procedure to remove retained or dislodged tubes in most patients. Having the device embedded with antimicrobial agents will
eliminate the difficult-to administer post-procedure antibiotic ear tube regimen. Our partners previously completed successful animal studies using working prototypes of the
device. Our efforts have focused on sourcing commercially ready aqueous silk and optimizing manufacturing processes consistent with the necessary cost of goods for the
commercial product. Once this product is commercialized, we believe it will garner premium pricing based on improving compliance and eliminating the significant cost related
to the post-procedure antibiotic regimen, the need for second procedure and fewer complications.
11
Our Products Pipeline (Continued)
NextCath™ - Self-Anchoring Short-Term Catheters
The Market. A wide variety of short-term catheters are used in clinical practice to infuse fluids, medications or other substances into a vein or other structures, to monitor
physiologic parameters and to drain visceral organs or cavities. Interventional radiology catheters, in particular, are widely used to drain various structures and cavities
including the pleural space, obstructed kidneys and abscess cavities. There is an increasing appreciation, however, of the importance of catheter securement in preventing
complications of all indwelling catheters. There has been an explosion of separate propriety devices marketed to facilitate catheter securement. A report by iData Research
Group estimates the catheter securement market to be approximately $4.0 billion annually.
Current Devices and their Limitations. Currently marketed short-term catheters are not self-anchoring, they have been traditionally anchored to the skin with simple tape or
some other adhesive incorporated into the sterile dressing. According to a report by Dr. Gregory J. Schears, a pediatric anesthesiologist and expert on catheter securement, both
microscopic and macroscopic movements from inadequate catheter securement can lead to complications including vascular injury and dislodgment. Catheter dislodgement
leads to increased pain, increased costs and potentially more serious complications arising from interruption of critical treatments or bleeding. These of course can also
adversely impact quality of care. Monitoring catheter patency and security and reinserting dislodged catheters is labor intensive. Many types of catheters are sutured to the skin,
a process which leads to increased pain and exposure to needle sticks. Dislodgement of interventional radiology catheters are a significant concern since they can lead to serious
complications and may require another visit to the procedural suite to replace or reposition the catheter. A wide variety of catheter securement devices are currently marketed.
Some have been shown to decrease complications relative to traditional techniques but add cost and complexity to the process.
Our Solution. We are developing self-anchoring short-term catheters which do not require suturing, traditional anchoring techniques or costly add-on catheter securement
devices. We are initially focusing on interventional radiology catheters which are less commoditized and result in significantly greater risk when dislodged. Our self-anchoring
technique, however, is applicable to most, if not all, short-term catheters. The self-anchoring mechanism is integral to the catheter. It allows insertion with standard techniques
and the use of simple clear sterile dressings. It allows the hub of the catheter to be flat and the tubing to come out eccentrically, or parallel to the skin, improving patient comfort
and catheter management. We have filed a nonprovisional patent application, engaged design and contract manufacturing firms with experience in extrusions which have
completed initial design work on the first product in the NextCath™ product line, and completed head-to-head testing of retention forces, comparing our working prototype to
several competing products, which has validated our approach and advanced the commercial design and development process focusing on optimizing the self-anchoring helical
portion as well as cost of materials and manufacturing processes. Further development of NextCath™ is subject to availability of additional financial resources. Once this
product is commercialized, we believe it will garner premium pricing based on fewer complications and reduced overall costs.
12
Our Products Pipeline (Continued)
NextFlo™ - Highly-Accurate Disposable Infusion System
The Market. Each day, over one million patients receive some type of infusion and 90% of hospitalized patients receive an intravenous infusion at some point during their
hospital stay. (Husch et al. Quality & Safety in Health Care 2005; 14:80-86). Unlike twenty years ago, nearly all inpatient infusions, including routine ones which do not require
flow adjustment, are delivered by expensive electric infusion pumps instead of with simple gravity. An increasing number of these patients are receiving infusions of
medications or other substances outside of a hospital, in ambulatory facilities and at home. In addition, disposable infusion pumps (“DIPs”) have many attractive features that
favor their use in these settings over outpatient electric infusion pumps. Patients tend to favor DIPs because they are small, disposable, simple to operate, easy to conceal, and
allow for greater mobility. They are used to deliver medications including antibiotics, local anesthetics and opioids. According to a report by Transparency Market Research, the
overall global infusion market is estimated to be over $5.0 billion annually. DIPs account for approximately 10% of this market and inpatient infusion sets for about 20%.
Current Devices and their Limitations. Infusion pump errors are a serious ongoing problem and represent a large share of the overall human and economic burden of medical
errors. Electronic infusion pumps have become expensive, high-maintenance devices and have been plagued in recent years with recalls due to serious software and hardware
problems. These pumps are designed for fine titration of infusions in complex patients such as those in a critical care setting. Using them for routine administration of
medications or fluids is technological overkill. We believe there is a significant market opportunity for a simple, disposable device which can be incorporated into a standard
infusion set and eliminate the need for expensive, problem-prone infusion pumps for routine inpatient infusions. In terms of outpatient infusions, currently marketed DIPs are
powered by elastomeric membranes, compressed springs, compressed gas or vacuum and controlled by mechanical flow limiters. The primary limitation of DIPs is that they can
be highly inaccurate in actual use because they can be susceptible to changes in operating conditions (e.g. temperature, atmospheric pressure, viscosity, back pressure, partial
filing and prolonged storage). As a result, their safety profiles make them unsuitable for use with medications, such as chemotherapeutics, where flow accuracy is critical to
achieve the desired therapeutic effect and avoid complications. The FDA’s MAUDE database includes numerous reports of complications and even deaths as a result of DIPs
infusing a particular medication too slowly or too fast. We believe there is a significant market opportunity for highly accurate disposable infusion pumps for outpatient use.
Our Solution. We are developing highly-accurate infusion systems with variable flow resistors. We acquired U.S. Patent 8,622,976 issued January 7, 2014 and associated U.S.
and international patent applications, “System and Methods for Infusion of Fluids Using Stored Potential Energy and a Variable Flow Resistor”. We have built on the principles
underlying this patent and developed a new concept whereby the variable resistor does not have to be mechanically-linked to the infusion drive mechanism. This simplifies the
design and expands the range of potential follow-on products. We have performed extensive computer simulation testing on various embodiments and have demonstrated
highly-accurate flow rates across a wide range of driving pressures. We have advanced the design and development of the NextFlo™ device, including a redesign which
dramatically simplifies the product, lowers the projected cost of goods and expands its application to routine inpatient infusion sets, and completed benchtop testing of a
working prototype demonstrating constant flows across the range of pressures encountered in clinical situations. Further development of NextFlo™ is subject to availability of
additional financial resources which are currently focused on our three lead products. Once this product is commercialized, we believe it will command a premium price over
existing inpatient infusion sets and low-accuracy, DIPs. We believe infusion sets incorporating this product will permit hospitals to return to gravity and eliminating expensive
infusions pumps for the most inpatient infusions. We also believe the accuracy of our device incorporated into DIPs will allow them to be used with a broader range of drugs,
thereby significantly expanding the addressable market.
13
Our Products Pipeline (Continued)
Caldus™ - Disposable Tissue Ablation Devices
The Market. Tissue ablation involves the targeted destruction of tumors or benign tissues with pathologic impact (e.g. gastrointestinal, endometrial and cardiac) using one of a
variety of commercially-available ablation devices based on a specific energy source (e.g. radiofrequency, microwave, laser, ultrasound, cryoablation). With the exception of
cryoablation, all of these devices act through a common pathway of cellular hyperthermia. A 2014 report by Transparency Market Research estimates the tissue ablation market
generates $4.0 billion to $5.0 billion in annual revenue. One target which has not been successfully treated with ablation is fistula tracts, specifically fistula-in-ano. Up to
100,000 patients present with this condition annually. More recently, the renal nerves have been identified as a therapeutic target for ablation in patients with refractory
hypertension. Despite a widely publicized clinical trial which failed to meet its endpoint, many believe that renal denervation remains an attractive clinical and commercial
opportunity with approximately 10 million U.S. and 100 million worldwide patients with resistant hypertension (Pimenta et al. Circulation 2012; 125-1594-96).
Current Devices and their Limitations. All commercially-available devices or those under development for renal denervation rely on some form of a console to generate the
ablation energy. These consoles, whether sold or leased as capital equipment or incorporated into the disposable costs, represent a significant portion of the cost of the
technology and the procedure. These costs can significantly impact procedural margins and marketing in emerging countries with limited biomedical staff. Another limitation of
current devices is that they depend on maintaining the conductivity of its energy through the tissue during the ablation period. For example, radiofrequency ablation depends on
electrical conductivity to generate heat, but creating too much heat near the probe can generate charring which increases impedance and decreases the effective range of the
ablation. A wide variety of technologies and techniques have been developed to accommodate the challenges of ablating across large distances using radiofrequency (e.g. multi-
electrode probes, cooling, irrigation and complex power algorithms). As a result, these tissue ablation modalities typically require a complex, external console to assure the
precise amount of energy is delivered to the tissue. In addition, the consoles require on-going maintenance and monitoring by the manufacturer and local facility technical staff
to assure they remain safe for use in patients. This can be particularly burdensome when commercializing such devices in emerging markets where access to qualified technical
personnel may be limited.
Our Solution. We are developing completely disposable tissue ablation devices, including for renal denervation, based on direct thermal ablation of the tissue using heated
fluid. We are evaluating which initial applications for our Caldus™ disposable tissue ablation technology to pursue from a clinical and commercial point-of-view, and will
reinitiate development activity on this product upon resources becoming available. Once this product is commercialized, we believe that our completely disposable system will
have significantly lower procedural costs and higher margins than existing technologies.
Additional Products
We are evaluating a number of product opportunities and intellectual property covering a spectrum of clinical conditions, which have been presented to us by clinician
innovators and academic medical centers, for consideration of a partnership to develop and commercialize these products. We are also exploring opportunities to partner with
larger medical device companies to commercialize our lead products as they move towards regulatory clearance and commercialization; we are evaluating strategic merger and
acquisition opportunities which synergize with our growth strategy. Furthermore, we are exploring other opportunities to grow our business and enhance shareholder value
through the acquisition of pre-commercial or commercial stage products and /or companies with potential strategic corporate and commercial synergies.
14
Our Implementation Strategy
We intend to advance our lead products towards commercialization as quickly and efficiently as possible and expand our product pipeline by advancing our conceptual phase
projects through patent submission and early testing.
Although we will continue to conceive and develop products internally, as we grow and expand our resources, we intend to expand our pipeline with innovative products
sourced from third parties. In contrast to pharmaceuticals and other life sciences technologies, medical device innovation often begins with one, or at most a few, clinicians
and/or engineers identifying an unmet clinical need and proposing a technological solution to address such need. Many academic medical centers and other large institutions try
to aggregate their intellectual property through technology transfer centers and, more recently, through “innovation” centers which do not merely secure and transfer intellectual
property, but actually advance projects internally prior to spinning them out for eventual commercialization.
It is our belief, despite these efforts, only a small fraction of the potential pool of intellectual capital (i.e. the universe of individual clinicians with innovative product ideas) is
participating in medical device innovation. These clinicians rarely engage in the process for a variety of reasons, including the belief that they are too busy, can’t afford to divert
time away from their practice or that the upfront out-of-pocket costs are too great. Other clinicians believe that they lack the knowledge or connections to successfully navigate
the process. Technology transfer and full-fledged innovation centers have only had modest success in getting their clinicians to bring them innovative product ideas and even
less success getting these products commercialized. Even centers with extensive resources are usually limited in their ability to advance products beyond the pre-clinical phase
and are dependent on a shrinking pool of early-stage medical device venture capital to bring their products to market. Furthermore, some technology transfer and innovation
centers associated with not-for-profit hospitals, universities, endowments and charitable organizations may be precluded from directly engaging in commercial sales of medical
devices, creating opportunities for us to commercialize and market their intellectual property.
Our capital and time efficient model puts us in strong position to partner with innovative clinicians and academic medical centers focusing on medical device innovation. We
have developed a collaboration model focused on licensing technologies for development and commercialization. Since our founding, we have been contacted by clinicians and
centers inquiring about opportunities to work with us on developing and commercializing their ideas and technologies. In November 2016, we signed a definitive licensing
agreement with a group of leading academic institutions, including Tufts University and two Harvard Medical School teaching hospitals - Massachusetts Eye and Ear Infirmary
and Massachusetts General Hospital. The agreement provides us with an exclusive worldwide license to develop and commercialize antibiotic-eluting resorbable ear tubes based
on a proprietary aqueous silk technology conceived and developed at these institutions, a product we have dubbed DisappEAR™. Once commercialized, the institutions will
receive royalties based on revenue and a portion of certain additional proceeds from the sale or sublicensing of the technology to a third party.
Whether internally or externally sourced, we seek to maintain balance within our pipeline with shorter-term, lower-risk products which offer the opportunity for more rapid
commercialization, generating revenue to support development of longer-term products. As each product moves through our pipeline from concept to commercialization, we
continuously reassess the product’s long-term commercial potential, balance it against other products in the pipeline and re-allocate resources accordingly. As such, we expect to
have much greater flexibility to move products through our pipeline based on the actual developments and the overall interests of our company. We may accelerate, decelerate,
pause or abandon a product and increase or decrease resources applied to a product based on a variety of factors including available capital, shifts in the regulatory, clinical,
market and/or intellectual property landscape for a particular product, the emergence of one or more products with significantly greater commercial potential, or any other factor
which may impact its long-term commercial potential.
Sales and Marketing
We currently expect to commercialize our products through a network of independent U.S. medical distributors. We focus on high-margin products which are particularly
suitable to this mode of distribution. A high gross margin allows us to properly incentivize our distributors, which in turn allows us to attract the top distributors with the most
robust networks in our targeted specialties. Independent distributors play an even larger role in many parts of Europe, most of Asia and emerging markets worldwide.
We eventually may, however, choose to build (or obtain through a strategic acquisition) our own sales and marketing team to commercialize some or all of our products if it
is in our long-term interests. We may also choose to enter into distribution agreements with larger strategic partners whereby we take full responsibility for the manufacturing of
our products but outsource some or all of its distribution to a partner with its own robust distribution channels. Such agreements may include regional carve outs, minimum
sales volumes, margin splitting and/or an option or right of first offer to purchase the technology at a future date. As our pipeline grows, we may choose to jointly
commercialize subsets of related products which target certain medical specialties or healthcare locations.
15
Manufacturing
We currently have no plans to manufacture our own products because the fixed overhead costs and limited flexibility that come with owning manufacturing facilities are not
consistent with our capital efficient model. The entire medical device industry, including many of its largest players, depends heavily on contract manufacturers operating in the
United States and abroad. Medical device manufacturers are subject to extensive regulation by the FDA and other authorities. Compliance with these regulations is costly and
particularly onerous on small, development-phase companies. Contract manufacturers can also take advantage of significant economies of scale in terms of purchasing,
machining, tooling, specialized personnel, sub-contracting or even off-shoring certain processes to lower-cost operators. These economies are simply not available to us.
We have relationships with many contract manufacturers, including those with specialized skills in several processes important to our devices. We expect them to have
sufficient capacity to handle our manufacturing needs and anticipate that our growth will be better served by deploying our resources to expand our pipeline and
commercialization efforts.
We intend to work closely with our contract manufacturing partners to establish and manage our products’ supply chain, dual sourcing whenever possible. We expect to help
them design and build our products’ manufacturing lines including subassembly, assembly, sterilization and packaging and to work closely with them to manage our quality
system, to assure compliance with all regulations and to handle inspections or other queries with regulatory bodies. Our contract manufacturers have the ability to add lines and
shifts to increase the manufacturing capacity of our products as our demand dictates. We may ship our products directly from our contract manufacturers, but we may also
choose to utilize third-party regional warehousing and distribution services.
Intellectual Property
Our business will depend on our ability to create or acquire proprietary medical device technologies to commercialize. We intend to vigorously protect our proprietary
technologies’ intellectual property rights in patents, trademarks and copyrights, as available through registration in the United States and internationally. Patent protection and
other proprietary rights are thus essential to our business. Our policy is to aggressively file patent applications to protect our proprietary technologies including inventions and
improvements to inventions. We seek patent protection, as appropriate, on:
●
the product itself including all embodiments with future commercial potential;
●
the methods of using the product; and
●
the methods of manufacturing the product.
In addition to filing and prosecuting patent applications in the United States, we intend to file counterpart patent applications in Europe, Canada, Japan, Australia, China and
other countries worldwide. Foreign filings can be cumbersome and expensive, and we will pursue such filings when we believe they are warranted as we try to balance our
international commercialization plans with our desire to protect the global value of the technology.
The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in which we file, the patent term is 20
years from the earliest date of filing a non-provisional patent application. In the United States, a patent’s term may be shortened if a patent is terminally disclaimed over another
patent or as a result of delays in patent prosecution by the patentee, and a patent’s term may be lengthened by patent term adjustment, which compensates a patentee for
administrative delays by the U.S. Patent and Trademark Office in granting a patent.
We intend to continuously reassess and fine-tune our intellectual property strategy in order to fortify our position in the United States and internationally. Prior to acquiring or
licensing a technology from a third party, we will evaluate the existing proprietary rights, our ability to adequately obtain and protect these rights and the likelihood or
possibility of infringement upon competing rights of others.
We will also rely upon trade secrets, know-how, continuing technological innovation, and may rely upon licensing opportunities in the future, to develop and maintain our
competitive position. We intend to protect our proprietary rights through a variety of methods, including confidentiality agreements and/or proprietary information agreements
with suppliers, employees, consultants, independent contractors and other entities who may have access to proprietary information. We will generally require employees to
assign patents and other intellectual property to us as a condition of employment with us. All of our consulting agreements will pre-emptively assign to us all new and improved
intellectual property that arise during the term of the agreement.
16
Coverage and Reimbursement
Our ability to successfully commercialize our products will depend in part on the extent to which governmental authorities, private health insurers and other third-party payors
provide coverage for and establish adequate reimbursement levels for the procedures during which our products are used.
In the United States, third-party payors continue to implement initiatives that restrict the use of certain technologies to those that meet certain clinical evidentiary
requirements. In addition to uncertainties surrounding coverage policies, there are periodic changes to reimbursement. Third-party payors regularly update reimbursement
amounts and also from time to time revise the methodologies used to determine reimbursement amounts. This includes annual updates to payments to physicians, hospitals and
ambulatory surgery centers for procedures during which our products are used. An example of payment updates is the Medicare program’s updates to hospital and physician
payments, which are done on an annual basis using a prescribed statutory formula. In the past, when the application of the formula resulted in lower payment, Congress has
passed interim legislation to prevent the reductions.
Competition
Developing and commercializing new products is highly competitive. The market is characterized by extensive research and clinical efforts and rapid technological change.
We face intense competition worldwide from medical device, biomedical technology and medical products and combination products companies, including major medical
products companies. We may be unable to respond to technological advances through the development and introduction of new products. Most of our existing and potential
competitors have substantially greater financial, marketing, sales, distribution, manufacturing and technological resources. These competitors may also be in the process of
seeking FDA or other regulatory approvals, or patent protection, for new products. Our competitors may commercialize new products in advance of our products. Our products
also face competition from numerous existing products and procedures, some of which currently are considered part of the standard of care. We believe that the principal
competitive factors in our markets are:
●
the quality of outcomes for medical conditions;
●
acceptance by surgeons and the medical device market generally;
●
ease of use and reliability;
●
technical leadership and superiority;
●
effective marketing and distribution;
●
speed to market; and
●
product price and qualification for coverage and reimbursement.
We will also compete in the marketplace to recruit and retain qualified scientific, management and sales personnel, as well as in acquiring technologies and licenses
complementary to our products or advantageous to our business. We are aware of several companies that compete or are developing technologies in our current and future
products areas. In order to compete effectively, our products will have to achieve market acceptance, receive adequate insurance coverage and reimbursement, be cost effective
and be simultaneously safe and effective.
17
Government Regulation
Government authorities in the United States, at the federal, state and local level, and in other countries extensively regulate, among other things, the research, development,
testing, manufacture, quality control, approval, labeling, packaging, storage, recordkeeping, promotion, advertising, distribution, post-approval monitoring and reporting,
marketing and export and import of products such as those we are developing. The following is a summary of the government regulations applicable to our business.
Healthcare Reform
Current and future legislative proposals to further reform healthcare or reduce healthcare costs may result in lower reimbursement for our products, or for the procedures
associated with the use of our products, or limit coverage of our products. The cost containment measures that payors and providers are instituting and the effect of any
healthcare reform initiative implemented in the future could significantly reduce our revenues from the sale of our products. Alternatively, the shift away from fee-for-service
agreements to capitated payment models may support the value of our products which can be shown to decrease resource utilization and lead to cost saving - for both payors and
providers.
The implementation of the Affordable Care Act is an example that has the potential to substantially change healthcare financing and delivery by both governmental and
private insurers, and significantly impact the pharmaceutical and medical device industries.
The Affordable Care Act imposed, among other things, a new federal excise tax on the sale of certain medical devices. The Consolidated Appropriations Act, 2016 (Pub. L.
114-113), signed into law on Dec. 18, 2015, included a two-year moratorium on the medical device excise tax imposed by Internal Revenue Code section 4191. Because of the
moratorium, the medical device excise tax did not apply to sales of taxable medical devices during the period beginning on Jan. 1, 2016, and ending on Dec. 31, 2017. The
moratorium expired on Dec. 31, 2017. On January 22, 2018 as part of a stop gap spending bill, President Trump signed into law a moratorium for an additional two years
retroactive to January 1, 2018. The tax will not go into effect until January 1, 2020.
In addition, the ACA implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to
improve the coordination, quality and efficiency of certain healthcare services through bundled payment models. In addition, other legislative changes have been proposed and
adopted since the Patient Protection and Affordable Care Act, (“PPACA”) was enacted. On August 2, 2011, President Obama signed into law the Budget Control Act of 2011,
which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee
did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government
programs. This includes reductions to Medicare payments to providers of 2.0% per fiscal year, which went into effect on April 1, 2013, and will stay in effect through 2024
unless congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 took effect, which, among other things, reduced Medicare payments to
several providers, including hospitals, imaging centers and cancer treatment centers and increased the statute of limitations period for the government to recover overpayments
to providers from three to five years. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts
that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional pricing pressure.
Additionally, there is no assurance the PPACA, in whole or in part, will not be repealed in the future. Any impact such a repeal would have on the medical device industry
remains unclear.
18
FDA Regulation
Any product we may develop must be cleared by the FDA before it is marketed in the United States. Before and after approval or clearance in the United States, our products
are subject to extensive regulation by the FDA under the Federal Food, Drug, and Cosmetic Act and/or the Public Health Service Act, as well as by other regulatory bodies. FDA
regulations govern, among other things, the development, testing, manufacturing, labeling, safety, storage, recordkeeping, market clearance or approval, advertising and
promotion, import and export, marketing and sales, and distribution of medical devices and products.
In the United States, medical devices are subject to varying degrees of regulatory control and are classified in one of three classes depending on the extent of controls the FDA
determines are necessary to reasonably ensure their safety and efficacy:
● Class I: general controls, such as labeling and adherence to quality system regulations;
● Class II: special controls, pre-market notification (often referred to as a 510(k) application), specific controls such as performance standards, patient registries, post-market
surveillance, additional controls such as labeling and adherence to quality system regulations; and
● Class III: special controls and approval of a PMA application.
In general, the higher the classification, the greater the time and cost to obtain approval to market. There are no “standardized” requirements for approval, even within each
class. For example, the FDA could grant 510(k) status, but require a human clinical trial, a typical requirement of a PMA. They could also initially assign a device Class III
status, but end up approving a device as a 510(k) device if certain requirements are met. The range of the number and expense of the various requirements is significant. The
quickest and least expensive pathway would be 510(k) approval with just a review of existing data. The longest and most expensive path would be a PMA with extensive
randomized human clinical trials. We cannot predict how the FDA will classify our products, nor predict what requirements will be placed upon us to obtain market approval, or
even if they will approve our products at all.
To request marketing authorization by means of a 510(k) clearance, we must submit a pre-market notification demonstrating that the proposed device is substantially
equivalent to another currently legally marketed medical device, has the same intended use, and is as safe and effective as a currently legally marketed device and does not raise
different questions of safety and effectiveness than does a currently legally marketed device. 510(k) submissions generally include, among other things, a description of the
device and its manufacturing, device labeling, medical devices to which the device is substantially equivalent, safety and biocompatibility information, and the results of
performance testing. In some cases, a 510(k) submission must include data from human clinical studies. Marketing may commence only when the FDA issues a clearance letter
finding substantial equivalence. After a device receives 510(k) clearance, any product modification that could significantly affect the safety or effectiveness of the product, or
that would constitute a significant change in intended use, requires a new 510(k) clearance or, if the device would no longer be substantially equivalent, would require PMA, or
possibly, a de novo pathway under section 513(f)2 of the Federal Food, Drug and Cosmetic Act .. In addition, any additional claims the Company wished to make at a later date
may require a PMA. If the FDA determines that the product does not qualify for 510(k) clearance, they will issue a Not Substantially Equivalent letter, at which point the
Company must submit and the FDA must approve a PMA or issue premarket clearance using the de novo before marketing can begin.
In 1997, the Food and Drug Administration Modernization Act (FDAMA) added the de novo classification pathway under section 513(f)(2) of the FD&C Act, establishing an
alternate pathway to classify new devices into Class I or II that had automatically been placed in Class III after receiving a Not Substantially Equivalent (NSE) determination in
response to a 510(k) submission. In this process, a sponsor who receives an NSE determination may, within 30 days of receiving notice of the NSE determination, request FDA
to make a risk-based classification of the device under section 513(a)(1) of the Act.
In 2012, section 513(f)(2) of the FD&C Act was amended by section 607 of the Food and Drug Administration Safety and Innovation Act (FDASIA), to provide a second
option for de novo classification. In this second pathway, a sponsor who determines that there is no legally marketed device upon which to base a determination of substantial
equivalence may request FDA to make a risk-based classification of the device under section 513(a)(1) of the Act without first submitting a 510(k).
During the review of a 510(k) submission, the FDA may request more information or additional studies and may decide that the indications for which we seek approval or
clearance should be limited. In addition, laws and regulations and the interpretation of those laws and regulations by the FDA may change in the future. We cannot foresee what
effect, if any, such changes may have on us.
19
Clinical Trials of Medical Devices
One or more clinical trials may be necessary to support an FDA submission. Clinical studies of unapproved or uncleared medical devices or devices being studied for uses for
which they are not approved or cleared (investigational devices) must be conducted in compliance with FDA requirements. If an investigational device could pose a significant
risk to patients, the sponsor company must submit an Investigational Device Exemption, or IDE application to the FDA prior to initiation of the clinical study. An IDE
application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device on humans and that the testing protocol is
scientifically sound. The IDE will automatically become effective 30 days after receipt by the FDA unless the FDA notifies the company that the investigation may not begin.
Clinical studies of investigational devices may not begin until an institutional review board (“IRB”) has approved the study.
During any study, the sponsor must comply with the FDA’s IDE requirements. These requirements include investigator selection, trial monitoring, adverse event reporting,
and record keeping. The investigators must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of
investigational devices, and comply with reporting and record keeping requirements. We, the FDA, or the IRB at each institution at which a clinical trial is being conducted may
suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable risk. During the approval or clearance process,
the FDA typically inspects the records relating to the conduct of one or more investigational sites participating in the study supporting the application.
Post-Approval Regulation of Medical Devices
After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. These include:
●
the FDA Quality Systems Regulation (QSR), which governs, among other things, how manufacturers design, test manufacture, exercise quality control over, and document
manufacturing of their products;
●
labeling and claims regulations, which prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling; and
●
the Medical Device Reporting regulation, which requires reporting to the FDA of certain adverse experience associated with use of the product.
We will continue to be subject to inspection by the FDA to determine our compliance with regulatory requirements.
Manufacturing cGMP Requirements
Manufacturers of medical devices are required to comply with FDA manufacturing requirements contained in the FDA’s current Good Manufacturing Practices (cGMP) set
forth in the quality system regulations promulgated under section 520 of the Food, Drug and Cosmetic Act. cGMP regulations require, among other things, quality control and
quality assurance as well as the corresponding maintenance of records and documentation. Failure to comply with statutory and regulatory requirements subjects a manufacturer
to possible legal or regulatory action, including the seizure or recall of products, injunctions, consent decrees placing significant restrictions on or suspending manufacturing
operations, and civil and criminal penalties. Adverse experiences with the product must be reported to the FDA and could result in the imposition of marketing restrictions
through labeling changes or in product withdrawal. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems
concerning safety or efficacy of the product occur following the approval. We expect to use contract manufacturers to manufacture our products for the foreseeable future we
will therefore be dependent on their compliance with these requirements to market our products. We work closely with our contract manufacturers to assure that our products
are in strict compliance with these regulations.
20
Other U.S. Regulation
In addition to FDA restrictions on marketing and promotion of drugs and devices, other federal and state laws restrict our business practices. These laws include, without
limitation, anti-kickback and false claims laws, data privacy and security laws, as well as transparency laws regarding payments or other items of value provided to healthcare
providers.
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some of our business
activities, including certain sales and marketing practices and the provision of certain items and services to our customers, could be subject to challenge under one or more of
such laws. If our operations are found to be in violation of any of the health regulatory laws described above or any other laws that apply to us, we may be subject to penalties,
including potentially significant criminal and civil and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in government
healthcare programs, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings, and the curtailment or restructuring of our
operations, any of which could adversely affect our ability to operate our business and our results of operations. To the extent that any of our products are sold in a foreign
country, we may be subject to similar foreign laws, which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse
laws and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals.
Physician Payment Sunshine Act
There has been a recent trend of increased federal and state regulation of payments and transfers of value provided to healthcare professionals or entities. On February 8,
2013, the Centers for Medicare & Medicaid Services, or CMS, released its final rule implementing section 6002 of the Affordable Care Act known as the Physician Payment
Sunshine Act that imposes new annual reporting requirements on device manufacturers for payments and other transfers of value provided by them, directly or indirectly, to
physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their family members. A manufacturer’s failure to submit timely,
accurately and completely the required information for all payments, transfers of value or ownership or investment interests may result in civil monetary penalties of up to an
aggregate of $150,000 per year, and up to an aggregate of $1 million per year for “knowing failures.” Manufacturers that produces at least one product reimbursed by
Medicare, Medicaid, or Children’s Health Insurance Program and i.) If the product is a drug or biological, and it requires a prescription (or physician’s authorization) to
administer; or ii.) If the product is a device or medical supply, and it requires premarket approval or premarket notification by the FDA are required to comply with the Open
Payments (commonly referred to as the Sunshine Act) filing requirements under CMS. We currently do not have any products covered by Medicare, Medicaid, or Children’s
Health Insurance Program as none of our products have premarket approval or clearance notification. We expect that once our products receive regulatory clearance, we will be
required to comply with the Sunshine Act provisions.
Certain states, such as California and Connecticut, also mandate implementation of commercial compliance programs, and other states, such as Massachusetts and Vermont,
impose restrictions on device manufacturer marketing practices and require tracking and reporting of gifts, compensation and other remuneration to healthcare professionals and
entities. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance or reporting
requirements in multiple jurisdictions increase the possibility that a healthcare company may fail to comply fully with one or more of these requirements.
Federal Anti-Kickback Statute
The Federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving any remuneration (including any kickback,
bribe or rebate), directly or indirectly, overtly or covertly, to induce or in return for purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order
of any good, facility, item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federal healthcare programs. The term “remuneration” has been
broadly interpreted to include anything of value. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from
prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or
recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory
exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a
case-by-case basis based on a cumulative review of all its facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one
purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the Anti-Kickback Statute has been violated.
Additionally, the intent standard under the Anti-Kickback Statute was amended by the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care
and Education Reconciliation Act of 2010, collectively the Affordable Care Act, to a stricter standard such that a person or entity no longer needs to have actual knowledge of
the statute or specific intent to violate it in order to have committed a violation. In addition, the Affordable Care Act codified case law that a claim including items or services
resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.
21
Federal False Claims Act
The False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment or
approval to the federal government or knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal
government. A claim includes “any request or demand” for money or property presented to the U.S. government. The False Claims Act also applies to false submissions that
cause the government to be paid less than the amount to which it is entitled, such as a rebate. Intent to deceive is not required to establish liability under the False Claims Act.
Several pharmaceutical, device and other healthcare companies have been prosecuted under these laws for, among other things, allegedly providing free product to customers
with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of
the companies’ marketing of products for unapproved, and thus noncovered uses.
The government may further prosecute, as a crime, conduct constituting a false claim under the False Claims Act. The False Claims Act prohibits the making or presenting of
a claim to the government knowing such claim to be false, fictitious, or fraudulent and, unlike civil claims under the False Claims Act, requires proof of intent to submit a false
claim.
The Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act, or the FCPA, prohibits any U.S. individual or business from paying, offering, or authorizing payment or offering of anything of value,
directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or
business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with accounting provisions requiring
the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain
an adequate system of internal accounting controls for international operations. Activities that violate the FCPA, even if they occur wholly outside the United States, can result
in criminal and civil fines, imprisonment, disgorgement, oversight, and debarment from government contracts.
International Regulation
In order to market any product outside of the United States, we would need to comply with numerous and varying regulatory requirements of other countries and jurisdictions
regarding quality, safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of our products. We may be
subject to regulations and product registration requirements in the areas of product standards, packaging requirements, labeling requirements, import and export restrictions and
tariff regulations, duties and tax requirements. Whether or not we obtain FDA approval for a product, we would need to obtain the necessary approvals by the comparable
foreign regulatory authorities before we can commence clinical trials or marketing of the product in foreign countries and jurisdictions. The time required to obtain clearance
required by foreign countries may be longer or shorter than that required for FDA clearance, and requirements for licensing a product in a foreign country may differ
significantly from FDA requirements.
European Union
The European Union or EU will require a CE mark certification or approval in order to market our products in the various countries of the European Union or other countries
outside the United States. To obtain CE mark certification of our products, we will be required to work with an accredited European notified body organization to determine the
appropriate documents required to support certification in accordance with existing medical device directive. The predictability of the length of time and cost associated with
such a CE mark may vary, or may include lengthy clinical trials to support such a marking. Once the CE mark is obtained, we may market our product in the countries of the
EU.
European Good Manufacturing Practices
In the European Union, the manufacture of medical devices is subject to good manufacturing practice (GMP), as set forth in the relevant laws and guidelines of the European
Union and its member states. Compliance with GMP is generally assessed by the competent regulatory authorities. Typically, quality system evaluation is performed by a
Notified Body, which also recommends to the relevant competent authority for the European Community CE Marking of a device. The Competent Authority may conduct
inspections of relevant facilities, and review manufacturing procedures, operating systems and personnel qualifications. In addition to obtaining approval for each product, in
many cases each device manufacturing facility must be audited on a periodic basis by the Notified Body. Further inspections may occur over the life of the product.
22
Employees
Currently, we have five compensated employees, including our Chairman of the board of directors and Chief Executive Officer (“CEO”), our Executive Vice President and
Chief Financial Officer (“CFO”), and our Chief Medical Officer (“CMO”), each of whom are named executive officers, along with our Vice Chairman, who is currently not a
compensated employee of the Company, but is a member of our board of directors. No employees are covered by a collective bargaining agreement. We consider our
relationship with our employees to be good.
Available Information
We make available free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We make these reports available
through our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to the SEC. We also make available, free of charge on
our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably
practicable after copies of those filings are provided to us by those persons. The public also may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m. The public may obtain information on the
operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains an Internet site (http://www.sec.gov) that contains reports,
proxy and information statements, and other information regarding us that we file electronically with the SEC.
Our website address is http://www.pavmed.com. The content of our website is not incorporated by reference into this Annual Report on Form 10-K, nor in any other report or
document we file with the SEC, and any reference to our website are intended to be inactive textual references only.
23
Item 1A Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below
are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If
any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected.
We have incurred operating losses since our inception and may not be able to achieve profitability.
Risks Related to Financial Position and Capital Resources
We have incurred net losses since our inception. We incurred a net loss attributable to common stockholders of $10,398,134 and $5,650,851, and had net cash flows used in
operating activities of $6,608,208 and $4,454,857, for the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017, we had an accumulated deficit of
$17,907,611 To date, since our inception in June 2014, we have financed our operations principally through issuances of common stock, preferred stock, warrants, and debt, in
both private placements, our IPO in April 2016, and in an underwritten public offering of shares of our common stock pursuant to a previously filed effective shelf registration
statement. Our ability to generate sufficient revenue from any of our products in development, and to transition to profitability and generate consistent positive cash flows is
dependent upon factors that may be outside of our control. We expect our operating expenses will continue to increase as we continue to build our commercial infrastructure,
develop, enhance and commercialize new products and incur additional operational and reporting costs associated with being a public company. As a result, we expect to
continue to incur operating losses for the foreseeable future. These factors raise substantial doubt about our ability to continue as a going concern.
We have concluded there is substantial doubt of our ability to continue as a going concern and our independent registered public accounting firm’s report on our financial
statements contains an explanatory paragraph describing our ability to continue as a going concern.
In our December 31, 2017 consolidated financial statements, we have concluded and stated our recurring losses from operations, recurring cash flows used in operations,
accumulated deficit, and the requirement to raise additional capital to support our operating and capital expenditures, raise substantial doubt regarding our ability to continue as
a going concern. Correspondingly, our independent registered public accounting firm’s report on our consolidated financial statements also includes an explanatory paragraph
expressing substantial doubt about our ability to continue as a going concern. Our plans to address this going concern risk include pursuing additional offerings of debt and /or
equity securities. The consolidated financial statements do not include any adjustments that might result from our inability to consummate such offerings or our ability to
continue as a going concern. Moreover, there is no assurance if we consummate additional offerings, we will raise sufficient proceeds in such offerings to pay our financial
obligations as they become due. These factors raise substantial doubt about our ability to continue as a going concern.
We may need substantial additional funding and may be unable to raise capital when needed, which could force us to delay, reduce, eliminate or abandon growth
initiatives or product development programs.
We intend to continue to make investments to support our business growth. Because we have not generated any revenue or cash flow to date, we will require additional funds
to:
●
continue our research and development;
●
protect our intellectual property rights or defend, in litigation or otherwise, any claims that we infringe third-party patents or other intellectual property rights;
●
fund our operations;
●
deliver our new products, if any such products receive regulatory clearance or approval for commercial sale;
● market acceptance of our products;
●
the cost and timing of expanding our sales, marketing and distribution capabilities;
●
the effect of competing technological and market developments; and
●
the extent to which we acquire or invest in businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types
of transactions.
If we do not have, or are not able to obtain, sufficient funds, we may have to delay product development initiatives or license to third parties the rights to commercialize
products or technologies that we would otherwise seek to market. We also may have to reduce marketing, customer support or other resources devoted to our products.
24
Risks Associated with Our Business
Since we have a limited operating history, and have not generated any revenues, you will have little basis upon which to evaluate our ability to achieve our business
objective.
Since we have a limited operating history, and have not generated any revenues, you will have little basis upon which to evaluate our ability to achieve our business objective.
We are subject to all of the problems, expenses, delays and other risks inherent in any new business, as well as problems inherent in establishing a name and business reputation.
The markets in which we operate are highly competitive, and we may not be able to effectively compete against other providers of medical devices, particularly those with
greater resources.
We face intense competition from companies with dominant market positions in the medical device industry. These competitors have significantly greater financial, technical,
marketing and other resources than we have and may be better able to:
●
respond to new technologies or technical standards;
●
react to changing customer requirements and expectations;
●
acquire other companies to gain new technologies or products that may displace our products;
● manufacture, market and sell products;
●
acquire, prosecute, enforce and defend patents and other intellectual property;
●
devote resources to the development, production, promotion, support and sale of products; and
●
deliver a broad range of competitive products at lower prices.
We expect competition in the markets in which we participate to continue to increase as existing competitors improve or expand their product offerings.
Our future performance will depend largely on the success of products we have not yet developed.
Technology is an important component of our business and growth strategy, and our success depends on the development, implementation and acceptance of our products.
Commitments to develop new products must be made well in advance of any resulting sales, and technologies and standards may change during development, potentially
rendering our products outdated or uncompetitive before their introduction. Our ability to develop products to meet evolving industry requirements and at prices acceptable to
our customers will be significant factors in determining our competitiveness. We may expend considerable funds and other resources on the development of our products
without any guarantee that these products will be successful. If we are not successful in bringing one or more products to market, whether because we fail to address
marketplace demand, fail to develop viable technologies or otherwise, we may not generate any revenues and our results of operations could be seriously harmed.
Our products may never achieve market acceptance.
To date, we have not generated any revenues. Our ability to generate revenues from product sales and to achieve profitability will depend upon our ability to successfully
commercialize our products. Because we have not yet begun to offer any of our products for sale, we have no basis to predict whether any of our products will achieve market
acceptance. A number of factors may limit the market acceptance of any of our products, including:
●
the timing of regulatory approvals of our products and market entry compared to competitive products;
●
the effectiveness of our products, including any potential side effects, as compared to alternative treatments;
●
the rate of adoption of our products by hospitals, doctors and nurses and acceptance by the health care community;
●
the product labeling or product inserts required by regulatory authorities for each of our products;
●
the competitive features of our products, including price, as compared to other similar products;
●
the availability of insurance or other third-party reimbursement, such as Medicare, for patients using our products;
●
the extent and success of our marketing efforts and those of our collaborators; and
●
unfavorable publicity concerning our products or similar products.
25
Any products we may develop may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, thereby
harming our business.
The regulations that govern marketing approvals, pricing and reimbursement for new products vary widely from country to country. Some countries require approval of the
sale price of a product before it can be marketed. In many countries, the pricing review period begins after marketing approval is granted. In some foreign markets, pricing
remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain regulatory approval for a product in a particular country,
but then be subject to price regulations that delay our commercial launch of the product and negatively impact the revenue we are able to generate from the sale of the product in
that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more other products we may develop, even if our other products we may
develop obtain regulatory approval.
Our ability to commercialize any products we may develop successfully also will depend in part on the extent to which reimbursement for these products and related
treatments becomes available from government health administration authorities, private health insurers and other organizations. Government authorities and third-party payors,
such as private health insurers and health maintenance organizations, decide which treatments they will pay for and establish reimbursement levels. A primary trend in the U.S.
healthcare industry and elsewhere is cost containment. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount
of reimbursement for particular treatments. We cannot be sure that reimbursement will be available for any product that we commercialize and, if reimbursement is available,
what the level of reimbursement will be. Reimbursement may impact the demand for, or the price of, any product for which we obtain marketing approval. If reimbursement is
not available or is available only to limited levels, we may not be able to successfully commercialize any product that we successfully develop.
Moreover, eligibility for reimbursement does not imply that any product will be paid for in all cases or at a rate that covers our costs, including research, development,
manufacture, sale and distribution. Payment rates may vary according to the use of the product and the clinical setting in which it is used, may be based on payments allowed for
lower cost products that are already reimbursed and may be incorporated into existing payments for other services. Net prices for products may be reduced by mandatory
discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of products from countries
where they may be sold at lower prices than in the U.S. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own
reimbursement policies. Our inability to promptly obtain coverage and profitable payment rates from both government funded and private payors could have a material adverse
effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition. To obtain reimbursement or pricing approval in
some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product to other available therapies. Our business could be materially
harmed if reimbursement of any products we may develop, if any, is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels.
Any products we may develop may cause serious adverse side effects or even death or have other properties that could delay or prevent their regulatory approval, limit the
commercial desirability of an approved label or result in significant negative consequences following any marketing approval.
The risk of failure of clinical development is high. It is impossible to predict when or if any products we may develop will prove safe enough to receive regulatory approval.
Undesirable side effects caused by any products we may develop could cause us or regulatory authorities to interrupt, delay or halt clinical trials. They could also result in a
more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authority.
Additionally, after receipt of marketing approval of any products we may develop, if we or others later identify undesirable side effects or even deaths caused by such
product, a number of potentially significant negative consequences could result, including:
● we may be forced to recall such product and suspend the marketing of such product;
●
regulatory authorities may withdraw their approvals of such product;
●
regulatory authorities may require additional warnings on the label that could diminish the usage or otherwise limit the commercial success of such products;
●
●
the FDA or other regulatory bodies may issue safety alerts, Dear Healthcare Provider letters, press releases or other communications containing warnings about such
product;
the FDA may require the establishment or modification of Risk Evaluation Mitigation Strategies or a comparable foreign regulatory authority may require the establishment
or modification of a similar strategy that may, for instance, restrict distribution of our products and impose burdensome implementation requirements on us;
● we may be required to change the way the product is administered or conduct additional clinical trials;
● we could be sued and held liable for harm caused to subjects or patients;
● we may be subject to litigation or product liability claims; and
●
our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of the particular product.
26
Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.
We face an inherent risk of product liability exposure related to the sale of any products we may develop. The marketing, sale and use of any products we may develop could
lead to the filing of product liability claims against us if someone alleges product failures, product malfunctions, manufacturing flaws, or design defects, resulted in injury to
patients. We may also be subject to liability for a misunderstanding of, or inappropriate reliance upon, the information we provide. If we cannot successfully defend ourselves
against claims that any product we may develop caused injuries, we may incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
●
decreased demand for our products;
●
injury to our reputation and significant negative media attention;
● withdrawal of patients from clinical studies or cancellation of studies;
●
significant costs to defend the related litigation and distraction to our management team;
●
substantial monetary awards to patients;
●
loss of revenue; and
●
the inability to commercialize any products that we may develop.
In addition, insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any
liability that may arise.
Our business may suffer if we are unable to manage our growth.
If we fail to effectively manage our growth, our ability to execute our business strategy could be impaired. The anticipated rapid growth of our business may place a strain on
our management, operations and financial systems. We need to improve existing systems and controls or implement new systems and controls in response to anticipated growth.
We may not be able to protect or enforce our intellectual property rights, which could impair our competitive position.
Our success depends significantly on our ability to protect our rights to the patents, trademarks, trade secrets, copyrights and all the other intellectual property rights used, or
expected to be used, in our products. Protecting intellectual property rights is costly and time consuming. We rely primarily on patent protection and trade secrets, as well as a
combination of copyright and trademark laws and nondisclosure and confidentiality agreements to protect our technology and intellectual property rights. However, these legal
means afford only limited protection and may not adequately protect our rights or permit us to gain or maintain any competitive advantage. Despite our intellectual property
rights practices, it may be possible for a third party to copy or otherwise obtain and use our technology without authorization, develop similar technology independently or
design around our patents.
We cannot be assured that any of our pending patent applications will result in the issuance of a patent to us. The U.S. Patent and Trademark Office (“PTO”) may deny or
require significant narrowing of claims in our pending patent applications, and patents issued as a result of the pending patent applications, if any, may not provide us with
significant commercial protection or be issued in a form that is advantageous to us. We could also incur substantial costs in proceedings before the PTO. Patents that may be
issued to or licensed by us in the future may expire or may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related
technologies. Upon expiration of our issued or licensed patents, we may lose some of our rights to exclude others from making, using, selling or importing products using the
technology based on the expired patents. There is no assurance that competitors will not be able to design around our patents.
Further, we may not be able to obtain patent protection or secure other intellectual property rights in all the countries in which we operate, and under the laws of such
countries, patents and other intellectual property rights may be unavailable or limited in scope. If any of our patents fails to protect our technology, it would make it easier for
our competitors to offer similar products. Our trade secrets may be vulnerable to disclosure or misappropriation by employees, contractors and other persons. Any inability on
our part to adequately protect our intellectual property may have a material adverse effect on our business, financial condition and results of operations.
We also rely on unpatented proprietary technology. We cannot assure you that we can meaningfully protect all our rights in our unpatented proprietary technology or that
others will not independently develop substantially equivalent proprietary products or processes or otherwise gain access to our unpatented proprietary technology. We seek to
protect our know-how and other unpatented proprietary technology, as trade secrets or otherwise, with confidentiality agreements and/or intellectual property assignment
agreements with our team members, independent distributors and consultants. However, such agreements may not be enforceable or may not provide meaningful protection for
our proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements or in the event that our competitors discover or independently
develop similar or identical designs or other proprietary information. Our trade secrets may be vulnerable to disclosure or misappropriation by employees, contractors and other
persons.
In addition, we intend to rely on the use of registered and common law trademarks with respect to the brand names of some of our products. Common law trademarks provide
less protection than registered trademarks. Loss of rights in our trademarks could adversely affect our business, financial condition and results of operations.
27
We may be subject to intellectual property infringement claims by third parties which could be costly to defend, divert management’s attention and resources, and may
result in liability.
The medical device industry is characterized by vigorous protection and pursuit of intellectual property rights. Companies in the medical device industry have used
intellectual property litigation to gain a competitive advantage in the marketplace. From time to time, third parties may assert against us their patent, copyright, trademark and
other intellectual property rights relating to technologies that are important to our business. Searching for existing intellectual property rights may not reveal important
intellectual property and our competitors may also have filed for patent protection, which is not publicly-available information, or claimed trademark rights that have not been
revealed through our availability searches. We may be subject to claims that our team members have disclosed, or that we have used, trade secrets or other proprietary
information of our team members’ former employers. Our efforts to identify and avoid infringing on third parties’ intellectual property rights may not always be successful.
Any claims that our products or processes infringe these rights, regardless of their merit or resolution, could be costly, time consuming and may divert the efforts and attention
of our management and technical personnel. In addition, we may not prevail in such proceedings given the complex technical issues and inherent uncertainties in intellectual
property litigation.
Any claims of patent or other intellectual property infringement against us, even those without merit, could:
●
increase the cost of our products;
●
be expensive and/or time consuming to defend;
●
result in our being required to pay significant damages to third parties;
●
force us to cease making or selling products that incorporate the challenged intellectual property;
●
require us to redesign, reengineer or rebrand our products and technologies;
●
require us to enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property on terms that may not be favorable or
acceptable to us;
●
require us to develop alternative non-infringing technology, which could require significant effort and expense;
●
require us to indemnify third parties pursuant to contracts in which we have agreed to provide indemnification for intellectual property infringement claims; and,
●
result in our customers or potential customers deferring or limiting their purchase or use of the affected products impacted by the claims until the claims are resolved.
Any of the foregoing could affect our ability to compete or have a material adverse effect on our business, financial condition and results of operations.
Competitors may violate our intellectual property rights, and we may bring litigation to protect and enforce our intellectual property rights, which may result in substantial
expense and may divert our attention from implementing our business strategy.
We believe that the success of our business depends, in significant part, on obtaining patent protection for our products and technologies, defending our patents and
preserving our trade secrets. Our failure to pursue any potential claim could result in the loss of our proprietary rights and harm our position in the marketplace. Therefore, we
may be forced to pursue litigation to enforce our rights. Future litigation could result in significant costs and divert the attention of our management and key personnel from our
business operations and the implementation of our business strategy.
We or our third-party manufacturers may not have the manufacturing and processing capacity to meet the production requirements of clinical testing or consumer demand
in a timely manner.
Our capacity to conduct clinical trials and commercialize our products will depend in part on our ability to manufacture or provide our products on a large scale, at a
competitive cost and in accordance with regulatory requirements. We must establish and maintain a commercial scale manufacturing process for all of our products to complete
clinical trials. We or our third-party manufacturers may encounter difficulties with these processes at any time that could result in delays in clinical trials, regulatory submissions
or the commercialization of products.
For some of our products, we or our third-party manufacturers will need to have sufficient production and processing capacity in order to conduct human clinical trials, to
produce products for commercial sale at an acceptable cost. We have no experience in large-scale product manufacturing, nor do we have the resources or facilities to
manufacture most of our products on a commercial scale. We cannot guarantee that we or our third-party manufacturers will be able to increase capacity in a timely or cost-
effective manner, or at all. Delays in providing or increasing production or processing capacity could result in additional expense or delays in our clinical trials, regulatory
submissions and commercialization of our products.
The manufacturing processes for our products have not yet been tested at commercial levels, and it may not be possible to manufacture or process these materials in a cost-
effective manner.
28
We will be dependent on third-party manufacturers since we will not initially directly manufacture our products.
Initially, we will not directly manufacture our products and will rely on third parties to do so for us. If our manufacturing and distribution agreements are not satisfactory, we
may not be able to develop or commercialize products as planned. In addition, we may not be able to contract with third parties to manufacture our products in an economical
manner. Furthermore, third-party manufacturers may not adequately perform their obligations, may delay clinical development or submission of products for regulatory
approval or otherwise may impair our competitive position. We may not be able to enter into or maintain relationships with manufacturers that comply with good manufacturing
practices. If a product manufacturer fails to comply with good manufacturing practices, we could experience significant time delays or we may be unable to commercialize or
continue to market the products. Changes in our manufacturers could require costly new product testing and facility compliance inspections. In the United States, failure to
comply with good manufacturing practices or other applicable legal requirements can lead to federal seizure of violative products, injunctive actions brought by the federal
government, and potential criminal and civil liability on the part of a company and its officers and employees. Because of these and other factors, we may not be able to replace
our manufacturing capacity quickly or efficiently in the event that our manufacturers are unable to manufacture our products at one or more of their facilities. As a result, the
sale and marketing of our products could be delayed or we could be forced to develop our own manufacturing capacity, which could require substantial additional funds and
personnel and compliance with extensive regulations.
We may be dependent on the sales and marketing efforts of third parties if we choose not to develop an extensive sales and marketing staff.
Initially, we will depend on the efforts of third parties (including sales agents and distributors) to carry out the sales and marketing of our products. We anticipate that each
third party will control the amount and timing of resources generally devoted to these activities. However, these third parties may not be able to generate demand for our
products. In addition, there is a risk that these third parties will develop products competitive to ours, which would likely decrease their incentive to vigorously promote and sell
our products. If we are unable to enter into co-promotion agreements or to arrange for third-party distribution of our products, we will be required to expend time and resources
to develop an effective internal sales force. However, it may not be economical for us to market our own products or we may be unable to effectively market our products.
Therefore, our business could be harmed if we fail to enter into arrangements with third parties for the sales and marketing of our products or otherwise fail to establish
sufficient marketing capabilities.
Our officers will allocate their time to other businesses thereby potentially limiting the amount of time they devote to our affairs. This conflict of interest could have a
negative impact on our operations.
Our officers are not required to commit their full time to our affairs, which could create a conflict of interest when allocating their time between our operations and their other
commitments. We presently expect each of our employees to devote such amount of time as they reasonably believe is necessary to our business. All of our officers are
engaged in several other business endeavors and are not obligated to devote any specific number of hours to our affairs. If our officers’ other business affairs require them to
devote more substantial amounts of time to such affairs, it could limit their ability to devote time to our affairs and could have a negative impact on our operations. We cannot
assure you these conflicts will be resolved in our favor.
Our ability to be successful will be totally dependent upon the efforts of our key personnel.
Our ability to successfully carry out our business plan is dependent upon the efforts of our key personnel. We cannot assure you that any of our key personnel will remain
with us for the immediate or foreseeable future. The unexpected loss of the services of our key personnel could have a detrimental effect on us. We may also be unable to attract
and retain additional key personnel in the future. An inability to do so may impact our ability to continue and grow our operations.
Our officers have fiduciary obligations to other companies and, accordingly, may have conflicts of interest in determining to which entity a particular business opportunity
should be presented.
Certain of our officers have fiduciary obligations to other companies engaged in medical device business activities, namely Saphena Medical, Kaleidoscope Medical and
Cruzar Medsystems. Accordingly, they may participate in transactions and have obligations that may be in conflict or competition with our business. As a result, a potential
business opportunity may be presented by certain members of our management team to another entity prior to its presentation to us and we may not be afforded the opportunity
to engage in such a transaction.
29
Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct
business.
Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business.
These factors include:
●
challenges associated with cultural differences, languages and distance;
●
differences in clinical practices, needs, products, modalities and preferences;
●
longer payment cycles in some countries;
●
credit risks of many kinds;
●
legal and regulatory differences and restrictions;
●
currency exchange fluctuations;
●
foreign exchange controls that might prevent us from repatriating cash earned in certain countries;
●
political and economic instability and export restrictions;
●
variability in sterilization requirements for multi-usage surgical devices;
●
potential adverse tax consequences;
●
higher cost associated with doing business internationally;
●
challenges in implementing educational programs required by our approach to doing business;
●
negative economic developments in economies around the world and the instability of governments, including the threat of war, terrorist attacks, epidemic or civil unrest;
●
adverse changes in laws and governmental policies, especially those affecting trade and investment;
●
pandemics, such as the Ebola virus, the enterovirus and the avian flu, which may adversely affect our workforce as well as our local suppliers and customers;
●
import or export licensing requirements imposed by governments;
●
differing labor standards;
●
differing levels of protection of intellectual property;
●
the threat that our operations or property could be subject to nationalization and expropriation;
●
varying practices of the regulatory, tax, judicial and administrative bodies in the jurisdictions where we operate; and
●
potentially burdensome taxation and changes in foreign tax.
Any products we may develop may not be approved for sale in the U.S. or in any other country.
Risks Related to Government Regulation
Neither we nor any future collaboration partner can commercialize any products we may develop in the U.S. or in any foreign country without first obtaining regulatory
approval for the product from the FDA or comparable foreign regulatory authorities. The approval route in the U.S. for any products we may develop may be either via the PMA
process, a de novo 510(k) pathway, or traditional 510(k). The PMA approval process is more complex, costly and time consuming than the 510(k) process. Additional
randomized, controlled clinical trials may be necessary to obtain approval. The approval process may take several years to complete, and may never be obtained. Before
obtaining regulatory approvals for the commercial sale of any product we may develop in the U.S., we must demonstrate with substantial evidence, gathered in preclinical and
well-controlled clinical studies, that the planned products are safe and effective for use for that target indication. We may not conduct such a trial or may not successfully enroll
or complete any such trial. Any products we may develop may not achieve the required primary endpoint in the clinical trial, and may not receive regulatory approval. We must
also demonstrate that the manufacturing facilities, processes and controls for any products we may develop are adequate. Moreover, obtaining regulatory approval in one
country for marketing of any products we may develop does not ensure we will be able to obtain regulatory approval in other countries, while a failure or delay in obtaining
regulatory approval in one country may have a negative effect on the regulatory process in other countries.
Even if we or any future collaboration partner were to successfully obtain a regulatory approval for any product we may develop, any approval might contain significant
limitations related to use restrictions for specified age groups, warnings, precautions or contraindications, or may be subject to burdensome post-approval study or risk
management requirements. If we are unable to obtain regulatory approval for any products we may develop in one or more jurisdictions, or any approval contains significant
limitations, we may not be able to obtain sufficient revenue to justify commercial launch. Also, any regulatory approval of a product, once obtained, may be withdrawn. If we
are unable to successfully obtain regulatory approval to sell any products we may develop in the U.S. or other countries, our business, financial condition, results of operations
and growth prospects could be adversely affected.
30
The regulatory approval process is expensive, time consuming and uncertain, and may prevent us or our partners from obtaining approval for the commercialization of any
products we may develop. Approval of products in the U.S. or other territories may require that we, or a partner, conduct randomized, controlled clinical trials.
The regulatory pathway in the U.S. for approval of the products we are currently developing has not been determined. However, it is possible the FDA will require us to file
for approval via the PMA pathway for one or more of our planned products. In this case, the FDA is likely to require that randomized, controlled clinical trials be conducted
before an application for approval can be filed. These are typically expensive and time consuming, and require substantial commitment of financial and personnel resources
from the sponsoring company. These clinical trials also entail significant risk, and the resulting data may not be sufficient to support approval by the FDA or other regulatory
bodies.
Furthermore, regulatory approval of a PMA or a 510(k) pathway is not guaranteed, and the filing and approval process itself is expensive and may take several years. The
FDA also has substantial discretion in the approval process. Despite the time and expense exerted, failure may occur at any stage, and we could encounter problems that cause
us to abandon or repeat clinical studies. The FDA can delay, limit, or deny approval of a future product for many reasons, including but not limited to:
●
a future product may not be deemed to be safe and effective;
●
FDA officials may not find the data from clinical and preclinical studies sufficient;
●
the FDA may not approve our or our third-party manufacturer’s processes or facilities; or
●
the FDA may change its approval policies or adopt new regulations.
If any products we may develop fail to demonstrate safety and efficacy in further clinical studies may be required, or do not gain regulatory approval, our business and results
of operations will be materially and adversely harmed.
Even if we receive regulatory approval for any product we may develop, we will be subject to ongoing regulatory obligations and continued regulatory review, which may
result in significant additional expense and subject us to penalties if we fail to comply with applicable regulatory requirements.
Once regulatory approval has been obtained, the approved product and its manufacturer are subject to continual review by the FDA or non-U.S. regulatory authorities. Our
regulatory approval for any products we may develop may be subject to limitations on the indicated uses for which the product may be marketed. Future approvals may contain
requirements for potentially costly post-marketing follow-up studies to monitor the safety and efficacy of the approved product. In addition, we are subject to extensive and
ongoing regulatory requirements by the FDA and other regulatory authorities with regard to the labeling, packaging, adverse event reporting, storage, advertising, promotion and
recordkeeping for our products. In addition, we are required to comply with cGMP regulations regarding the manufacture of any products we may develop, which include
requirements related to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Further, regulatory authorities must
approve these manufacturing facilities before they can be used to manufacture drug products, and these facilities are subject to continual review and periodic inspections by the
FDA and other regulatory authorities for compliance with cGMP regulations. If we or a third party discover previously unknown problems with a product, such as adverse
events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory authority may impose restrictions on that product,
the manufacturer or us, including requiring withdrawal of the product from the market or suspension of manufacturing.
Failure to obtain regulatory approvals in foreign jurisdictions will prevent us from marketing our products internationally.
We intend to seek distribution and marketing partners for one or more of the products we may develop in foreign countries. The approval procedures vary among countries
and can involve additional clinical testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Moreover, clinical studies or
manufacturing processes conducted in one country may not be accepted by regulatory authorities in other countries. Approval by the FDA does not ensure approval by
regulatory authorities in other countries, and approval by one or more foreign regulatory authorities does not ensure approval by regulatory authorities in other foreign countries
or by the FDA. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. The foreign
regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. We
may not be able to file for regulatory approvals and even if we file we may not receive necessary approvals to commercialize our products in any market.
31
Healthcare reform measures could hinder or prevent our products’ commercial success.
In the U.S., there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system in ways that could affect our
future revenue and profitability and the future revenue and profitability of our potential customers. Federal and state lawmakers regularly propose and, at times, enact legislation
that could result in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. For example, one of
the most significant healthcare reform measures in decades, the PPACA, was enacted in 2010. The PPACA contains a number of provisions, including those governing
enrollment in federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which will impact existing government healthcare programs and will
result in the development of new programs. The PPACA, among other things:
●
imposes a tax of 2.3% on the retail sales price of medical devices sold after December 31, 2012 (On January 22, 2018, the implementation of the medical device tax was
deferred until January 1, 2020); and
●
could result in the imposition of injunctions.
While the U.S. Supreme Court upheld the constitutionality of most elements of the PPACA in June 2012, other legal challenges are still pending final adjudication in several
jurisdictions. In addition, Congress has also proposed a number of legislative initiatives, including possible repeal of the PPACA. At this time, it remains unclear whether there
will be any changes made to the PPACA, whether to certain provisions or its entirety. The 2.3% tax on sales of medical devices may be applicable to sales of one or more
products we may develop. We cannot assure you that the PPACA, as currently enacted or as amended in the future, will not adversely affect our business and financial results
and we cannot predict how future federal or state legislative or administrative changes relating to healthcare reform will affect our business.
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. For example, the Budget Control Act of 2011, among other things,
created the Joint Select Committee on Deficit Reduction to recommend proposals for spending reductions to Congress. The Joint Select Committee did not achieve a targeted
deficit reduction of at least $1.2 trillion for the years 2013 through 2021, which triggered the legislation’s automatic reduction to several government programs, including
aggregate reductions to Medicare payments to providers of up to 2.0% per fiscal year, starting in 2013. In January 2013, President Obama signed into law the American
Taxpayer Relief Act of 2012, or the ATRA, which delayed for another two months the budget cuts mandated by the sequestration provisions of the Budget Control Act of 2011.
The ATRA, among other things, also reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to
recover overpayments to providers from three to five years. In March 2013, President Obama signed an executive order implementing sequestration, and in April 2013, the
2.0% Medicare reductions went into effect. We cannot predict whether any additional legislative changes will affect our business.
There likely will continue to be legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost of health care. We cannot predict
the initiatives that may be adopted in the future or their full impact. The continuing efforts of the government, insurance companies, managed care organizations and other
payors of healthcare services to contain or reduce costs of health care may adversely affect:
●
our ability to set a price that we believe is fair for our products;
●
our ability to generate revenue and achieve or maintain profitability; and
●
the availability of capital.
Further, changes in regulatory requirements and guidance may occur, both in the United States and in foreign countries, and we may need to amend clinical study protocols to
reflect these changes. Amendments may require us to resubmit our clinical study protocols to IRB’s for reexamination, which may impact the costs, timing or successful
completion of a clinical study. In light of widely publicized events concerning the safety risk of certain drug and medical device products, regulatory authorities, members of
Congress, the Governmental Accounting Office, medical professionals and the general public have raised concerns about potential safety issues. These events have resulted in
the recall and withdrawal of medical device products, revisions to product labeling that further limit use of products and establishment of risk management programs that may,
for instance, restrict distribution of certain products or require safety surveillance or patient education. The increased attention to safety issues may result in a more cautious
approach by the FDA or other regulatory authorities to clinical studies and the drug approval process. Data from clinical studies may receive greater scrutiny with respect to
safety, which may make the FDA or other regulatory authorities more likely to terminate or suspend clinical studies before completion, or require longer or additional clinical
studies that may result in substantial additional expense and a delay or failure in obtaining approval or approval for a more limited indication than originally sought.
Given the serious public health risks of high profile adverse safety events with certain products, the FDA or other regulatory authorities may require, as a condition of
approval, costly risk evaluation and mitigation strategies, which may include safety surveillance, restricted distribution and use, patient education, enhanced labeling, special
packaging or labeling, expedited reporting of certain adverse events, preapproval of promotional materials and restrictions on direct-to-consumer advertising.
32
If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.
Even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, certain federal and state
healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. We could be subject to healthcare fraud and abuse
and patient privacy regulation by both the federal government and the states in which we conduct our business. The regulations that may affect our ability to operate include,
without limitation:
●
●
●
the federal healthcare program Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or
providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or
service for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs;
the U.S. Foreign Corrupt Practices Act, or FCPA, which prohibits payments or the provision of anything of value to foreign officials for the purpose of obtaining or keeping
business;
the federal False Claims Act, or FCA, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, false claims, or
knowingly using false statements, to obtain payment from the federal government, and which may apply to entities like us which provide coding and billing advice to
customers;
●
federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
●
the federal transparency requirements under the Health Care Reform Law requires manufacturers of drugs, devices, biologics and medical supplies to report to the
Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests;
●
the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, which
governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information; and
●
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party
payor, including commercial insurers.
The PPACA, among other things, amends the intent requirement of the Federal Anti-Kickback Statute and criminal healthcare fraud statutes. A person or entity no longer
needs to have actual knowledge of this statute or specific intent to violate it. In addition, the PPACA provides that the government may assert that a claim including items or
services resulting from a violation of the Federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties,
including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our
operations could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defend
against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining
compliance with applicable federal and state privacy, security and fraud laws may prove costly.
If required, clinical trials necessary to support a 510(k) notice or PMA application will be expensive and will require the enrollment of large numbers of patients, and
suitable patients may be difficult to identify and recruit. Delays or failures in our clinical trials will prevent us from commercializing any modified or new products and will
adversely affect our business, operating results and prospects.
Initiating and completing clinical trials necessary to support a 510(k) notice or a PMA application will be time-consuming and expensive and the outcome uncertain.
Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product the Company advances into clinical trials may not have favorable
results in early or later clinical trials.
Conducting successful clinical studies will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment
in clinical trials and completion of patient participation and follow-up depend on many factors, including the size of the patient population, the nature of the trial protocol, the
attractiveness of, or the discomforts and risks associated with, the treatments received by patients enrolled as subjects, the availability of appropriate clinical trial investigators,
support staff, and proximity of patients to clinical sites and ability to comply with the eligibility and exclusion criteria for participation in the clinical trial and patient
compliance. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or
follow-up to assess the safety and effectiveness of our products or if they determine that the treatments received under the trial protocols are not attractive or involve
unacceptable risks or discomforts. Patients may also not participate in our clinical trials if they choose to participate in contemporaneous clinical trials of competitive products.
In addition, patients participating in clinical trials may die before completion of the trial or suffer adverse medical events unrelated to investigational products.
Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy may be required and the Company may not adequately develop such protocols
to support clearance and approval. Further, the FDA may require the Company to submit data on a greater number of patients than it originally anticipated and/or for a longer
follow-up period or change the data collection requirements or data analysis for any clinical trials. Delays in patient enrollment or failure of patients to continue to participate in
a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of our products or result in the failure of the clinical trial. The FDA
may not consider our data adequate to demonstrate safety and efficacy. Such increased costs and delays or failures could adversely affect our business, operating results and
prospects.
33
The results of the Company’s clinical trials may not support our product candidate claims or may result in the discovery of adverse side effects.
Even if any of the Company’s clinical trials are completed as planned, it cannot be certain that study results will support product candidate claims or that the FDA or foreign
regulatory authorities will agree with our conclusions regarding them. Success in pre-clinical evaluation and early clinical trials does not ensure that later clinical trials will be
successful, and we cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our
product candidates are safe and effective for the proposed indicated uses, which could cause us to abandon a product candidate and may delay development of others. Any delay
or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our product candidates and generate revenues. It
is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the product candidate’s profile.
The Company’s medical products may in the future be subject to product recalls that could harm its reputation, business and financial results.
The FDA has the authority to require the recall of commercialized medical device products in the event of material deficiencies or defects in design or manufacture. In the
case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death.
Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by the Company or
one of its distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of the
Company’s products would divert managerial and financial resources and have an adverse effect on its financial condition and results of operations. The FDA requires that
certain classifications of recalls be reported to the FDA within ten (10) working days after the recall is initiated. Companies are required to maintain certain records of recalls,
even if they are not reportable to the FDA. The Company may initiate voluntary recalls involving its products in the future that the Company determines do not require
notification of the FDA. If the FDA disagrees with the Company’s determinations, they could require the Company to report those actions as recalls. A future recall
announcement could harm the Company’s reputation with customers and negatively affect its sales. In addition, the FDA could take enforcement action for failing to report the
recalls when they were conducted. No recalls of the Company’s medical products have been reported to the FDA.
If the Company’s medical products cause or contribute to a death or a serious injury, or malfunction in certain ways, we will be subject to medical device reporting
regulations, which can result in voluntary corrective actions or agency enforcement actions.
Under the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a device has or may have caused or
contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device or one of
our similar devices were to recur. If the Company fails to report these events to the FDA within the required timeframes, or at all, the FDA could take enforcement action against
the Company. Any such adverse event involving its products also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action,
such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of the
Company’s time and capital, distract management from operating our business, and may harm its reputation and financial results.
If the effectiveness and safety of the Company’s devices are not supported by long-term data, the Company’s future revenues could decline.
The Company’s products may not be accepted in the market if the Company does not produce clinical data supported by the independent efforts of clinicians, and if that data
indicates that treatment with the Company’s products does not provide patients with sustained benefits or that treatment with the Company’s products is less effective or less
safe than the Company’s current data suggests, the Company’s future revenues could decline. In addition, the FDA could then bring legal or regulatory enforcement actions
against the Company and/or its products including, but not limited to, recalls or requirements for pre-market 510(k) authorizations. The Company can give no assurance that its
data will be substantiated in studies involving more patients. In such a case, the Company may never achieve significant revenues or profitability.
34
If the Company is found to be promoting the use of its devices for unapproved or “off-label” uses or engaging in other noncompliant activities, the Company may be
subject to recalls, seizures, fines, penalties, injunctions, adverse publicity, prosecution, or other adverse actions, resulting in damage to its reputation and business.
The Company’s labeling, advertising, promotional materials and user training materials must comply with the FDA and other applicable laws and regulations, including the
prohibition of the promotion of a medical device for a use that has not been cleared or approved by the FDA. Obtaining 510(k) clearance or PMA approval only permits the
Company to promote its products for the uses specifically cleared by the FDA. Use of a device outside its cleared or approved indications is known as “off-label” use.
Physicians and consumers may use the Company’s products off-label because the FDA does not restrict or regulate a physician’s choice of treatment within the practice of
medicine nor is there oversight on patient use of over-the-counter devices. Although the Company may request additional cleared indications for our current products, the FDA
may deny those requests, require additional expensive clinical data to support any additional indications or impose limitations on the intended use of any cleared product as a
condition of clearance. Even if regulatory clearance or approval of a product is granted, such clearance or approval may be subject to limitations on the intended uses for which
the product may be marketed and reduce our potential to successfully commercialize the product and generate revenue from the product.
If the FDA determines that the Company’s labeling, advertising, promotional materials, or user training materials, or representations made by Company personnel, include the
promotion of an off-label use for the device, or that the Company has made false or misleading or inadequately substantiated promotional claims, or claims that could
potentially change the regulatory status of the product, the agency could take the position that these materials have misbranded the Company’s devices and request that the
Company modifies its labeling, advertising, or user training or promotional materials and/or subject the Company to regulatory or legal enforcement actions, including the
issuance of an Untitled Letter or a Warning Letter, injunction, seizure, recall, adverse publicity, civil penalties, criminal penalties, or other adverse actions. It is also possible
that other federal, state, or foreign enforcement authorities might take action if they consider the Company’s labeling, advertising, promotional, or user training materials to
constitute promotion of an unapproved use, which could result in significant fines, penalties, or other adverse actions under other statutory authorities, such as laws prohibiting
false claims for reimbursement. In that event, we would be subject to extensive fines and penalties and the Company’s reputation could be damaged and adoption of the
products would be impaired. Although the Company intends to refrain from statements that could be considered off-label promotion of its products, the FDA or another
regulatory agency could disagree and conclude that the Company has engaged in off-label promotion. For example, the Company has made statements regarding some of its
devices that the FDA may view as off-label promotion. In addition, any such off-label use of the Company’s products may increase the risk of injury to patients, and, in turn, the
risk of product liability claims, and such claims are expensive to defend and could divert the Company’s management’s attention and result in substantial damage awards
against the Company.
The Company may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and regulations and could face substantial penalties if the
Company is unable to fully comply with such laws.
While the Company does not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, many healthcare laws and regulations
apply to the Company’s business. For example, the Company could be subject to healthcare fraud and abuse and patient privacy regulation and enforcement by both the federal
government and the states in which the Company intends to conduct its business. The healthcare laws and regulations that may affect the Company’s ability to operate include:
●
●
●
●
t h e federal healthcare programs’ Anti-Kickback Law, which prohibits, among other things, persons or entities from soliciting, receiving, offering or providing
remuneration, directly or indirectly, in return for or to induce either the referral of an individual for, or the purchase order or recommendation of, any item or service for
which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs;
federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from
Medicare, Medicaid, or other third-party payors that are false or fraudulent, or are for items or services not provided as claimed and which may apply to entities like the
Company to the extent that the Company’s interactions with customers may affect their billing or coding practices;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which established new federal crimes for knowingly and willfully executing a scheme
to defraud any healthcare benefit program or making false statements in connection with the delivery of or payment for healthcare benefits, items or services, as well as
leading to regulations imposing certain requirements relating to the privacy, security and transmission of individually identifiable health information; and
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party
payor, including commercial insurers, and state laws governing the privacy of health information in certain circumstances, many of which differ from each other in
significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
Recently, the medical device industry has been under heightened scrutiny as the subject of government investigations and regulatory or legal enforcement actions involving
manufacturers who allegedly offered unlawful inducements to potential or existing customers in an attempt to procure their business, including arrangements with physician
consultants. If the Company’s operations or arrangements are found to be in violation of any of the laws described above or any other governmental regulations that apply to the
Company, the Company may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs and the
curtailment or restructuring of its operations. Any penalties, damages, fines, exclusions, curtailment or restructuring of the Company’s operations could adversely affect its
ability to operate its business and its financial results. The risk of the Company being found in violation of these laws is increased by the fact that many of these laws are broad
and their provisions are open to a variety of interpretations. Any action against the Company for violation of these laws, even if the Company successfully defends against that
action and the underlying alleged violations, could cause the Company to incur significant legal expenses and divert its management’s attention from the operation of its
business. If the physicians or other providers or entities with whom the Company does business are found to be non-compliant with applicable laws, they may be subject to
sanctions, which could also have a negative impact on the Company’s business.
35
The Company or its subsidiaries’ failure to obtain or maintain necessary FDA clearances or approvals, or equivalents thereof in the U.S. and relevant foreign markets,
could hurt our ability to distribute and market our products.
In both the United States and foreign markets, the Company and its subsidiaries are affected by extensive laws, governmental regulations, administrative determinations,
court decisions and similar constraints. Such laws, regulations and other constraints may exist at the federal, state or local levels in the United States and at analogous levels of
government in foreign jurisdictions.
For example, certain of the Company’s planned product candidates may fall under the regulatory purview of various centers at the FDA and in other countries by similar
health and regulatory authorities.
In addition, the formulation, manufacturing, packaging, labeling, distribution, importation, sale and storage of the Company’s and its subsidiaries’ products are subject to
extensive regulation by various federal agencies, including, but not limited to, the FDA, the FTC, State Attorneys General in the United States, the Ministry of Health, Labor
and Welfare in Japan, as well as by various other federal, state, local and international regulatory authorities in the countries in which its products are manufactured, distributed
or sold. If the Company or its manufacturers fail to comply with those regulations, the Company and its subsidiaries could become subject to significant penalties or claims,
which could harm its results of operations or its ability to conduct its business. In addition, the adoption of new regulations or changes in the interpretations of existing
regulations may result in significant compliance costs or discontinuation of product sales and may impair the marketing of its products, resulting in significant loss of net sales.
The Company’s failure to comply with federal or state regulations, or with regulations in foreign markets that cover its product claims and advertising, including direct claims
and advertising by the Company or its subsidiaries, may result in enforcement actions and imposition of penalties or otherwise harm the distribution and sale of its products.
Further, the Company and its subsidiaries’ businesses are subject to laws governing our accounting, tax and import and export activities. Failure to comply with these
requirements could result in legal and/or financial consequences that might adversely affect its sales and profitability. Each medical device that the Company wishes to market
in the U.S. must first receive either 510(k) clearance or premarket approval from the FDA unless an exemption applies. Either process can be lengthy and expensive. The FDA’s
510(k) clearance process may take from three to twelve months, or longer, and may or may not require human clinical data. The premarket approval process is much more
costly and lengthy. It may take from eleven months to three years, or even longer, and will likely require significant supporting human clinical data. Delays in obtaining
regulatory clearance or approval could adversely affect the Company’s revenues and profitability. Although the Company has obtained 510(k) clearances for its LHE devices as
these clearances may be subject to revocation if post-marketing data demonstrates safety issues or lack of effectiveness. Similar clearance processes may apply in foreign
countries. Further, more stringent regulatory requirements or safety and quality standards may be issued in the future with an adverse effect on the Company’s business.
Risks Associated with Ownership of Our Common Stock
We may issue shares of our common and /or preferred stock in the future which could reduce the equity interest of our stockholders and might cause a change in control of
our ownership.
Our certificate of incorporation authorizes the issuance of up to 50,000,000 shares of common stock, par value $.001 per share, and 20,000,000 shares of preferred stock, par
value $.001 per share. We may issue a substantial number of additional shares of our common stock or preferred stock, or a combination of common and preferred stock, to
raise additional funds or in connection with any strategic acquisition. The issuance of additional shares of our common stock or any number of shares of our preferred stock:
● may significantly reduce the equity interest of investors;
● may subordinate the rights of holders of common stock if preferred stock is issued with rights senior to those afforded to our common stockholders;
● may cause a change in control if a substantial number of our shares of common stock are issued, which may affect, among other things, our ability to use our net operating
loss carryforwards, if any, and most likely also result in the resignation or removal of some or all of our present officers and directors; and
● may adversely affect prevailing market prices for our common stock.
36
We have incurred substantial indebtedness, and may incur additional indebtedness in the future, which could adversely affect our liquidity, financial condition, and results
of operations.
On July 3, 2017, we issued to Scopia Holdings LLC (“Scopia or the Lender”) a Senior Secured Note with an initial principal amount of $5.0 million pursuant to a Note and
Security Purchase Agreement. The aggregate remaining unpaid principal balance of the note is due on June 30, 2019. The note bears interest at a fixed annual rate of 15.0%,
with interest payable semi-annually in arrears on June 30 and December 30 of each calendar year, commencing on December 30, 2017. We may elect, at our sole discretion, to
defer payment of up to 50% of the semi-annual interest, with the unpaid interest added to the outstanding interest-bearing principal balance of the Senior Secured Note. The
obligations under the Senior Secured Note are secured by all of our assets and those of our subsidiaries. The Note and Security Purchase Agreement and the Senior Secured
Note also contain various affirmative and negative covenants, including restrictions on our incurring any additional indebtedness or liens or declaring or paying any dividends,
subject to certain exceptions provided for in the Note and Security Purchase Agreement, while any amount under the Senior Secured Note remains outstanding.
Our indebtedness could have important consequences on our business. To the extent new debt and/or new credit sources are added to our existing debt under the Senior
Secured Note issued to Scopia, the related risks for us could intensify. In particular, it could:
●
●
●
●
●
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund
operating expenditures, capital expenditures, and for other general corporate purposes;
limit, among other things, our ability to borrow additional funds and otherwise raise additional capital, and our ability to conduct acquisitions, joint, ventures or similar
arrangements, as a result of our obligations to repay such indebtedness and as a result of restrictive covenants contained in the agreements governing our indebtedness;
limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate;
increase our vulnerability to general adverse economic and industry conditions; and
place us at a competitive disadvantage compared to our competitors that have less debt.
In addition, while the Note and Security Purchase Agreement and the Senior Secured Note do not contain any financial covenants, the agreements governing any future
indebtedness we incur, may potentially include such covenants. Our ability to comply with the financial covenants may be subject to factors beyond our control.
Despite our right to increase the principal balance of the Senior Secured Note by a portion of the interest expense, as noted above, we may not be able to generate sufficient
cash to service the Senior Secured Note, or any future indebtedness incurred by us, as cash payments become due. If we are unable to make payments as they come due or
comply with the restrictions and covenants in the Note and Security Purchase Agreement and the Senior Secured Note with Scopia, or any other agreements governing our
future indebtedness, there could be a default under the terms of such agreements. In such event, or if we are otherwise in default under the Note and Security Purchase
Agreement and the Senior Secured Note with Scopia, or such other agreements, including pursuant to any cross-default provisions of such agreements, the lenders could
terminate their commitments to lend and/or accelerate the loans and declare all amounts borrowed due and payable. Furthermore, Scopia and any future lenders to whom we
grant a security interest could foreclose on their security interests in our assets, including our intellectual property. If any of those events occur, our assets might not be
sufficient to repay in full all of our outstanding indebtedness and we may be unable to find alternative financing. Even if we could obtain alternative financing, it might not be
on terms we deem favorable or acceptable to us. Additionally, we may not be able to amend the Note and Security Purchase Agreement and the Senior Secured Note with
Scopia, or such other agreements, or obtain needed waivers, on satisfactory terms or without incurring substantial costs. Failure to maintain existing or secure new financing
could have a material adverse effect on our liquidity, financial position, and/or results of operations.
Our management and their affiliates control a substantial interest in us and thus may influence certain actions requiring a stockholder vote.
As of December 31, 2017, our management and their affiliates collectively own approximately 52% of our issued and outstanding shares of common stock. Accordingly,
these individuals would have considerable influence regarding the outcome of any transaction that requires stockholder approval. Furthermore, our Board of Directors is and
will be divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. As a consequence of
our “staggered” Board of Directors, only a minority of the Board of Directors will be considered for election in any given year and our initial stockholders, because of their
ownership position, will have considerable influence regarding the outcome.
There can be no assurance that our common stock will continue to trade on the Nasdaq Capital Market or another national securities exchange.
As of March 5, 2018, we are not in compliance with the MVLS standard of the continued listing standards for Nasdaq Capital Market companies. We have been afforded until
September 4, 2018 to regain compliance. There can be no assurance that we will be able to meet the MVLS or any of the other Nasdaq Capital Market listing standards. If we
are unable to regain compliance with the MVLS standard or another listing standard within the time frame set by Nasdaq, and maintain compliance with such standards, our
common stock may no longer be listed on the Nasdaq Capital Market or another national securities exchange and the liquidity and market price of our common stock may be
adversely affected.
If Nasdaq delists our securities from trading on its exchange, we could face significant material adverse consequences, including:
●
●
●
●
●
a limited availability of market quotations for our securities;
reduced liquidity with respect to our securities;
a determination our shares of common stock are “penny stock” which will require brokers trading in our shares of common stock to adhere to more stringent rules, possibly
resulting in a reduced level of trading activity in the secondary trading market for our shares of common stock;
a limited amount of news and analyst coverage for our company; and
a decreased ability to issue additional securities or obtain additional financing in the future.
37
A robust public market for our common stock may not develop or be sustained, which could affect your ability to sell our common stock or depress the market price of our
common stock.
We are unable to predict whether an active trading market for our common stock will develop or will be sustained. A substantial number of our securities are “restricted
securities” as defined in Rule 144 under the Securities Act of 1933, as amended, or the “Securities Act,” and/or are held by affiliates of ours. Securities held by affiliates of an
issuer are sometimes referred to as “control securities.” Restricted securities and control securities may only be sold publicly pursuant to a registration statement or an
exemption from registration. Rule 144, which provides such an exemption, requires that public sales meet certain conditions, including, in the case of restricted securities, that
certain holding period requirements are met and, in the case of control securities (including restricted securities that are control securities), that certain information be publicly
available and that sales be made in compliance with certain manner of sale and volume limitations. The public information requirement also applies to sales of restricted
securities (even if they are not control securities), if such securities have been held for less than one year. There can be no assurance that we will continue to fulfill the public
information requirement or that the other conditions to the availability of Rule 144 will be satisfied, and even if satisfied, the volume limitations of Rule 144 will restrict the
number of control securities that may be sold. Accordingly, certain amounts of our securities may not be eligible for public sale. If an active market does not develop or is not
sustained for the foregoing reasons or for any other reason, it may be difficult for you to sell your securities at the time you wish to sell them, at a price that is attractive to you,
or at all.
Our stock price may be volatile, and purchasers of our securities could incur substantial losses.
Our stock price is likely to be volatile. The stock market in general, and the market for life science companies, and medical device companies in particular, have experienced
extreme volatility that has often been unrelated to the operating performance of particular companies. The market price for our common stock may be influenced by many
factors, including the following:
●
our ability to successfully commercialize, and realize revenues from sales of, any products we may develop;
●
the performance, safety and side effects of any products we may develop;
●
the success of competitive products or technologies;
●
results of clinical studies of any products we may develop or those of our competitors;
●
regulatory or legal developments in the U.S. and other countries, especially changes in laws or regulations applicable to any products we may develop;
●
introductions and announcements of new products by us, our commercialization partners, or our competitors, and the timing of these introductions or announcements;
●
actions taken by regulatory agencies with respect to our products, clinical studies, manufacturing process or sales and marketing terms;
●
variations in our financial results or those of companies that are perceived to be similar to us;
●
the success of our efforts to acquire or in-license additional products or other products we may develop;
●
developments concerning our collaborations, including but not limited to those with our sources of manufacturing supply and our commercialization partners;
●
developments concerning our ability to bring our manufacturing processes to scale in a cost-effective manner;
●
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
●
developments or disputes concerning patents or other proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our products;
●
our ability or inability to raise additional capital and the terms on which we raise it;
●
the recruitment or departure of key personnel;
●
changes in the structure of healthcare payment systems;
● market conditions in the medical device, pharmaceutical and biotechnology sectors;
●
actual or anticipated changes in earnings estimates or changes in stock market analyst recommendations regarding our common stock, other comparable companies or our
industry generally;
●
trading volume of our common stock;
●
sales of our common stock by us or our stockholders;
●
general economic, industry and market conditions; and
●
the other risks described in this “Risk Factors” section.
These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of
volatility in the market, securities class action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and
diversion of management’s attention and resources, which could materially and adversely affect our business, financial condition, results of operations and growth prospects.
38
Our outstanding warrants and other convertible securities may have an adverse effect on the market price of our common stock.
We currently have outstanding warrants and other convertible securities to purchase an aggregate of 16,421,793 shares of our Common Stock, including (i) 301,416 shares of
issuable upon conversion of our Series A Preferred Stock, (ii) 268,001 shares of issuable upon exercise of our Series A Warrants, (iii) 357,259 shares issuable upon conversion
of our Series A-1 Preferred Stock, (iv) 279,837 shares issuable upon exercise of our Series A-1 Warrants, (v) 1,473,640 shares issuable upon exercise of our Series S Warrants,
(vi) 106,000 shares issuable upon exercise of the unit purchase option granted to the selling agents in our IPO, (vii) 3,102,140 shares issuable upon exercise of our employee
stock options, and (viii) 10,533,500 Series W warrants issued in our initial public offering in April 2016 (the “IPO”) and in private placements prior to our IPO (the latter of
which automatically converted into Series W Warrants upon completion of the IPO). In addition, each Series A Warrant is exchangeable for four Series X Warrants, each to
purchase one share of Common Stock, and each Series A-1 Warrant is exchangeable for either five Series W Warrants or four Series X-1 Warrants, each to purchase one share
of Common Stock. Furthermore, dividends on the Series A Preferred Stock may be paid in additional shares of Series A Preferred Stock or in shares of our Common Stock. We
have an effective registration statement under the Securities Act registering the issuance of the shares underlying the employee stock options and the resale to the public of the
shares of our Common Stock underlying the Series A Preferred Stock, the Series A Warrants, the Series X Warrants issuable in exchange for the Series A Warrants, and certain
of the Series W Warrants that previously were issued in private placements. Additionally, we have filed a registration statement under the Securities Act registering the resale to
the public of the shares of our Common Stock underlying the Series A-1 Preferred Stock, the Series A-1 Warrants, the Series X-1 Warrants and Series W Warrants issuable in
exchange for the Series A-1 Warrants, and the Series S Warrants. The sale, or even the possibility of sale, of such shares could have an adverse effect on the market price for our
securities or on our ability to obtain future public financing. If and to the extent our warrants or other convertible securities, or any additional warrants or other convertible
securities, we issue, are exercised or converted, you may experience dilution to your holdings.
If our initial stockholders exercise their registration rights, it may have an adverse effect on the market price of our common stock.
Our initial stockholders are entitled to demand that we register the resale of their securities acquired in connection with our organization and private placements. The presence
of additional number of shares of common stock and warrants eligible for trading in the public market may have an adverse effect on the market price of our common stock.
If the Company’s proposed Rights Offering is completed, it could result in additional dilution of our stockholders and could cause the price of our Common Stock to fall.
The Company intends to conduct the Rights Offering. Pursuant to the Rights Offering, the Company expects to distribute to the holders of outstanding shares of its Common
Stock, for no consideration, one transferable right to purchase a new unit of the Company’s securities for each share of Common Stock outstanding. Each unit is expected to be
comprised of one share of Common Stock and one Series Z Warrant. The rights are expected to be exercisable at a price of $2.25 per unit. If the Company completes the rights
offering, such offering may result in material dilution to the holders of the warrants, including Series W Warrants and Series Z Warrants.
There can be no assurance that we will complete the Rights Offering.
Although the Company intends to conduct the Rights Offering, there can be no assurance that the Company will complete such Rights Offering on the terms described above,
or at all.
We do not intend to pay any dividends on our common stock at this time.
We have not paid any cash dividends on our shares of common stock to date. The payment of cash dividends on our common stock in the future will be dependent upon our
revenues and earnings, if any, capital requirements and general financial condition and will be within the discretion of our Board of Directors. It is the present intention of our
Board of Directors to retain all earnings, if any, for use in our business operations and, accordingly, our Board of Directors does not anticipate declaring any dividends on our
common stock in the foreseeable future. As a result, any gain you will realize on our common stock (including common stock obtained upon exercise of our warrants) will
result solely from the appreciation of such shares.
39
We are an “emerging growth company” (“EGC”), and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our
common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, which was enacted in April 2012. For as long as we continue to be an emerging growth company, we
may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not
being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations
regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive
compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although
circumstances could cause us to lose that status earlier. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year following the fifth
anniversary of the completion of our initial public offering, (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.0 billion, (3) the date on
which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior
June 30th, and (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. We cannot predict if investors
will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less
active trading market for our common stock and our stock price may suffer or be more volatile.
Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such
time as those standards apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards that have
different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt
out of the extended transition period under the JOBS Act.
We incur significant costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance initiatives.
As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. We are subject to the reporting requirements of the
Exchange Act, the other rules and regulations of the Securities and Exchange Commission, or SEC, and the rules and regulations of Nasdaq or any other national securities
exchange on which our securities are then trading. Compliance with the various reporting and other requirements applicable to public companies requires considerable time and
attention of management. For example, the Sarbanes-Oxley Act and the rules of the SEC and Nasdaq have imposed various requirements on public companies, including
requiring establishment and maintenance of effective disclosure and financial controls. Our management and other personnel devote a substantial amount of time to these
compliance initiatives. These rules and regulations result in significant legal and financial compliance costs and make some activities more time-consuming and costly.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In
particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our
internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In addition, we will be required to have our independent registered public
accounting firm attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 10-K following the date on which we are no
longer an emerging growth company. Our compliance with Section 404 of the Sarbanes-Oxley Act requires that we incur substantial accounting expense and expend significant
management efforts. We currently do not have an internal audit group, and as our business expands we will need to hire additional accounting and financial staff with
appropriate public company experience and technical accounting knowledge. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or
our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market
price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and
management resources.
Our ability to successfully implement our business plan and comply with Section 404 requires us to be able to prepare timely and accurate financial statements. We expect
that we will need to continue to improve existing, and implement new operational and financial systems, procedures and controls to manage our business effectively. Any delay
in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to
conclude that our internal control over financial reporting is effective and to obtain an unqualified report on internal controls from our auditors as required under Section 404 of
the Sarbanes-Oxley Act. This, in turn, could have an adverse impact on trading prices for our common stock, and could adversely affect our ability to access the capital markets.
40
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and trading volume could
decline.
The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. If any analyst
who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. In addition, if our operating
results fail to meet the forecast of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us
regularly, demand for our common stock could decrease, which might cause our stock price and trading volume to decline.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to
replace or remove our current management.
Provisions in our corporate charter and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider
favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be
willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any
attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors. Because
our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace
current members of our management team. Among others, these provisions include the following.
●
our Board of Directors is divided into three classes with staggered three-year terms which may delay or prevent a change of our management or a change in control;
●
our Board of Directors has the right to elect directors to fill a vacancy created by the expansion of our Board of Directors or the resignation, death or removal of a director,
which will prevent stockholders from being able to fill vacancies on our Board of Directors;
●
our certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
●
our stockholders are required to provide advance notice and additional disclosures in order to nominate individuals for election to our Board of Directors or to propose
matters that can be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the
acquirer’s own slate of directors or otherwise attempting to obtain control of our company; and
●
our Board of Directors is able to issue, without stockholder approval, shares of undesignated preferred stock, which makes it possible for our Board of Directors to issue
preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person
who owns in excess of 15.0% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person
acquired in excess of 15.0% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
41
Item 1B. Unresolved Staff Comments
None
Item 2. Property
We occupy approximately 610 square feet of office space plus common area facilities at One Grand Central Place, 60 East 42nd Street, New York, NY 10165, under a lease
agreement which initially provided for two consecutive six month terms beginning on February 1, 2016, and was subsequently amended to extended the lease term through May
31, 2017. The lease agreement includes a 5% increase in monthly rent effective on each twelve month anniversary date. Upon the May 31, 2017 termination date, the lease
agreement converted to a month-to-month lease, which may be cancelled by the Company with three months written notice.
Previously we rented access to a research and development facility, located at 375 West Street, West Bridgewater, MA 02379, for monthly rent of $1,000, on a month-to-
month basis under which either the landlord or the Company could cancel the rental arrangement at any time. Effective February 28, 2017, we ceased use of the research and
development facility and canceled the rental arrangement.
At this time, we consider the leased facilities to be adequate for our current operations. Notwithstanding, we may obtain additional space as warranted by our business
operations.
Item 3. Legal Proceedings
In the normal course of business, from time-to-time, we may become subject to claims in legal proceedings, however, we do not believe we are currently a party to any
pending legal actions. Notwithstanding, legal proceedings are subject-to inherent uncertainties, and an unfavorable outcome could include monetary damages, and in such
event, could result in a material adverse impact on our business, financial position, results of operations, and /or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
42
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company consummated its IPO on April 28, 2016 under a registration statement on Form S-1 (File No. 333-203569) declared effective January 29, 2016. The IPO
resulted in $4.2 million of net cash proceeds, after deducting cash selling agent discounts and commissions and cash offering expenses, from the issuance of 1,060,000 IPO
Units, at an offering price of $5.00 per unit, with each such IPO Unit comprised of one share of common stock of the Company and one Series W Warrant to purchase a share
of common stock of the Company.
The IPO Units were initially listed on the Nasdaq Capital Market (“Nasdaq”) under the symbol “PAVMU” from the consummation of the IPO until July 27, 2016 when the
IPO Units ceased to be quoted and traded on Nasdaq, whereupon, the IPO Units separated into their constituent securities, and the underlying shares of common stock and the
Series W Warrants began separate trading on Nasdaq, under their respective individual symbols of “PAVM” for the shares of common stock and “PAVMW” for the Series W
Warrants. Prior to our initial public offering, there was no public market for our securities.
The following table shows the high and low closing sale prices per share of our securities as reported on the Nasdaq for the periods indicated:
2018:
First Quarter*
2017:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2016:
Fourth Quarter
Third Quarter**
Through March 12, 2018.
*
** Commencing July 27, 2016
Holders
Common Stock
High
Low
Series W Warrants
High
Low
$
$
$
$
$
$
$
3.98
5.70
8.59
5.43
8.00
14.00
15.24
$
$
$
$
$
$
$
1.35
2.18
2.86
3.57
4.64
6.80
5.00
$
$
$
$
$
$
$
1.56
1.91
2.65
4.53
5.84
8.00
4.85
$
$
$
$
$
$
$
0.21
0.38
0.98
1.51
2.24
5.51
4.00
As of March 12, 2018, there were 17,235,397 shares of common stock outstanding. We believe our shares of common stock are held by more than 1,200 beneficial owners of
our common stock.
Dividends
We have not paid any cash dividends on our common stock to date. Any future decisions regarding dividends will be made by our board of directors. We do not anticipate
paying dividends in the foreseeable future, but expect to retain earnings to finance the growth of our business. Our board of directors has complete discretion on whether to pay
dividends. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements
and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
Information about our equity compensation plans
Information required by Item 5 of Form 10-K regarding equity compensation plans is incorporated herein by reference to Item 12 of Part III of this Annual Report on Form
10-K.
Recent Sales of Unregistered Securities
In November 2016 and December 2016, 20,732 and 79 shares of common stock were issued, resulting from the cashless exercise of 40,000 and 200 Series W Warrants,
respectively. The shares issued upon exercise of the warrants were issued pursuant to the exemption from registration contained in Section 3(a)(9) of the Securities Act, as the
warrants were exchanged for shares exclusively, and no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.
Item 6. Selected Financial Data
Not applicable.
43
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our consolidated financial condition and results of operations should be read together with our consolidated financial statements
and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this
Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements
involving risks and uncertainties and should be read together with the “Risk Factors” section of this Annual Report on Form 10-K for a discussion of important factors which
could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Forward-looking statements
This Annual Report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical
facts, contained in this Annual Report on Form 10-K, as well as “Risk Factors” section of this Annual Report on Form 10-K, including statements regarding our future results
of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “may,” “will,”
“should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the
negative of these terms or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying
words.
The forward-looking statements in this Annual Report on Form 10-K include, among other things, statements about:
● our limited operating history;
● our financial performance, including our ability to generate revenue;
● ability of our products to achieve market acceptance;
● success in retaining or recruiting, or changes required in, our officers, key employees or directors;
● reliance upon additional financings to fund ongoing operating losses;
● potential ability to obtain additional financing;
● ability to sustain status as a going concern;
● ability to protect our intellectual property;
● ability to complete strategic acquisitions;
● ability to manage growth and integrate acquired operations;
● potential liquidity and trading of our securities;
● regulatory or operational risks;
● our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; and
● the time during which we will be an ECG under the JOBS Act.
We may not actually achieve the plans, intentions, and /or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-
looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have
included important factors in the cautionary statements included in this Annual Report on Form 10-K, particularly in the “Risk Factors” section, that could cause actual results
or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future financings,
acquisitions, mergers, dispositions, joint ventures or investments we may make.
You should read this Annual Report on Form 10-K and the documents we have filed as exhibits to this Annual Report on Form 10-K completely and with the understanding
our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by applicable law.
44
Overview
We are a highly-differentiated multi-product medical device company organized to advance a broad pipeline of innovative medical technologies from concept to
commercialization. We employ a business model focused on capital efficiency and speed to market. Since our inception on June 26, 2014, our activities have focused on
advancing the lead products in our pipeline towards regulatory approval and commercialization, while protecting our intellectual property, and strengthening our corporate
infrastructure and management team.
Since our inception in June 2014, we have financed our operations principally through equity and debt financings, including: approximately $2.1 million of net proceeds
from private offerings of common stock and warrants issued prior our 2016 initial public offering (“IPO”); approximately $4.2 million of net cash proceeds resulting from the
Company’s IPO on April 28, 2016; and, to-date during 2017, approximately $7.5 million of aggregate net cash proceeds resulting from: a Note and Security Purchase
Agreement with Scopia Holdings LLC, including the issuance of a Senior Secured Note and Series S Warrants; the Series A-1 Preferred Stock Units private placement; and the
Series A Preferred Stock Units private placement, each as summarized herein below in “— Recent Developments - Financing Transactions”. Additionally, subsequent to
December 31, 2017, in January 2018, the Company raised $4.3 million of net cash proceeds to-date in an underwritten public offering of shares of common stock of the
Company pursuant to its previously filed effective shelf registration statement on SEC Form S-3 (File No. 333-220549), each as further discussed herein below in “— Recent
Developments - Financing Transactions”.
The following is a brief overview of the lead products currently in our pipeline, including: CarpX™, PortIO™, and DisappEAR™. These products are all in various phases of
development and have not yet received regulatory approval. Among other things:
● We have filed final nonprovisional patent applications for PortIO™ and CarpX™ and entered into a licensing agreement with a group of academic centers securing the
worldwide rights in perpetuity to a family of patents and patent applications underlying our DisappEAR™ product.
● We have advanced, in partnership with our design and contract manufacturing partners, our CarpX™ product from concept to working prototypes, completed successful
benchtop and cadaver testing confirming the device consistently cuts the transverse carpal ligament, as well as commercial design and development, and performed pre-
submission verification and validation testing. On November 27, 2017 we filed a 510(k) premarket notification submission with the Federal Food and Drug Administration
(“FDA”) for CarpX™ using a commercially available carpal tunnel release device as a predicate. We have received promising initial feedback from the FDA and we are
working to provide additional non-clinical support for our application. In addition, we are preparing to submit for CE Mark clearance in Europe and a first-in-man clinical
series outside of the United States. We are exploring commercialization strategies in the United States and commercialization partnerships worldwide.
● We have advanced, in partnership with our design and contract manufacturing partners, our PortIO™ product from concept to working prototypes, benchtop, animal, and
cadaver testing, commercial design and development, verification and validation testing, and an initial submission to the FDA for 510(k) market clearance for use in
patients requiring 24-hour emergency type vascular access. After further discussion with the FDA, we decided to pursue a broader clearance for use in patients with a need
for vascular access up to seven days under section 513(f)2 of the Federal Food, Drug and Cosmetic Act, also referred to as de novo classification. We filed with a de novo
pre-submission package with the FDA which was followed by an in-person meeting on January 9, 2018 to discuss the risk assessment and proposed mitigation testing for
the de novo application. Based on their recommendations are about to initiate a seven-day animal study, having successfully completed a pilot animal study which showed
excellent function of the device over the seven-day implant period and on explant. In anticipation of having to follow up the animal study with a human clinical safety trial,
we have accelerated our strategic partnership efforts to include the pre-clearance phase.
● We have advanced, in partnership with our design and contract manufacturing partners and our academic partners at Tufts University and Harvard Medical School, our
DisappEAR™. Our efforts have focused on sourcing commercially ready aqueous silk and optimizing manufacturing processes consistent with the necessary cost of good
for the commercial product.
● Although we have focused the majority of our resources on our lead products, we have additional products in our pipeline which are currently in different stages of
development. We have completed initial design work on the first product in the NextCath™ product line, completed head-to-head testing of retention forces, comparing our
working prototype to several competing products, which has validated our approach and advanced the commercial design and development process focusing on optimizing
the self-anchoring helical portion as well as cost of materials and manufacturing processes. We have advanced the design and development of the NextFlo™ device,
including a redesign which dramatically simplifies the product, lowers the projected cost of goods and expands its application to routine inpatient infusion sets. We have,
completed benchtop testing of a working prototype demonstrating constant flows across the range of pressures encountered in clinical situations. We will be able to quickly
move NextCath™ and NextFlo™ into the commercial and regulatory pathway when resources become available. Finally, we are evaluating which initial applications for
our Caldus™ disposable tissue ablation technology to pursue from a clinical and commercial point-of-view and will reinitiate development activity on this product once
resources are available.
45
Overview (continued)
● We remain actively engaged with our full-service regulatory consulting partner who is working closely with our contract design, engineering and manufacturing partners as
our products advance towards regulatory submission, clearance, and commercialization.
● We are evaluating a number of product opportunities and intellectual property covering a spectrum of clinical conditions, which have been presented to us by clinician
innovators and academic medical centers, for consideration of a partnership to develop and commercialize these products; we are also exploring opportunities to partner
with larger medical device companies to commercialize our lead products as they move towards regulatory clearance and commercialization; we are evaluating strategic
merger and acquisition opportunities which synergize with our growth strategy.
● We are exploring other opportunities to grow our business and enhance shareholder value through the acquisition of pre-commercial or commercial stage products and /or
companies with potential strategic corporate and commercial synergies.
We have proprietary rights to the trademarks used herein, including, among others, PAVmed™, PortIO™, Caldus™, CarpX™, DisappEAR™, NextCath™, NextFlo™, and
“Innovating at the Speed of Life™, among others. Solely as a matter of convenience, trademarks and trade names referred to herein may or may not be accompanied with the
requisite marks of “™” and /or “®”, however, the absence of such marks is not intended to indicate, in any way, we will not assert, to the fullest extent possible under
applicable law, our rights or the rights to such trademarks and trade names.
Recent Developments
Regulatory Events
On November 27, 2017 we filed a 510(k) premarket notification submission with the FDA for our CarpX™ minimally invasive device designed to treat carpal tunnel
syndrome. using a commercially available carpal tunnel release device as a predicate. We have received promising initial feedback from the FDA and are working to provide
additional non-clinical support for our application.
On December 17, 2016, we filed a 510(k) premarket notification submission with the FDA for our first product, the PortIO™ Intraosseous Infusion System relying upon
substantial equivalence to a previously approved predicate device with an indication for use for up to 24 hours. The Company engaged with the FDA on the issue of substantial
equivalence, including an in-person meeting in July 2017, and had submitted a response based on the FDA’s feedback which included narrower indications and inclusion of a
needle in the kit. After further discussion with the FDA, we decided to pursue a broader clearance for use in patients with a need for vascular access up to seven days under
section 513(f)2 of the Federal Food, Drug and Cosmetic Act, also referred to as de novo classification. We filed a de novo pre-submission package with the FDA which was
followed by an in-person meeting on January 9, 2018 to discuss the risk assessment and proposed mitigation testing for the de novo application. Based on their
recommendations we are about to initiate a seven-day animal study, having successfully completed a pilot animal study which showed excellent function of the device over the
seven-day implant period and on explant. In anticipation of having to follow up the animal study with a human clinical safety trial, we have accelerated our strategic partnership
efforts to include the pre-clearance phase.
Financing Transactions
Shareholders’ Rights Offering
Subsequently, on January 17, 2018, the Company filed an initial registration statement on Form S-1 (File No. 333-222581), currently under SEC review, related to a
proposed offering wherein, as currently proposed, the Company will distribute one transferable equity subscription right for each issued and outstanding share of common stock
of the Company as of a record date to be determined by the Company’s Board of Directors (“Equity Subscription Rights Offering” or “Rights Offering”). As currently
proposed, the Equity Subscription Rights Offering is to commence upon an effective registration statement. Further, as currently proposed, for a period of 30 days from their
distribution date, the transferable equity subscription right may be exercised for $2.25 per unit to purchase a common stock unit comprised of one share of common stock of the
Company and one Series Z Warrant. As currently proposed, the common stock unit will trade for up to 90 days, after which it will separate into its underlying components of
one share of common stock of the Company and one Series Z Warrant. The Series Z Warrant may be exercised for one share of common stock of the Company at an exercise
price of $3.00 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, and will expire after the close of business on April 30, 2024. The Series Z Warrants are redeemable by the Company under certain conditions. See our consolidated
financial statements Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for a further discussion of the Series Z Warrants.
46
Recent Developments (continued)
Financing (continued)
Issue of Common Stock - Underwritten Public Offering - January 2018
Subsequently, in January 2018, we conducted an underwritten public offering pursuant to a 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, we entered into an
underwriting agreement with Dawson James Securities, Inc., as sole underwriter, under which we agreed to issue to the underwriter at $1.80 per share, 2,415,278 shares of
common stock of the Company 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. The Company issued the 2,415,278 of such shares on January 23, 2018, and on January 25, 2018,
issued 234,540 of such shares, under the underwriter’s over-allotment, resulting in net cash proceeds of $4,263,099, after deduction of both underwriting discounts of $381,574
and estimated offering costs.
Series A and Series A-1 Exchange Offer - Series B Convertible Preferred Stock and Series Z Warrants
Subsequently, on February 14, 2018 the Company initiated an exchange offer to the holders of both the Series A Convertible Preferred Stock and Series A Warrants, and the
Series A-1 Convertible Preferred Stock and Series A-1 Warrants (“Series A and Series A-1 Exchange Offer”), as follows: (i) one share of Series A Convertible Preferred Stock
exchanged for two shares of Series B Convertible Preferred Stock, and one Series A Warrant exchanged for five Series Z Warrants; and (ii) one share of Series A-1 Convertible
Preferred Stock exchanged for 1.33 shares of Series B Convertible Preferred Stock, and one Series A-1 Warrant exchanged for five Series Z Warrants. A condition of the Series
A and Series A-1 Exchange Offer is for all outstanding shares of Series A Convertible Preferred Stock and all Series A Warrants, and all shares of Series A-1 Convertible
Preferred Stock and all Series A-1 Warrants, must be tendered. If not all are tendered, then the Company reserves the right to not accept any tenders. The Series A and Series A-
1 Exchange Offer is scheduled to expire on March 15, 2018, unless extended by the Company, at its sole discretion.
The Series B Convertible Preferred Stock has a par value of $0.001 per share, no voting rights, a stated value of $3.00 per share, and is immediately convertible upon its
issuance. At the holders’ election, one share of Series B Convertible Preferred Stock is convertible into one share of common stock of the Company, based on a common stock
conversion exchange factor equal to a numerator of $3.00 and a denominator of $3.00, with such denominator not subject to further adjustment, except for the effect of stock
dividends, stock splits or similar events affecting the Company’s common stock. The Series B Convertible Preferred Stock shall not be redeemed for cash and under no
circumstances shall the Company be required to net cash settle the Series B Convertible Preferred Stock.
The Series B Convertible Preferred Stock provides for dividends at a rate of 8% per annum on the stated value of the Series B Convertible Preferred Stock, with such
dividends compounded quarterly, accumulate, and payable in arrears upon being declared by the Company’s Board of Directors. The Series B Convertible Preferred Stock
dividends from April 1, 2018 through October 1, 2021 are payable-in-kind (“PIK”) in additional shares of Series B Convertible Preferred Stock. The dividends may be settled
after October 1, 2021, at the option of the Company, through any combination of the issuance of additional Series B Convertible Preferred Stock, shares of common stock, and
/or cash payment.
The Series Z Warrants issued in the Series A and Series A-1 Exchange Offer will be immediately exercisable upon issuance and expire after the close of business on April 30,
2024, and each may be exercised for one share of common stock of the Company at an exercise price of $3.00 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. The Series Z Warrants are redeemable by the Company under
certain conditions. See our consolidated financial statements Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for a further discussion of the
Series B Convertible Preferred Stock and the Series Z Warrants.
47
Recent Developments (continued)
Financing (continued)
Series W Warrants Offer-to-Exercise
Subsequently, 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 (“Series W Warrants Offer-to-Exercise”). As of the February 8, 2018 expiry of the Series W Warrants Offer-to-Exercise, 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, and the issue of a corresponding number of shares of common
stock of the Company.
Series W Warrants Offer-to-Exchange
Subsequently, on February 20, 2018, the Company filed with the SEC a Tender Offer Statement on Schedule TO offering to exchange two Series W Warrants for one Series
Z Warrant, with such exchange offer expiring on March 19, 2018 (“Series W Warrants Offer-to-Exchange”). The Series Z Warrants issued upon exchange of the Series W
Warrants will be immediately exercisable upon issuance and expire after the close of business on April 30, 2024, and each may be exercised for one share of common stock of
the Company at an exercise price of $3.00 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. The Series Z Warrants are redeemable by the Company under certain conditions. See our consolidated financial statements Note 13, Series
A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for a further discussion of the Series W Warrants and the Series Z Warrants.
Note and Security Purchase Agreement with Scopia Holdings LLC
The Company and Scopia Holdings LLC (“Scopia or the Lender”) entered into a Note and Security Purchase Agreement, under which, upon Scopia delivering to the
Company $4.8 million in net cash proceeds on July 3, 2017, the Company issued to Scopia and its designees, a Senior Secured Note with an initial principal amount of $5.0
million (“Senior Secured Note”), and 2,660,000 Series S Warrants to purchase shares of common stock of the Company.
The Senior Secured Note bears interest at a fixed annual rate of 15.0%, with interest payable semi-annually in arrears on June 30 and December 30 of each calendar year,
commencing on December 30, 2017. The Company may elect, at its sole discretion, to defer payment of up to 50% of the semi-annual interest payment, with such deferred
amount added to and increasing the outstanding interest-bearing principal balance of the Senior Secured Note by such amount. As of December 31, 2017, the Senior Secured
Note principal balance is $5,188,542, including $188,542 of deferred interest payment. The aggregate remaining unpaid principal balance of the Senior Secured Note is due on
June 30, 2019.
The Series S Warrants were immediately exercisable upon issuance, have an exercise price of $0.01 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, may be exercised for cash or on a cashless basis, and expire June 30, 2032,
with any Series S Warrants outstanding on the expiration date automatically exercised on a cashless basis. In each of October 2017 and November 2017, 532,000 (or a total of
1,064,00) 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. Accordingly, at December 31, 2017, there were 1,473,640 Series S Warrants issued and outstanding.
See Liquidity and Capital Resources herein below for further information regarding the Note and Security Purchase Agreement with Scopia Holdings LLC.
48
Recent Developments (continued)
Financing (continued)
Series A-1 Preferred Stock Units Private Placement
On August 3, 2017, the Company’s Board of Directors authorized the issuance of up to 150,000 Series A-1 Preferred Stock Units, comprised of one share of Series A-1
Convertible Preferred Stock convertible into a share of common stock of the Company, and one Series A-1 Warrant exercisable for a share of common stock of the Company,
or the Series A-1 Warrant may be exchanged for five Series W Warrants or four Series X-1 Warrants each of which is exercisable for a share of common stock of the
Company.
On, August 4, 2017, the Company entered into a Securities Purchase Agreement, as amended, pursuant to which the Company may issue up to an aggregate of $600,000
(subject to increase) of Series A-1 Preferred Stock Units at a price of $4.00 per unit, in a private placement transaction (Series A-1 Preferred Stock Units private placement),
and on such date, issued a total of 125,000 Series A-1 Preferred Stock Units for aggregate proceeds of $500,000. The Company did not incur placement agent fees in connection
with the Series A-1 Preferred Stock Units private placement.
On November 17, 2017 (“November 17, 2017 Exchange Date”), the Company completed an exchange offer initiated on October 20, 2017 to the 28 holders of the Series A
Convertible Preferred Stock and Series A Warrants - to exchange one share Series A Convertible Preferred Stock for 1.5 shares of Series A-1 Convertible Preferred Stock, and,
one Series A Warrant for one Series A-1 Warrant (“Series A Exchange Offer”) - resulting in 154,837 shares of Series A Convertible Preferred Stock exchanged for 232,259
shares of Series A-1 Convertible Preferred Stock, and 154,837 Series A Warrants exchanged for 154,837 Series A-1 Warrants, by 13 holders on the November 17, 2017
Exchange Date. Accordingly, as of December 31, 2017, 357,259 shares of Series A-1 Convertible Preferred Stock and 279,837 Series A-1 Warrants were each issued and
outstanding.
See Liquidity and Capital Resources herein below for further information regarding the Series A-1 Preferred Stock Units private placement, Series A-1 Convertible Stock,
and Series A-1 Warrants.
Series A Preferred Stock Units Private Placement
The Company’s Board of Directors authorized the issuance of up to a total of 1.25 million Series A Preferred Stock Units, including authorizing 500,000 units on January 21,
2017 and 750,000 units on May 10, 2017. A Series A Preferred Stock Unit was comprised of one share of Series A Convertible Preferred Stock convertible into a share of
common stock of the Company, and one Series A Warrant exercisable for a share of common stock of the Company, or one Series A Warrant may be exchanged for four Series
X Warrants, each of which is exercisable for a share of common stock of the Company.
On January 26, 2017, the Company entered into a Securities Purchase Agreement pursuant to which the Company may issue up to an aggregate of $3,000,000 (subject to
increase) of Series A Preferred Stock Units at a price of $6.00 per unit, in a private placement transaction (Series A Preferred Stock Units private placement). On the January
26, 2017 initial closing date of the Series A Preferred Stock Units private placement, and at subsequent closings on January 31, 2017 and March 8, 2017, a total of 422,838
Series A Preferred Stock Units were issued for aggregate gross proceeds of approximately $2.5 million and net proceeds of approximately $2.2 million, after payment of
placement agent fees and closing costs.
In addition to the 154,837 shares of Series A Convertible Preferred Stock exchanged for 232,259 shares of Series A-1 Convertible Preferred Stock, and the 154,837 Series A
Warrants exchanged for 154,837 Series A-1 Warrants in the Series A Exchange Offer, a total of 18,334 shares of Series A Convertible Preferred Stock were converted into a
total of 22,093 shares of common stock of the Company during the year ended December 31, 2017. Accordingly, as of December 31, 2017, 249,667 shares of Series A
Convertible Preferred Stock and 268,001 Series A Warrants were each issued and outstanding.
See Liquidity and Capital Resources herein below for further information regarding the Series A-1 Preferred Stock Units private placement, Series A-1 Convertible Stock,
and Series A-1 Warrants.
49
Recent Developments (continued)
Other Events
Nasdaq Notice
On March 5, 2018, we received a notice from the Nasdaq Listing Qualifications Department stating that, for the prior 30 consecutive business days through March 2, 2018,
the market value of our listed securities (“MVLS”) had been below the minimum of $35 million required for continued inclusion on the Nasdaq Capital Market under Nasdaq
Listing Rule 5550(b)(2). The notification letter stated we would be afforded 180 calendar days, or until September 4, 2018, to regain compliance. In order to regain compliance,
our MVLS must remain at or above $35 million for a minimum of ten consecutive business days. The notification letter also states in the event we do not regain compliance
within the 180 day period, our securities may be subject to delisting. In the event we receive a delisting determination, we may appeal such determination to a Nasdaq Hearings
Panel.
Tufts Patent License Agreement - Antibiotic-Eluting Resorbable Ear Tubes
In November 2016, we executed the Tufts Patent License Agreement with the Licensors. Pursuant to the Tufts Patent License Agreement, the Licensors granted us the
exclusive right and license to certain patents owned or controlled by the Licensors in connection with the development and commercialization of antibiotic-eluting resorbable
ear tubes based on a proprietary aqueous silk technology. Upon execution of the Tufts Patent License Agreement, we paid the Licensors a $50,000 up-front non-refundable
payment. The Tufts Patent License Agreement also provides for payments by us to the Licensors upon the achievement of certain product development and regulatory clearance
milestones as well as royalty payments on net sales upon the commercialization of products developed utilizing the licensed patents.
Initial Public Offering
Under a registration statement on Form S-1 (File No. 333-203569) declared effective January 29, 2016, the Company’s initial public offering (“IPO”) was consummated on
April 28, 2016, resulting in $4.2 million of net cash proceeds, after deducting cash selling agent discounts and commissions and offering expenses, from the issuance of
1,060,000 units, referred to as an “IPO Unit”, at an offering price of $5.00 per unit. The IPO Unit was comprised of one share of the Company’s common stock and one warrant
to purchase a share of common stock of the Company, with such warrant referred to as a “Series W Warrant”. The IPO Units were initially listed on the Nasdaq Capital Market
(“Nasdaq”) under the symbol “PAVMU”, until July 27, 2016, when the PAVMU IPO Units ceased to be quoted and traded on Nasdaq, and the shares of common stock and the
Series W Warrants which comprised the PAVMU IPO Units, began separate trading on Nasdaq, under their own individual symbols of “PAVM” for the shares of common
stock and “PAVMW” for the Series W Warrants.
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, and became exercisable on October 28, 2016 and expire on January 29, 2022 or earlier upon redemption by the Company,
under certain conditions, as discussed below.
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 election, 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 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 a Series W Warrant will have no further rights except to receive the redemption price for such holder’s Series
W Warrant upon surrender of such warrant.
50
Financial Results of Operations
Revenue
To date, we have not generated any revenues from product sales. Our ability to generate product revenue and become profitable depends upon our ability to successfully
complete the development and initiate the commercialization of our products.
General and administrative expenses
General and administrative expenses consist primarily of salaries and related costs for personnel, including travel expenses for our employees in executive and research and
development functions, facility-related costs, professional fees, accounting and legal services, consultants and expenses associated with obtaining and maintaining patents within
our intellectual property portfolio.
We anticipate our general and administrative expenses will increase in the future as we increase the number of personnel to support the expected commercialization of our
products. We also anticipate increased expenses related to being a public company, including audit, legal, regulatory and tax-related services associated with maintaining
compliance as a public company, director and officer insurance premiums and investor relations costs. Additionally, prior to the potential regulatory approval of our first
product, we anticipate an increase in payroll and related expenses as a result of our preparation for commercial operations, especially as it relates to sales and marketing.
Research and development expenses
Research and development expenses are recognized in the period they are incurred and consist principally of internal and external expenses incurred for the research and
development of our products and include:
● consulting costs charged to us by various external contract research organizations we contract with to conduct preclinical studies and engineering studies;
● salary and benefit costs associated with our chief medical officer;
● costs associated with regulatory filings;
● patent license fees;
● cost of laboratory supplies and acquiring, developing and manufacturing preclinical prototypes;
● product design engineering studies; and
● rental expense for facilities maintained solely for research and development purposes.
We incurred approximately $4.8 million in research and development costs from June 26, 2014 (inception) through December 31, 2017. We plan to increase our research and
development expenses for the foreseeable future as we continue development of our products. Our current research and development activities are focused principally on
obtaining FDA clearance and initializing commercialization of the lead products in our pipeline, PortIO™ and CarpX™, and advancing our DisappEAR™ product through its
initial development phase, with research and development activities on our other portfolio products commensurate with available sufficient capital resources. These planned
research and development activities include the following:
● completion of engineering design studies for our products;
● finalization of engineering designs and documentation supporting our products;
● additional engineering and preclinical studies through our contract research partners;
● preparation and filing of regulatory submissions with the FDA for our products; and
● establishing and documenting manufacturing processes for our products.
The successful development of our products is highly uncertain and subject to numerous risks including, but not limited to:
● the scope, rate of progress and expense of our research and development activities;
● the scope, terms and timing of obtaining regulatory clearances;
● the expense of filing, prosecuting, defending and enforcing patent claims;
● the continued access to expertise through outsourced suppliers for engineering and manufacturing; and
● the cost, timing and our ability to manufacture sufficient prototype and commercial supplies for our products.
51
Financial Results of Operations
Comparison of the years ended December 31, 2017 and 2016.
Revenue
Operating expense
General and administrative expenses
Research and development expenses
Total operating expenses
Loss from operations
Other income (expense)
Interest expense
Loss on Series A Preferred Stock Units issued in a private placement
Change in fair value of Series A Warrants derivative liability
Change in fair value of Series A Convertible Preferred Stock conversion option derivative liability
Modification of Series A-1 Warrant agreement
Other income (expense), net
Loss before income tax
Income tax
Net loss
Series A Convertible Preferred Stock dividends
Series A-1 Convertible Preferred Stock dividends
Deemed dividend Series A-1 Convertible Preferred Stock issued in a private placement
Deemed dividend Series A-1 Convertible Preferred Stock issued in the Series A Exchange Offer
Years Ended
December 31,
2017
2016
$
—
$
5,415,324
2,618,795
8,034,119
(8,034,119)
(724,684)
(3,124,285)
1,942,501
643,318
(222,000)
(1,485,150)
(9,519,269)
—
(9,519,269)
(112,570)
(79,788)
(182,500)
(504,007)
—
3,931,264
1,719,587
5,650,851
(5,650,851)
—
—
—
—
—
—
(5,650,851)
—
(5,650,851)
—
—
—
—
Net loss attributable to common stockholders
$
(10,398,134)
$
(5,650,851)
Revenue
To date, we have not generated any revenues from product sales. Our ability to generate product revenue and become profitable depends upon our ability to successfully
complete the development and initiate the commercialization of our products.
52
Financial Results of Operations (continued)
General and administrative expense
The following table summarizes our general and administrative expense incurred during the years ended December 31, 2017 and 2016:
Year
Ended
December 31,
2017
Year
Ended
December 31,
2016
$ Change
%Change
Compensation and related personnel costs
Stock-based compensation
Outside professional services
Facility related costs
Board related costs
Other operating costs
Total general and administrative expenses
$
$
1,167,714
925,534
2,580,344
169,145
306,667
265,920
5,415,324
$
$
728,125
664,068
1,846,497
164,189
193,333
335,052
3,931,264
$
$
439,589
261,466
733,847
4,956
113,334
(69,132)
1,484,060
60%
39%
40%
3%
59%
-21%
38%
General and administrative expenses incurred for the year ended December 31, 2017 were $5,415,324, an increase of $1,484,060 as compared to $3,931,264 incurred for the
prior year period. The increased general and administrative expenses for the current year period is principally due to increased expenses related to compensation and related
personnel costs of $439,589, stock-based compensation expense of $261,466, outside professional services of $733,847, facility related costs of $4,956, and, board of directors
related costs of 113,334; offset by a decrease of $69,132 in other operating costs.
The increased compensation and related personnel costs expense of $439,589 in the year ended December 31, 2017 as compared to the prior year period, resulted from higher
salary expense related to additional personnel, and, principally, the recognition of an accrued bonus expense for the year ended December 31, 2017, for which there was no
corresponding expense in the prior year. Such accrued bonus payable as of December 31, 2017, represents both the guaranteed bonus under the Chief Executive Officer
(“CEO”) employment agreement and discretionary bonus payments to other employees.
The stock-based compensation expense, which includes stock-based compensation expense classified as general and administrative expense related to stock options granted to
both employees and non-employees, increased $261,466 in the year ended December 31, 2017 as compared to the prior year period, principally resulting from a full twelve
months of stock-based compensation expense recognized in the year ended December 31, 2017 as compared to a partial period expense recognized in the prior year period, as
the stock options granted in the prior year 2016 were principally granted effective with the April 28, 2016 IPO, along with other stock option grants in the fourth quarter of
2016. Additionally, stock-based compensation expense in the year ended December 31, 2017 includes $51,389 related to the March 31, 2017 modifications to the stock option
grant previously awarded to the Company’s former Chief Financial Officer. The increase in total employee stock-based compensation expense for the current year 2017, was
offset by lower stock-based compensation expense related to non-employees, principally associated with lower stock option vesting date fair value corresponding to lower share
price of the underlying common stock of the Company on such dates in the current year period as compared to the prior year period.
The outside professional services expense includes fees incurred under consulting agreements with entities and /or individuals affiliated with certain of our officers and /or
former directors, including: $300,000 incurred for each of the years ended December 31, and 2016 under the HCP/Advisors consulting agreement; $80,000 and $100,000
incurred in the years ended December 31, 2017 and 2016, respectively, related to the previous (expired) HCFP/Strategy Advisors consulting agreement; and, $0 and $15,000
incurred in the year ended December 31, 2017 and 2016, respectively, related to the previous (expired) Swartwood Hesse consulting agreement - see “Contractual Obligations”
below for further details on these related party agreements. Additionally, in the current year period as compared to the prior year period, there were higher expenses of:
$662,136 associated with professional fees for information technology, legal, accounting, tax, valuations, auditing, SEC reporting, and public company requirements; $75,432
of increased expenses related to regulatory matters, $78,310 of increased expenses related to intellectual property matters; offset by $47,031 of decreased expenses related to
investor and public relations.
The increase in facility related costs of $4,995 in the year ended December 31, 2017 as compared to the prior year period, principally resulted from higher rent expense
associated with our corporate offices, as a result of twelve months rent expense in the year ended December 31, 2017 as compared to eleven months in the prior year.
Notwithstanding, effective August 1, 2017, the Company reduced the quantity of leased office space, resulting in a decrease in the monthly rent expense.
The board of director related costs includes the expense of member compensation expense incurred for the services of non-executive members of $306,667 for the year ended
December 31, 2017, as compared to $193,333 in the prior year period, with the increase resulting from the addition of a new member of the board of directors in August 2017
and, in the prior year period, board of directors compensation expense was less than a full year, as such compensation commenced on the IPO closing date of April 28, 2016.
The decrease in other operating expenses of $69,132 in the year ended December 31, 2017 as compared to the prior year period, principally resulted from lower travel and
related costs offset by higher director and officers insurance premiums.
53
Financial Results of Operations (continued)
Research and development expenses
The following table summarizes our research and development expenses incurred during the year ended December 31, 2017 and 2016:
Compensation and related personnel costs
Stock-based compensation
Patent license fees
Regulatory filing fees
Outside professional services
Total research and development expenses
Year
Ended
December 31,
2017
Year
Ended
December 31,
2016
$
$
423,231
122,593
—
10,566
2,062,405
2,618,795
$
$
215,790
83,297
50,000
4,690
1,365,810
1,719,587
$
$
$ Change
%Change
207,441
39,296
(50,000)
5,876
696,595
899,208
96%
47%
-100%
125%
51%
52%
Research and development expenses incurred for the year ended December 31, 2017 totaled $2,618,795, an increase of $899,208 as compared to $1,719, 587 incurred for the
prior year. The increase in research and development expenses for the current year period is principally due to increased outside professional services of $696,595, along with
compensation and related personnel costs of $207,441, and stock-based compensation of 39,296, offset by $50,000 of patent license fees.
Compensation and related personnel cost classified as research and development expense is related to our Chief Medical Officer (“CMO”), with such expense incurred for
twelve months in the current year period as compared to a partial period of time in the prior year period. In this regard, upon the commencement of the CMO employment
agreement on July 1, 2016, the CMO was paid an initial payment of $50,000 for services provided before the employment agreement effective date, with such payment and
related employer payroll taxes recognized as an accrued expense at June 30, 2016. Additionally, the increase also resulted from the recognition of an accrued discretionary
bonus expense for the year ended December 31, 2017, for which there was no corresponding expense in the prior year.
The stock-based compensation expense classified as research and development expense relates to stock options granted to the CMO, with such amount resulting in an increase
of $39,296 in the year ended December 31, 2017, as compared to the prior year period, as twelve months of stock-based compensation expense was recognized in the current
year 2017 as compared to a partial period expense recognized in the prior year 2016, as the CMO stock options were granted on the IPO date of April 28, 2016.
In the prior year ended December 31, 2016, we incurred $50,000 of patent license fees upon the execution of the Tufts Patent License Agreement. There was no such expense
incurred in the current year ended December 31, 2017.
We incurred expenses related to FDA regulatory filing fees for 510(k) premarket notification submissions of $10,566 for our CarpX™ product in the year ended December
31, 2017, and $4,690 for our PortIO™ product in the year ended December 31, 2016.
The increased research and development expenses related to outside professional services of $646,596 in the year ended December 31, 2017 as compared to the prior year
period, resulted from increased research and development activities in support of advancing our products toward FDA submittals and corresponding approval and clearance, as
compared with limited research and development activities on certain of the products during the prior year period, with such expenses principally related to our CarpX™
product, offset by decreased research and development expenses related to our PortIO™ product.
54
Financial Results of Operations (continued)
Other Income and Expense
Other income (expense), net for the periods indicated, is as follows:
Years Ended
December 31,
2017
2016
Other income (expense)
Interest expense
Loss on Series A Preferred Stock Units issued in a private placement
Change in fair value of Series A Warrants derivative liability
Change in fair value of Series A Convertible Preferred Stock conversion option derivative liability
Modification of Series A-1 Warrant agreement
Other income (expense), net
$
$
(724,684)
(3,124,285)
1,942,501
643,318
(222,000)
(1,485,150)
$
$
—
—
—
—
—
—
Interest Expense
The Company and Scopia Holdings LLC (“Scopia or the Lender”) entered into a Note and Security Purchase Agreement, under which, upon 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 amount of $5.0 million (“Senior
Secured Note”), and 2,660,000 Series S Warrants to purchase shares of common stock of the Company. The aggregate remaining unpaid principal balance of the Senior Secured
Note is due on June 30, 2019.
The $4,842,577 of cash proceeds, which are net of the Lender’s debt issuance costs, have been allocated to the Scopia Note and the Series S Warrants based on their
respective relative fair value, resulting in an allocation of $1,408,125 to the Scopia Note and $3,434,452 to the Series S-Warrants, with the resulting difference of $3,591,875
between the Scopia Note initial principal amount and the allocated amount accounted for a debt discount amortized as interest expense over the term of the Scopia Note.
The Senior Secured Note bears interest at a fixed annual rate of 15.0%, with interest payable semi-annually in arrears on June 30 and December 30 of each calendar year,
commencing December 30, 2017. The Company may elect, at its sole discretion, to defer payment of up to 50% of the semi-annual interest due, with the unpaid semi-annual
interest payment added to the outstanding interest-bearing principal balance of the Senior Secured Note. As of December 31, 2017, the Senior Secured Note principal balance is
$5,188,542, including $188,542 of deferred interest payment.
During the year ended December 31, 2017, interest expense recognized totaled $724,684, including $377,083 with respect to the semi-annual interest payment, which as
discussed above, 50% of such amount or $188,542, has been added to the outstanding interest-bearing principal balance of the Senior Secured Note, and $347,601 with respect
to the amortization of debt discount. The Senior Secured Note remaining unamortized debt discount is $3,244,274 at December 31, 2017.
55
Financial Results of Operations (continued)
Other Income and Expense (continued)
Loss on Series A Preferred Stock Units Issued in a Private Placement
The Series A Preferred Stock Units were issued in a private placement with closings in the three months ended March 31, 2017, including an initial closing on January 26,
2017, and subsequent closings on January 31, 2017 and March 8, 2017, resulting in a total of 422,838 Series A Preferred Stock Units issued for aggregate gross proceeds of
approximately $2.5 million and net proceeds of approximately $2.2 million, after payment of placement agent fees and closing costs.
The Series A Preferred Stock Unit was comprised of one share of Series A Convertible Preferred Stock and one Series A Warrant, with each were immediately separable
upon their issuance, and became convertible and exercisable, respectively, 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).
At the election of their respective holder, a share of Series A Convertible Preferred Stock is convertible into a number of shares of common stock of the Company at a
prescribed common stock exchange factor, and, a Series A Warrant is exercisable for one share of common stock of the Company, or may be exchanged for four Series X
Warrants, with each such Series X Warrant exercisable for one share of common stock of the Company.
On November 17, 2017 (“November 17, 2017 Exchange Date”), the Company completed an exchange offer initiated on October 20, 2017 to the 28 holders of the Series A
Convertible Preferred Stock and Series A Warrants - to exchange one share Series A Convertible Preferred Stock for 1.5 shares of Series A-1 Convertible Preferred Stock, and,
one Series A Warrant for one Series A-1 Warrant (“Series A Exchange Offer”) - resulting in 154,837 shares of Series A Convertible Preferred Stock exchanged for 232,259
shares of Series A-1 Convertible Preferred Stock, and 154,837 Series A Warrants exchanged for 154,837 Series A-1 Warrants, by 13 holders on the November 17, 2017
Exchange Date. Further, at the election of their respective holders, a total of 18,334 shares of Series A Convertible Preferred Stock were converted into 22,093 shares of
common stock of the Company. Accordingly, as of December 31, 2017, 249,667 shares of Series A Convertible Preferred Stock and 268,001 Series A Warrants were each
issued and outstanding.
The Series A Warrant and the Series A Convertible Preferred Stock conversion option were each determined to be a derivative liability under FASB ASC 815. The issuance
of the Series A Preferred Stock Units resulted in the recognition of a loss of $3,124,285, resulting from the aggregate initial fair value of each of the Series A Warrant and the
Series A Convertible Preferred Stock conversion option derivative liability, being in excess of the gross proceeds of the Series A Preferred Stock Units private placement, with
such excess amounting to $2,735,657, recognized as a current period expense, along with offering costs of $388,628, which were also recognized as a current period expense, as
follows:
Series A Preferred Stock Units issuance gross proceeds
Less: Series A Warrants derivative liability initial fair value
Less: Series A Convertible Preferred Stock conversion option derivative liability initial fair value
Excess of initial fair value of derivative liabilities over gross proceeds
Offering costs of the issuance of the Series A Preferred Stock Units
Loss on issuance of Series A Preferred Stock Units
Series A
Preferred
Stock Units
Issue Dates
(Aggregate)
$
$
2,537,012
(4,050,706)
(1,221,963)
(2,735,657)
(388,628)
(3,124,285)
See our consolidated financial statements Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for further information regarding the Series A
Preferred Stock Units private placement, the Series A Convertible Preferred Stock, and the Series A Warrants.
56
Financial Results of Operations (continued)
Other Income and Expense (continued)
Change in Fair Value of Series A Warrants and Series A Convertible Preferred Stock Conversion Option Derivative Liabilities
The Series A Warrant and the Series A Convertible Preferred Stock conversion option were each determined to be a derivative liability under FASB ASC 815. The respective
Series A Warrants and the Series A Convertible Preferred Stock conversion option derivative liability are classified as a current liability on the consolidated balance sheet, and
each were initially measured at fair value at the time of issuance and are subsequently remeasured at fair value on a recurring basis at each reporting period date, with changes in
fair value recognized as other income or expense in the consolidated statement of operations. The reconciliation of each of the Series A Warrants and the Series A Convertible
Preferred Stock conversion option derivative liability for the year ended December 31, 2017 are as follows:
Derivative Liability
Balance at December 31, 2016
Initial fair value on dates of issuance
Change in fair value
Conversion of Series A Convertible Preferred Stock
Series A Exchange Offer
Balance at December 31, 2017
Change in Fair Value
Series A
Warrants
—
4,050,706
(1,942,501)
—
(1,347,082)
761,123
$
$
$
$
Series A
Convertible
Preferred Stock
Conversion Option
—
1,221,963
(643,318)
(27,335)
(339,093)
212,217
The change in estimated fair value, including fair value adjustments on the dates of the Series A Exchange Offer, the conversion of Series A Convertible Preferred Stock, and
the recurring fair value adjustment as of December 31, 2017, resulted in the recognition of other income of $1,942,501 and $643,318, with corresponding decreases in both the
Series A Warrants derivative liability and the Series A Convertible Preferred Stock conversion option derivative liability, respectively, during the year ended December 31,
2017.
The initial issue date and subsequent reporting period date recurring estimated fair value of each of the Series A Warrants and the Series A Convertible Preferred Stock
conversion option derivative liability were each 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 including, assumptions regarding the estimated volatility in the value of the
Company’s common stock price and probabilities associated with the likelihood and timing of future dilutive transactions. See our consolidated financial statements Note 11,
Financial Instruments Fair Value Measurements, for further information with respect to the initial issue date and subsequent recurring reporting period date estimated fair
values of each of the Series A Warrants and the Series A Convertible Preferred Stock conversion option derivative liability.
Conversion of Series A Convertible Preferred Stock
At the election of their respective holders, a total of 18,334 shares of Series A Convertible Preferred Stock were converted into a total of 22,093 shares of common stock of
the Company. The Series A Convertible Preferred Stock conversion option derivative liability fair value was adjusted as of each conversion date, with the resulting change in
fair value recognized as other income or expense in the consolidated statement of operations, upon which the corresponding Series A Convertible Preferred Stock conversion
option derivative liability was derecognized, with a corresponding recognition of common stock par value and additional paid-in capital with respect to the shares of common
stock of the Company issued, summarized as follows:
Series A Convertible Preferred Stock
Converted to shares of Common Stock of the Company
Year ended December 31, 2017
Shares of Series A Convertible Preferred Stock converted to common stock
Shares of common stock issued upon conversion of Series A Convertible Preferred Stock
Fair Value - Series A Convertible Preferred Stock conversion option derivative liability derecognized
Shares of common stock issued - par value
Shares of common stock issued - additional paid-in capital
Conversion
Dates
Aggregated
18,334
22,093
27,335
22
27,313
$
$
$
The fair value of the Series A Convertible Preferred Stock conversion option derivative liability was estimated on each of the respective conversion dates 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, as of each conversion date.
57
Financial Results of Operations (continued)
Other Income and Expense (continued)
Change in Fair Value of Series A Warrants and Series A Convertible Preferred Stock Conversion Option Derivative Liabilities (continued)
Series A Exchange Offer - November 17, 2017 Exchange Date
As noted above, a total of 422,838 shares of Series A Convertible Preferred Stock and 422,838 Series A Warrants were issued in the Series A Preferred Stock private
placement. On the November 17, 2017 Exchange Date, the Company completed the Series A Exchange Offer, resulting in 154,837 shares of Series A Convertible Preferred
Stock being exchanged for 232,259 shares of Series A-1 Convertible Preferred Stock, and 154,837 Series A Warrants being exchanged for 154,837 Series A-1 Warrants, by 13
holders on the November 17, 2017 Exchange Date.
The Series A Exchange Offer resulted in the extinguishment of: 154,837 shares of Series A Convertible Preferred Stock, the corresponding (bifurcated) conversion option
derivative liability, and, 154,837 Series A Warrants, resulting from the issuance-upon-exchange of: 232,259 shares of Series A-1 Convertible Preferred Stock and 154,837
Series A-1 Warrants, each as discussed herein below.
Series A Exchange Offer - Series A Convertible Preferred Stock Exchanged for Series A-1 Convertible Preferred Stock
The fair value of the consideration given in the form of the issue of 232,259 shares of Series A-1 Convertible Preferred Stock, with such fair value recognized as the carrying
value of such issued shares of Series A-1 Convertible Preferred Stock, as compared to the extinguishment of both: the carrying value of the Series A Convertible Preferred
Stock and the fair value of the corresponding conversion option derivative liability, resulted in an excess of fair value of $504,007 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
attributable to common stockholders, summarized as follows:
Series A-1 Convertible Preferred Stock Issued
Series A Convertible Preferred Stock and Conversion Option Derivative Liability Extinguished Deemed Dividend Charged to
Accumulated Deficit
Fair value - 232,259 shares of Series A-1 Convertible Preferred Stock issued
Less: Fair value - Series A Convertible Preferred Stock conversion option derivative liability extinguished
Less: Carrying value - 154,837 shares of Series A Convertible Preferred Stock exchanged
Deemed dividend charged to accumulated deficit
Series A
Exchange Offer
November 17, 2017
Exchange Date
$
$
843,100
339,093
—
504,007
● The November 17, 2017 Exchange Date fair value of $843,100 for the 232,259 shares of Series A-1 Convertible Preferred Stock issued in the Series A Exchange Offer, was
estimated 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 Company’s common stock price, the Company’s dividend yield, the risk-free rates based on U.S. Treasury security yields, estimated volatility in the value of the
Company’s common stock, and certain other Level-3 inputs.
● The November 17, 2017 Exchange Date fair value of $339,093 for the 154,837 shares of Series A Convertible Preferred Stock conversion option derivative liability
extinguished, was 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 including, assumptions regarding the estimated volatility in the value of the Company’s common stock
price and probabilities associated with the likelihood and timing of future dilutive transactions.
● 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
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,
Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for a further discussion of the Series A Preferred Stock Units private placement and the Series A
Convertible Preferred Stock.
58
Financial Results of Operations (continued)
Other Income and Expense (continued)
Change in Fair Value of Series A Warrants and Series A Convertible Preferred Stock Conversion Option Derivative Liabilities (continued)
Series A Exchange Offer - November 17, 2017 Exchange Date (continued)
Series A Exchange Offer - Series A Warrants Exchanged for Series A-1 Warrants
The 154,837 Series A Warrants derivative liability fair value was adjusted to the November 17, 2017 Exchange Date fair value of the consideration given in the form the
154,837 Series A-1 Warrants issued, with the resulting change in fair value recognized as other income or expense in the consolidated statement of operations, immediately
followed by the derecognition of the 154,837 Series A Warrants derivative liability and the recognition of additional paid-in capital of such amount in the consolidated balance
sheet, as the Series A-1 Warrants are equity classified. The November 17, 2017 Exchange Date fair value of the Series A-1 Warrants of $1,347,082 was estimated assuming the
exchange of one Series A-1 Warrant for five Series W Warrants, using a Black-Scholes 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, the estimated volatility in the value of the Company’s common stock price, and the Series W Warrant exercise
price.
Modification of Series A-1 Warrant Agreement
The Series A-1 Preferred Stock Units were issued in a private placement on August 4, 2017, and were comprised of one share of Series A-1 Convertible Preferred Stock and
one Series A-1 Warrant, each, at their issuance, were immediately separable, and immediately convertible and exercisable, respectively. At the election of their respective
holder, a share of Series A-1 Convertible Preferred Stock is convertible into one shares of common stock of the Company, and a Series A-1 Warrant may be exercised for one
share of common stock of the Company at an exercise of $6.67 per share, or may be exchanged into either five Series W Warrants with an exercise price of $5.00 per share for
one share of common stock of the Company, or four Series X-1 Warrants with an exercise of $6.00 per share for one share of common stock of the Company, with each such
warrant exercise price not subject to further adjustment, except for the effect of stock dividends, stock splits or similar events affecting the common stock. As of December 31,
2017, no Series A-1 Warrants had been exchanged for Series W Warrants nor Series X-1 Warrants.
On October 18, 2017, the Series A-1 Convertible Preferred Stock holders unanimously approved Amendment No. 1 to Series A-1 Preferred Stock Units private placement
transaction documents (“Series A-1 Amendment No. 1), wherein: a Series A-1 Warrant may 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, which had an exercise price of
$6.00 per share for one share of common stock of the Company.
The Series A-1 Amendment No. 1 modification to the Series A-1 Warrants’ exchange elections was accounted for under the analogous guidance of FASB ASC 718, wherein,
the incremental fair value is measured as the difference between the fair value immediately after the modification as compared to the fair value immediately before the
modification, with such incremental fair value, to the extent an increase, recognized as a modification expense. On the October 18, 2017 date of the Series A-1 Amendment
No.1, the Company recognized a current period expense related to the Series A-1 Warrants’ modification of $222,000, with such expense included in other income (expense) on
the consolidated statement of operations, with a corresponding increase in additional paid-in capital in the consolidated balance sheet, as the Series A-1 Warrants are equity
classified. Such incremental fair value was estimated assuming the exchange of one Series A-1 Warrant for five Series W Warrants after the modification of the Series A-1
Warrant, as compared to an exchange of one Series A-1 Warrant for four Series X Warrants before such modification, using a Black-Scholes 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, the estimated volatility in the value of the Company’s
common stock price, and the respective warrants’ exercise price.
See our consolidated financial statements Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for a further discussion of the Series A-1
Preferred Stock Units private placement, the Series A-1 Convertible Preferred Stock, the Series A-1 Warrants, the Series A-1 Warrant modification resulting from the Series A-
1 Amendment No.1, and the Series W Warrants or Series X-1 Warrants which may be issued upon the exchange of Series A-1 Warrants.
The estimated fair values presented herein are subjective and are affected by changes in inputs to the valuation models, 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 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. Changes in these assumptions can materially affect the estimated fair values. See our consolidated financial statements Note 11,
Financial Instruments Fair Value Measurements, for further information with respect to recurring reporting period date and non-recurring issue-date and /or date -of-
occurrence estimated fair values.
59
Financial Results of Operations (continued)
Non-GAAP Financial Measures
The factors described above resulted in net loss attributable to common stockholders of $10,398,134 and $5,650,851 for the years ended December 31, 2017 and 2016,
respectively.
To supplement our consolidated financial statements presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
within this Annual Report on Form 10-K, management provides certain non-GAAP financial measures (“NGFM”) of the Company’s financial results, including such amounts
captioned: “net loss before interest, taxes, depreciation, and amortization” or “EBITDA”, and “non-GAAP Adjusted Loss”, as presented herein below.
Such NGFM are presented with the intent of providing greater transparency of information used by us in our financial performance analysis and operational decision-making.
Additionally, we believe these NGFM provide meaningful information to assist investors, shareholders, and other readers of our consolidated financial statements, in making
comparisons to our historical financial results, and analyzing the underlying financial results of our operations. The NGFM are provided to enhance readers’ overall
understanding of our current financial results and to provide further information to enhance the comparability of results between the current year period and the prior year
period.
We believe the NGFM provide useful information by isolating certain expenses, gains, and losses, which are not necessarily indicative of our operating financial results and
business outlook. In this regard, the presentation of the NGFM herein below, is to help the reader of our consolidated financial statements to understand the effects of the non-
cash impact on our (U.S. GAAP) consolidated statement of operations of: the loss recognized with respect to the issuance of the Series A Preferred Stock Units; the change in
fair value of each of the respective Series A Warrant and Series A Convertible Preferred Stock conversion option derivative liability; and, the expense recognized resulting from
the modification of the Series A-1 Warrant agreement, each as discussed herein above.
Importantly, we note the NGFM measures captioned “EBITDA” and “non-GAAP Adjusted Loss” are not recognized terms under U.S. GAAP, and as such, they are not: a
substitute for, considered superior to, considered separately from, nor as an alternative to, U.S. GAAP and /or the most directly comparable U.S. GAAP financial measures.
60
Financial Results of Operations (continued)
Non-GAAP Financial Measures (continued)
A reconciliation to the most directly comparable U.S. GAAP measure to NGFM, as discussed above, is as follows:
2017
Year Ended December 31,
2016
$ Change
Net loss attributable to common stockholders
Series A Convertible Preferred Stock dividends
Series A-1 Convertible Preferred Stock dividends
Deemed dividend Series A-1 Convertible Stock issued in a private placement
on August 4, 2017
Deemed dividend Series A-1 Convertible Stock issued in the Series A
Exchange Offer on November 17, 2017
Net loss - as reported
Adjustments
Depreciation expense(1)
Interest expense
Income tax provision
EBITDA
Stock-based compensation expense(2)
Loss on the issuance of Series A Preferred Stock Units(3)
Change in fair value of Series A Warrants derivative liability(4)
Change in fair value of Series A Convertible Preferred Stock conversion
option derivative liability(4)
Modification of Series A-1 Warrant agreement(5)
$
(10,398,134)
112,570
79,788
$
182,500
504,007
(9,519,269)
7,110
724,684
—
(8,787,475)
1,048,127
3,124,285
(1,942,501)
(643,318)
222,000
(5,650,851) $
—
—
—
—
(5,650,851)
3,793
—
—
(4,747,283)
112,570
79788
182,500
504,007
(3,868,418)
3,317
728,684
—
(5,647,058)
(3,140,417)
747,365
—
—
—
—
300,762
3,124,285
(1,942,501)
(643,318)
222,000
Non-GAAP adjusted loss $
(6,978,882)
$
(4,899,693) $
(2,079,189)
(1)
Included in general and administrative expenses in the condensed consolidated statement of operations.
(2) Stock-based compensation expense of $925,534 (which includes $51,389 of stock-based compensation expense related to the March 31, 2017 modifications of the stock
options previously granted to the Company’s former Chief Financial Officer) and $664,068, is included in general administrative expenses; and, $122,593 and $83,297, is
included in research and development expenses, in the consolidated statement of operations, for the years ended December 31, 2017 and 2016, respectively.
(3) As discussed herein above, the issuance of the Series A Preferred Stock Units resulted in the recognition of a loss of $3,124,285, resulting from the aggregate initial fair value
of each of the Series A Warrant and the Series A Convertible Preferred Stock conversion option derivative liability, being in excess of the gross proceeds of the Series A
Preferred Stock Units private placement, with such excess amounting to $2,735,657, recognized as a current period expense, along with offering costs of $388,628, which
were also recognized as a current period expense. There was no comparable amount in the prior year.
(4) As discussed herein above, the Series A Warrant and the Series A Convertible Preferred Stock conversion option were each determined to be a derivative liability, and each
were initially measured at fair value at the time of issuance and are subsequently remeasured at fair value on a recurring basis at each reporting period, with changes in fair
value recognized as other income or expense in the consolidated statement of operations. The change in estimated fair value, including fair value adjustments on the dates of
the Series A Exchange Offer, the conversion of Series A Convertible Preferred Stock, and the recurring fair value adjustment as of December 31, 2017, resulted in the
recognition of other income of $1,942,501 and $643,318, with corresponding decreases in each of the Series A Warrants derivative liability and the Series A Convertible
Preferred Stock conversion option derivative liability, respectively, during the year ended December 31, 2017. There were no comparable amounts in the prior year.
(5) As discussed herein above, the Series A-1 Amendment No. 1 resulted in a modification to the Series A-1 Warrant agreement, with such modification resulting in the
recognition of a $222,000 current period expense the October 18, 2017 date of the Series A-1 Amendment No.1, with such modification expense included in other income
(expense) on the consolidated statement of operations, with a corresponding increase in additional paid-in capital in the consolidated balance sheet, as the Series A-1
Warrants are equity classified. There was no comparable amount in the prior year.
61
Financial Results of Operations (continued)
Income Taxes
We account for income taxes using the asset and liability method, wherein, current tax liabilities or receivables are recognized for the amount of taxes estimated to be payable
or refundable for the current year, and deferred tax assets and deferred tax liabilities are recognized for estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax basis used for income tax purposes, along with net operating loss (“NOL”) and tax
credit carryforwards.
Deferred tax assets and deferred tax liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect of the change in the tax rate is recognized as income or expense in the period of the enacted change in tax rate. See herein below
for a discussion of the “Tax Act of 2017”, which resulted in a change to future years’ statutory corporate tax rate applicable to taxable income. Changes in deferred tax assets
and deferred tax liabilities are recorded in the provision for income taxes.
As required by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 740, Income Taxes”, (“ASC 740), a “more-likely-than-
not” criterion is applied when assessing the estimated realization of deferred tax assets through their utilization to reduce future taxable income, or with respect to a deferred tax
asset for tax credit carryforward, to reduce future tax expense. A valuation allowance is established, when necessary, to reduce deferred tax assets, net of deferred tax liabilities,
when the assessment indicates it is more-likely-than-not, the full or partial amount of the net deferred tax asset will not be realized. Accordingly, we have evaluated the positive
and negative evidence bearing upon the estimated realizability of our net deferred tax assets, and based on our history of operating losses, we have concluded it is more-likely-
than-not the deferred tax assets will not be realized, and therefore have recognized a valuation allowance reserve equal to the full amount of the deferred tax assets, net of
deferred tax liabilities, as of December 31, 2017 and 2016.
We have total estimated federal and state NOL carryforward of $13,780,719 and $6,432,797 at December 31, 2017 and 2016, respectively, which is available to reduce future
taxable income and begin to expire in 2035. We have total estimated research and development (“R&D”) tax credit carryforward of $194,345 and $91,535 as of December 31,
2017 and 2016, respectively, including generating such R&D tax credit of $102,810 and $70,861, during the years ended December 31, 2017 and 2016, respectively, with the
R&D tax credit carryforward available to reduce future tax expense and begin to expire in 2035.
On December 22, 2017, the president of the United States signed into law what is commonly referred to as the Tax Cuts and Jobs Act of 2017 (Public Law No. 115-97),
referred to herein as the Tax Act of 2017. The Tax Act of 2017 is a comprehensive revision to federal tax law which makes broad and complex changes to the U.S. tax code,
including, but not limited to, reducing the U.S. federal corporate tax rate from 35% to 21%, eliminating the corporate alternative minimum tax (AMT) and changing how
existing AMT credits can be realized; creating a new limitation on deductible interest expense; changing rules related to uses and limitations of net operating loss carryforwards
created in tax years beginning after December 31, 2017; and limitations on the deductibility of certain executive compensation.
In December 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses situations where the accounting is incomplete for the income tax effects
of the Tax Act of 2017. SAB 118 directs taxpayers to consider the impact of the Act as “provisional” when the Company does not have the necessary information available,
prepared, or analyzed, including computations, to finalize the accounting for the changes resulting from the Tax Act of 2017. Companies are provided a measurement period of
up to one year to obtain, prepare, and analyze information necessary to finalize the accounting for provisional amounts or amounts that cannot be estimated as of December 31,
2017.
With regards to the Tax Act of 2017 impact on our tax provision for year ending December 31, 2017, we have recognized the provisional impact of the revaluation of
deferred tax assets and deferred tax liabilities to 21% from 35%, resulting in an estimated $1.6 million tax expense, which was fully offset by a corresponding change in the
valuation allowance applied to the net deferred tax assets.
See our consolidated financial statements Note 7, Income Taxes, for additional information with respect to our income tax provision, deferred tax assets, and deferred tax
liabilities.
62
Liquidity and Capital Resources
Going Concern
The provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements - Going
Concern (ASC Topic 205-40) requires management to assess an entity’s ability to continue as a going concern within one year of the date of the financial statements are issued.
In each reporting period (including interim periods), an entity is required to assess conditions known and reasonably knowable as of the financial statement issuance date to
determine whether it is probable an entity will not meet its financial obligations within one year from the financial statement issuance date. Substantial doubt about an entity’s
ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate it is probable the entity will be unable to meet its financial
obligations as they become due within one year after the date the financial statements are issued.
We are an early stage and emerging growth company and have not generated any revenues to date. As such, we are subject to all of the risks associated with early stage and
emerging growth companies. Since inception, we have incurred losses and negative cash flows from operating activities. We do not expect to generate positive cash flows from
operating activities in the near future until such time, if at all, as we complete the development process of our products, including regulatory approvals and clearances, and
thereafter begin to commercialize and achieve substantial acceptance in the marketplace for the first of a series of products in its medical device portfolio, which is not expected
to occur in the near future, if at all.
We incurred a net loss attributable to common stockholders of $10,398,134 and $5,650,851, and had net cash flows used in operating activities of $6,608,208 and $4,454,857,
for the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017, we had an accumulated deficit of $17,907,611 and working capital of $53,060,
adjusted to exclude the Series A Warrants derivative liability of $761,123 and the Series A Convertible Preferred Stock conversion option derivative liability of $212,217. We
anticipate incurring operating losses and do not expect to generate positive cash flows from operating activities, if any, for the next several years as we complete the
development of our products, file for and request regulatory approvals and clearances of such products, and begins to commercially market such products. These factors raise
substantial doubt about our ability to continue as a going concern within one year after the date our consolidated financial statements are issued.
Our ability to fund our operations is dependent upon management’s plans, which include raising additional capital, obtaining regulatory approvals for our products currently
under development, commercializing and generating revenues from our products currently under development, and continuing to control expenses. However, there is no
assurance we will be successful in these efforts.
A failure to raise sufficient capital, obtain regulatory approvals and clearances of our products, generate sufficient product revenues, or control expenditures, among other
factors, will adversely impact our ability to meet our financial obligations as they become due and payable and to achieve our intended business objectives, and therefore raise
substantial doubt regarding our ability to continue as a going concern within one year after the date our consolidated financial statements are issued.
Our consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and satisfaction of liabilities and
commitments in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities should we be unable to continue as a going concern.
Financing
Since our inception in June 2014, we have financed our operations principally through issuances of common stock, preferred stock, warrants, and debt. Prior to our April
2016 IPO, we raised approximately $2.1 million of net cash proceeds from private offerings of our common stock and warrants. Our April 28, 2016 IPO resulted in
approximately $4.2 million of net cash proceeds. During 2017, we raised a total of approximately $7.5 million of net cash proceeds from: a Note and Security Purchase
Agreement with Scopia Holdings LLC (“Scopia” or “the Lender”), including the issuance of a $5.0 million Senior Secured Note and Series S Warrants; the Series A-1 Preferred
Stock Units private placement; and the Series A Preferred Stock Units private placement, each as summarized herein below. Subsequent to December 31, 2017, in January
2018, the Company raised $4.3 million of net cash proceeds in an underwritten public offering of shares of common stock of the Company pursuant to its previously filed
effective shelf registration statement on SEC Form S-3 (File No. 333-220549), as summarized below.
63
Liquidity and Capital Resources (continued)
Note and Security Purchase Agreement with Scopia Holdings LLC
We entered into a Note and Security Purchase Agreement with Scopia, under which, upon Scopia delivering to the Company $4.8 million in net cash proceeds, we issued to
Scopia and its designees, a Senior Secured Note with an initial principal amount of $5.0 million (“Senior Secured Note”), and 2,660,000 Series S Warrants to purchase a
corresponding number of shares of our common stock. The aggregate remaining unpaid principal balance of the Senior Secured Note is due on June 30, 2019.
The Senior Secured Note bears interest at a fixed annual rate of 15.0%, with interest payable semi-annually in arrears on June 30 and December 30 of each calendar year,
commencing December 30, 2017. The Company may elect, at its sole discretion, to defer payment of up to 50% of the semi-annual interest payment, with such deferred amount
added to and increasing the outstanding interest-bearing principal balance of the Senior Secured Note by such amount. As of December 31, 2017, the Senior Secured Note
principal balance is $5,188,542, including $188,542 of deferred interest payment. The aggregate remaining unpaid principal balance of the Senior Secured Note is due on June
30, 2019.
During the year ended December 31, 2017, interest expense recognized totaled $724,684, including $377,083 with respect to the semi-annual interest payment, which as
discussed above, 50% or $188,542, has been added to the outstanding interest-bearing principal balance of the Senior Secured Note, and $347,601 with respect to the
amortization of debt discount. The Senior Secured Note remaining unamortized debt discount is $3,244,274 at December 31, 2017.
The Series S Warrants were immediately exercisable upon issuance, have an exercise price of $0.01 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, may be exercised for cash or on a cashless basis, and expire June 30, 2032,
with any Series S Warrants outstanding on the expiration date automatically exercised on a cashless basis.
In each of October 2017 and November 2017, 532,000 (or a total of 1,064,00) 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. Accordingly, at December 31, 2017, there were 1,473,640 Series S Warrants issued and
outstanding.
See our consolidated financial statements Note 12, Note and Securities Purchase Agreement, Senior Secured Note, and Series S Warrants, for a further discussion of the Note
and Security Purchase Agreement with Scopia Holdings LLC; and, Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for further information
with respect to the Series S Warrants.
Series A-1 Preferred Stock Units Private Placement
On August 3, 2017, the Company’s Board of Directors authorized the issuance of up to 150,000 Series A-1 Preferred Stock Units, comprised of one share of Series A-1
Convertible Preferred Stock convertible into a share of common stock of the Company, and one Series A-1 Warrant exercisable for a share of common stock of the Company,
or the Series A-1 Warrant may be exchanged for five Series W Warrants or four Series X-1 Warrants each of which is exercisable for a share of common stock of the
Company.
On, August 4, 2017, the Company entered into a Securities Purchase Agreement, as amended, pursuant to which the Company may issue up to an aggregate of $600,000
(subject to increase) of Series A-1 Preferred Stock Units at a price of $4.00 per unit, in a private placement transaction (Series A-1 Preferred Stock Units private placement),
and on such date, issued a total of 125,000 Series A-1 Preferred Stock Units for aggregate proceeds of $500,000. The Company did not incur placement agent fees in connection
with the Series A-1 Preferred Stock Units private placement.
On November 17, 2017 (“November 17, 2017 Exchange Date”), the Company completed an exchange offer initiated on October 20, 2017 to the 28 holders of the Series A
Convertible Preferred Stock and Series A Warrants - to exchange one share Series A Convertible Preferred Stock for 1.5 shares of Series A-1 Convertible Preferred Stock, and,
one Series A Warrant for one Series A-1 Warrant (“Series A Exchange Offer”) - resulting in 154,837 shares of Series A Convertible Preferred Stock exchanged for 232,259
shares of Series A-1 Convertible Preferred Stock, and 154,837 Series A Warrants exchanged for 154,837 Series A-1 Warrants, by 13 holders on the November 17, 2017
Exchange Date. Accordingly, as of December 31, 2017, 357,259 shares of Series A-1 Convertible Preferred Stock and 279,837 Series A-1 Warrants were each issued and
outstanding.
See our consolidated financial statements Note 11, Financial Instruments Fair Value Measurements, for a further discussion of the Series A Exchange Offer, and Note 13,
Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for a further discussion of the Series A-1 Preferred Stock Units private placement, the Series A-1
Convertible Preferred Stock, the Series A-1 Warrants, and the Series W Warrants or Series X-1 Warrants which may be issued upon the exchange of Series A-1 Warrants.
64
Liquidity and Capital Resources (continued)
Series A Preferred Stock Units Private Placement
The Company’s Board of Directors authorized the issuance of up to a total of 1.25 million Series A Preferred Stock Units, including authorizing 500,000 units on January 21,
2017 and 750,000 units on May 10, 2017. A Series A Preferred Stock Unit was comprised of one share of Series A Convertible Preferred Stock convertible into a share of
common stock of the Company, and one Series A Warrant exercisable for a share of common stock of the Company, or one Series A Warrant may be exchanged for four Series
X Warrants, each of which is exercisable for a share of common stock of the Company.
On January 26, 2017, the Company entered into a Securities Purchase Agreement pursuant to which the Company may issue up to an aggregate of $3,000,000 (subject to
increase) of Series A Preferred Stock Units at a price of $6.00 per unit, in a private placement transaction (Series A Preferred Stock Units private placement). On the January
26, 2017 initial closing date of the Series A Preferred Stock Units private placement, and at subsequent closings on January 31, 2017 and March 8, 2017, a total of 422,838
Series A Preferred Stock Units were issued for aggregate gross proceeds of approximately $2.5 million and net proceeds of approximately $2.2 million, after payment of
placement agent fees and closing costs.
In addition to the 154,837 shares of Series A Convertible Preferred Stock exchanged for 232,259 shares of Series A-1 Convertible Preferred Stock, and the 154,837 Series A
Warrants exchanged for 154,837 Series A-1 Warrants in the Series A Exchange Offer, a total of 18,334 shares of Series A Convertible Preferred Stock were converted into a
total of 22,093 shares of common stock of the Company during the year ended December 31, 2017. Accordingly, as of December 31, 2017, 249,667 shares of Series A
Convertible Preferred Stock and 268,001 Series A Warrants were each issued and outstanding.
See our consolidated financial statements Note 11, Financial Instruments Fair Value Measurements, for a further discussion of the Series A Exchange Offer and the shares of
Series A Convertible Preferred Stock converted into shares of common stock of the Company, and Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and
Warrants, for a further discussion of the Series A Preferred Stock Units private placement, Series A Convertible Preferred Stock, Series A Warrant, and the Series X Warrants
which may be issued upon the exchange of Series A Warrants.
Issue of Common Stock - Underwritten Public Offering
Subsequently, in January 2018, the Company conducted an underwritten public offering of 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. The Company issued the 2,415,278
shares on January 23, 2018, and on January 25, 2018, issued 234,540 shares of common stock, under the underwriter’s over-allotment, resulting in net cash proceeds of
$4,263,099, after deduction of both underwriting discounts of $381,574 and estimated offering costs.
Series W Warrants Offer-to-Exercise
Subsequently, on January 11, 2018, the Company filed with the SEC a Tender Offer Statement on Schedule TO with respect to offered Series W Warrants holders the
opportunity to exercise their Series W Warrants at a temporarily reduced exercise price of $2.00 per share (“Series W Warrants Offer-to-Exercise”). As of the February 8, 2018
expiry of the Series W Warrants Offer-to-Exercise, 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, and the issue of a corresponding number of shares of common stock of the Company.
Series W Warrants Offer-to-Exchange
Subsequently, on February 20, 2018, the Company filed with the SEC a Tender Offer Statement on Schedule TO with respect to the Company offering Series W Warrant
holders the opportunity to exchange two Series W Warrants for one Series Z Warrant, with such exchange offer expiring on March 19, 2018 (“Series W Warrants Offer-to-
Exchange”). The Series Z Warrants issued upon exchange of the Series W Warrants will be immediately exercisable upon issuance and expire after the close of business on
April 30, 2024, and each may be exercised for one share of common stock of the Company at an exercise price of $3.00 per share, with such exercise price and number of
underlying shares not subject to further adjustment, except for the effect of stock dividends, stock splits or similar events affecting the common stock. The Series Z Warrants are
redeemable by the Company under certain conditions. See our consolidated financial statements Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and
Warrants, for a further discussion of the Series W Warrants and the Series Z Warrants.
65
Liquidity and Capital Resources (continued)
Shareholders’ Rights Offering
Subsequently, on January 17, 2018, the Company filed an initial registration statement on Form S-1 (File No. 333-222581), currently under SEC review, related to a
proposed rights offering wherein, as currently proposed, the Company will distribute one transferable equity subscription right for each issued and outstanding share of common
stock of the Company as of a record date to be determined by the Company’s Board of Directors (“Rights Offering”). As currently proposed, the equity subscription Rights
Offering is to commence upon an effective registration statement. Further, as currently proposed, for a period of 30 days from their distribution date, the transferable equity
subscription right may be exercised for $2.25 per unit to purchase a common stock unit comprised of one share of common stock of the Company and one Series Z Warrant. As
currently proposed, the common stock unit will trade for up to 90 days, after which it will separate into its underlying components of one share of common stock of the
Company and one Series Z Warrant. The Series Z Warrant may be exercised for one share of common stock of the Company at an exercise price of $3.00 per share, with such
exercise price and number of underlying shares not subject to further adjustment, except for the effect of stock dividends, stock splits or similar events affecting the common
stock, and will expire after the close of business on April 30, 2024. The Series Z Warrants are redeemable by the Company under certain conditions. See our consolidated
financial statements Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for a further discussion of the Series Z Warrants.
Series A and Series A-1 Exchange Offer - Series B Convertible Preferred Stock and Series Z Warrants
Subsequently, on February 14, 2018 the Company initiated an exchange offer to the holders of both the Series A Convertible Preferred Stock and Series A Warrants, and the
Series A-1 Convertible Preferred Stock and Series A-1 Warrants (“Series A and Series A-1 Exchange Offer”), as follows: one (1) share of Series A Convertible Preferred Stock
exchanged for two (2) shares of Series B Convertible Preferred Stock, and one (1) Series A Warrant exchanged for five (5) Series Z Warrants; and one (1) share of Series A-1
Convertible Preferred Stock exchanged for 1.33 shares of Series B Convertible Preferred Stock, and one (1) Series A-1 Warrant exchanged for five (5) one Series Z Warrants. A
condition of the Series A and Series A-1 Exchange Offer is for all outstanding shares of Series A Convertible Preferred Stock and all Series A Warrants, and all shares of Series
A-1 Convertible Preferred Stock and all Series A-1 Warrants, must be tendered, else, if not all are tendered, then the Company reserves the right to not accept any tenders, if
any. The Series A and Series A-1 Exchange Offer is scheduled to expire on March 15, 2018, unless extended by the Company, at its sole discretion.
The Series B Convertible Preferred Stock has a par value of $0.001 per share, no voting rights, a stated value of $3.00 per share, and is immediately convertible upon its
issuance. At the holders’ election, a share of Series B Convertible Preferred Stock is convertible into a number of shares of common stock of the Company at a common stock
conversion exchange factor equal to a numerator of $3.00 and a denominator of $3.00, with such denominator not subject to further adjustment, except for the effect of stock
dividends, stock splits or similar events affecting the Company’s common stock. The Series B Convertible Preferred Stock shall not be redeemed for cash and under no
circumstances shall the Company be required to net cash settle the Series B Convertible Preferred Stock.
The Series B Convertible Preferred Stock provides for dividends at a rate of 8% per annum on the stated value of the Series B Convertible Preferred Stock, with such
dividends compounded quarterly, accumulate, and are payable in arrears upon being declared by the Company’s Board of Directors. The Series B Convertible Preferred Stock
dividends from April 1, 2018 through October 1, 2021 are payable-in-kind (“PIK”) in additional shares of Series B Convertible Preferred Stock. The dividends may be settled
after October 1, 2021, at the option of the Company, through any combination of the issuance of additional Series B Convertible Preferred Stock, shares of common stock, and
/or cash payment.
The Series Z Warrants issued in the Series A and Series A-1 Exchange Offer will be immediately exercisable upon issuance and expire after the close of business on April 30,
2024, and each may be exercised for one share of common stock of the Company at an exercise price of $3.00 per share and number of underlying shares, 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. The Series Z Warrants are redeemable
by the Company under certain conditions. See our consolidated financial statements Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for a
further discussion of the Series B Convertible Preferred Stock and the Series Z Warrants.
66
Liquidity and Capital Resources (continued)
Cash flows and liquidity
The primary cash flow sources and uses for each period is as follows:
Net cash flows (used in) or provided by:
Operating activities
Investing activities
Financing activities
Net increase in cash
Cash, beginning of period
Cash, end of period
Net cash flows used in operating activities
Year Ended December 31,
2017
2016
$
$
(6,608,208)
(5,301)
7,562,851
949,342
585,680
1,535,022
$
$
(4,454,857)
(21,793)
4,295,062
181,588
767,268
585,680
Net cash flows used in operating activities was $6,608,2018 and $4,454,857 in the years ending December 31, 2017 and 2016, respectively, consisting of, respectively, a net
loss of $9,519,269 and $5,650,851, with adjustments totaling, respectively, $2,911,061 and $1,195,994 to reconcile such net loss to net cash used in operating activities,
including, respectively, a total of $2,351,846 and 751,158 of non-cash items, and a total of $559,215 and $444,836 of a net change in operating assets and liabilities, for each of
the years ended December 31, 2017 and 2016, as follows:
Net cash flows (used in) operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation expense
Stock-based compensation
Loss on issuance of Preferred Stock Units
Change in fair value - Series A Warrants derivative liability
Change in fair value - Series A Convertible Preferred Stock conversion option derivative liability
Modification of Series A-1 Warrant agreement
Amortization of discount - Senior Secured Note
Unpaid interest expense added to principal of Senior Secured Note
Changes in operating assets and liabilities:
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other current liabilities
Adjustments to reconcile net loss to net cash used in operating activities
Net cash flows used in operating activities
Net cash flows used in investing activities
Year Ended December 31,
2017
2016
$
(9,519,269)
$
(5,650,851)
7,110
1,048,127
3,124,285
(1,942,501)
(643,318)
222,000
347,601
188,542
67,023
(85,008)
577,200
2,911,061
(6,608,208)
$
$
3,793
747,365
—
—
—
—
—
—
(146,729)
877,592
(286,027)
1,195,994
(4,454,857)
$
$
Net cash flows used in investing activities in the years ended December 31, 2017 and 2016, related to the purchases of computer and research equipment, totaling $5,301 and
$21,793, respectively.
Net cash flows provided by financing activities
Net cash flows provided by financing activities in the year ended December 31, 2017, totaled $7,562,851, comprised of $2,537,012, offset by $388,628 of offering costs, from
the Series A Preferred Stock Units private placement, $500,000 from the Series A-1 Preferred Stock Units private placement, $4,842,577 from the Scopia Note and Security
Purchase Agreement, each as discussed herein above, along with $71,890 of cash proceeds from the exercise of IPO Warrants.
Net cash flows provided by financing activities in the year ended December 31, 2016, totaled $4,295,062, comprised of $5,300,000 of gross proceeds, offset by $1,004,938 of
offering costs, from the issuance of units in our April 28, 2016 IPO, as discussed herein above.
67
Critical Accounting Policies and Significant Judgments and Estimates
This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance
with generally accepted accounting principles in the United States of America, or U.S. GAAP. The preparation of these consolidated financial statements requires us to make
estimates and assumptions affecting the reported amounts of assets, liabilities, and equity, along with the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of expenses during the corresponding periods. In accordance with U.S. GAAP, we base our estimates on historical
experience and on various other assumptions we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or
conditions. While our significant accounting policies are described in more detail in our consolidated financial notes, we believe the following accounting policies to be critical
to the judgments and estimates used in the preparation of our consolidated financial statements.
Research and Development Expense
Research and development expenditures are charged to research and development expense as incurred. Research and development costs include costs related to our various
outside professional service providers and suppliers, engineering studies, supplies, outsourced testing and consulting as well as rental costs for access to certain facilities at one
of our contract research suppliers.
Stock-Based Compensation
The Company issues stock-based awards to employees, members of its board of directors, and non-employees. Stock-based awards to employees and members of its board of
directors are accounted for in accordance with FASB ASC Topic 718, Stock Compensation, and stock-based awards to non-employees are accounted for in accordance with
FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees.
The Company measures the compensation expense of stock-based awards granted to employees and members of its board of directors using the grant-date fair value of the
award and recognizes compensation expense for stock-based awards on straight-line basis over the requisite service period, which is generally the vesting period of the
respective stock option award.
The Company measures the expense of stock-based awards granted to non-employees on a vesting date basis, fixing the fair value of vested non-employee stock options as of
their respective vesting date, The fair value of vested non-employee stock options is not subject-to-change at subsequent reporting dates. The estimated fair value of the
unvested non-employee stock options are remeasured to then current fair value at each subsequent reporting date. The expense of non-employee stock options is recognized on
a straight-line basis over the service period, which is generally the vesting period of the respective non-employee stock option award.
Financial Instruments and Fair Value Measurements
FASB ASC Topic 820, Fair Value Measurement, (ASC 820) defines fair value as the price which would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at a transaction measurement date. The FASB ASC 820 three-tier fair value hierarchy prioritizes the inputs used in the valuation
methodologies, as follows:
Level 1 Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2 Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted
prices for identical or similar assets and liabilities in markets which are not active, or other inputs observable or can be corroborated by observable market data.
Level 3 Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market
participants. These valuations require significant judgment.
The Company evaluates its financial instruments to determine if those instruments or any embedded components of those instruments potentially qualify as derivatives that
need to be separately accounted for in accordance with FASB ASC Topic 815, Derivatives and Hedging (ASC 815). The accounting for warrants issued to purchase shares of
common stock of the Company is based on the specific terms of the respective warrant agreement, and are generally classified as equity, but may be classified as a derivative
liability if the warrant agreement provides required or potential full or partial cash settlement. A warrant classified as a derivative liability, or a bifurcated embedded conversion
or settlement option classified as a derivative liability, is initially measured at its issue-date fair value, with such fair value subsequently adjusted at each reporting period, with
the resulting fair value adjustment recognized as other income or expense. If upon the occurrence of an event resulting in the warrant liability or the embedded derivative
liability being subsequently classified as equity, or the exercise of the warrant or the conversion option, the fair value of the derivative liability will be adjusted on such date-of-
occurrence, with such date-of-occurrence fair value adjustment recognized as other income or expense, and then the derivative liability will be derecognized at such date-of-
occurrence fair value.
68
Critical Accounting Policies and Significant Judgments and Estimates (continued)
Financial Instruments and Fair Value Measurements (continued)
The Series A Warrant and the Series A Convertible Preferred Stock conversion option were each determined to be a derivative liability under FASB ASC 815, as the Series
A Convertible Preferred Stock common stock exchange factor denominator and the Series A Warrant exercise price are 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. The
respective Series A Warrants and the Series A Convertible Preferred Stock conversion option derivative liability are each classified as a current liability on the consolidated
balance sheet, and each were initially measured at fair value at the time of issuance and are subsequently remeasured at fair value on a recurring basis at each reporting period,
with changes in fair value recognized as other income or expense in the consolidated statement of operations, with each such estimated fair values using a Monte Carlo
simulation valuation model, utilizing the Company’s common stock price and certain Level 3 inputs to take into account the probabilities of certain events occurring over their
respective life.
In addition to the recurring estimated fair value measurements, the issue-date and /or date -of-occurrence non-recurring estimated fair value measurements include: 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; the Series A-1
Convertible Preferred Stock and Series A-1 Warrants issued in the Series A-1 Preferred Stock Units private placement; the Series A-1 Warrants modification resulting from the
Series A-1 Amendment No.1, and the Series A Exchange Offer - with each utilizing the Company’s common stock price along with certain Level 3 inputs, as discussed below,
in the development of discounted cash flow analyses and /or Black-Scholes valuation models.
The recurring and non-recurring estimated fair value measurements are subjective and are affected by changes in inputs to the valuation models, including the Company’s
common stock price, and certain Level 3 inputs, including, the assumptions regarding the estimated volatility in the value of the Company’s common stock price; the
Company’s dividend yield; the likelihood and timing of future dilutive transactions, as applicable, along with the risk-free rates based on U.S. Treasury security yields. Changes
in these assumptions can materially affect the estimated fair values.
Income Taxes
The Company accounts for income taxes using the asset and liability method, wherein, current tax liabilities or receivables are recognized for the amount of taxes estimated to
be payable or refundable for the current year, and deferred tax assets and deferred tax liabilities are recognized for estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis used for income tax purposes, along with net operating loss
(“NOL”) and tax credit carryforwards.
Deferred tax assets and deferred tax liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect of the change in the tax rate is recognized as income or expense in the period of the enacted change in tax rate. See herein below
for a discussion of the “Tax Act of 2017”, which resulted in a change to future years’ statutory corporate tax rate applicable to taxable income. Changes in deferred tax assets
and deferred tax liabilities are recorded in the provision for income taxes.
On December 22, 2017, the president of the United States signed into law what is commonly referred to as the Tax Cuts and Jobs Act of 2017 (Public Law No. 115-97),
referred to herein as the Tax Act of 2017. The Tax Act of 2017 is a comprehensive revision to federal tax law which makes broad and complex changes to the U.S. tax code,
including, but not limited to, reducing the U.S. federal corporate tax rate from 35% to 21%, eliminating the corporate alternative minimum tax (AMT) and changing how
existing AMT credits can be realized; creating a new limitation on deductible interest expense; changing rules related to uses and limitations of net operating loss carryforwards
created in tax years beginning after December 31, 2017; and limitations on the deductibility of certain executive compensation.
In December 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses situations where the accounting is incomplete for the income tax effects
of the Tax Act of 2017. SAB 118 directs taxpayers to consider the impact of the Act as “provisional” when the Company does not have the necessary information available,
prepared, or analyzed, including computations, to finalize the accounting for the changes resulting from the Tax Act of 2017. Companies are provided a measurement period of
up to one year to obtain, prepare, and analyze information necessary to finalize the accounting for provisional amounts or amounts that cannot be estimated as of December 31,
2017.
As required by FASB ASC Topic 740, Income Taxes”, (“ASC 740), a “more-likely-than-not” criterion is applied when assessing the estimated realization of deferred tax
assets through their utilization to reduce future taxable income, or with respect to a deferred tax asset for tax credit carryforward, to reduce future tax expense. A valuation
allowance is established, when necessary, to reduce deferred tax assets, net of deferred tax liabilities, when the assessment indicates it is more-likely-than-not, the full or partial
amount of the net deferred tax asset will not be realized. Accordingly, the Company evaluated the positive and negative evidence bearing upon the estimated realizability of the
net deferred tax assets, and based on the Company’s history of operating losses, concluded it is more-likely-than-not the deferred tax assets will not be realized, and therefore
recognized a valuation allowance reserve equal to the full amount of the deferred tax assets, net of deferred tax liabilities, as of December 31, 2017 and 2016.
69
Critical Accounting Policies and Significant Judgments and Estimates (continued)
Going Concern
The provisions of FASB ASC Topic 205-40, Presentation of Financial Statements - Going Concern (ASC Topic 205-40) requires management to assess an entity’s ability to
continue as a going concern within one year of the date of the financial statements are issued. In each reporting period (including interim periods), an entity is required to assess
conditions known and reasonably knowable as of the financial statement issuance date to determine whether it is probable an entity will not meet its financial obligations within
one year from the financial statement issuance date. Substantial doubt about an entity’s ability to continue as a going concern exists when conditions and events, considered in
the aggregate, indicate it is probable the entity will be unable to meet its financial obligations as they become due within one year after the date the financial statements are
issued. We have incorporated specific disclosures within our financial statements stating there is substantial doubt regarding the Company’s ability to continue as a going
concern within one year from the financial statement issuance date. See Liquidity and Capital Resources above for a discussion of our liquidity and going concern status.
The Company’s consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and satisfaction of liabilities and
commitments in the normal course of business, and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities should the Company be unable to continue as a going concern.
Recently Issued Accounting Standards
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) -
Part I - Accounting for Certain Financial Instruments with Down-Round Features, and Part II - Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial
Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Principally, ASU 2017-11 amendments
simplify the accounting for certain financial instruments with down-round features. The amendments require companies to disregard the down-round feature when assessing
whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will
adjust their basic EPS calculation for the effect of the down-round feature when triggered (i.e., when the exercise price of the related equity-linked financial instrument is
adjusted downward because of the down-round feature) and will also recognize the effect of the trigger within equity. Additionally, ASU 2017-11 also addresses “navigational
concerns” within the FASB ASC related to an indefinite deferral available to private companies with mandatorily redeemable financial instruments and certain noncontrolling
interests, which has resulted in the existence of significant “pending content” in the ASC. The FASB decided to reclassify the indefinite deferral as a scope exception, which
does not have an accounting effect. The guidance of ASU 2017-11 is effective for public business entities, as defined in the ASC Master Glossary, for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years, and for all other entities, the amendments are effective for fiscal years beginning after December
15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Earlier adoption is permitted for all entities as of the beginning of an interim period for
which financial statements (interim or annual) have not been issued or have not been made available for issuance. The Company is evaluating the impact of this guidance on its
consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) - Scope of Modification Accounting. In ASU 2017-09, the FASB provides
guidance on determining which changes to the terms and conditions of stock-based compensation arrangements require the application of “modification accounting” under ASC
718. Generally, ASC 718 modification accounting is not applicable if the stock-based arrangement immediately before and after the modification has the same fair value,
vesting conditions, and balance sheet classification. The guidance of ASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual
periods, beginning December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities, as defined in the ASC Master
Glossary, for periods for which financial statements have not yet been issued, and for all other entities for reporting periods for which financial statements have not yet been
made available for issuance. The Company adopted this guidance as of April 1, 2017, and it did not have an effect on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, which amends the guidance of FASB ASC Topic 805, Business Combinations (ASC 805) adding guidance to assist entities
with evaluating whether transactions should be accounted for as acquisitions (disposals) of assets or businesses. The objective of ASU 2017-01 is to narrow the definition of
what qualifies as a business under Topic 805 and to provide guidance for streamlining the analysis required to assess whether a transaction involves the acquisition (disposal) of
a business. ASU 2017-01 provides a screen to assess when a set of assets and processes do not qualify as a business under Topic 805, reducing the number of transactions that
need to be considered as possible business acquisitions. ASU 2017-01 also narrows the definition of output under Topic 805 to make it consistent with the description of outputs
under Topic 606. The guidance of ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and early
adoption is permitted under certain circumstances. The adoption of this guidance as of January 1, 2018 did not have an effect on the Company’s consolidated financial
statements.
70
Recently Issued Accounting Standards (continued)
In August 2016, the FASB issued ASU 2016-15, which amended the guidance of FASB ASC Topic 230, Statement of Cash Flows (ASC 230) on the classification of certain
cash receipts and payments. The primary purpose of ASU 2016-15 is to reduce the diversity in practice which has resulted from a lack of consistent principles on this topic. The
amendments of ASU 2016-15 add or clarify guidance on eight specific cash flow issues, including debt prepayment or debt extinguishment costs, settlement of zero-coupon
debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of
corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash
flows and application of the predominance principle. The guidance of ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. The adoption of this guidance as of January 1, 2018 did not have an effect on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and subsequently issued additional updates amending the guidance
contained in Topic 606 (ASC 606), thereby affecting the guidance contained in ASU 2014-09. ASU 2014-09 and the subsequent ASC 606 updates will supersede and replace
nearly all existing U.S. GAAP revenue recognition guidance. The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to
customers in an amount equal to the consideration to which the entity expects to be entitled for those goods and services. ASU 2014-09 defines a five step process to achieve this
core principle, and in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard
is effective for annual periods beginning after December 15, 2017, including interim periods therein, using either of the following transition methods: (i) a full retrospective
approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the
cumulative effect of initially adopting the standard recognized at the date of adoption (which includes additional footnote disclosures). To date, since its inception, the
Company has not generated any revenue, as such, the provisions of ASC 606 have not impacted the Company’s consolidated results of operations or financial condition.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”). The
amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by amending certain existing
illustrative examples and adding additional illustrative examples to assist in the application of the guidance. The effective date and transition requirements for the amendments
are the same as the effective date and transition requirements in Topic 606. The guidance is effective for the Company beginning January 1, 2018, although early adoption is
permitted beginning January 1, 2017. To date, since its inception, the Company has not generated any revenue, as such, the provisions of ASC 606 have not impacted the
Company’s consolidated results of operations or financial condition.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”).
The amendments in ASU 2016-10 clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The
amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date
and transition requirements in Topic 606. The guidance is effective for the Company beginning January 1, 2018, although early adoption is permitted beginning January 1,
2017. To date, since its inception, the Company has not generated any revenue, as such, the provisions of ASC 606 have not impacted the Company’s consolidated results of
operations or financial condition.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which establishes a right-of-use (ROU) model requiring a lessee to recognize a
ROU asset and a lease liability for all leases with terms greater-than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of
expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods with those fiscal years.
A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial
statements, with certain practical expedients available. The Company is currently evaluating the impact of this guidance on its consolidated financial position, results of
operations, and cash flows.
71
Contractual Obligations
We entered into a Note and Security Purchase Agreement with Scopia Holdings LLC (“Scopia or the Lender”), under which, upon Scopia delivering to the Company $4.8
million in net cash proceeds by wire transfer on July 3, 2017, the Company issued to Scopia and its designees, a Senior Secured Note with an initial principal amount of $5.0
million (“Senior Secured Note”), and 2,660,000 Series S Warrants to purchase a corresponding number of shares of our common stock. The aggregate remaining unpaid
principal balance of the Senior Secured Note is due on June 30, 2019.
The Senior Secured Note bears interest at a fixed annual rate of 15.0%, with interest payable semi-annually in arrears on June 30 and December 30 of each calendar year,
commencing December 30, 2017. At our sole discretion, we may elect to defer payment of up to 50% of the semi-annual interest due, with the unpaid semi-annual interest
payment added to the outstanding interest-bearing principal balance of the Senior Secured Note. As of December 31, 2017, the Senior Secured Note principal balance is
$5,188,542, including $188,542 of deferred interest payment.
The $4,842,577 of cash proceeds, net of the Lender’s debt issuance costs, have been allocated to the Senior Secured Note and the Series S Warrants based on their respective
relative estimated fair value, 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 between the Senior Secured Note initial principal amount and the allocated amount accounted for as debt discount, amortized as interest expense over the term of the
Senior Secured Note.
During the year ended December 31, 2017, interest expense recognized totaled $724,684, including $377,083 with respect to the semi-annual interest payment, which as
discussed above, 50% or $188,542, has been added to the outstanding interest-bearing principal balance of the Senior Secured Note, and $347,601 with respect to the
amortization of debt discount. The Senior Secured Note remaining unamortized debt discount is $3,244,274 at December 31, 2017.
At our discretion, the aggregate principal balance of the Senior Secured Note and any earned and unpaid interest may be repaid at any time without penalty or premium.
Additionally, under the Senior Secured Note, if at the Company’s discretion, it sells its implantable intraosseous vascular access device (the “PortIO™ Product”), then the
Senior Secured Note holders’ may require the Company to repay the then outstanding aggregate principal amount of the Senior Secured Note, in whole or in part, together with
any accrued interest thereon, from the net cash proceeds of such PortIO™ Product sale, provided such principal and interest repayment is limited to the amount of the net cash
proceeds from such PortIO™ Product sale.
The Note and Security Purchase Agreement with Scopia contains various customary negative covenants of the Company including restrictions on the Company incurring any
additional indebtedness or liens or declaring or paying any dividends, subject to certain exceptions provided for in the Note and Security Purchase Agreement with Scopia,
while any amount under the Senior Secured Note remains outstanding. Additionally, the Note and Security Purchase Agreement with Scopia also contains certain affirmative
covenants of the Company, including, among others:
●
●
If the PortIO™ Product obtains initial FDA 510(k) clearance, then, commencing four months after such FDA 510(k) clearance, we will use reasonable best efforts to attempt
to sell the PortIO™ Product on commercially reasonable terms for an amount not less than $10.0 million. If the net cash proceeds are $10.0 million or greater from such
PortIO™ product sale, and there are no continuing obligations imposed on the Company, which would constitute an undue burden on the Company, resulting from such
PortIO™ Product sale transaction, then the Senior Secured Note holders may request the Company to repay the then aggregate remaining unpaid principal balance of the
Senior Secured Note. Notwithstanding, as the FDA has indicated the PortIO™ Product will be reviewed for approval and clearance under a regulatory pathway other than a
510(k) clearance, such Note and Securities Purchase Agreement provision is not operative;
Effective with the first bi-monthly payroll in July 2017, our CEO agreed to the payment of a reduced salary of $4,200 per month, with the payment of such earned but unpaid
salary to occur on the earlier of (a) the date that FDA 510(k) clearance for the PortIO™ Product is obtained or (b) the date the aggregate remaining unpaid principal balance
of the Senior Secured Note is repaid in full. Subsequently, Scopia irrevocably waived compliance with this provision by the Company and the CEO on a prospective basis
commencing February 1, 2018. Notwithstanding, the unpaid CEO salary for the period July 1, 2017 to January 31, 2018, may only be paid upon the Senior Secured Note first
being repaid-in-full.
Additionally, the Note and Security Purchase Agreement with Scopia provides, for so long as the Lender holds at least 50% of the aggregate remaining unpaid principal
balance of the Senior Secured Note, the Lender shall have the ability to nominate one individual to the Company’s board of directors, provided the board of directors shall have
the right to reject any such Lender nominee if it determines in good faith such Lender nominee is not reasonably acceptable. In this regard, on August 3, 2017, the Lender
nominee was appointed to the Company’s board of directors.
Payment of all amounts due and payable under the Senior Secured Note are guaranteed by the Company, and the obligations under the Senior Secured Note are 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.
72
Contractual Obligations (continued)
The Company leases office space for its corporate office, which initially provided for two consecutive six-month terms beginning on February 1, 2016, and was subsequently
amended to extended the lease term through May 31, 2017. The lease agreement includes a 5% increase in monthly rent effective on each twelve-month anniversary date. Upon
the May 31, 2017 termination date, the lease agreement converted to a month-to-month lease, which may be cancelled by the Company with three months written notice. Total
rent expense incurred under the corporate office space lease arrangement was $147,276 and $134,356 for the years ended December 31, 2017 and 2016, respectively. At
December 31, 2017, the Company’s future minimum lease payments totaled $125,186 for the period January 1, 2018 to December 31, 2018, with respect to the lease
arrangement on a month-to-month basis.
Effective October 2015, the Company entered into a three-year management services agreement through October 2018 with HCP/Advisors LLC, an affiliate of a former
director of the Company. Pursuant to the HCP/Advisors LLC agreement, such entity has agreed to provide the Company with certain management services, including without
limitation identifying potential corporate opportunities, general business development, corporate development, corporate governance, marketing strategy, strategic development
and planning, coordination with service providers, and other advisory services as may be mutually agreed upon. The Company has agreed to pay HCP/Advisors LLC an initial
first month fee of $35,000 commencing as of November 1, 2015, and thereafter, a monthly fee of $25,000 through October 31, 2018. Under this agreement, the Company
incurred fees of $300,000 in each of the years ending December 31, 2017 and 2016, with such expense included in “General and administrative expenses” in the accompanying
consolidated statements of operations.
Effective November 1, 2014, the Company entered into an employment agreement with its CEO (the “CEO Employment Agreement”) for a five-year term, with a current
base salary of $295,000 per year. On April 28, 2016, upon consummation of the IPO, the CEO was granted a stock option to purchase 278,726 shares of the Company’s
common stock with an exercise price equal to $5.00 per share. Effective on January 1, 2016, the CEO Employment Agreement provides for a guaranteed bonus equal to 50% of
base salary, beginning on January 1 of each year. Additionally, the CEO will also be eligible to earn discretionary annual performance bonuses upon meeting certain objectives
as determined by the Board of Directors. Effective as of December 31, 2016, the CEO agreed to waive his right to the guaranteed bonus for the year ended December 31, 2016.
Under the terms of the Note and Security Purchase Agreement between the Company and Scopia Holdings LLC, effective with the first bi-monthly payroll in July 2017, the
CEO agreed to the payment of a reduced salary of $4,200 per month, with the payment of the earned but not paid amount to be deferred until the earlier to occur of: (i) the date
FDA 510(k) clearance is obtained for the for the Company’s implantable intraosseous vascular access device (the “PortIO™ Product”); or, (ii) the date the borrowings due
Scopia Holdings LLC are repaid-in-full. The CEO Employment Agreement contains provisions for the protection of the Company’s intellectual property and contains non-
compete restrictions in the event of his termination other than without “cause” or by the board of directors with “good reason.”
Effective March 20, 2017, the Company entered into a two-year employment agreement with its current Chief Financial Officer with a base salary of $285,000 per year. The
Chief Financial Officer will be eligible to earn discretionary annual performance bonuses upon meeting certain objectives as determined by the Board of Directors.
Effective July 1, 2016, the Company entered into a five-year employment agreement with its Chief Medical Officer with a base salary of $285,000 per year, plus an initial
payment of $50,000. The Chief Medical Officer will be eligible to earn discretionary annual performance bonuses upon meeting certain objectives as determined by the Board
of Directors.
On March 20, 2017, Richard F. Fitzgerald resigned as our (former) Chief Financial Officer and the Company and Mr. Fitzgerald entered into a separation agreement, under
which Mr. Fitzgerald executed a general release and waiver in favor of the Company. Mr. Fitzgerald remained a full-time employee through March 31, 2017. In connection with
his employment termination, on March 31, 2017, the Company entered into a consulting agreement with Mr. Fitzgerald, providing for his engagement as an advisor at a fee of
$10,000 per month for April, May, and June 2017, and the continuation of health insurance benefits from April 1, 2017 to June 30, 2017, as well as a single $2,200 payment on
April 30, 2017 for temporary housing and travel expenses. The Company recognized an expense of $41,240 at March 31, 2017 as an accrued liability related to the termination
benefits, with such obligation fully settled as of June 30, 2017.
Effective June 30, 2017, the Company and Michael J. Glennon, Vice Chairman and a member of the Company’s Board of Directors, mutually agreed to terminate the
consulting agreement between the Company and Mr. Glennon (the “Glennon Consulting Agreement”). Previously, effective October 1, 2016, the Company and Mr. Glennon
entered into the Glennon Consulting Agreement, under which Mr. Glennon provided the Company with services and advice relating to the successful development and
commercialization of medical device products. Effective as of December 31, 2016, Mr. Glennon and the Company entered into an agreement whereby Mr. Glennon waived his
right to compensation under the Glennon Consulting Agreement for the year ended December 31, 2016, and, effective as of March 31, 2017, Mr. Glennon and the Company
entered into a second agreement whereby Mr. Glennon further waived his right to compensation under the Glennon Consulting Agreement for the period January 1, 2017
through June 30, 2017. As of June 30, 2017, there were no amounts payable under the Glennon Consulting Agreement.
73
JOBS Act
We are an “emerging growth company” or EGC, as defined in the JOBS Act, and are eligible to take advantage of certain exemptions from various reporting requirements
applicable to other public companies who are not an ECG, including, but not limited to, only two years of audited financial statements in addition to any required unaudited
interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure, not being
required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our
periodic reports and proxy or information statements, and not being required to adopt certain new and revised accounting standards until those standards would otherwise apply
to private companies. We have irrevocably elected to avail ourselves of the extended time for the adoption of new or revised accounting standards, and, therefore, will not be
subject to the same new or revised accounting standards as public companies who are not an ECG.
Off-Balance sheet arrangements
We do not have any off-balance sheet arrangements, as defined by applicable SEC regulations.
Effect of Inflation and Changes in Prices
We do not expect inflation and changes in prices will have a material effect on our operations.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements, together with the report of our independent registered public accounting firm, appear herein commencing on page F-1 of this Annual
Report on Form 10-K and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
74
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2017. Based on that evaluation, our principal executive officer and principal financial officer concluded our disclosure controls and procedures
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) are effective as of such date at the reasonable assurance level in ensuring that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in
the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as such term is defined in Exchange Act
Rules 13(a)-15(f). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the U.S.
Our internal control over financial reporting includes those policies and procedures that:
●
●
●
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;
provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with accounting principles
generally accepted in the U.S., and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and
provide a reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on
the financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect all
misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our system contains self-monitoring
mechanisms, so actions will be taken to correct deficiencies as they are identified.
Our management conducted an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework in Internal Control-Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our system
of internal control over financial reporting was effective as of December 31, 2017.
This Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s
report was not subject to attestation by our registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this Form
10-K.
Changes to Internal Controls Over Financial Reporting
There has been no change in internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our fourth
quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting
Item 9B. Other Information
None.
75
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item 10 is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission within 120 days of the fiscal year ended December 31, 2017.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission within 120 days of the fiscal year ended December 31, 2017.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission within 120 days of the fiscal year ended December 31, 2017.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission within 120 days of the fiscal year ended December 31, 2017.
Item 14. Principal Accounting Fees and Services
The information required by this Item 14 is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission within 120 days of the fiscal year ended December 31, 2017.
76
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
The following documents filed as a part of the report:
(1)
The following financial statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Stockholders’ (Deficit) Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2)
The financial statement schedules:
Schedules other than those listed above are omitted for the reason they are not required or are not applicable, or the required information is shown in the financial
statements or notes thereto. Columns omitted from schedules filed have been omitted because the information is not applicable.
(3)
The following exhibits:
Exhibit
No.
Description
Certificate of Incorporation(1)
Certificate of Amendment to Certificate of Incorporation (1)
Form of Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (2)
Form of Certificate of Designation of Preferences, Rights, and Limitations of Series A-1 Convertible Preferred Stock (6)
Bylaws (1)
Specimen Common Stock Certificate (1)
Specimen Warrant Certificate (1)
Warrant Agreement, dated April 28, 2016, between Continental Stock Transfer & Trust Company and the Registrant (3)
Form of Unit Purchase Option (1)
Form of Series A Warrant (2)
Form of Series X Warrant (2)
Form of Series A-1 Warrant (6)
Patent Option Agreement (1)
3.1
3.2
3.3
3.4
3.5
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1
10.2.1* Employment Agreement between PAVmed and Dr. Aklog (1)
10.2.2* Amendment to Employment Agreement between PAVmed and Dr. Aklog (1)
10.2.3* Second Amendment to Employment Agreement between PAVmed and Dr. Aklog (1)
10.2.4* Third Amendment to Employment Agreement between PAVmed and Dr. Aklog (9)
10.3.1
10.3.2
10.4.1
10.4.2
10.5.1
10.5.2
10.5.3
10.6
10.7.1* Employment Agreement between PAVmed and Richard Fitzgerald (1)
10.7.2* Separation Agreement between PAVmed and Richard F. Fitzgerald (8)
10.7.3* Consulting Agreement between PAVmed and Richard F. Fitzgerald (8)
10.8*
10.9.1* Consulting Agreement between PAVmed and Michael Glennon (5)
10.9.2* Amendment to Consulting Agreement between PAVmed and Michael J. Glennon (9)
10.9.3* Amendment to Consulting Agreement between PAVmed and Michael J. Glennon (8)
10.9.4* Termination of Consulting Agreement between PAVmed and Michael J. Glennon (10)
10.10.1 Securities Purchase Agreement between PAVmed and the purchasers of the Series A Preferred Stock Units (2)
10.10.2 Registration Rights Agreement between PAVmed and the purchasers of the Series A Preferred Stock Units (2)
10.11* 2014 Long-Term Equity Incentive Plan (1)
10.12* Employment Agreement between PAVmed and Dennis M. McGrath (8)
10.14
10.15.1 Securities Purchase Agreement between PAVmed and the purchasers of the Series A-1 Preferred Stock Units (2)
10.15.2 Registration Rights Agreement between PAVmed and the purchasers of the Series A-1 Preferred Stock Units (2)
14
Form of Subscription Agreement (July 2014) (1)
Form of Subscription Agreement (November 2014) (1)
Form of Letter Agreement with HCFP Capital Partners III LLC (1)
Form of Letter Agreement with Pavilion Venture Partners LLC (1)
Letter agreement regarding corporate opportunities executed by Dr. Lishan Aklog (1)
Letter agreement regarding corporate opportunities executed by Michael Glennon (1)
Letter agreement regarding corporate opportunities executed by Dr. Brian deGuzman (1)
Management services agreement between PAVmed and HCP/Advisors LLC (1)
Note and Securities Purchase Agreement between PAVmed and Scopia Holdings LLC (7)
Employment Agreement between PAVmed and Dr. Brian deGuzman (4)
Form of Code of Ethics (1)
77
Item 15. Exhibits and Financial Statement Schedules (continued)
(3)
The following exhibits (continued):
Exhibit No. Description
23.1
31.1
31.2
32.1
32.2
Consent of Citrin Cooperman & Company, LLP
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (SEC File No. 333-203569)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on February 1, 2017.
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on May 3, 2016.
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on July 19, 2016.
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on October 14, 2016.
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on August 8, 2017.
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on July 6, 2017.
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on May 22, 2017.
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on February 16, 2017.
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on August 11, 2017.
*
Management contract or compensatory plan or arrangement.
78
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly
SIGNATURES
authorized.
March 14, 2018
PAVmed Inc.
By:
/s/ Lishan Aklog, M.D.
Lishan Aklog, M.D.
Chairman of Board of Directors
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the report has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated. Each person whose signature appears below hereby authorizes both Lishan Aklog, M.D. and Dennis M. McGrath or either of them acting
in the absence of the others, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution for him or her and in his or her name,
place and stead, in any and all capacities to sign any and all amendments to this report, and to file the same, with all exhibits thereto and other documents in connection
therewith, with the United States Securities and Exchange Commission.
Signature
/s/ Lishan Aklog, M.D.
Lishan Aklog, M.D.
/s/ Michael J. Glennon
Michael J. Glennon
/s/ Dennis M. McGrath
Dennis M. McGrath
/s/ David S. Battleman
David S. Battleman
/s/ James L. Cox, M.D.
James L. Cox, M.D.
/s/ Ronald M. Sparks
Ronald M. Sparks
/s/ David Weild IV
David Weild IV
Title
Chairman of the Board of Directors
Chief Executive Officer
(Principal Executive Officer)
Vice Chairman
Director
Executive Vice President
Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
79
Date
March 14, 2018
March 14, 2018
March 14, 2018
March 14, 2018
March 14, 2018
March 14, 2018
March 14, 2018
PAVMED INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the years ended December 31, 2017 and 2016
Consolidated Statements of Series A Convertible Preferred Stock (Temporary Equity) and
Stockholders’ Deficit for the years ended December 31, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016
Notes to Consolidated Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6
F-7
To the Stockholders and the Board of Directors of PAVmed Inc.
Opinion on the Financial Statements
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of PAVmed Inc. and Subsidiary (the “Company”) as of December 31, 2017 and 2016, and the related
consolidated statements of operations, Series A Convertible preferred stock and stockholders’ deficit, and cash flows, for each of the two years in the period ended December
31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
consolidated financial position of the Company as of December 31, 2017 and 2016, and the results of their consolidated operations and their cash flows for each of the two
years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the
Company’s recurring losses from operations, recurring cash used in operating activities, accumulated deficit and absence of revenue generation raise substantial doubt about its
ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 1 to the financial statements. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ CITRIN COOPERMAN & COMPANY, LLP
We have served as the Company’s auditor since 2014.
New York, New York
March 14, 2018
F-2
PAVMED INC.
and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Assets
Current assets
Cash
Prepaid expenses and other current assets
Total current assets
Equipment, net
Deferred offering costs
Total assets
Liabilities, Preferred Stock, and Stockholders’ Deficit
Current liabilities
Accounts payable
Accrued expenses and other current liabilities
Series A Warrants derivative liability
Series A Convertible Preferred Stock conversion option derivative liability
Total current liabilities
Senior Secured Note, net of $3,244,274 unamortized debt discount
Total liabilities
COMMITMENTS AND CONTINGENCIES (NOTE 9)
December 31, 2017
December 31, 2016
$
$
$
$
$
$
$
1,535,022
88,467
1,623,489
16,191
—
1,639,680
864,405
706,024
761,123
212,217
2,543,769
1,944,268
585,680
155,490
741,170
18,000
111,249
870,419
949,413
240,073
—
—
1,189,486
—
4,488,037
$
1,189,486
Series A Convertible Preferred Stock
Preferred stock, par value $0.001, 20,000,000 shares authorized; Series A Convertible Preferred Stock, par
value $0.001, 249,667 and 0 shares issued and outstanding at December 31, 2017 and December 31, 2016,
respectively
Stockholders’ Deficit
Preferred stock, par value $0.001, 20,000,000 shares authorized; Series A-1 Convertible Preferred Stock, par
value $0.001, 357,259 and 0 shares issued and outstanding at December 31, 2017 and December 31, 2016
respectively
Common stock, par value $0.001; 50,000,000 shares authorized, 14,551,234 and 13,330,811 shares issued and
outstanding at December 31, 2017 and December 31, 2016, respectively
Additional paid-in capital
Accumulated deficit
Total Stockholders’ Deficit
—
1,032,650
14,551
14,012,053
(17,907,611)
(2,848,357)
Total Liabilities, Series A Convertible Preferred Stock, and Stockholders’ Deficit
$
1,639,680$
See accompanying notes to the consolidated financial statements.
F-3
—
—
13,331
7,369,437
(7,701,835)
(319,067)
870,419
PAVMED INC.
and SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
December 31,
2017
2016
$
—
$
Revenue
General and administrative expenses
Research and development expenses
Total operating expenses
Loss from operations
Other income (expense)
Interest expense
Loss on issuance of Series A Preferred Stock Units in a private placement
Change in fair value of Series A Warrants derivative liability
Change in fair value of Series A Convertible Preferred Stock conversion option derivative liability
Modification of Series A-1 Warrant agreement
Other income (expense), net
Loss before income tax
Income tax
Net loss
Series A Convertible Preferred Stock dividends
Series A-1 Convertible Preferred Stock dividends
Deemed dividend Series A-1 Convertible Preferred Stock issued in a private placement
Deemed dividend Series A-1 Convertible Preferred Stock issued in the Series A Exchange Offer
Net loss attributable to common stockholders
Net loss per share - basic and diluted
Net loss attributable to common stockholders per share - basic and diluted
5,415,324
2,618,795
8,034,119
(8,034,119)
(724,684)
(3,124,285)
1,942,501
643,318
(222,000)
(1,485,150)
(9,519,269)
—
—
3,931,264
1,719,587
5,650,851
(5,650,851)
—
—
—
—
—
—
(5,650,851)
—
(9,519,269)
(5,650,851)
(112,570)
(79,788)
(182,500)
(504,007)
(10,398,134)
(0.71)
(0.77)
$
$
$
$
$
$
—
—
—
—
(5,650,851)
(0.44)
(0.44)
Weighted average common shares outstanding - basic and diluted
13,495,951
12,972,153
See accompanying notes to the consolidated financial statements.
F-4
PAVMED INC.
and SUBSIDIARY
CONSOLIDATED STATEMENT OF
SERIES A CONVERTIBLE PREFERRED STOCK
STOCKHOLDERS’ DEFICIT
Series A Convertible
Preferred Stock
Series A-1
Convertible
Preferred Stock
Common Stock
Shares Amount Shares Amount
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders
Equity
(Deficit)
Stockholders’ Deficit
Balance at December 31, 2015
— $
—
—
— 12,250,000 $ 12,250 $ 2,672,652
$
(2,050,984) $
633,918
Units issued in connection with initial public offering, net
of offering costs
—
— 1,060,000
1,060 3,949,441
Common stock issued upon exercise of warrants
20,811
21
(21)
3,950,501
—
747,365
747,365
Stock-based compensation
Net loss
Balance at December 31, 2016
— $
—
— $
— 13,330,811 $ 13,331 $ 7,369,437
$
(5,650,851)
(7,701,835) $
(5,650,851)
(319,067)
See accompanying notes to the consolidated financial statements.
F-5
PAVMED INC.
and SUBSIDIARY
CONSOLIDATED STATEMENT OF
SERIES A CONVERTIBLE PREFERRED STOCK
STOCKHOLDERS’ DEFICIT
Stockholders' Deficit
Additional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders
Equity
(Deficit)
$ 7,369,437
$
(7,701,835)
$
(319,067)
---
500,000
Balance at December 31, 2016
Series A Convertible
Preferred Stock
Series A-1 Convertible
Preferred Stock
Common Stock
Shares
---
Amount
---
$
Shares
---
Amount
---
$
Shares
13,330,811
Amount
$ 13,331
Series A Convertible Preferred Stock issued in a
in a private placement
422,838
---
Series A-1 Convertible Preferred Stock and
Series A-1 Warrants issued in a private placement
125,000
7,050
492,950
Series A Exchange Offer
(154,837)
---
232,259
843,100
1,347,082
(504,007)
1,686,175
Series A-1 Convertible Preferred Stock deemed
dividend
Modification of Series A-1 Warrant Agreement
Series S Warrants issued in connection with
Senior Secured Note payable
Common stock issued upon exercise of warrants
Common stock issued upon conversion of Series
A Convertible Preferred Stock
Stock-based compensation
Net loss
182,500
(182,500)
---
222,000
3.434,452
1,193,330
1,198
70,692
(18,334)
---
22,093
22
27,313
1,048,127
222,000
3,434,452
71,890
27,335
1,048,127
(9,519,269)
(9,519,269)
Balance at December 31, 2017
249,667
$
---
357,259
$ 1,032,650
14,551,234
$ 14,551
$ 14,012,053
$ (17,907,611)
$ (2,848,357)
See accompanying notes to the consolidated financial statements.
F-6
PAVMED INC.
and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2017
2016
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities Depreciation expense
Stock-based compensation
Loss on issuance of Preferred Stock Units
Change in fair value - Series A Warrants derivative liability
Change in fair value - Series A Convertible Preferred Stock conversion option derivative liability
Modification of Series A-1 Warrant agreement
Amortization of discount - Senior Secured Note
Unpaid interest expense added to principal of Senior Secured Note
Changes in operating assets and liabilities:
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other current liabilities
Net cash flows used in operating activities
Cash flows from investing activities
Purchase of equipment
Net cash flows used in investing activities
Cash flows from financing activities
Proceeds from issuance of Series A Preferred Stock Units
Payment of offering costs in connection with Series A Preferred Stock Units
Proceeds from issuance of Series A-1 Preferred Stock Units
Proceeds from issuance of senior secured note payable
Proceeds from issuance of units in connection with initial public offering
Payment of offering costs in connection with initial public offering
Proceeds from common stock issued upon exercise of warrants
Net cash flows provided by financing activities
Net increase (decrease) in cash
Cash, beginning of period
Cash, end of period
$
$
See accompanying notes to the consolidated financial statements.
F-7
$
(9,519,269)
7,110
1,048,127
3,124,285
(1,942,501)
(643,318)
222,000
347,601
188,542
67,023
(85,008)
577,200
(6,608,208)
(5,301)
(5,301)
2,537,012
(388,628)
500,000
4,842,577
—
—
71,890
7,562,851
949,342
585,680
1,535,022
$
(5,650,851)
3,793
747,365
—
—
—
—
—
—
(146,729)
877,592
(286,027)
(4,454,857)
(21,793)
(21,793)
—
—
—
—
5,300,000
(1,004,938)
—
4,295,062
(181,588)
767,268
585,680
Note 1 — The Company, Description of the Business, and Going Concern
PAVMED INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAVmed Inc. (“PAVmed” or the “Company”) is a highly-differentiated multi-product medical device company organized to advance a broad pipeline of innovative medical
technologies from concept to commercialization, employing a business model focused on capital efficiency and speed to market. The Company is focused on advancing its lead
products towards regulatory approval and commercialization, protecting its intellectual property, and building its corporate infrastructure and management team. The Company
was organized under the laws of the State of Delaware on June 26, 2014 (inception), originally under the name of PAXmed Inc., and on April 19, 2015, changed its name to
PAVmed Inc. The Company operates in one segment as a medical device company.
The Company has financed its operations principally through the issuances of its common stock, preferred stock, warrants, and debt. Prior to the Company’s 2016 initial
public offering (IPO), the Company raised approximately $2.1 million of net cash proceeds from private offerings of its common stock and warrants. See Note 13, Series A
Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for a discussion of the Company’s common stock and warrants issued prior to the Company’s IPO. The
Company realized approximately $4.2 million of net cash proceeds resulting from the Company’s IPO on April 28, 2016.
In the year ended December 31, 2017, the Company raised approximately $7.5 million of net cash proceeds, including: the Note and Security Purchase Agreement with
Scopia Holdings LLC, the Series A-1 Preferred Stock Units private placement; and the Series A Preferred Stock Units private placement, and, subsequent to December 31,
2017, in January 2018, the Company raised $4.3 million of net cash proceeds in an underwritten public offering of shares of common stock of the Company pursuant to its
previously filed effective shelf registration statement on United States Securities and Exchange Commission (“SEC”) Form S-3 (File No. 333-220549).
See Note 12, Note and Securities Purchase Agreement, Senior Secured Note, and Series S Warrants, for a further discussion of the Note and Security Purchase Agreement
with Scopia Holdings LLC; and, Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for a further discussion of the Series A-1 Preferred Stock
Units private placement, Series A Preferred Stock Units private placement, and the issue of common stock of the Company in an underwritten public offering in January 2018.
Initial Public Offering
Under a registration statement on Form S-1 (File No. 333-203569) declared effective January 29, 2016, the Company’s IPO was consummated on April 28, 2016, resulting in
$4.2 million of net cash proceeds, after deducting cash selling agent discounts and commissions and offering expenses, from the issuance of 1,060,000 units at an offering price
of $5.00 per unit, with each such unit comprised of one share of common stock of the Company and one warrant to purchase a share of common stock of the Company, with
such warrant referred to as a “Series W Warrant”. The units issued in the IPO were initially listed on the Nasdaq Capital Market (“Nasdaq”) under the symbol “PAVMU”, until
July 27, 2016, when the PAVMU units ceased to be quoted and traded on Nasdaq, and the underlying shares of common stock and the Series W Warrants began separate
trading on Nasdaq, under their respective individual symbols of “PAVM” for the shares of common stock and “PAVMW” for the Series W Warrants. See Note 13, Series A
Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for a further discussion of the Company’s common stock and Series W Warrants.
F-8
Note 1 — The Company, Description of the Business, and Going Concern (continued)
Going Concern
The provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements - Going
Concern (ASC 205-40) requires management to assess an entity’s ability to continue as a going concern within one year of the date of the financial statements are issued. In
each reporting period, including interim periods, an entity is required to assess conditions known and reasonably knowable as of the financial statement issuance date to
determine whether it is probable an entity will not meet its financial obligations within one year from the financial statement issuance date. Substantial doubt about an entity’s
ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate it is probable the entity will be unable to meet its financial
obligations as they become due within one year after the date the financial statements are issued.
The Company is an early stage and emerging growth company and has not generated any revenues to date. As such, the Company is subject to all of the risks associated with
early stage and emerging growth companies. Since inception, the Company has incurred losses and negative cash flows from operating activities. The Company does not expect
to generate positive cash flows from operating activities in the near future until such time, if at all, it completes the development process of its products, including regulatory
approvals and clearances, and thereafter, begins to commercialize and achieve substantial marketplace acceptance for the first of a series of products in its medical device
portfolio, which is not expected to occur in the near future, if at all.
The Company incurred a net loss attributable to common stockholders of $10,398,134 and had net cash flows used in operating activities of $6,608,208 for the year ended
December 31, 2017. As of December 31, 2017, the Company had an accumulated deficit of $17,907,611 and working capital of $53,060, adjusted to exclude the Series A
Warrants derivative liability of $761,123 and the Series A Convertible Preferred Stock conversion option derivative liability of $212,217.
The Company anticipates incurring operating losses and does not expect to experience positive cash flows from operating activities, if any, and may continue to incur
operating losses for the next several years as it completes the development of its products, seeks regulatory approvals and clearances of such products, and begins to
commercially market such products. These factors, which have existed since inception, are expected to continue for the foreseeable future, and raise substantial doubt about the
Company’s ability to continue as a going concern within one year after the date the accompanying consolidated financial statements are issued.
The Company’s ability to fund its operations is dependent upon management’s plans, which include raising additional capital, obtaining regulatory approvals for its products
currently under development, commercializing and generating revenues from products currently under development, and continuing to control expenses. However, there is no
assurance the Company will be successful in these efforts.
A failure to raise sufficient capital, obtain regulatory approvals and clearances for the Company’s products, generate sufficient product revenues, or control expenditures,
among other factors, will adversely impact the Company’s ability to meet its financial obligations as they become due and payable and to achieve its intended business
objectives, and therefore, raises substantial doubt of the Company’s ability to continue as a going concern within one year after the date the consolidated financial statements are
issued.
The Company’s consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and satisfaction of liabilities and
commitments in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities should the Company be unable to continue as a going concern.
F-9
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”), and include the accounts of the Company and its wholly-owned subsidiary as of December 31, 2017 and 2016. All intercompany transactions and balances have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make accounting estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting
period. Significant estimates in these consolidated financial statements include those related to the fair value of warrants, the fair value of derivative liabilities, stock-based
compensation, research and development expenses, the provision or benefit for income taxes and the corresponding valuation allowance on deferred tax assets. In addition,
management’s assessment of the Company’s ability to continue as a going concern involves the estimation of the amount and timing of future cash inflows and outflows. On an
ongoing basis, the Company evaluates its estimates, judgements, and methodologies. The Company bases its estimates on historical experience and on various other
assumptions believed to be reasonable. Due to the inherent uncertainty involved in making such accounting estimates and assumptions, the actual financial statement results
could differ materially from such accounting estimates and assumptions.
Cash
The Company maintains its cash at a major financial institution with high credit quality. At times, the balance of its cash deposits may exceed federally insured limits. The
Company has not experienced and does not anticipate any losses on deposits with commercial banks and financial institutions which exceed federally insured limits.
Research and Development Expenses
Research and development expenses are recognized as incurred and include the salary and stock-based compensation of the Company’s Chief Medical Officer (“CMO”) and
the costs related to the Company’s various contract research service providers, suppliers, engineering studies, supplies, and outsourced testing and consulting, as well as rental
costs for equipment and access to certain facilities at one of the Company’s contract research service providers.
Offering Costs
Offering costs consist of certain legal, accounting, and other advisory fees incurred related to the Company’s efforts to raise debt and equity capital. Offering costs in
connection with equity financing are recognized as either an offset against the financing proceeds to extent the underlying security is equity classified or a current period
expense to extent the underlying security is liability classified. Offering costs, lender fees, and warrants issued in connection with debt financing are recognized as debt
discount, which reduces the reported carrying value of the debt, and which is amortized as interest expense, generally over the contractual term of the debt agreement, to result
in a constant rate of interest. Offering costs associated with in-process capital financing are accounted for as deferred offering costs. The deferred offering costs at December
31, 2016 relate to legal fees incurred with respect to the Series A Preferred Stock Units private placement financing transaction, with such private placement financing
transaction discussed in Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants.
Patent Costs and Purchased Patent License Rights
Patent related costs in connection with filing and prosecuting patent applications and patents filed by the Company are expensed as incurred, and are classified as general and
administrative expenses. The purchase of patent license rights for use in research and development activities are expensed as incurred and are classified as research and
development expense.
F-10
Note 2 — Summary of Significant Accounting Policies (continued)
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets.
Maintenance and repairs are charged to operations as incurred. Upon sale or retirement of assets, the cost and related accumulated depreciation are removed from the balance
sheet and resulting gain or loss, if any, is included in the consolidated statement of operations. The useful lives of equipment are as follows:
Research and development equipment
Computer equipment
Long-Lived Assets
5 years
3 years
The Company evaluates its long-lived assets, including equipment, for impairment whenever events or changes in circumstances indicate the carrying value of these assets
may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows expected to result
from the use of the asset and its eventual disposition. If the asset is considered impaired, the amount of any impairment is measured as the difference between the carrying value
and the fair value of the impaired assets. The Company has not recorded impairment of any long-lived assets in the periods presented.
Financial Instruments Fair Value Measurements
The Company evaluates its financial instruments to determine if those instruments or any embedded components of those instruments potentially qualify as derivatives that
need to be separately accounted for in accordance with FASB ASC Topic 815, Derivatives and Hedging (ASC 815). The accounting for warrants issued to purchase shares of
common stock of the Company is based on the specific terms of the respective warrant agreement, and are generally classified as equity, but may be classified as a derivative
liability if the warrant agreement provides required or potential full or partial cash settlement. A warrant classified as a derivative liability, or a bifurcated embedded conversion
or settlement option classified as a derivative liability, is initially measured at its issue-date fair value, with such fair value subsequently adjusted at each reporting period, with
the resulting fair value adjustment recognized as other income or expense. If upon the occurrence of an event resulting in the derivate liability being subsequently classified as
equity or otherwise derecognized, the fair value of the derivative liability will be adjusted on such date-of-occurrence, with such date-of-occurrence fair value adjustment
recognized as other income or expense, and then the derivative liability will be derecognized at such date-of-occurrence fair value.
FASB ASC Topic 820, Fair Value Measurement, (ASC 820) defines fair value as the price which would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at a transaction measurement date. The ASC 820 three-tier fair value hierarchy prioritizes the inputs used in the valuation
methodologies, as follows:
Level 1
Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2
Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted
prices for identical or similar assets and liabilities in markets which are not active, or other inputs observable or can be corroborated by observable market data.
Level 3
Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market
participants. These valuations require significant judgment.
As of December 31, 2017 and 2016, the carrying values of cash, accounts payable, and accrued expenses, approximate their respective fair value due to the short-term nature
of these financial instruments.
The Company evaluates its financial instruments to determine if those instruments or any potential embedded components of those instruments qualify as derivatives that
need to be separately accounted for in accordance with FASB ASC Topic 815, Derivatives and Hedging (ASC 815). Warrants are classified as either equity or a derivative
liability depending on the specific terms of the respective warrant agreement. Generally, warrants with cash settlement or certain exercise price adjustment provisions, are
accounted for as a derivative liability. A warrant classified as a liability, or a bifurcated embedded derivative classified as a liability, is initially measured at its issue-date fair
value, with such fair value subsequently adjusted at each reporting period, with the resulting adjustment recognized as other income or expense. If upon the occurrence of an
event resulting in the warrant liability or the embedded derivative liability being subsequently classified as equity, the fair value will be adjusted on such date-of-occurrence,
with such date-of-occurrence fair value adjustment recognized as other income or expense, and then it will be classified as equity at such date-of-occurrence adjusted fair value.
F-11
Note 2 — Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
The Company issues stock-based awards to employees, members of its board of directors, and non-employees. Stock-based awards to employees and members of its board of
directors are accounted for in accordance with FASB ASC Topic 718, Stock Compensation, and stock-based awards to non-employees are accounted for in accordance with
FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees.
The Company measures the compensation expense of stock-based awards granted to employees and members of its board of directors using the grant-date fair value of the
award and recognizes compensation expense for stock-based awards on a straight-line basis over the requisite service period, which is generally the vesting period of the
respective stock-based award.
The Company measures the expense of stock-based awards granted to non-employees on a vesting date basis, fixing the fair value of vested non-employee stock options as of
their respective vesting date. The fair value of vested non-employee stock options is not subject-to-change at subsequent reporting dates. The estimated fair value of the
unvested non-employee stock options is remeasured to then current fair value at each subsequent reporting date. The expense of non-employee stock options is recognized on a
straight-line basis over the service period, which is generally the vesting period of the respective non-employee stock-based award.
In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-
Based Payment Accounting, (“ASU 2016-09”) which simplified several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for the Company beginning January 1, 2017,
although early adoption is permitted. The Company elected to early adopt ASU 2016-09 effective as of April 1, 2016. As the Company did not have any stock options issued or
outstanding prior to the closing of its IPO, the early adoption did not have an impact on the Company’s consolidated financial position, results of operations and cash flows.
Income Taxes
The Company accounts for income taxes using the asset and liability method, as required by FASB ASC Topic 740, Income Taxes, (ASC 740). Current tax liabilities or
receivables are recognized for the amount of taxes estimated to be payable or refundable for the current year. Deferred tax assets and liabilities are recognized for estimated
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, along with
net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. See Note 7, Income Taxes, for a discussion of the “Tax Cuts and Jobs Act of 2017”, enacted on December
22, 2017, which resulted in a change to future years’ statutory federal corporate tax rate applicable to taxable income. Changes in deferred tax assets and liabilities are recorded
in the provision for income taxes.
The Company assesses the likelihood its deferred tax assets will be recovered from future taxable income, and to the extent it deems reasonable, based on available evidence,
it is more-likely-than-not all or a portion of the deferred tax assets will not be realized, a valuation allowance reserve is established through a charge to income tax expense.
The Company recognizes the benefit of an uncertain tax position it has taken or expects to take on its income tax return if such a position is more-likely-than-not to be
sustained upon examination by the taxing authorities, with the tax benefit recognized being the largest amount having a greater than 50% likelihood of being realized upon
ultimate settlement.
The Company’s policy for recording interest and penalties associated with audits is to record such expense as a component of income tax expense. There were no amounts
accrued for penalties or interest as of December 31, 2017 and December 31, 2016, or recognized during the years ended December 31, 2017 and 2016. As of December 31,
2017 the Company does not have any unrecognized tax benefits resulting from uncertain tax positions. The Company is not aware of any issues under review to potentially
result in significant payments, accruals, or material deviations from its position.
Net Loss Per Share
Basic net loss per share and basic net loss attributable to common stockholders per share, are each computed by dividing the net loss and the net loss attributable to common
stockholders, respectively, by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share and diluted net loss attributable
to common stockholders per share, are each computed by dividing the net loss and the net loss attributable to common stockholders, respectively, by the sum of the weighted-
average number of common shares outstanding during the reporting period, and, if dilutive, the incremental shares resulting from common stock equivalents, computed using
the treasury stock method. The Company’s common stock equivalents include: stock options, unit purchase options, convertible preferred stock, and warrants. Notwithstanding,
as the Company’s consolidated financial results resulted in a net loss and a net loss attributable to common stockholders for all periods presented, basic and diluted net loss per
share and net loss attributable to common stockholders per share are the same due to the exclusion of incremental shares resulting from common stock equivalents, as their
inclusion would be anti-dilutive.
F-12
Note 2 — Summary of Significant Accounting Policies (continued)
Segment Data
The Company manages its operations as a single operating segment for the purposes of assessing performance and making operating decisions. No revenue has been
generated since inception, and all tangible assets are held in the United States.
JOBS Act Accounting Election
The Company is an “emerging growth company” or “EGC”, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, an EGC
can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The
Company has irrevocably elected to avail itself of this exemption from new or revised accounting standards, and, therefore, will not be subject to the same new or revised
accounting standards as public companies who are not an EGC.
Recent Accounting Pronouncements
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) -
Part I - Accounting for Certain Financial Instruments with Down-Round Features, and Part II - Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial
Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Principally, ASU 2017-11 amendments
simplify the accounting for certain financial instruments with down-round features. The amendments require companies to disregard the down-round feature when assessing
whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will
adjust their basic EPS calculation for the effect of the down-round feature when triggered (i.e., when the exercise price of the related equity-linked financial instrument is
adjusted downward because of the down-round feature) and will also recognize the effect of the trigger within equity. Additionally, ASU 2017-11 also addresses “navigational
concerns” within the FASB ASC related to an indefinite deferral available to private companies with mandatorily redeemable financial instruments and certain noncontrolling
interests, which has resulted in the existence of significant “pending content” in the ASC. The FASB decided to reclassify the indefinite deferral as a scope exception, which
does not have an accounting effect. The guidance of ASU 2017-11 is effective for public business entities, as defined in the ASC Master Glossary, for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years, and for all other entities, the amendments are effective for fiscal years beginning after December
15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Earlier adoption is permitted for all entities as of the beginning of an interim period for
which financial statements (interim or annual) have not been issued or have not been made available for issuance. The Company is evaluating the impact of this guidance on its
consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) - Scope of Modification Accounting. In ASU 2017-09, the FASB provides
guidance on determining which changes to the terms and conditions of stock-based compensation arrangements require the application of “modification accounting” under ASC
718. Generally, ASC 718 modification accounting is not applicable if the stock-based arrangement immediately before and after the modification has the same fair value,
vesting conditions, and balance sheet classification. The guidance of ASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual
periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities, as defined in the ASC Master
Glossary, for periods for which financial statements have not yet been issued, and for all other entities for reporting periods for which financial statements have not yet been
made available for issuance. The Company adopted this guidance as of April 1, 2017, and it did not have an effect on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which amends the guidance of FASB ASC
Topic 805, Business Combinations (ASC 805) adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (disposals) of
assets or businesses. The objective of ASU 2017-01 is to narrow the definition of what qualifies as a business under Topic 805 and to provide guidance for streamlining the
analysis required to assess whether a transaction involves the acquisition (disposal) of a business. ASU 2017-01 provides a screen to assess when a set of assets and processes do
not qualify as a business under Topic 805, reducing the number of transactions that need to be considered as possible business acquisitions. ASU 2017-01 also narrows the
definition of output under Topic 805 to make it consistent with the description of outputs under Topic 606. The guidance of ASU 2017-01 is effective for fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years and early adoption is permitted under certain circumstances. The adoption of this guidance as of
January 1, 2018 did not have an effect on the Company’s consolidated financial statements.
F-13
Note 2 — Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements (continued)
In August 2016, the FASB issued ASU 2016-15, which amended the guidance of FASB ASC Topic 230, Statement of Cash Flows (ASC 230) on the classification of certain
cash receipts and payments. The primary purpose of ASU 2016-15 is to reduce the diversity in practice which has resulted from a lack of consistent principles on this topic. The
amendments of ASU 2016-15 add or clarify guidance on eight specific cash flow issues, including debt prepayment or debt extinguishment costs, settlement of zero-coupon
debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of
corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash
flows and application of the predominance principle. The guidance of ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. The adoption of this guidance as of January 1, 2018 did not have an effect on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and subsequently issued additional updates amending the guidance
contained in Topic 606 (ASC 606), thereby affecting the guidance contained in ASU 2014-09. ASU 2014-09 and the subsequent ASC 606 updates will supersede and replace
nearly all existing U.S. GAAP revenue recognition guidance. The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to
customers in an amount equal to the consideration to which the entity expects to be entitled for those goods and services. ASU 2014-09 defines a five step process to achieve this
core principle, and in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard
is effective for annual periods beginning after December 15, 2017, including interim periods therein, using either of the following transition methods: (i) a full retrospective
approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the
cumulative effect of initially adopting the standard recognized at the date of adoption (which includes additional footnote disclosures). To date, since its inception, the
Company has not generated any revenue, as such, the provisions of ASC 606 have not impacted the Company’s consolidated results of operations or financial condition.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”). The
amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by amending certain existing
illustrative examples and adding additional illustrative examples to assist in the application of the guidance. The effective date and transition requirements for the amendments
are the same as the effective date and transition requirements in Topic 606. The guidance is effective for the Company beginning January 1, 2018, although early adoption is
permitted beginning January 1, 2017. To date, since its inception, the Company has not generated any revenue, as such, the provisions of ASC 606 have not impacted the
Company’s consolidated results of operations or financial condition.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”).
The amendments in ASU 2016-10 clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The
amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date
and transition requirements in Topic 606. The guidance is effective for the Company beginning January 1, 2018, although early adoption is permitted beginning January 1,
2017. To date, since its inception, the Company has not generated any revenue, as such, the provisions of ASC 606 have not impacted the Company’s consolidated results of
operations or financial condition.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which establishes a right-of-use (“ROU”) model requiring a lessee to recognize
a ROU asset and a lease liability for all leases with terms greater-than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern
of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods with those fiscal
years. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the
financial statements, with certain practical expedients available. The Company is currently evaluating the impact of this guidance on its consolidated financial position, results
of operations, and cash flows.
F-14
Note 3 — Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following as of:
Security deposits
Prepaid insurance
Advanced payments to suppliers
Total prepaid expenses and other current assets
Note 4 — Equipment, Net
Equipment, net consisted of the following as of:
Research and development equipment
Computer equipment
Less: accumulated depreciation
Equipment, net
December 31, 2017
December 31, 2016
14,250
33,175
41,042
88,467
December 31, 2017
13,656
13,438
27,094
(10,903)
16,191
$
$
$
$
48,350
35,947
71,193
155,490
December 31, 2016
10,156
11,637
21,793
(3,793)
18,000
$
$
$
$
Depreciation expense was $7,110 and $3,793 for the year ended December 31, 2017 and 2016, respectively.
Note 5 — Agreement Related to Intellectual Property Right
Tufts Patent License Agreement - Antimicrobial Resorbable Ear Tubes
On November 2, 2016, the Company executed a Patent License Agreement (the “Tufts Patent License Agreement”) with Tufts University and its co-owners, the
Massachusetts Eye and Ear Infirmary and Massachusetts General Hospital (the “Licensors”). Pursuant to the Tufts Patent License Agreement, the Licensors granted the
Company the exclusive right and license to certain patents in connection with the development and commercialization of antimicrobial resorbable ear tubes based on a
proprietary aqueous silk technology conceived and developed by the Licensors. Upon execution of the Tufts Patent License Agreement, the Company paid the Licensors an
upfront non-refundable fee of $50,000. The Tufts Patent License Agreement also provides for payments from the Company to the Licensors upon the achievement of certain
product development and regulatory clearance milestones as well as royalty payments on net sales upon the commercialization of products developed utilizing the licensed
patents. The Company incurred expenses related to patent fee reimbursement under the Tufts Patent License Agreement of $67,501 in the year ended December 31, 2017.
There were no such expenses incurred in the year ended December 31, 2016.
The Company accounted for the Tufts Patent License Agreement as an asset acquisition as the license agreement did not meet the definition of a business pursuant to the
guidance prescribed in FASB ASC Topic 805, Business Combinations, as the transaction principally resulted in the acquisition of intellectual property rights only. In this regard,
the Company did not acquire any employees or tangible assets, or any processes, protocols, or operating systems. Additionally, at the time of the transaction, there were no
activities being conducted related to the licensed patents. As of the transaction date, the Company recognized as expense the cost of the acquired intellectual property rights, as
required, since this intangible asset purchased from others for use in a research and development activity, and for which there are no alternative future uses. Accordingly, the
Company recognized the $50,000 payment as research and development expense in the year ended December 31, 2016. The Company will record as expense any contingent
milestone payments or royalties in the period in which such liabilities are incurred.
F-15
Note 6 — Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following as of:
Accrued bonus
Accrued payroll
Accrued vacation
Accrued board of director fees
Accrued professional fees
Accrued operating expenses
Total accrued expenses and other current liabilities
December 31, 2017
December 31, 2016
459,451 $
125,088
28,722
82,500
—
10,263
706,024 $
—
—
28,324
72,500
111,249
28,000
240,073
$
$
At December 31, 2017, the accrued bonus represents the guaranteed bonus payment to the Company’s Chief Executive Officer (“CEO”) under the CEO Employment
Agreement and to other employees. At December 31, 2016, the CEO waived his right to receive a guaranteed bonus payment for 2016. See Note 9, Commitments and
Contingencies, for further details regarding the CEO compensation. In addition to the waiver of the CEO guaranteed bonus payment, in December 2016, the Company also
reversed the accrued discretionary bonus payments previously recognized throughout 2016, as the Company’s board of directors determined no discretionary bonuses would be
paid for 2016.
At December 31, 2017, the accrued payroll represents earned but unpaid salary for the period July 1, 2017 through December 31, 2017, payable to the Company’s CEO. In
this regard, under the terms of the Note and Security Purchase Agreement, including the corresponding Senior Secured Note, between the Company and Scopia Holdings LLC,
effective with the first bi-monthly payroll in July 2017, the CEO agreed to the payment of a reduced salary of $4,200 per month, with the payment of the earned but not paid
amount to be deferred until the earlier to occur of: (i) the date FDA 510(k) clearance is obtained for the for the Company’s implantable intraosseous vascular access device (the
“PortIO™ Product”); or, (ii) the date the borrowings due Scopia Holdings LLC are repaid-in-full. Subsequently, Scopia irrevocable waived compliance with this provision by
the Company and the CEO on a prospective basis commencing February 1, 2018. Notwithstanding, the unpaid CEO salary for the period July 1, 2017 to January 31, 2018, may
only be paid upon the Senior Secured Note first being repaid-in-full. See Note 12 — Note and Securities Purchase Agreement, Senior Secured Note, and Series S Warrants, for
a discussion of the Note and Security Purchase Agreement with Scopia Holdings LLC.
The accrued board of director fees at December 31, 2017 and December 31, 2016 represent amounts payable to all non-executive members of the board of directors,
including $10,000 payable to a former board member previously deemed to be a related party, at each of December 31, 2017 and 2016.
The accrued professional fees at December 31, 2016 related to deferred offering costs incurred with respect to the Series A Preferred Stock Units private placement, as
further discussed in Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants.
Included in accrued operating expenses at December 31, 2016, is $10,000 due to HCFP/Strategy Advisors LLC, a former related party, as further discussed in Note 8,
Related Party Transactions.
F-16
Note 7 — Income Taxes
Income tax (benefit) expense consisted of the following for the years ended December 31, 2017 and 2016:
Current:
Federal, state, and local
Deferred:
Federal
State and local
Less: Valuation allowance reserve
December 31, 2017
December 31, 2016
$
$
— $
(105,093)
(471,522)
(576,616)
576,616
— $
—
(1,945,638)
(424,840)
(2,370,478)
2,370,478
—
At December 31, 2017 and 2016, the reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
December 31, 2017
December 31, 2016
U.S. federal statutory rate
U.S. state and local income taxes, net of federal tax benefit
Permanent differences
Tax credits
Change in U.S. federal tax law
Valuation allowance
Effective tax rate
35.0%
5.6%
(2.3)%
1.2%
(19.4)%
(20.1)%
0.0%
At December 31, 2017 and 2016, the approximate tax effects of temporary differences which give rise to the net deferred tax assets are as follows:
Deferred tax assets:
Net operating loss
Stock-based compensation expense
Deferred compensation
Accrued expenses
Section 195 deferred start-up costs
Patent licenses
Research and development tax credit carryforward
Deferred tax assets
Deferred tax liabilities:
Discount on debt
Depreciation
Deferred tax liabilities
Less: valuation allowance
Deferred tax assets, net after valuation allowance
$
$
4,309,231 $
201,950
—
8,981
26,445
17,077
194,345
4,758,029
(1,014,484)
(2,904)
(1,017,388)
(3,740,641)
— $
35.0%
7.5%
(1.8)%
1.3%
—%
(42.0)%
0.0%
2,795,050
199,921
—
12,307
39,746
25,466
91,535
3,164,025
—
—
—
(3,164,025)
—
Deferred tax assets and deferred tax liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect of the change in the tax rate is recognized as income or expense in the period of the enacted change in tax rate. See herein below
for a discussion of the “Tax Cuts and Jobs Act of 2017”, which resulted in a change to future years’ statutory federal corporate tax rate applicable to taxable income. Changes in
deferred tax assets and deferred tax liabilities are recorded in the provision for income taxes.
On December 22, 2017, the president of the United States signed into law what is commonly referred to as the Tax Cuts and Jobs Act of 2017 (Public Law No. 115-97). ,
referred to herein as the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act is a comprehensive revision to federal tax law which makes broad and complex changes to the U.S.
tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35% to 21%, eliminating the corporate alternative minimum tax (AMT) and changing
how existing AMT credits can be realized; creating a new limitation on deductible interest expense; changing rules related to uses and limitations of net operating loss
carryforwards created in tax years beginning after December 31, 2017; and limitations on the deductibility of certain executive compensation.
F-17
Note 7 — Income Taxes (continued)
In December 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses situations where the accounting is incomplete for the income tax effects
of the Tax Cuts and Jobs Act. SAB 118 directs taxpayers to consider the impact of the Tax Cuts and Jobs Act as “provisional” when the Company does not have the necessary
information available, prepared, or analyzed, including computations, to finalize the accounting for the changes resulting from the Tax Cuts and Jobs Act. Companies are
provided a measurement period of up to one year to obtain, prepare, and analyze information necessary to finalize the accounting for provisional amounts or amounts that cannot
be estimated as of December 31, 2017.
The Tax Cuts and Jobs Act impact on the tax provision of the Company for year ending December 31, 2017, resulted in the Company recognizing the provisional impact of
the revaluation of deferred tax assets and deferred tax liabilities to 21% from 35%, resulting in an estimated $1.6 million tax expense, which was fully offset by a corresponding
change in the valuation allowance applied to the net deferred tax assets.
As required by FASB ASC Topic 740, Income Taxes”, (“ASC 740), a “more-likely-than-not” criterion is applied when assessing the estimated realization of deferred tax
assets through their utilization to reduce future taxable income, or with respect to a deferred tax asset for tax credit carryforward, to reduce future tax expense. A valuation
allowance is established, when necessary, to reduce deferred tax assets, net of deferred tax liabilities, when the assessment indicates it is more-likely-than-not, the full or partial
amount of the net deferred tax asset will not be realized. Accordingly, the Company evaluated the positive and negative evidence bearing upon the estimated realizability of the
net deferred tax assets, and based on the Company’s history of operating losses, concluded it is more-likely-than-not the deferred tax assets will not be realized, and therefore
recognized a valuation allowance reserve equal to the full amount of the deferred tax assets, net of deferred tax liabilities, as of December 31, 2017 and 2016.
The Company has total estimated federal and state net operating loss (“NOL”) carryforward of $13,780,719 and $6,432,797 at December 31, 2017 and 2016, respectively,
which is available to reduce future taxable income and begin to expire in 2035. The Company has total estimated research and development (“R&D”) tax credit carryforward of
$194,345 and $91,535 as of December 31, 2017 and 2016, respectively, including generating R&D tax credit of $102,810 and $70,861, during the years ended December 31,
2017 and 2016, respectively, with the R&D tax credit carryforward available to reduce future tax expense, and begin to expire in 2035.
The Company files income tax returns in the United States in federal and applicable state jurisdictions. The Company’s tax filings for the years 2016, 2015 and for its initial
period of operations from June 26, 2014 (inception) through December 31, 2014, each remain subject to examination by taxing authorities. The Company’s policy is to record
interest and penalties related to income taxes as part of its income tax provision. The Company has not recognized any penalties or interest related to its income tax provision.
F-18
Note 8 — Related Party Transactions
Effective October 2015, the Company entered into a three-year management services agreement through October 2018 with HCP/Advisors LLC, an affiliate of a former
director of the Company, wherein HCP/Advisors LLC is to provide the Company with certain management services, including without limitation, identifying potential corporate
opportunities, general business development, corporate development, corporate governance, marketing strategy, strategic development and planning, coordination with service
providers, and other advisory services as may be mutually agreed upon. Pursuant to such agreement with HCP/Advisors LLC, the Company paid HCP/Advisors LLC an initial
first month’s fee of $35,000 commencing as of November 1, 2015, and thereafter, a monthly fee of $25,000 through October 31, 2018. Under the agreement with HCP/Advisors
LLC, the Company incurred an expense of $300,000 in each of the years ended December 31, 2017 and 2016, included in “General and administrative expenses” in the
accompanying consolidated statements of operations.
Effective September 2016, the Company and HCFP/Strategy Advisors LLC, an affiliate of certain former directors and current officers of the Company, entered into a
management consulting agreement referred to as the “HCFP Strategic Advisory Agreement”, which expired on May 14, 2017, as discussed below. Under the HCFP Strategic
Advisory Agreement, HCFP/Strategy Advisors LLC had been engaged for an initial term of five months from September 14, 2016 to February 14, 2017, to provide various
management consulting advisory services, including: to provide strategic business planning, to identify and assist with potential sources of financing arrangements, to promote
the Company to various potential investors, and to provide strategic advisory services as reasonably requested by the Company. The HCFP Strategic Advisory Agreement
provided for an initial total fee of $110,000, with $30,000 paid upon execution of the agreement and four payments of $20,000 per month from October 2016 to January 2017.
Subsequently, on February 17, 2017, the Company and HCFP/Strategy Advisors LLC executed an extension of the HCFP Strategic Advisory Agreement, effective as of
February 15, 2017, extending the services from February 15, 2017 to May 14, 2017, and obligating the Company to make payments of $20,000 per month in each of February,
March, and April 2017. The Company did not further renew the HCFP Strategic Advisory Agreement after the May 14, 2017 expiration date. Previously, at December 31,
2016, the Company recognized a $10,000 estimated accrued expense liability for HCFP/Strategy Advisors LLC asserted out-of-pocket expenses under the HCFP Strategic
Advisory Agreement in effect as of December 31, 2016. Subsequently, at June 30, 2017, the Company reversed such $10,000 estimated accrued expense liability, as supporting
documentation had not been provided by HCFP/Strategy Advisors LLC. At June 30, 2017, the Company had made all contractually obligated payments to, and disclaimed any
further payment obligations, under the HCFP Strategic Advisory Agreement.
Separately, the Company incurred an expense of $10,000 related to a HCFP/Strategy Advisors LLC vendor invoice dated June 30, 2017, for a professional services fee
related to separate discrete discussions between the Company’s management and HCFP /Strategy Advisors LLC, conducted between the period of May 15, 2017 to May 31,
2017 regarding corporate matters, which were separate and apart from the previously expired HCFP Strategic Advisory Agreement.
The Company incurred expense of $80,000 and $100,000 in the years ended December 31, 2017 and 2016, respectively, under the HCFP Strategic Advisory Agreement and
the HCFP/Strategy Advisors LLC discrete invoice dated June 30, 2017, as noted above, with such expense included in “General and administrative expenses” in the
accompanying consolidated statements of operations.
Effective September 2016, the Company also entered into a consulting agreement with Swartwood Hesse, Inc., an affiliate of HCFP/Strategy Advisors (which, as noted
above, is an affiliate of certain former directors and current officers of the Company) (the “Swartwood Hesse Financial Advisory Agreement”). Under the Swartwood Hesse
Financial Advisory Agreement, Swartwood Hesse Inc. was engaged for an initial term of five months to provide advisory services regarding potential financing arrangements, to
assist the Company with its investors relations, and to provide other financial advisory services as reasonably requested by the Company. The Swartwood Hesse Financial
Advisory Agreement provided for total fee payments to Swartwood Hesse of $15,000, which was paid and recognized as expense upon execution of the agreement. No such
expense was incurred in the year ended December 31, 2017.
In January 2017, the Company entered into an agreement with Xzerta Trading LLC d/b/a HCFP/Capital Markets (“HCFP/Capital Markets”), an affiliate of certain former
directors and current officers of the Company, wherein HCFP/Capital Markets was engaged to be the Company’s exclusive placement agent in an offering of securities (“the
HCFP/Capital Markets Placement Agent Agreement”), including the Series A Preferred Stock Units private placement transaction. Under the HCFP /Capital Markets Placement
Agent Agreement, HCFP/Capital Markets is paid a fee of 7.0% of the gross proceeds realized in the securities offering, plus reimbursement of certain out-of-pocket costs. The
term of the HCFP/Capital Markets Placement Agent Agreement is from the January 2017 execution date to the completion or termination of any other potential transactions in
conjunction with the Series A Preferred Stock Units private placement. The Company incurred $177,576 of fees paid to HCFP/Capital Markets in connection with the issuances
of Series A Preferred Stock Units in the year ended December 31, 2017, with such expense included in “Loss on issuance of Series A Preferred Stock Units” in the
accompanying consolidated statements of operations.
F-19
Note 8 — Related Party Transactions (continued)
Effective June 30, 2017, the Company and Michael J. Glennon, Vice Chairman and a member of the Company’s Board of Directors, mutually agreed to terminate the
consulting agreement between the Company and Mr. Glennon (the “Glennon Consulting Agreement”). Previously, effective October 1, 2016, the Company and Mr. Glennon
entered into the Glennon Consulting Agreement, under which Mr. Glennon provided the Company with services and advice relating to the successful development and
commercialization of medical device products. Effective as of December 31, 2016, Mr. Glennon and the Company entered into an agreement whereby Mr. Glennon waived his
right to compensation under the Glennon Consulting Agreement for the year ended December 31, 2016, and, effective as of March 31, 2017, Mr. Glennon and the Company
entered into a second agreement whereby Mr. Glennon further waived his right to compensation under the Glennon Consulting Agreement for the period January 1, 2017
through June 30, 2017.
Effective November 2016, the Company entered into a consulting agreement with Patrick Glennon, a related-party who is the brother of Michael J. Glennon, Vice Chairman
and a member of the Company’s board of directors (the “Patrick Glennon Consulting Agreement”). Under the terms of the Patrick Glennon Consulting Agreement, Mr. Patrick
Glennon will provide consulting support and advice with respect to the development and commercialization of resorbable ear tubes. The sole compensation for such services is
the issuance on November 28, 2016 of stock options to purchase 20,000 shares of the Company’s common stock, with an exercise price of $9.50 per share, and vesting ratably
on a quarterly basis commencing December 31, 2016 through September 30, 2019.
Note 9 — Commitments and Contingencies
Employment Agreements & Compensation
Chief Executive Officer Employment Agreement
Effective November 1, 2014, the Company entered into an employment agreement with its CEO for a five-year term, with a current base salary of $295,000 per year (“CEO
Employment Agreement”). Effective on January 1, 2016, the CEO Employment Agreement provides for a guaranteed bonus equal to 50% of base salary, beginning on January
1 of each year. Additionally, the CEO will also be eligible to earn discretionary annual performance bonuses upon meeting certain objectives as determined by the Board of
Directors. Effective as of December 31, 2016, the CEO agreed to waive his right to the guaranteed bonus for the year ended December 31, 2016.
Under the terms of the Note and Security Purchase Agreement, including the Senior Secured Note, between the Company and Scopia Holdings LLC, effective with the first
bi-monthly payroll in July 2017, the Company’s CEO agreed to the payment of a reduced salary of $4,200 per month, with the payment of such earned but unpaid salary to
occur on the earlier of (a) the date that FDA 510(k) clearance for the PortIO™ Product is obtained or (b) the date the aggregate remaining unpaid principal balance of the Senior
Secured Note is repaid-in-full. Subsequently, Scopia irrevocable waived compliance with this provision by the Company and the CEO on a prospective basis commencing
February 1, 2018. Notwithstanding, the unpaid CEO salary for the period July 1, 2017 to January 31, 2018, may only be paid upon the Senior Secured Note first being repaid-
in-full. See Note 12 — Note and Securities Purchase Agreement, Senior Secured Note, and Series S Warrants, for a discussion of the Note and Security Purchase Agreement
with Scopia Holdings LLC.
On April 28, 2016, the CEO was granted a stock option with an exercise price of $5.00 per share to purchase 278,726 shares of common stock of the Company, and on
February 14, 2018, the CEO was granted a stock option with an exercise price of $2.01 per share to purchase 195,108 shares of common stock of the Company. The CEO
Employment Agreement contains provisions for the protection of the Company’s intellectual property and contains non-compete restrictions in the event of his termination other
than without “cause” or by the board of directors with “good reason.”
Executive Vice President and Chief Financial Officer Employment Agreement
On March 20, 2017, the Company entered into a two year employment agreement with Dennis M. McGrath, to serve as the Company’s Executive Vice President and Chief
Financial Officer (“CFO”), with a base annual salary of $285,000, and a discretionary annual performance bonus with a target of 50% of his then current annual base salary,
based upon his performance and the Company’s performance over the preceding year, as determined by the compensation committee of the Board of Directors (“CFO
Employment Agreement”). Additionally, the Company will reimburse Mr. McGrath up to $2,250 per month for housing and travel expenses for up to 12 months. On March 20,
2017, the CFO was granted a stock option with an exercise price of $5.95 per share to purchase 250,000 shares of common stock of the Company, and a on February 14, 2018,
the CFO was granted a stock option with an exercise price of $2.01 per share to purchase 195,108 shares of common stock of the Company. The CFO Employment Agreement
contains provisions for the protection of the Company’s intellectual property and contains non-compete restrictions in the event of his termination other than without “cause” or
by the board of directors with “good reason”.
F-20
Note 9 — Commitments and Contingencies (continued)
Employment Agreements & Compensation (continued)
Chief Medical Officer Employment Agreement
Effective July 1, 2016, the Company entered into a five-year employment agreement with Dr. Brian J. deGuzman, M.D. to serve as the Company’s Chief Medical Officer
(“CMO”) with a base annual salary of $285,000, plus an initial bonus of $50,000 for services provided before the agreement’s effective date (“CMO Employment Agreement”).
Dr. deGuzman is eligible to earn discretionary annual performance bonuses upon meeting certain objectives as determined by the compensation committee of the Board of
Directors. On April 28, 2016, the CMO was granted a stock option with an exercise price of $5.00 per share to purchase 278,726 shares of common stock of the Company, and
on February 14, 2018, the CMO was granted a stock option with an exercise price of $2.01 per share to purchase 100,000 shares of common stock of the Company. The CMO
Employment Agreement contains provisions for the protection of the Company’s intellectual property and contains non-compete restrictions in the event of his termination other
than without “cause” or by the CEO with “good reason”.
Leases
The Company leases office space for its corporate office, which initially provided for two consecutive six-month terms beginning on February 1, 2016, and was subsequently
amended to extended the lease term through May 31, 2017. The lease agreement includes a 5% increase in monthly rent effective on each twelve-month anniversary date. Upon
the May 31, 2017 termination date, the lease agreement converted to a month-to-month lease, which may be cancelled by the Company with three months written notice. Total
rent expense incurred under the corporate office space lease arrangement was $147,276 and $134,356 for the years ended December 31, 2017 and 2016, respectively. At
December 31, 2017, the Company’s future minimum lease payments totaled $125,186 for the period January 1, 2018 to December 31, 2018, with respect to the lease
arrangement on a month-to-month basis.
Additionally, the Company had previously rented access to a research and development facility, for monthly rent of $1,000, on a month-to-month basis under which either the
landlord or the Company could cancel the rental arrangement at any time. Effective February 28, 2017, the Company ceased use of the research and development facility and
canceled the rental arrangement. Total rental expense under this research and development facility rental arrangement amounted to $2,000 and $12,000 for the years ended
December 31, 2017 and 2016, respectively.
Legal Proceedings
In the normal course of business, from time-to-time, the Company may be subject to claims in legal proceedings. However, the Company does not believe it is currently a
party to any pending legal actions. Notwithstanding, legal proceedings are subject-to inherent uncertainties, and an unfavorable outcome could include monetary damages, and
in such event, could result in a material adverse impact on the Company’s business, financial position, results of operations, and /or cash flows.
F-21
Note 10 — Stock-Based Compensation
The 2014 Long-Term Incentive Equity Plan (the “2014 Stock Plan”), adopted by the Company’s board of directors and stockholders in November 2014, is designed to enable
the Company to offer employees, officers, directors, and consultants, as defined, an opportunity to acquire a proprietary interest in the Company. The types of awards that may
be granted under the 2014 Stock Plan include stock options, stock appreciation rights, restricted stock, and other stock-based awards subject to limitations under applicable law.
All awards are subject to approval by the compensation committee of the Company’s board of directors.
The following table summarizes information about stock options outstanding for the periods presented below:
Outstanding at December 31, 2015
Granted
Exercised
Forfeited
Outstanding at December 31, 2016
Vested and exercisable at December 31, 2016
Unvested at December 31, 2016
Outstanding at December 31, 2016
Granted
Exercised
Forfeited
Outstanding at December 31, 2017
Vested and exercisable at December 31, 2017
Unvested at December 31, 2017
Number Stock Options
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
—
1,633,313
—
—
1,633,313
356,719
1,276,594
1,633,313
380,000
—
(76,389)
1,936,924
964,080
972,844
$
$
$
$
$
$
$
$
$
$
$
$
$
$
5.14
—
—
5.14
5.05
5.16
5.14
5.35
—
5.00
5.19
5.14
5.23
$
$
$
$
$
$
3,017,795
670,621
2,347,175
—
—
—
The aggregate intrinsic value is computed as the difference between the exercise price of the underlying stock options and the quoted price of the common stock on December
31, 2017, to the extent the exercise price is less than the quoted price.
During the year ended December 31, 2016, the Company granted a total of 1,633,313 stock options, each with a ten year contractual term from date-of-grant, as follows:
● April 2016 - an aggregate of 1,588,313 stock options were granted upon the closing of the closing of the Company’s IPO on April 28, 2016, each with an exercise price of
$5.00 per share, vesting of 3/36 on July 28, 2016 and 1/36 on each successive month thereafter from Aug 28, 2016 to April 28, 2019, including: a total of 487,770 stock
options granted to members of the Company’s board of directors, a total 961,178 to employees, and a total of 139,365 to members of the Company’s medical advisory board;
● November 2016 - 25,000 stock options with an exercise price of $10.50 per share, vesting ratably on a quarterly basis over a three year period commencing December 31,
2016, granted to a new member of the Company’s medical advisory board; and, 20,000 stock options with an exercise price of $9.50 per share, vesting ratably on a quarterly
basis over a three year period commencing December 31, 2016, granted to (related party) consultant.
During the year ended December 31, 2017, the Company granted a total of 380,000 stock options, each with a ten year contractual term from date-of-grant, as follows:
● March 2017 - 25,000 stock options with an exercise price of $5.01 per share, vesting ratably on a quarterly basis over a three year period commencing June 30, 2017, granted
to a new member of the Company’s medical advisory board, and, 250,000 stock options granted outside the 2014 Stock Plan, with an exercise price of $5.95 per share, vesting
ratably on a quarterly basis over a three year period commencing June 30, 2017, to the Company’s new CFO;
● July 2017 - 50,000 stock options with an exercise price of $4.50 per share, vesting ratably on a quarterly basis over a three year period commencing September 30, 2017,
granted to the Company’s Corporate Controller;
● August 2017 - 40,000 stock options with an exercise price of $2.98 per share, vesting ratably on a quarterly basis over a three year period commencing September 30, 2017,
granted to a new member of the Board of Directors;
● October 2017 - 15,000 stock options with an exercise price of $5.11 per share, vesting ratably on an annual basis over a three year period commencing October 2018, granted
to a consultant.
In March 2017, 76,389 stock options were forfeited upon the resignation of the Company’s former CFO, as discussed below.
F-22
Note 10 — Stock-Based Compensation (continued)
Subsequently, an aggregate of 1,265,216 stock options were granted, each with a ten year contractual term from date-of-grant, and each vesting ratably on a quarterly basis
over a three year period commencing March 31, 2018, including: in January 2018, 175,000 stock options with an exercise price of $2.96 granted to the Company’s VP
Technology and Product Development, and in February 2018, a total of 500,000 stock options granted to non-executive members of the Company’s board of directors, and a
total of 590,216 stock options granted to employees, each with an exercise price of $2.01 per share. Additionally, in February 2018, a total of 195,108 previously granted stock
options were forfeited in connection with the resignation of two members from the Company’s board of directors.
A total of 2,951,081 shares of common stock of the Company are reserved for issuance under the 2014 Stock Plan. As of December 31, 2017, 1,515,011 shares of common
stock of the Company were available for grant under the 2014 Stock Plan, excluding stock options granted outside the 2014 Stock Plan, including 250,000 in 2017 and 250,854
in 2016.
At December 31, 2017, the weighted average remaining contractual term was 8.4 years for stock options outstanding and 8.1 years for stock options vested and exercisable.
The stock-based compensation expense related to stock options granted to employees and directors is based on the grant-date fair value, and for stock options granted to non-
employees is based on the vesting date fair value, with the cost recognized on a straight-line basis over the award’s requisite service period. Stock-based compensation expense
recognized for the periods indicated was as follows:
General and administrative expenses
Research and development expenses
Year Ended
December 31,
2017
2016
$
$
925,534
122,593
1,048,127
$
$
664,068
83,297
747,365
Included in general and administrative expenses, is $51,389 of stock-based compensation expense resulting from the March 31, 2017 modifications to the stock option grant
to the Company’s former CFO. Previously, on April 28, 2016, upon the closing of the Company’s IPO, the former CFO was granted 125,000 stock options at an exercise price
of $5.00 per share. On March 31, 2017, the April 28, 2016 stock option agreement was amended, wherein the stock option grant continued to vest monthly in April, May, and
June 2017, and the 48,611 vested stock options are exercisable until April 28, 2019, with the remaining 76,389 stock options forfeited effective March 31, 2017.
At December 31, 2017, total unrecognized stock-based compensation expense of $1,573,988 is expected to be recognized over the weighted average remaining requisite
service period of 1.5 years. At December 31, 2016, total unrecognized stock-based compensation expense of $ 2,196,566 was expected to be recognized over the weighted
average remaining requisite service period of 2.3 years.
Stock-based compensation expense recognized for stock options granted to employees and members of the board of directors was based on a weighted average fair value of
$2.62 per share and $1.32 per share during the years ended December 31, 2017 and 2016, respectively, calculated using the following weighted average Black-Scholes
valuation model assumptions:
Risk free interest rate
Expected term of stock options (in years)
Expected stock price volatility
Expected dividend yield
Year Ended December 31,
2017
2016
2.1%
5.8
50%
0%
1.4%
5.8
50%
0%
Stock-based compensation expense recognized for stock options granted to non-employees was based on a weighted average fair value of $2.80 per share and $5.60 per share
during the years ended December 31, 2017 and 2016, respectively, calculated using the following weighted average Black-Scholes valuation model assumptions
Risk free interest rate
Expected term of stock options (in years)
Expected stock price volatility
Expected dividend yield
F-23
Year Ended December 31,
2017
2016
2.3%
9.0
60%
0%
1.9%
9.6
60%
0%
Note 10 — Stock Based Compensation (continued)
The Company uses the Black-Scholes valuation model to estimate the fair value of stock options. The Black-Scholes valuation model requires the Company to make certain
estimates and assumptions, including assumptions related to the expected price volatility of the Company’s stock, the period during which the options will be outstanding, the
rate of return on risk- free investments, and the expected dividend yield for the Company’s stock. The weighted-average valuation assumptions for all stock-based awards were
determined as follows:
Weighted-average risk-free interest rate: The Company bases the risk-free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of grant for
a period commensurate with the assumed expected option term.
Expected term of options: The expected term of stock options represents the period of time options are expected to be outstanding, which for employees is the expected term
derived using the simplified method and for non-employees is the contractual term.
Expected stock price volatility: The expected volatility is based on historical stock price volatilities of similar entities within the Company’s industry over the period
commensurate with the expected term of the stock option.
Expected dividend yield: The estimate for annual dividends is $0.00 as the Company has not historically paid, and does not expect for the foreseeable future to pay, a
dividend.
F-24
Note 11 — Financial Instruments Fair Value Measurements
Recurring Fair Value Measurements
The Series A Warrants and the Series A Convertible Preferred Stock conversion option derivative liabilities as of December 31, 2017, are summarized in the fair value
hierarchy table, as follows:
Fair Value Measurement on a Recurring Basis at Reporting Date Using:
Level-1 Inputs
Level-2 Inputs
Level-3 Inputs
Total
December 31, 2017
Series A Warrants derivative liability
Series A Convertible Preferred Stock conversion option
derivative liability
Totals
$
$
—
$
—
—
$
—
$
—
—
$
761,123
$
761,123
212,217
973,340
$
212,217
973,340
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.
At December 31, 2016 the Company did not have any assets or liabilities required to be measured at fair value on a recurring basis in accordance with FASB ASC 820.
The Series A Preferred Stock Units were issued in a private placement with three closings occurring in the three months ended March 31, 2017, and were each comprised of
one share of Series A Convertible Preferred Stock and one Series A Warrant. At the option of their respective holder, the Series A Convertible Preferred Stock may be
converted into shares of common stock of the Company and the Series A Warrant may be exercised for a share of common stock of the Company. See Note 13, Series A
Convertible Preferred Stock, Stockholders’ Deficit, and Warrants for a further discussion of the Series A Preferred Stock Units private placement, the Series A Convertible
Preferred Stock, and the Series A Warrant.
The Series A Warrant and the Series A Convertible Preferred Stock conversion option were each determined to be a derivative liability under FASB ASC 815, as the Series
A Convertible Preferred Stock common stock exchange factor denominator and the Series A Warrant exercise price are 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. The
respective Series A Warrants and the Series A Convertible Preferred Stock conversion option derivative liability are classified as a current liability on the consolidated balance
sheet, and each were initially measured at fair value at the time of issuance and are subsequently remeasured at fair value on a recurring basis at each reporting period date, with
changes in fair value recognized as other income or expense in the consolidated statement of operations. The reconciliation of each of the Series A Warrants and the Series A
Convertible Preferred Stock conversion option derivative liability for the year ended December 31, 2017 are as follows:
Derivative Liability
Balance at December 31, 2016
Initial fair value on dates of issuance
Change in fair value
Conversion of Series A Convertible Preferred Stock
Series A Exchange Offer
Balance at December 31, 2017
Series A
Warrants
—
4,050,706
(1,942,501)
—
(1,347,082)
761,123
$
$
$
$
Series A
Convertible
Preferred Stock
Conversion Option
—
1,221,963
(643,318)
(27,335)
(339,093)
212,217
As of December 31, 2017, 249,667 shares of Series A Convertible Preferred Stock and 268,001 Series A Warrants were each issued and outstanding, summarized as follows:
Issued and Outstanding
Issued and outstanding as of December 31, 2016
Issued in Series A Preferred Stock Units private placement
Conversion of Series A Convertible Preferred Stock
Series A Exchange Offer
Issued and outstanding as of December 31, 2017
F-25
Series A
Warrants
Series A
Convertible
Preferred Stock
—
422,838
—
(154,837)
268,001
—
422,838
(18,334)
(154,837)
249,667
Note 11 — Financial Instruments Fair Value Measurements (continued)
Change in Fair Value
The change in estimated fair value, including fair value adjustments on the dates of the Series A Exchange Offer, the conversion of Series A Convertible Preferred Stock, and
the recurring fair value adjustment as of December 31, 2017, resulted in the recognition of other income of $1,942,501 and $643,318, with corresponding decreases in each of
the Series A Warrants derivative liability and the Series A Convertible Preferred Stock conversion option derivative liability, respectively, during the year ended December 31,
2017.
The initial issue date and subsequent recurring reporting period date estimated fair value of each of the Series A Warrants and the Series A Convertible Preferred Stock
conversion option derivative liability were each 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:
Series A Warrants Derivative Liability
Fair Value Assumptions
Calculated aggregate fair value
Series A Warrants outstanding
Value of common stock
Exercise price per share
Expected term (years)
Volatility
Risk free rate
Dividend yield
Series A Convertible Preferred Stock
Conversion Option Derivative Liability
Fair Value Assumptions
Calculated aggregate fair value
Series A Convertible Preferred Stock shares
Value of common stock
Common stock exchange factor numerator
Common stock exchange factor denominator
Expected term (years)
Volatility
Risk-free interest rate
Dividend yield
Conversion of Series A Convertible Preferred Stock
$
$
$
$
$
$
$
December 31, 2017
Issue
Dates'
Aggregated Weighted
Average
761,123
268,001
2.29
6.61
6.33
55%
2.2%
0%
December 31,2017
212,217
249,667
2.29
6.00
4.97
6.33
55%
2.2%
0%
$
$
$
$
$
$
$
4,050,706
422,838
5.73
8.00
7.21
47%
2.3%
0%
Issue
Dates’
Aggregated Weighted
Average
1,221,963
422,838
5.73
6.00
6.00
7.21
47%
2.3%
0%
At the election of their respective holders, a total of 18,334 shares of Series A Convertible Preferred Stock were converted into a total of 22,093 shares of common stock of
the Company. The Series A Convertible Preferred Stock conversion option derivative liability fair value was adjusted as of each conversion date, with the resulting change in
fair value recognized as other income or expense in the consolidated statement of operations, upon which the corresponding Series A Convertible Preferred Stock conversion
option derivative liability was derecognized, with a corresponding recognition of common stock par value and additional paid-in capital with respect to the shares of common
stock of the Company issued, summarized as follows:
Series A Convertible Preferred Stock
Converted to Shares of Common Stock of the Company
Year ended December 31, 2017
Shares of Series A Convertible Preferred Stock converted to common stock
Shares of common stock issued upon conversion of Series A Convertible Preferred Stock
Fair Value - Series A Convertible Preferred Stock conversion option derivative liability derecognized
Common stock issued - par value
Common stock issued - additional paid-in capital
Conversion
Dates
Aggregated
18,334
22,093
27,335
22
27,313
$
$
$
On each of the respective conversion dates, the Series A Convertible Preferred Stock conversion option derivative liability fair value was 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.
F-26
Note 11 — Financial Instruments Fair Value Measurements (continued)
Series A Exchange Offer - November 17, 2017 Exchange Date
As noted above, a total of 422,838 shares of Series A Convertible Preferred Stock and 422,838 Series A Warrants were issued in the Series A Preferred Stock private
placement. On November 17, 2017 (“November 17, 2017 Exchange Date”), the Company completed an exchange offer initiated on October 20, 2017 to all 28 holders of the
Series A Convertible Preferred Stock and Series A Warrants - to exchange one share Series A Convertible Preferred Stock for 1.5 shares of Series A-1 Convertible Preferred
Stock, and, one Series A Warrant for one Series A-1 Warrant (“Series A Exchange Offer”) - resulting in 154,837 shares of Series A Convertible Preferred Stock exchanged for
232,259 shares of Series A-1 Convertible Preferred Stock, and 154,837 Series A Warrants exchanged for 154,837 Series A-1 Warrants, by 13 holders on the November 17,
2017 Exchange Date.
The Series A Exchange Offer resulted in the extinguishment of: 154,837 shares of Series A Convertible Preferred Stock, the corresponding (bifurcated) conversion option
derivative liability, and, 154,837 Series A Warrants, resulting from the issuance-upon-exchange of: 232,259 shares of Series A-1 Convertible Preferred Stock and 154,837
Series A-1 Warrants, each as discussed herein below.
Series A Exchange Offer - Series A Convertible Preferred Stock Exchanged for Series A-1 Convertible Preferred Stock
The fair value of the consideration given in the form of the issue of 232,259 shares of Series A-1 Convertible Preferred Stock, with such fair value recognized as the carrying
value of such issued shares of Series A-1 Convertible Preferred Stock, as compared to the extinguishment of both the carrying value of the Series A Convertible Preferred Stock
and the fair value of the corresponding conversion option derivative liability, resulted in an excess of fair value of $504,007 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
attributable to common stockholders, summarized as follows:
Series A-1 Convertible Preferred Stock Issued
Series A Convertible Preferred Stock and Conversion Option Derivative Liability Extinguished Deemed Dividend Charged to
Accumulated Deficit
Fair value - 232,259 shares of Series A-1 Convertible Preferred Stock issued
Less: Fair value - Series A Convertible Preferred Stock conversion option derivative liability extinguished
Less: Carrying value - 154,837 shares of Series A Convertible Preferred Stock exchanged
Deemed dividend charged to accumulated deficit
Series A
Exchange Offer November 17,
2017 Exchange Date
$
$
843,100
339,093
—
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 was estimated using a
combination of the present value of its cash flows using a synthetic credit rating analysis required rate of return and the Black-Scholes option pricing model, using the following
assumptions:
Series A-1 Convertible Preferred Stock
Fair Value Assumptions
Aggregate fair value
Series A-1 Convertible Preferred Stock shares
Required rate of return
Common stock conversion factor numerator
Common stock conversion factor denominator
Value of common stock
Expected term (years)
Volatility
Risk free rate
Dividend yield
$
$
$
$
November 17, 2017
Exchange Date
843,100
232,259
27.0%
4.00
4.00
4.33
6.45
53%
2.2%
0%
The November 17, 2017 Exchange Date estimated fair value of $339,093 of the extinguished 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.
Series A Convertible Preferred Stock Conversion Option Derivative Liability
Fair Value Assumptions
Aggregate fair value
Series A Convertible Preferred Stock shares
Value of common stock
Common stock exchange factor numerator
Common stock exchange factor denominator
Expected term (years)
Volatility
Risk-free interest rate
Dividend yield
F-27
$
$
$
$
November 17, 2017
Exchange Date
339,093
154,837
4.33
6.00
4.97
6.45
53%
2.2%
0%
Note 11 — Financial Instruments Fair Value Measurements (continued)
Series A Exchange Offer - November 17, 2017 Exchange Date (continued)
Series A Exchange Offer - Series A Convertible Preferred Stock Exchanged for Series A-1 Convertible Preferred Stock (continued)
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 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, Series A
Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for a further discussion of the Series A Preferred Stock Units private placement and the Series A Convertible
Preferred Stock.
Series A Exchange Offer - Series A Warrants Exchanged for Series A-1 Warrants
The 154,837 Series A Warrants derivative liability fair value was adjusted to the November 17, 2017 Exchange Date fair value of the consideration given in the form the
154,837 Series A-1 Warrants issued, with the resulting change in fair value recognized as other income or expense in the consolidated statement of operations, immediately
followed by the derecognition of the 154,837 Series A Warrants derivative liability and the recognition of additional paid-in capital of such amount in the consolidated balance
sheet, as the Series A-1 Warrants are equity classified. The November 17, 2017 Exchange Date fair value of the Series A-1 Warrants of $1,347,082 was estimated using a
Black-Scholes valuation model assuming the exchange of one Series A-1 Warrant for five Series W Warrants, using the following assumptions:
Series A-1 Warrants
Fair Value Assumptions
Aggregate fair value
Exercise price per share - Series W Warrant
Value of common stock
Expected term (years)
Volatility
Risk free rate
Dividend yield
Non-recurring Fair Value Measurements
$
$
$
November 17, 2017
Exchange Date
1,347,082
5.00
4.33
4.2
57%
2.0%
0%
In addition to the Series A Exchange Offer discussed above, the other issue-date and /or date -of-occurrence non-recurring estimated fair values include: 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; the Series A-1 Convertible
Preferred Stock and Series A-1 Warrants issued in the Series A-1 Preferred Stock Units private placement; and, the Series A-1 Warrants modification resulting from the Series
A-1 Amendment No. 1 - with each utilizing the Company’s common stock price along with certain Level 3 inputs, as discussed below, in the development of discounted cash
flow analyses and /or Black-Scholes valuation models. Further information regarding these non-recurring estimated fair values are discussed in both: Note 12, Note and
Securities Purchase Agreement, Senior Secured Note, and Series S Warrants; and, Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants.
The estimated fair values presented herein are subjective and are affected by changes in inputs to the valuation models, 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 probabilities associated with the likelihood and timing of future dilutive transactions. Changes in these assumptions can
materially affect the estimated fair values.
F-28
Note 12 — Note and Securities Purchase Agreement, Senior Secured Note, and Series S Warrants
The Company and Scopia Holdings LLC (“Scopia or the Lender”) entered into a Note and Security Purchase Agreement, under which, upon 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 amount 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. The aggregate remaining unpaid principal
balance of the Senior Secured Note is due on June 30, 2019.
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 classified as equity in the consolidated balance sheet. See Note 13, Series A Convertible Preferred
Stock, Stockholders’ Deficit, and Warrants, for further information with respect to the Series S Warrants.
The $4,842,577 of cash proceeds, net of the Lender’s debt issuance costs, have been 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 between the Senior Secured Note initial principal amount and the allocated amount accounted for as debt discount, amortized as interest expense over the term of
the Senior Secured Note.
The Senior Secured Note bears interest at a fixed annual rate of 15.0%, with interest payable semi-annually in arrears on June 30 and December 30 of each calendar year,
commencing December 30, 2017. The Company may elect, at its sole discretion, to defer payment of up to 50% of the semi-annual interest due, with the unpaid semi-annual
interest payment added to the outstanding interest-bearing principal balance of the Senior Secured Note.
During the year ended December 31, 2017, interest expense recognized totaled $724,684, including $377,083 with respect to the semi-annual 15.0% interest payment, with
50% of such amount or $188,542 added to the outstanding interest-bearing principal balance of the Senior Secured Note, and $347,601 with respect to the amortization of debt
discount.
As of December 31, 2017, the Senior Secured Note principal balance is $5,188,542, including $188,542 of unpaid interest added to the interest-bearing principal balance, as
discussed above. The Senior Secured Note remaining unamortized debt discount is $3,244,274 at December 31, 2017.
At the discretion of the Company, the aggregate principal balance of the Senior Secured Note and any earned and unpaid interest may be repaid at any time without penalty or
premium. Additionally, under the Senior Secured Note, if at the Company’s discretion, it sells its implantable intraosseous vascular access device (the “PortIO™ Product”), then
the Senior Secured Note holders’ may require the Company to repay the then outstanding aggregate principal amount of the Senior Secured Note, in whole or in part, together
with any accrued interest thereon, from the net cash proceeds of such PortIO™ Product sale, provided such principal and interest repayment is limited to the amount of the net
cash proceeds from such PortIO™ Product sale.
The Note and Security Purchase Agreement with Scopia contains various customary negative covenants of the Company including restrictions on the Company incurring any
additional indebtedness or liens or declaring or paying any dividends, subject to certain exceptions provided for in the Note and Security Purchase Agreement with Scopia,
while any amount under the Senior Secured Note remains outstanding. Additionally, the Note and Security Purchase Agreement with Scopia also contains certain affirmative
covenants of the Company, including, among others:
● If the PortIO™ Product obtains initial FDA 510(k) clearance, then, commencing four months after such FDA 510(k) clearance, the Company will use its reasonable best
efforts to attempt to sell the PortIO™ Product on commercially reasonable terms for an amount not less than $10.0 million. If the net cash proceeds are $10.0 million or
greater from such PortIO™ product sale, and there are no continuing obligations imposed on the Company, which would constitute an undue burden on the Company,
resulting from such PortIO™ Product sale transaction, then the Senior Secured Note holders may request the Company to repay the then aggregate remaining unpaid principal
balance of the Senior Secured Note. Notwithstanding, as the FDA has indicated the PortIO™ Product will be reviewed for approval and clearance under a regulatory pathway
other than a 510(k) clearance, such Note and Securities Purchase Agreement provision is not operative;
● Effective with the first bi-monthly payroll in July 2017, the Company’s CEO agreed to the payment of a reduced salary of $4,200 per month, with the payment of such earned
but unpaid salary to occur on the earlier of (a) the date that FDA 510(k) clearance for the PortIO™ Product is obtained or (b) the date the aggregate remaining unpaid principal
balance of the Senior Secured Note is repaid-in-full. Subsequently, Scopia irrevocable waived compliance with this provision by the Company and the CEO on a prospective
basis commencing February 1, 2018. Notwithstanding, the unpaid CEO salary for the period July 1, 2017 to January 31, 2018, may only be paid upon the Senior Secured Note
first being repaid-in-full.
F-29
Note 12 — Note and Securities Purchase Agreement, Senior Secured Note, and Series S Warrants (continued)
Additionally, the Note and Security Purchase Agreement with Scopia provides, for so long as the Lender holds at least 50% of the aggregate remaining unpaid principal
balance of the Senior Secured Note, the Lender shall have the ability to nominate one individual to the Company’s board of directors, provided the board of directors shall have
the right to reject any such Lender nominee if it determines in good faith such Lender nominee is not reasonably acceptable. In this regard, on August 3, 2017, the Lender
nominee was appointed to the Company’s board of directors.
Payment of all amounts due and payable under the Senior Secured Note are guaranteed by the Company, and the obligations under the Senior Secured Note are 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.
As of December 31, 2017, Senior Secured Note had an estimated fair value of $4.6 million. The Senior Secured Note 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:
Series S Warrants
Exercise price per share
Value of common stock
Expected term (years)
Volatility
Risk free rate
Dividend yield
Issue Date
$
$
0.01
4.50
15.0
48%
2.4%
0%
As required by the Note and Security Purchase Agreement, the Company filed a registration statement on Form S-3 (File No. 333-221406), declared effective January 8,
2018, (“the January 2018 Form S-3”), to register the issuance of a total of 2,810,654 shares of common stock of the Company, including 1,473,640 shares issuable, and
1,186,080 shares previously issued, upon the exercise of Series S Warrants; and, the registration of (i) the issuance of 150,934 shares of the Company’s common stock upon the
exercise of 150,934 certain Series W Warrants issued prior to the Company’s IPO, but only in the event such certain Series W Warrants are publicly transferred pursuant to
Rule 144 prior to their exercise, or (ii) the resale of such 150,934 shares of common stock, but only in the event such certain Series W Warrants are exercised prior to being
publicly transferred pursuant to Rule 144.
F-30
Note 13 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants
Preferred Stock
The Company is authorized to issue 20,000,000 shares of its preferred stock, par value of $0.001 per share, with such designation, rights, and preferences as may be
determined from time-to-time by the Company’s board of directors.
As of December 31, 2017, 249,667 shares of Series A Convertible Preferred Stock (classified in temporary equity), and 357,259 shares of Series A-1 Convertible Preferred
Stock (classified in permanent equity), were each issued and outstanding. At December 31, 2016 there were no shares of preferred stock issued or outstanding.
Series A Preferred Stock Units Private Placement
The Company’s Board of Directors authorized the issuance of up to a total of 1.25 million Series A Preferred Stock Units, including authorizing 500,000 units on January 21,
2017 and 750,000 units on May 10, 2017. On January 26, 2017, the Company entered into a Securities Purchase Agreement pursuant to which the Company may issue up to an
aggregate of $3,000,000 of Series A Preferred Stock Units at a price of $6.00 per unit, in a private placement transaction (“Series A Preferred Stock Units private placement”).
At the Series A Preferred Stock Units private placement initial closing on January 26, 2017, and at subsequent closings on January 31, 2017 and March 8, 2017, a total of
422,838 Series A Preferred Stock Units were issued for aggregate gross proceeds of approximately $2.5 million and net proceeds of approximately $2.2 million, after payment
of placement agent fees and closing costs.
On November 17, 2017 (“November 17, 2017 Exchange Date”), the Company completed an exchange offer initiated on October 20, 2017 to the 28 holders of the Series A
Convertible Preferred Stock and Series A Warrants - to exchange one share Series A Convertible Preferred Stock for 1.5 shares of Series A-1 Convertible Preferred Stock, and,
one Series A Warrant for one Series A-1 Warrant (“Series A Exchange Offer”) - resulting in 154,837 shares of Series A Convertible Preferred Stock exchanged for 232,259
shares of Series A-1 Convertible Preferred Stock, and 154,837 Series A Warrants exchanged for 154,837 Series A-1 Warrants, by 13 holders on the November 17, 2017
Exchange Date. See Note 11, Financial Instruments Fair Value Measurements, for further detail regarding the Series A Exchange Offer.
As of December 31, 2017, 249,667 shares of Series A Convertible Preferred Stock and 268,001 Series A Warrants were each issued and outstanding, summarized as follows:
Issued and outstanding as of December 31, 2016
Issued in Series A Preferred Stock Units private placement
Series A Exchange Offer
Conversion of Series A Convertible Preferred Stock
Issued and outstanding as of December 31, 2017
Series A
Convertible
Preferred Stock
Series A
Warrants
—
422,838
(154,837)
(18,334)
249,667
—
422,838
(154,837)
—
268,001
As the Series A Convertible Preferred Stock and the Series A Warrants were first issued in the Series A Preferred Stock Units private placement during the three months ended
March 31, 2017, there were no comparable amounts for the prior year ended December 31, 2016.
The Series A Preferred Stock Unit was comprised of one share of Series A Convertible Preferred Stock and one Series A Warrant. The Series A Convertible Preferred Stock
and Series A Warrants were immediately separable upon their issuance, and became convertible and exercisable, respectively, 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).
At the election of their respective holder, a share of Series A Convertible Preferred Stock is convertible into a number of shares of common stock of the Company at a
prescribed common stock exchange factor, and, a Series A Warrant is exercisable for one share of common stock of the Company, or may be exchanged for four Series X
Warrants, with each such Series X Warrant exercisable for one share of common stock of the Company - each as more fully described below.
F-31
Series A Preferred Stock Units Private Placement (continued)
The Series A Warrant and the Series A Convertible Preferred Stock conversion option were each determined to be a derivative liability under ASC 815, as discussed below.
The issuance of the Series A Preferred Stock Units resulted in the recognition of a loss of $3,124,285, resulting from the aggregate initial fair value of each of the Series A
Warrant and the Series A Convertible Preferred Stock conversion option derivative liability, being in excess of the gross proceeds of the Series A Preferred Stock Units private
placement, with such excess amounting to $2,735,657, recognized as a current period expense, along with offering costs of $388,628, which were also recognized as a current
period expense, as follows:
Series A Preferred Stock Units issuance gross proceeds
Less: Series A Warrants derivative liability initial fair value
Less: Series A Convertible Preferred Stock conversion option derivative liability initial fair value
Excess of initial fair value of derivative liabilities over gross proceeds
Offering costs of the issuance of the Series A Preferred Stock Units
Loss on issuance of Series A Preferred Stock Units
Series A
Preferred
Stock Units
Issue Dates (Aggregate)
$
$
2,537,012
(4,050,706)
(1,221,963)
(2,735,657)
(388,628)
(3,124,285)
See Note 11, Financial Instruments Fair Value Measurements, for information with respect to the initial issue date estimated fair value of each of the Series A Warrants
derivative liability and the Series A Convertible Preferred Stock conversion option derivative liability.
The Company filed an effective registration statement on Form S-1 (File No. 333-216963), declared effective June 23, 2017, (“the Series A Registration Statement”)
registering for resale the maximum number of the Company’s shares of common stock issuable upon conversion of the Series A Convertible Preferred Shares and the exercise
of the Series A Warrants, or if exchanged, the Series X Warrants. The Series A Registration Statement also registers the resale of the Series X Warrants, and the initial issuance
of the shares of common stock of the Company underlying the Series X Warrants to the extent the Series X Warrants are publicly sold prior to the exercise of such Series X
Warrants. The Company timely filed the initial registration statement with the SEC on March 27, 2017, and such registration statement became effective on June 23, 2017, with
such dates consistent with the requirements of the registration rights agreement entered into in connection with the Series A Preferred Stock Units private placement. If the
Series A Registration Statement effectiveness is not maintained, then, the Company is required to make payments to the investors of 2% of their Series A Preferred Stock Units
subscription amount on the date of such event, and every thirty days thereafter until the effectiveness is cured.
Series A Convertible Preferred Stock
As discussed above, a total of 422,838 shares of Series A Convertible Preferred Stock were issued in the Series A Preferred Stock private placement. Subsequently, at the
election of their respective holders, in November 2017, 8,334 shares of Series A Convertible Preferred Stock were converted into 10,021 shares of common stock of the
Company, and in December 2017, 10,000 shares of Series A Convertible Preferred Stock were converted into 12,072 shares of common stock of the Company. Further, as
noted above, on the Series A Exchange Offer November 17, 2017 Exchange Date, a total of 154,837 shares of Series A Convertible Preferred Stock were exchanged for
232,259 shares of Series A-1 Convertible Preferred Stock. Accordingly, as of December 31, 2017, there were 249,667 shares of Series A Convertible Preferred Stock issued
and outstanding. See Note 11, Financial Instruments Fair Value Measurements, for further detail regarding the shares of Series A Convertible Preferred Stock converted into
shares of common stock of the Company and the Series A Exchange Offer.
The Series A Convertible Preferred Stock is classified in temporary equity in the consolidated balance sheet, has a par value of $0.001 per share, no voting rights, a stated
value of $6.00 per share, and became convertible 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). The Series A Convertible Preferred Stock 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 Preferred Stock
Units private placement issuance gross proceeds, with such excess recognized as a current period loss in the consolidated statement of operations, as discussed above.
F-32
Note 13 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Preferred Stock (continued)
Series A Convertible Preferred Stock (continued)
At the holders’ election, a share of Series A Convertible Preferred Stock is convertible into a number of shares of common stock of the Company at a common stock
conversion exchange factor equal to a numerator of $6.00 and a denominator currently set at $4.97, with such denominator subject to further adjustment by a prescribed formula
should any subsequent issuances by the Company of common stock, or securities convertible into common stock, be at a price lower than such denominator immediately prior
to such new issuance. Previously, at issuance, the Series A Convertible Preferred Stock common stock conversion exchange factor denominator was initially $6.00, and was
subsequently adjusted to $5.00 upon the issuance of the Series S Warrants on July 3, 2017, then to $4.99 upon the issuance of the Series A-1 Preferred Stock Units on August 4,
2017, and then to $4.97 upon the issuance of Series A-1 Convertible Preferred Stock and Series A-1 Warrants on the November 17, 2017 Exchange Date of the Series A
Exchange Offer. As noted, the Series A Convertible Preferred Stock common stock conversion exchange factor denominator is subject to further adjustment, including at the
conclusion of the overallotment period with respect to the January 2018 underwritten public offering of shares of common stock of the Company, as discussed herein below.
The Series A Convertible Preferred Stock conversion option is accounted for as a bifurcated derivative liability under FASB ASC 815, as along with other provisions, the
Series A Convertible Preferred Stock common stock exchange factor denominator, as discussed above, is subject to potential adjustment resulting from future financing
transactions, under certain conditions. The Series A Convertible Preferred Stock conversion option derivative liability is classified as a current liability on the balance sheet,
initially measured at fair value at the time of issuance, and subsequently remeasured at fair value at each reporting period, with changes in its fair value recognized as other
income or expense in the statement of operations. Upon the occurrence of an event resulting in the Series A Convertible Preferred Stock conversion option derivative liability to
be subsequently derecognized, its fair value will first be adjusted on such date, with the fair value adjustment recognized as other income or expense, and then such derivative
liability will be derecognized. See Note 11, Financial Instruments Fair Value Measurements, for further detail regarding the fair value of the Series A Convertible Preferred
Stock conversion option derivative liability.
The Series A Convertible Preferred Stock provides for dividends at a rate of 8% per annum on the stated value of the Series A Convertible Preferred Stock, with such
dividends compounded quarterly, accumulate, and are payable in arrears upon being declared by the Company’s Board of Directors. The Series A Convertible Preferred Stock
dividends from April 1, 2017 through April 1, 2021 are payable-in-kind (“PIK”) in additional shares of Series A Convertible Preferred Stock. The dividends may be settled
after April 1, 2021, at the option of the Company, through any combination of the issuance of additional Series A Convertible Preferred Stock, shares of common stock, and /or
cash payment. As of December 31, 2017, Series A Convertible Preferred Stock dividends totaling $119,669 or a payment-in-kind of 19,973 shares of Series A Convertible
Preferred Stock, were earned, accumulated, and in arrears, as the Company’s board of directors had not declared such dividends payable, and, therefore, such dividends are not
being recognized as a dividend payable liability in the consolidated balance sheet until declared by the Company’s board of directors. Notwithstanding, the Company has
presented such dividends in the calculation of basic and diluted net loss attributable to common stockholders.
In the event of a Deemed Liquidation Event, as defined in the Certificate of Designation of Preferences, Rights, and Limitations of the Series A Convertible Preferred Stock,
the Series A Convertible Preferred Stock can become redeemable at the election of at least two-thirds of holders of the then number of issued and outstanding Series A
Convertible Preferred Stock, if the Company fails to effect a dissolution of the Company under the Delaware General Corporation Law within ninety (90) days after such
Deemed Liquidation Event. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company or a Deemed Liquidation Event, as defined, the
holders of the Series A Convertible Preferred Stock then outstanding are entitled to be paid out the assets of the Company available for distribution to its stockholders before
any payment shall be made to the holders of the common stock, an amount per share equal to the greater of (i) the stated value, plus any dividends accrued but unpaid, or (ii)
such amount per share as would have been payable had all the shares of Series A Convertible Preferred Stock been converted into shares of common stock prior to such
liquidation, dissolution, winding up, or Deemed Liquidation Event, as defined. As the Deemed Liquidation Event, as defined, is a contingent event, the Series A Convertible
Preferred Stock is classified outside of stockholders’ equity in temporary (“mezzanine”) equity. Further, as the Series A Convertible Preferred Stock is not currently redeemable
and redemption is not probable, as a Deemed Liquidation Event, as defined, has not occurred and is not probable, the Series A Convertible Preferred Stock will not be
measured at fair value until such time as a redemption trigger occurs which causes redemption to be probable.
F-33
Note 13 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Preferred Stock (continued)
Series A-1 Preferred Stock Units Private Placement
On August 3, 2017, the Company’s Board of Directors authorized the issuance of up to 150,000 Series A-1 Preferred Stock Units, and on August 4, 2017, the Company
entered into a Securities Purchase Agreement pursuant to which the Company may issue up to an aggregate of $600,000 (subject to increase) of Series A-1 Preferred Stock
Units at a price of $4.00 per unit, in a private placement transaction (Series A-1 Preferred Stock Units private placement).
On the August 4, 2017 closing date (“Series A-1 Close Date”) of the Series A-1 Preferred Stock Units private placement, a total of 125,000 Series A-1 Preferred Stock Units
were issued for cash proceeds of $500,000 - the Company did not incur placement agent fees in connection with the August 4, 2017 closing.
The Series A-1 Preferred Stock Unit was comprised of one share of Series A-1 Convertible Preferred Stock and one Series A-1 Warrant - as more fully described below. At
their issuance, the Series A-1 Convertible Preferred Stock and the Series A-1 Warrant were immediately separable, and each was immediately convertible and exercisable,
respectively.
At the election of their respective holder, a share of Series A-1 Convertible Preferred Stock is convertible into one share of common stock of the Company at a prescribed
common stock exchange factor, and, a Series A-1 Warrant is exercisable for one share of common stock of the Company, or may be exchanged for four Series X-1 Warrants or
five Series W Warrants, with each such warrant exercisable for one share of common stock of the Company - each as more fully described herein below.
On October 18, 2017, the Series A-1 Convertible Preferred Stock holders unanimously approved Amendment No. 1 to Series A-1 Preferred Stock Units private placement
transaction documents (“Series A-1 Amendment No. 1), wherein: a Series A-1 Warrant may be exchanged for four Series X-1 Warrants, or additionally, exchanged for five
Series W Warrants. See herein below for a discussion of the expense recognized resulting from the Series A-1 Amendment No. 1 modification to provide for the additional
exchange of one Series A-1 Warrant 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. 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 X-1 Warrant also confirms such warrants are not subject to redemption, and under no circumstances will
the Company be required to net cash settle the Series X-1 Warrants, for any reason, nor to pay any liquidated damages or other payments, resulting from a failure to satisfy any
obligations under the Series X-1 Warrant, notwithstanding such provisions were applicable to the Series X Warrant through the operation of the Securities Purchase Agreement
of the Series A-1 Preferred Stock Units private placement. See herein below for a discussion of the Series X-1 Warrants or Series W Warrants issued upon exchange of a Series
A-1 Warrant.
Additionally, the Series A-1 Amendment No. 1 removed the requirement for the Company to file an initial registration statement within sixty days of the Series A-1 Close
Date. Further, on December 29, 2017, the Series A-1 Convertible Preferred Stock holders unanimously approved Amendment No.2 to Series A-1 Preferred Stock Units private
placement transaction documents (“Series A-1 Amendment No. 2), wherein, the due date for an effective registration statement was changed to 210 days from 150 days of the
Series A-1 Close Date - see below for further information with respect to the “Series A-1 Registration Statement” on Form S-1 (File 333-222234), declared effective on
January 8, 2018.
On November 17, 2017 (“November 17, 2017 Exchange Date”), the Company completed an exchange offer initiated on October 20, 2017 to the 28 holders of the Series A
Convertible Preferred Stock and Series A Warrants - to exchange one share Series A Convertible Preferred Stock for 1.5 shares of Series A-1 Convertible Preferred Stock, and,
one Series A Warrant for one Series A-1 Warrant (“Series A Exchange Offer”) - resulting in 154,837 shares of Series A Convertible Preferred Stock exchanged for 232,259
shares of Series A-1 Convertible Preferred Stock, and 154,837 Series A Warrants exchanged for 154,837 Series A-1 Warrants, by 13 holders on the November 17, 2017
Exchange Date. See Note 11, Financial Instruments Fair Value Measurements, for further detail regarding the Series A Exchange Offer.
As of December 31, 2017, 357,259 shares of Series A-1 Convertible Preferred Stock and 279,837 Series A Warrants were each issued and outstanding, summarized as
follows:
Issued in Series A Preferred Stock Units private placement
Series A Exchange Offer
Converted to shares of common stock
Issued and outstanding as of December 31, 2017
Series A-1 Convertible
Preferred Stock
Series A-1
Warrants
125,000
232,259
—
357,259
125,000
154,837
—
279,837
As the Series A-1 Convertible Preferred Stock and the Series A-1 Warrants were first issued on the Series A-1 Close Date, there were no comparable amounts for the prior year
ended December 31, 2016.
F-34
Note 13 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Preferred Stock (continued)
Series A-1 Preferred Stock Units Private Placement (continued)
The Series A-1 Preferred Stock Units private placement cash proceeds of $500,000 were allocated as $189,550 to the Series A-1 Convertible Preferred Stock and $310,450 to
the Series A-1 Warrants, based on their respective relative fair value. The issue-date fair value of the Series A-1 Convertible Preferred Stock was estimated using a combination
of the Series A-1 Convertible Preferred Stock’s present value of its cash flows using a required rate of return determined through a synthetic credit rating analysis and the
Black-Scholes valuation model; and the fair value of the Series A-1 Warrants was estimated using a Black-Scholes valuation model and assuming the exchange of one Series A-
1 Warrant for four Series X Warrants, using the following assumptions:
Series A-1 Convertible Preferred Stock
Allocated fair value
Shares of Series A-1 Convertible Preferred Stock
Required rate of return
Common stock conversion factor numerator
Common stock conversion factor denominator
Value of common stock
Expected term (years)
Volatility
Risk free rate
Dividend yield
Series A-1 Warrants
Allocated fair value
Exercise price per share - Series X Warrants
Value of common stock
Expected term (years)
Volatility
Risk free rate
Dividend yield
$
$
$
$
$
$
$
Issue Date
189,550
125,000
27.0%
4.00
4.00
2.98
6.74
52%
2.0%
0%
Issue Date
310,450
6.00
2.98
6.74
52%
2.0%
0%
The Company filed a registration statement on Form S-1 (File No. 333-222234), declared effective January 8, 2018, (“the Series A-1 Registration Statement”) registering for
resale the maximum number of the Company’s shares of common stock issuable upon conversion of the Series A-1 Convertible Preferred Shares and the exercise of the Series
A-1 Warrants, or if exchanged, the Series X-1 Warrants or Series W Warrants (as discussed below). Such registration statement also registers the resale of the Series X-1
Warrants or Series W Warrants, and the initial issuance of the shares of common stock of the Company underlying the Series X-1 Warrants or Series W Warrants to the extent
the Series X-1 Warrants or Series W Warrants are publicly sold prior to the exercise of such Series X Warrants. The Series A-1 Registration Statement January 8, 2018
effectiveness date was consistent with the requirements of the registration rights agreement, as amended, entered into in connection with the Series A-1 Preferred Stock Units
private placement. If the Series A-1 Registration Statement effectiveness is not maintained, then, the Company is required to make payments to the investors of 2% of their
Series A-1 Preferred Stock Units subscription amount on the date of such events, and every thirty days thereafter until the effectiveness is cured.
Series A-1 Convertible Preferred Stock
As discussed above, a total of 125,000 shares of Series A-1 Convertible Preferred Stock were issued in the Series A-1 Preferred Stock private placement, and a total of
154,837 shares of Series A Convertible Preferred Stock were exchanged for 232,259 shares of Series A-1 Convertible Preferred Stock as a result of the Series A Exchange
Offer. Accordingly, as of December 31, 2017, there were 357,259 shares of Series A-1 Convertible Preferred Stock issued and outstanding. See Note 11, Financial Instruments
Fair Value Measurements, for further detail regarding the Series A Exchange Offer.
The Series A-1 Convertible Preferred Stock is classified in permanent equity in the consolidated balance sheet, has a par value of $0.001 per share, no voting rights, a stated
value of $4.00 per share, and was immediately convertible upon its issuance.
At the holders’ election, a share of Series A Convertible Preferred Stock is convertible into one share of common stock of the Company at a common stock conversion
exchange factor equal to a numerator of $4.00 and a denominator of $4.00, with such denominator not subject to further adjustment, except for the effect of stock dividends,
stock splits or similar events affecting the Company’s common stock. The Series A-1 Convertible Preferred Stock shall not be redeemed for cash and under no circumstances
shall the Company be required to net cash settle the Series A-1 Convertible Preferred Stock.
F-35
Note 13 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Preferred Stock (continued)
Series A-1 Convertible Preferred Stock (continued)
As discussed above, the Series A-1 Preferred Stock Units private placement cash proceeds allocated to the Series A-1 Convertible Preferred Stock of $189,550 resulted in an
effective conversion price below the issue-date fair value of the underlying shares of common stock, resulting in a $182,500 beneficial conversion feature, which was accounted
for as an implied discount on the Series A-1 Convertible Preferred Stock. The Series A-1 Convertible Preferred Stock does not have a stated redemption date and was
immediately convertible upon issuance, resulting in the full accretion of the beneficial conversion feature as a deemed dividend paid to the Series A-1 Convertible Preferred
Stock on the August 4, 2017 issue date, with such deemed dividend included as a component of net loss attributable to attributable to common stockholders.
The Series A-1 Convertible Preferred Stock provides for dividends at a rate of 8% per annum on the stated value of the Series A-1 Convertible Preferred Stock, with such
dividends compounded quarterly, accumulate, and are payable in arrears upon being declared by the Company’s Board of Directors. The Series A-1 Convertible Preferred Stock
dividends from October 1, 2017 through October 1, 2021 are payable-in-kind (“PIK”) in additional shares of Series A-1 Convertible Preferred Stock. The dividends may be
settled after October 1, 2021, at the option of the Company, through any combination of the issuance of additional Series A-1 Convertible Preferred Stock, shares of common
stock, and /or cash payment. As of December 31, 2017, Series A-1 Convertible Preferred Stock dividends totaling $79,788 or a payment-in-kind of 19,962 shares of Series A-1
Convertible Preferred Stock, were earned, accumulated, and in arrears, as the Company’s board of directors had not declared such dividends payable, and, therefore, such
dividends are not being recognized as a dividend payable liability in the consolidated balance sheet until declared by the Company’s board of directors. Notwithstanding, the
Company has presented such dividends in the calculation of basic and diluted net loss attributable to common stockholders.
Series A and Series A-1 Exchange Offer - Series B Convertible Preferred Stock and Series Z Warrants
Subsequently, on February 14, 2018 the Company initiated an exchange offer to the holders of both the Series A Convertible Preferred Stock and Series A Warrants, and the
Series A-1 Convertible Preferred Stock and Series A-1 Warrants (“Series A and Series A-1 Exchange Offer”), as follows: one (1) share of Series A Convertible Preferred Stock
exchanged for two (2) shares of Series B Convertible Preferred Stock, and one (1) Series A Warrant exchanged for five (5) Series Z Warrants; and one (1) share of Series A-1
Convertible Preferred Stock exchanged for 1.33 shares of Series B Convertible Preferred Stock, and one (1) Series A-1 Warrant exchanged for five (5) one Series Z Warrants. A
condition of the Series A and Series A-1 Exchange Offer is for all outstanding shares of Series A Convertible Preferred Stock and all Series A Warrants, and all shares of Series
A-1 Convertible Preferred Stock and all Series A-1 Warrants, must be tendered, else, if not all are tendered, then the Company reserves the right to not accept any tenders, if
any. The Series A and Series A-1 Exchange Offer is scheduled to expire on March 15, 2018, unless extended by the Company, at its sole discretion.
The Series B Convertible Preferred Stock has a par value of $0.001 per share, no voting rights, a stated value of $3.00 per share, and is immediately convertible upon its
issuance. At the holders’ election, a share of Series B Convertible Preferred Stock is convertible into a number of shares of common stock of the Company at a common stock
conversion exchange factor equal to a numerator of $3.00 and a denominator of $3.00, with such denominator not subject to further adjustment, except for the effect of stock
dividends, stock splits or similar events affecting the Company’s common stock. The Series B Convertible Preferred Stock shall not be redeemed for cash and under no
circumstances shall the Company be required to net cash settle the Series B Convertible Preferred Stock.
The Series B Convertible Preferred Stock provides for dividends at a rate of 8% per annum on the stated value of the Series B Convertible Preferred Stock, with such
dividends compounded quarterly, accumulate, and are payable in arrears upon being declared by the Company’s Board of Directors. The Series B Convertible Preferred Stock
dividends from April 1, 2018 through October 1, 2021 are payable-in-kind (“PIK”) in additional shares of Series B Convertible Preferred Stock. The dividends may be settled
after October 1, 2021, at the option of the Company, through any combination of the issuance of additional Series B Convertible Preferred Stock, shares of common stock, and
/or cash payment.
The Series Z Warrants issued in the Series A and Series A-1 Exchange Offer will be immediately exercisable upon issuance and expire after the close of business on April 30,
2024, and each may be exercised for one share of common stock of the Company at an exercise price of $3.00 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. The Series Z Warrants are redeemable by the Company under
certain conditions. See herein below for further information with respect to the Series Z Warrant.
F-36
Note 13 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Common Stock
The Company is authorized to issue 50,000,000 shares of common stock with a par value of $0.001 per share.
As of December 31, 2017 and 2016, there were 14,551,234 and 13,330,811 shares of common stock and 10,567,845 and 10,580,095 Series W Warrants issued and
outstanding, respectively, each as discussed herein below and summarized as follows:
Issued and outstanding December 31, 2015
Issued in the initial public offering
Exercise of Series W Warrants
Issued and outstanding as of December 31, 2016
Exercises of Series W Warrants
Exercises of Series S Warrants
Conversion of Series A Convertible Preferred Stock
Issued and outstanding as of December 31, 2017
Common
Stock
Series-W
Warrants
12,250,000
1,060,000
20,811
13,330,811
12,250
1,186,080
22,093
14,551,234
9,560,295
1,060,000
(40,200)
10,580,095
(12,250)
—
—
10,567,845
● In June 2014, in connection with the organization of the Company, a total of 8,083,049 shares of the Company’s common stock and 8,710,181 warrants (of which 627,133
warrants were subsequently returned to the Company in October 2014) (“Founders’ Warrants”) were sold to the Company’s founders (the “Founders”) for an aggregate
purchase price of $3,212.
● In June 2014 and July 2014, in a private placement (“Pre-IPO Private Placement 1”), a total of 418,089 units, consisting of one share of common stock and one warrant to
purchase a share of common stock of the Company, were sold to the initial investors (“Initial Investors”) for an aggregate purchase price of $75,000 less offering costs of
$7,500.
● In November 2014, the Company completed an additional private placement (Pre-IPO Private Placement 2) of 2,355,233 units, consisting of one share of common stock and
one warrant to purchase one share of common stock of the Company, raising $845,000 in gross offering proceeds less offering costs of $46,500. Taken together, the two pre-
IPO private placements are referred to collectively as the “Pre-IPO Private Placements”.
● In August 2015, the Company issued 97,554 warrants to an outside advisor in exchange for services.
● In September 2015, 1,393,629 Pre-IPO Private Placements warrants were exercised for cash proceeds of $1.25 million, resulting in the issuance of a corresponding number
shares of common stock of the Company.
● Under a registration statement on Form S-1 (File No. 333-203569) declared effective January 29, 2016, the Company’s initial public offering (IPO) was consummated on
April 28, 2016, resulting in $4.2 million of net cash proceeds, after deducting cash selling agent discounts and commissions and offering expenses, from the issuance of
1,060,000 units at an offering price of $5.00 per unit, with each such unit comprised of one share of common stock of the Company and one warrant to purchase a share of
common stock of the Company, with such warrant referred to as a “Series W Warrant” - see below for a discussion of the Series W Warrant. The Company estimated the fair
value of its common stock issued in the IPO using the guideline transaction method of the market approach and arrived at an estimated fair value of common stock of $3.50.
● The 9,560,295 remaining unexercised warrants previously issued in the Pre-IPO Private Placements were converted into identical Series W Warrants issued in the Company’s
IPO, and are therefore aggregated with the Series W Warrants issued in the IPO, and together are collectively referred to as “Series W Warrants” - see below for a further
discussion of the Series W Warrants.
● The units issued in the IPO were initially listed on the Nasdaq Capital Market (“Nasdaq”) under the symbol “PAVMU”, until July 27, 2016, when the PAVMU units ceased to
be quoted and traded on Nasdaq, and the underlying shares of common stock and the Series W Warrants began separate trading on Nasdaq, under their respective individual
symbols of “PAVM” for the shares of common stock and “PAVMW” for the Series W Warrants - see below for a discussion of the Series W Warrant.
● In November 2016 and December 2016, 20,732 and 79 shares of common stock were issued, resulting from the cashless exercise of 40,000 and 200 Series W Warrants,
respectively.
● In March and September 2017, 400 shares and 11,850 shares of common stock were issued, resulting from a corresponding number of Series W Warrants exercised for
$2,000 and $59,250 of cash proceeds, respectively.
F-37
Note 13 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Common Stock (continued)
● In October 2017, 532,000 shares of common stock 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 were issued, resulting from the cashless exercise of 122,360 Series S Warrants; and, in November 2017, 532,000 shares of
common stock 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 were issued upon the conversion of 8,334 and 10,000 shares of Series A Convertible Preferred
Stock, respectively.
● Subsequently, on January 17, 2018, the Company filed an initial registration statement on Form S-1 (File No. 333-222581), currently under SEC review, related to a proposed
offering wherein, as currently proposed, the Company will distribute one transferable equity subscription right for each issued and outstanding share of common stock of the
Company as of a record date to be determined by the Company’s Board of Directors (“Equity Subscription Rights Offering” or “Rights Offering”). As currently proposed, the
Equity Subscription Rights Offering is to commence upon an effective registration statement. Further, as currently proposed, for a period of 30 days from their distribution
date, the transferable equity subscription right may be exercised for $2.25 per unit to purchase a common stock unit comprised of one share of common stock of the Company
and one Series Z Warrant. As currently proposed, the common stock unit will trade for up to 90 days, after which it will separate into its underlying components of one share
of common stock of the Company and one Series Z Warrant. The Series Z Warrant may be exercised for one share of common stock of the Company at an exercise price of
$3.00 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,
and will expire after the close of business on April 30, 2024. The Series Z Warrants are redeemable by the Company under certain conditions. See herein below for a further
discussion of the Series Z Warrant.
● Subsequently, in January 2018, the Company conducted an underwritten public offering of 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. The Company issued the 2,415,278
shares on January 23, 2018, and on January 25, 2018, issued 234,540 shares of common stock, under the underwriter’s over-allotment, resulting in net cash proceeds of
$4,263,099, after deductions of underwriting discounts of $381,574 and estimated offering costs.
● Subsequently, 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, resulting
in $68,690 of cash proceeds. See herein below for a discussion of the “Series W Warrants Offer-to-Exercise”.
● Subsequently, on March 5, 2018, the Company received a notice from the Nasdaq Listing Qualifications Department stating, for the prior 30 consecutive business days
through March 2, 2018, the market value of the Company’s listed securities (“MVLS”) had been below the minimum of $35 million required for continued inclusion on the
Nasdaq Capital Market under Nasdaq Listing Rule 5550(b)(2). The notification letter stated the Company would be afforded 180 calendar days, or until September 4, 2018, to
regain compliance. In order to regain compliance, the MVLS must remain at or above $35 million for a minimum of ten consecutive business days. The notification letter also
states in the event the Company does not regain compliance within the 180 day period, its securities may be subject to delisting. In the event of a delisting determination, the
Company may appeal such determination to a Nasdaq Hearings Panel.
Unit Purchase Options
On April 28, 2016, the Company issued 53,000 unit purchase options (“UPO”) to the selling agents in the Company’s IPO. The holder of the UPO may purchase a unit
identical to the unit issued in the Company’s IPO, as discussed above, at an exercise price of $5.50 per unit. The UPO was recognized as an offering cost of the Company’s IPO,
with an estimated the 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%.
F-38
Note 13 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Warrants
The following table summarizes outstanding warrants to purchase common stock at the dates indicated:
December 31, 2017
Warrants Issued and Outstanding at
Weighted Average
Exercise Price
/Share
December 31, 2016
Weighted Average
Exercise
Price
10,567,845
53,000
1,473,640
279,837
268,001
12,642,323
$
$
$
$
$
$
5.00
5.00
0.01
6.67
6.61
4.49
10,580,095
53,000
---
---
---
10,580,095
$
$
$
$
$
$
5.00
5.00
---
---
---
5.00
Expiration Date
January 2022
January 2022
June 2032
April 2024
April 2024
Equity classified warrants
Series W Warrants
UPO - Series W Warrants
Series S Warrants
Series A-1 Warrants
Liability classified warrants
Series A Warrants
Total
Series W Warrants
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, and became exercisable on October 28, 2016 and expire on January 29, 2022, or earlier upon redemption by the Company,
as discussed below.
As discussed above, a total of 1,060,000 Series W Warrants were issued in the Company’s IPO, and the remaining previously issued (pre-IPO) 9,560,295 unexercised
warrants outstanding on the April 28, 2016 IPO date were automatically converted into identical Series W Warrants issued in the IPO, and are therefore aggregated with the
1,060,000 Series W Warrants issued in the IPO, and together are collectively referred to as Series W Warrants.
As discussed below, a Series A-1 Warrant, at the election of the holder, may be exchanged for five Series W Warrants or four Series X-1 Warrants. As of December 31,
2017, no Series A-1 Warrants had been exchanged for Series W Warrants nor Series X-1 Warrants.
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. In November and December 2016, 40,000 and 200 Series W Warrants were exercised on a cashless basis,
resulting in the issuance of 20,732 and 79 shares of common stock of the Company, respectively.
Subsequently, 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 (“Series W Warrants Offer-to-Exercise”). As of the February 8, 2018 expiry of the Series W Warrants Offer-to-Exercise, 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, and the issue of a corresponding number of shares of common
stock of the Company.
Subsequently, on February 20, 2018, the Company filed with the SEC a Tender Offer Statement on Schedule TO offering to exchange two (2) Series W Warrants for one (1)
Series Z Warrant, with such exchange offer having a March 19, 2018 expiration date (“Series W Warrants Offer-to-Exchange”). The Series Z Warrants issued upon exchange of
the Series W Warrants will be immediately exercisable upon issuance and expire after the close of business on April 30, 2024, and each may be exercised for one share of
common stock of the Company at an exercise price of $3.00 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. The Series Z Warrants are redeemable by the Company under certain conditions. See herein below for a further discussion
of the Series Z Warrant.
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 underlying such warrants. The right to exercise will be forfeited unless the IPO Warrants are exercised prior to the date
specified in the notice of redemption. On and after the redemption date, a record holder of an IPO Warrant will have no further rights except to receive the redemption price for
such holder’s IPO Warrant upon surrender of such warrant.
F-39
Note 13 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Warrants (continued)
Series W Warrants (continued)
The Company filed a Registration Statement on Form S-1 (File No. 333-214288), declared effective February 3, 2017, (the “February 2017 Form S-1”) to register the
issuance of 1,020,000 shares of the Company’s common stock upon the exercise of 1,020,000 remaining unexercised Series W Warrants, along with the registration of (i) the
issuance of 1,062,031 shares of the Company’s common stock upon the exercise of 1,062,031 of the unexercised IPO Warrants (issued prior to the IPO), but only in the event
such warrants are publicly transferred pursuant to Rule 144 prior to exercise, or (ii) the resale of such shares of common stock, but only in the event such warrants are exercised
prior to being publicly transferred pursuant to Rule 144.
The Company filed a registration statement on Form S-3 (File No. 333-221406), declared effective January 8, 2018, (“the January 2018 Form S-3”), to register the issuance of
a total of 2,810,654 shares of common stock of the Company, including 1,473,640 shares issuable, and 1,186,080 shares previously issued, upon the exercise of Series S
Warrants; and, the registration of (i) the issuance of 150,934 shares of the Company’s common stock upon the exercise of 150,934 certain Series W Warrants issued prior to the
Company’s IPO, but only in the event such Series W Warrants are publicly transferred pursuant to Rule 144 prior to their exercise, or (ii) the resale of such 150,934 shares of
common stock, but only in the event such Series W Warrants are exercised prior to being publicly transferred pursuant to Rule 144.
Series S Warrants
The Company and Scopia Holdings LLC (“Scopia or the Lender”) entered into a Note and Security Purchase Agreement under which, on July 3, 2017, the Company issued
to Scopia and its designees, a Senior Secured Note (“Senior Secured Note”), and 2,660,000 Series S Warrants. The Series S Warrants were immediately exercisable upon
issuance and expire after the close of business on June 30, 2032, 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, and may be
exercised for cash or on a cashless basis, with any Series S Warrants outstanding on the expiration date will be automatically exercised on a cashless basis.
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. Accordingly, at December 31, 2017, there were 1,473,640 Series S Warrants issued and
outstanding.
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 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, Note and Securities Purchase Agreement, Senior Secured Note, and Series S Warrants, 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.
The Company filed a registration statement on Form S-3 (File No. 333-221406), declared effective January 8, 2018, (“the January 2018 Form S-3”), to register the issuance of
a total of 2,810,654 shares of common stock of the Company, including 1,473,640 shares issuable, and 1,186,080 shares previously issued, upon the exercise of Series S
Warrants; and, the registration of (i) the issuance of 150,934 shares of the Company’s common stock upon the exercise of 150,934 certain Series W Warrants issued prior to the
Company’s IPO, but only in the event such certain Series W Warrants are publicly transferred pursuant to Rule 144 prior to their exercise, or (ii) the resale of such 150,934
shares of common stock, but only in the event such certain Series W Warrants are exercised prior to being publicly transferred pursuant to Rule 144.
F-40
Note 13 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Warrants (continued)
Series A-1 Warrants
As discussed above, a total of 125,000 Series A-1 Warrants were issued in the Series A-1 Preferred Stock private placement and a total of 154,837 Series A Warrants were
exchanged for 154,837 Series A-1 Warrants resulting from the Series A Exchange Offer. Accordingly, as of December 31, 2017, there were 279,837 Series A-1 Warrants
issued and outstanding. See Note 11, Financial Instruments Fair Value Measurements, for further detail regarding the Series A Exchange Offer.
The Series A-1 Warrants were immediately exercisable upon issuance and expire after the close of business on April 30, 2024, and each may be exercised 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. 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. As
of December 31, 2017, no Series A-1 Warrants had been exchanged for Series W Warrants nor Series X-1 Warrants.
The Series A-1 Warrants are not subject to redemption, and under no circumstances will 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 will be 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 noted above, the Series A-1 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 Amendment No.1 modification to the Series A-1 Warrants’ exchange elections was accounted for under the analogous guidance of FASB ASC 718, wherein,
the incremental fair value is measured as the difference between the fair value immediately after the modification as compared to the fair value immediately before the
modification, with such incremental fair value, to the extent an increase, recognized as a modification expense. On the October 18, 2017 date of the Series A-1 Amendment
No.1, the Company recognized a current period expense related to the Series A-1 Warrants’ modification of $222,000, with such expense included in other income (expense) on
the consolidated statement of operations, with a corresponding increase in additional paid-in capital in the consolidated balance sheet, as the Series A-1 Warrants are equity
classified. Such incremental 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:
Aggregate fair value
Exercise price per share - Series W Warrant
Exercise price per share - Series X Warrant
Value of common stock per share
Expected term - years
Volatility
Risk free interest rate
Dividend yield
F-41
Series A-1 Amendment No. 1
Series A-1 Warrants Modification
Fair Value - October 18, 2017
Immediately
After
Modification
Immediately
Before
Modification
$
$
$
$
$
$
$
$
1,531,000
5.00
—
5.40
4.3
55%
1.9%
0%
1,309,000
—
6.00
5.40
6.5
52%
2.1%
0%
Note 13 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Warrants (continued)
Series W Warrants and Series X-1 Warrants Issued Upon Exchange of Series A-1 Warrants
As discussed above, a Series A-1 Warrant, at the election of the holder, may be exchange for five Series W Warrants or four Series X-1 Warrants. As of December 31, 2017
no Series A-1 Warrants had been exchanged for Series W Warrants nor Series X-1 Warrants.
The Series W Warrants issued upon the exchange of a Series A-1 Warrant 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, and became exercisable on October 28, 2016 and expire on January
29, 2022 or earlier upon redemption by the Company, as discussed herein above.
The Series X-1 Warrants issued upon exchange of a Series A-1 Warrant, are 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. The Series X-1 Warrants are
exercisable commencing on the first trading day following October 31, 2018 and expire on April 30, 2024, or earlier upon redemption by the Company, as discussed below. At
their expiration date, provided the closing price of the Company’s common stock is greater than $6.00 per share, any such outstanding Series X-1 Warrants will be
automatically exercised via a cashless exercise.
The Company may redeem all, but not less than all, of the issued and outstanding Series X-1 Warrants, at any time after April 30, 2019, at a price of $0.01 per Series X-1
Warrant, if the volume weighted average price per share of the common stock of the Company has been for twenty trading days out of the thirty trading day period ending three
business days prior to the notice of redemption, at least $18.00, with such price adjusted for stock splits, stock dividends, or similar events occurring after the August 4, 2017
closing date of the Series A-1 Preferred Stock Units private placement.
Series Z Warrants
A Series Z Warrant may be exercised for one share of common stock of the Company at an exercise price of $3.00 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, and will expire after the close of business on April 30, 2024.
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 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 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.
The Series Z Warrants issued upon exchange of the Series W Warrants under the Series W Warrants Offer-to-Exchange, as discussed herein above, and the Series Z Warrants
issued in the Series A and Series A-1 Exchange Offer, as discussed herein above, will be immediately exercisable upon issuance. The Series Z Warrants included as a
component of the common stock unit issued in the Equity Subscription Rights Offering, as discussed herein above, will be exercisable when such common stock units separate
into their underlying components of one share of common stock of the Company and one Series Z Warrant, which, as currently proposed, is expected to be up to 90 days from
the date of issuance of such common stock unit.
There were no Series Z Warrants issued and outstanding as of December 31, 2017 or 2016. Subsequent to December 31, 2017, in February 2018, upon their resignation, the
Company issued 100,000 Series Z Warrants each to two former members of the Company’s board of directors, with such Series Z Warrants immediately exercisable and having
the terms and conditions as described herein above.
F-42
Note 13 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Warrants (continued)
Series A Warrants
As discussed above, a total of 422,838 Series A Warrants were issued in the Series A Preferred Stock private placement and a total of 154,837 Series A Warrants were
exchanged for 154,837 Series A-1 Warrants resulting from the Series A Exchange Offer. Accordingly, as of December 31, 2017, there were 268,001 Series A Warrants issued
and outstanding. See Note 11, Financial Instruments Fair Value Measurements, for further detail regarding the 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 may be exercised for one share of common stock at an exercise price currently set at $6.61 per share. Previously, upon issuance, the Series A Warrant
exercise was initially $8.00 per share, and then subsequently adjusted to $6.67 per share upon the issuance of the Series S Warrants on July 3, 2017, and then to $6.65 per share
upon the issuance of the Series A-1 Preferred Stock Units on August 4, 2017, and then to $6.61 per share upon the issuance of Series A-1 Convertible Preferred Stock and
Series A-1 Warrants on the November 17, 2017 Exchange Date of the Series A Exchange Offer. The Series A Warrant exercise price is 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, may be exchanged
for four Series X Warrants, with such Series X Warrants discussed below.
During the time the Series A Warrants are outstanding, the holders will be 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 noted above, 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 is classified as a current liability on 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 on the consolidated statement of operations. Upon the occurrence of an event resulting in the Series A Warrant derivative liability to be subsequently
derecognized, its fair value will first be adjusted on such date, with the fair value adjustment recognized as other income or expense, and then such derivative liability will be
derecognized. See Note 11, Financial Instruments Fair Value Measurements, for further detail regarding the fair value of the Series A Warrants derivative liability.
Series X Warrants Issued Upon Exchange of Series A Warrants
A Series A Warrant, as discussed above, at the election of the holder, may be exchanged for four Series X Warrants. As of December 31, 2017, no Series A Warrants had
been exchanged for Series X Warrants.
The Series X Warrants issued upon exchange of a Series A Warrant are exercisable for one share of common stock at $6.00 per share, with such Series X Warrant exercise
price not subject to further adjustment, except in the event of stock dividends, stock splits or similar events affecting the common stock. The Series X Warrants are exercisable
commencing on the first trading day following October 31, 2018. The Series X Warrants may be exercised until their April 30, 2024 expiration date, or earlier upon redemption
by the Company, as discussed below. At their expiration date, provided the closing price of the Company’s common stock is greater than $6.00 per share, any such outstanding
Series X Warrants will be automatically exercised via a cashless exercise.
The Company may redeem all, but not less than all, of the issued and outstanding Series X Warrants, at any time after April 30, 2019, at a price of $0.01 per Series X
Warrant, if the volume weighted average price per share of the common stock of the Company has been for twenty trading days out of the thirty trading day period ending three
business days prior to the notice of redemption, at least $18.00, with such price adjusted for stock splits, stock dividends, or similar events occurring after the January 26, 2017
initial closing date of the Series A Preferred Stock Units private placement.
F-43
Note 14 —Loss Per Share
The following table sets forth basic and diluted net loss per share - as reported and net loss attributable to common stockholders per share for the periods indicated:
Numerator
Net loss - as reported
Undeclared and accumulated dividends:
Series A Convertible Preferred Stock(1)
Series A-1 Convertible Preferred Stock(2)
Series A-1 Convertible Preferred Stock deemed dividend(3)
Series A Exchange Offer deemed dividend(4)
Year Ended December 31,
2017
2016
$
(9,519,269) $
(5,650,851)
(112,570)
(79,788)
(182,500)
(504,007)
—
—
—
—
Net loss attributable to common stockholders
$
(10,398,134) $
(5,650,851)
Denominator
Weighted-average common shares outstanding basic and diluted(5)
13,495,951
12,972,153
Loss per share(6)
Basic and diluted
- Net loss - as reported
- Net loss attributable to common stockholders
$
$
(0.71) $
(0.77) $
(0.44)
(0.44)
(1) As discussed herein above, as of December 31, 2017, Series A Convertible Preferred Stock dividends totaling $119,669 or a payment-in-kind of 19,973 shares of Series A
Convertible Preferred Stock, were earned, accumulated, and in arrears, as the Company’s board of directors had not declared such dividends payable, and, therefore, such
dividends are not be recognized as a dividend payable liability in the consolidated balance sheet until declared by the Company’s board of directors. Notwithstanding, the
Company has presented such dividends in the calculation of basic and diluted net loss attributable to common stockholders. See Note 13, Series A Convertible Preferred
Stock, Stockholders’ Deficit, and Warrants, for a further discussion of the Series A Convertible Preferred Stock dividends.
(2) As discussed herein above, as of December 31, 2017, such Series A-1 Convertible Preferred Stock dividends totaling $79,788 or a payment-in-kind of 19,962 shares of
Series A-1 Convertible Preferred Stock, were earned, accumulated, and in arrears, as the Company’s board of directors had not declared such dividends payable, and,
therefore, such dividends are not be recognized as a dividend payable liability in the consolidated balance sheet until declared by the Company’s board of directors.
Notwithstanding, the Company has presented such dividends in the calculation of basic and diluted net loss attributable to common stockholders. See Note 13, Series A
Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for a further discussion of the Series A-1 Convertible Preferred Stock dividends.
(3) The Series A-1 Preferred Stock Units cash proceeds allocated to the Series A-1 Convertible Preferred Stock resulted in an effective conversion price below the issue date fair
value of the underlying shares of common stock, resulting in a $182,500 beneficial conversion feature, which was accounted for as an implied discount on the Series A-1
Convertible Preferred Stock. The Series A-1 Convertible Preferred Stock does not have a stated redemption date and was immediately convertible upon issuance, resulting
in the full accretion of the beneficial conversion feature as a deemed dividend paid to the Series A-1 Convertible Preferred Stock on the Series A-1 Preferred Stock Units
August 4, 2017 issue date.
(4)
In the Series A Exchange Offer, 154,837 shares of Series A Convertible Preferred Stock were exchanged for 232,259 shares of Series A-1 Convertible Preferred Stock,
resulting in an excess of fair value of $504,007, of the 232,259 shares of Series A-1 Convertible Preferred Stock issued as compared to the Series A conversion option
derivative liability extinguished, with such excess fair value recognized as a deemed dividend and included as a component of net loss attributable to attributable to common
stockholders. See Note 11, Financial Instruments Fair Value Measurements, for further detail regarding the Series A Exchange Offer.
(5) Basic weighted-average number of shares of common stock outstanding for the period excludes incremental shares resulting from common stock equivalents, while diluted
weighted average number of shares outstanding includes such incremental shares. However, as the Company was in a loss position for all periods presented, basic and
diluted weighted average shares outstanding are the same, as the inclusion of common stock equivalent incremental shares would be anti-dilutive.
(6) The holders of the Series A Warrants and the Series A-1 Warrants have the same rights to receive dividends as the holders of common stock. As such, the Series A Warrants
and Series A-1 Warrants are considered participating securities under the two-class method of calculating net loss per share. The Company has incurred net losses to-date,
and as the holders of the Series A Warrants and the Series A-1 Warrants are not contractually obligated to share in the losses, there is no impact on the Company’s net loss
per share calculation for the periods indicated.
F-44
Note 14 —Loss Per Share (continued)
The following common stock equivalents have been excluded from the computation of diluted weighted average shares outstanding as their inclusion would be anti-
dilutive:
Stock Options
Unit purchase options as to shares of common stock
Unit purchase options as to shares underlying Series W Warrants
Series W Warrants(10)
Series A Convertible Preferred Stock(7)
Series A Warrants(8)
Series X Warrants(8)
Series A-1 Convertible Preferred Stock(9)
Series A-1 Warrants(10)
Series X-1 Warrants(10)
Series S Warrants
Series Z Warrants(11)
Total
December 31,
2017
2016
1,936,924
53,000
53,000
10,567,845
249,667
268,001
—
357,259
279,837
—
1,473,640
—
15,239,173
1,633,313
53,000
53,000
10,580,095
—
—
—
—
—
—
—
—
12,319,408
(7) The 249,667 shares of Series A Convertible Preferred Stock, issued and outstanding at December 31, 2017, if converted at the election of the holder, would result in
301,416 additional outstanding shares of common stock of the Company. See Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants , for a
further discussion of the Series A Convertible Preferred Stock common stock conversion election.
(8) The 268,001 Series A Warrants, issued and outstanding at December 31, 2017, at the election of the holder, may be exchanged for four Series X Warrants under the terms
of the Series A Warrant agreement. At December 31, 2017, no Series A Warrants had been exchanged for Series X Warrants. Notwithstanding, The Series X Warrants
issued in exchange for the Series A Warrants are exercisable commencing on the first trading day following October 31, 2018, and are therefore would not result in common
stock equivalent incremental shares for purposes of diluted weighted average shares outstanding as of December 31, 2017.
(9) The 357,259 shares of Series A-1 Convertible Preferred Stock issued and outstanding at December 31, 2017, if converted at the election of the holder, would result in
357,259 additional outstanding shares of common stock of the Company. See Note 13, Series A-1 Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for a
further discussion of the Series A-1 Convertible Preferred Stock common stock conversion election.
(10) The 279,837 Series A-1 Warrants, issued and outstanding at December 31, 2017, at the election of the holder may be exchanged for five Series W Warrants or four Series
X-1 Warrants under the terms of the Series A-1 Warrant agreement. As of December 31, 2017, no Series A-1 Warrants had been exchanged for either Series W Warrants or
Series X1 Warrants. The Series W Warrants issued in exchange for the Series A-1 Warrants would be exercisable upon their issuance. The Series X-1 Warrants issued upon
the exchange of the Series A-1 Warrants are exercisable commencing on the first trading day following October 31, 2018, and therefore would not result in common stock
equivalent incremental shares for purposes of diluted weighted average shares outstanding as of December 31, 2017.
(11) There were no Series Z Warrants issued and outstanding as of December 31, 2017 or 2016. Subsequently, in February 2018, upon their resignation, the Company issued
100,000 Series Z Warrants each to two former members of the Company’s board of directors, with such Series Z Warrants immediately exercisable and having the terms and
conditions as described in Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants.
Note 15 — Subsequent Events
Except as otherwise noted herein, the Company has evaluated subsequent events through the date of filing of this Annual Report on Form 10-K, and determined there to be
no further events requiring adjustments to the consolidated financial statements and /or disclosures therein.
F-45
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 14, 2018, with respect to the consolidated financial statements in the Annual Report of PAVmed Inc. on Form 10-K for the year
ended December 31, 2017. We consent to the incorporation by reference of said report in Registration Statements of PAVmed Inc. on Form S-1 (File No’s: 333-214288, 333-
216963, 333-222234 and 333-222581) and on Form S-3 (File No’s: 333-220549 and 333-221406). Our report includes an explanatory paragraph about the existence of
substantial doubt concerning the Company’s ability to continue as a going concern.
Exhibit 23.1
/s/ CITRIN COOPERMAN & COMPANY, LLP
New York, New York
March 14, 2018
CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
Exhibit 31.1
I, Lishan Aklog, M.D., certify that:
1.
I have reviewed this annual report on Form 10-K of PAVmed Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 14, 2018
By:
/s/ Lishan Aklog, M.D.
Lishan Aklog, M.D., Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER
Exhibit 31.2
I, Dennis M. McGrath, certify that:
1.
I have reviewed this annual report on Form 10-K of PAVmed Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 14, 2018
By:
/s/ Dennis M. McGrath
Dennis M. McGrath, EVP & Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of PAVmed Inc. (the “Company”) for the year ended December 31, 2017 as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), the undersigned, Lishan Aklog, M.D., Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section
1350, that to his knowledge:
(1)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 14, 2018
By:
/s/ Lishan Aklog, M.D.
Lishan Aklog, M.D.
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-Q of PAVmed Inc. (the “Company”) for the year ended December 31, 2017 as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), the undersigned, Dennis M. McGrath, EVP & Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C.
Section 1350, that to his knowledge:
(1)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 14, 2018
By:
/s/ Dennis M. McGrath
Dennis M. McGrath
Executive Vice President
Chief Financial Officer
(Principal Financial and Accounting Officer)