Exhibit
(a)(1)(B)
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE TRANSACTION CONTEMPLATED
HEREIN; PASSED UPON THE MERITS OR FAIRNESS OF THE TRANSACTION; OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE DISCLOSURE IN THIS
DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
OFFER
TO EXERCISE
WARRANTS
TO PURCHASE COMMON STOCK
OF
PAVMED
INC.
JANUARY
11, 2018
THE
OFFER TO EXERCISE (AND ASSOCIATED WITHDRAWAL RIGHTS) WILL EXPIRE AT 11:59 P.M. (EASTERN TIME) ON THE EVENING OF FEBRUARY 8,
2018, UNLESS THE OFFER PERIOD IS EXTENDED.
In
this Offer to Exercise, we refer to PAVmed Inc., a Delaware corporation, as “we,” “us,”
“PAVmed” or the “Company,” and eligible holders of outstanding warrants as “you.”
The
Company is offering to holders of outstanding warrants to purchase 10,567,845 shares of the Company’s common stock
issued in the Company’s initial public offering (“IPO”) and in private placements prior to the IPO, each
with an exercise price of $5.00 per share, and any subsequently issued warrants with identical terms and conditions (collectively,
the “Series W Warrants”), upon the terms and subject to the conditions set forth herein, the opportunity to
exercise the Series W Warrants at a temporarily reduced exercise price of $2.00 per share of common stock (the “Offer
to Exercise”). There is no minimum participation requirement with respect to the Offer to Exercise.
The
Company is exercising its discretion in accordance with the warrant agreement that governs the Series W Warrants (the “Series
W Warrant Agreement”) to temporarily reduce the exercise price of the Series W Warrants to $2.00 per share for the period
that begins on January 11, 2018, which is the date the materials relating to this Offer to Exercise are first being sent
to the holders of the Series W Warrants, and ends at 11:59 p.m. (Eastern Time) on February 8, 2018, as the same may be
extended by the Company in its sole discretion (the “Expiration Date”). Other than as set forth above, the
terms of the Series W Warrants will remain unmodified and in full force and effect. At the Expiration Date, the exercise price
of the Series W Warrants will return to the current exercise price of $5.00 per share.
The
Company expects to conduct a rights offering promptly following the expiration of this Offer to Exercise (the “Rights
Offering”). In the Rights Offering, the Company will issue as a dividend to its stockholders one transferrable right
for each share of the Company’s common stock outstanding. Each right will entitle its holder to purchase one unit, comprised
of one share of common stock and one Series Z Warrant. Each Series Z Warrant will entitle its holder to purchase one share of
common stock. To the extent holders of Series W Warrants exercise their warrants in this Offer to Exercise, such holders will
receive rights in the Rights Offering with respect to the shares of common stock received upon exercise. However, there can be
no assurance that the Company will complete the Rights Offering on the terms set forth above, or at all, and the Offer to Exercise
is not conditioned in any manner on the Rights Offering.
The
Offer to Exercise is conditioned on the Company having in place an effective registration statement under the Securities Act of
1933, as amended (the “Securities Act”), for the purpose of registering the exercise of 2,232,965 of
the outstanding Series W Warrants at the reduced cash exercise price of $2.00 per share, and the shares issuable upon such exercise
having been registered or qualified or deemed to be exempt from registration under the securities laws of the states of residence
of the holders of the Series W Warrants (the “Registration Statement Condition”). The Company has effective
registration statements on Form S-1 (File No. 333-214288 and 333-222234) and Form S-3 (File No. 333-221406) (the “Registration
Statements”) for the issuance of shares upon exercise of such warrants, and has filed with the Securities and Exchange
Commission (“SEC”) a prospectus supplement (a “Supplement”) to each Registration Statement
that covers the exercise of such warrants at the reduced cash exercise price of $2.00 per share. Accordingly, the Registration
Statements, as supplemented by the Supplements, reflect the terms of the Series W Warrants as modified by this Offer to Exercise.
The Company will rely on the exemption from registration provided by Section 4(a)(2) of the Securities Act for the exercise of
the remaining 8,334,880 of the outstanding Series W Warrants, which were issued in private placements.
The
Company will not complete the Offer to Exercise unless, at such time, the Registration Statements remain effective. If the Registration
Statements cease to be effective, the Company may, in its discretion, extend, terminate or withdraw the Offer to Exercise. The
Company will inform you of any extension of the offer period in the manner described in “Description of the Offer to
Exercise — Section 7: Extension of Offer to Exercise Period; Termination; Amendments.” If the Company terminates
or withdraws the Offer to Exercise, or allows the Offer to Exercise to expire because the Registration Statements cease to be
effective, the Company will return any tendered Series W Warrants promptly following such expiration, termination or withdrawal.
The purpose of the Offer to Exercise is to
encourage the exercise of the Series W Warrants by temporarily reducing the exercise price, which will provide funds to the Company
for working capital and for general corporate purposes. If
all of the outstanding Series W Warrants are exercised for cash, the Company would receive gross proceeds of $21,135,690 from
such exercises. Please see “Description of the Offer
to Exercise — Section 2: Purposes of the Offer to Exercise and Use of Proceeds; Plans or Proposals” below for
a description of the purposes of the Offer to Exercise.
You
may elect to participate in the Offer to Exercise with respect to some, all or none of your Series W Warrants. If you choose not
to participate in the Offer to Exercise, your Series W Warrants will remain in effect, with an exercise price of $5.00 per share,
following the Expiration Date.
The
Offer to Exercise is not being made to, nor will tenders be accepted from or on behalf of, holders of Series W Warrants residing
in any jurisdiction in which the making of the Offer to Exercise or acceptance thereof would not be in compliance with the laws
of that jurisdiction.
The
period during which the Series W Warrants may be exercised at a reduced price of $2.00 per share of common stock, pursuant to
this Offer to Exercise, will commence on January 11, 2018 (the date the materials relating to the Offer to Exercise are
first sent to the holders) and run through the Expiration Date. If you properly tender (and do not validly withdraw) your Series
W Warrants and the other Acceptance and Exercise Deliveries described below, on or prior to the Expiration Date, promptly following
the Expiration Date, we intend to accept your payment of the exercise price and your other Acceptance and Exercise Deliveries.
NOTE THAT TENDERED SERIES W WARRANTS WILL NOT BE DEEMED EXERCISED UNTIL THE EXPIRATION DATE AND THEIR ACCEPTANCE BY THE
COMPANY.
Subject
to satisfaction of the Registration Statement Condition, the Company will issue shares of common stock at the temporarily reduced
exercise price of $2.00 per share for all Series W Warrants that are validly tendered in accordance with the terms and conditions
of the Offer to Exercise and the attached Election to Participate and Exercise Series W Warrants and that are not validly withdrawn.
IT IS THE COMPANY’S CURRENT INTENTION NOT TO CONDUCT ANOTHER OFFER DESIGNED TO INDUCE THE EARLY EXERCISE OF THE SERIES
W WARRANTS.
IMPORTANT
PROCEDURES
This
Offer to Exercise together with the Election to Participate and Exercise Series W Warrants and Notice of Withdrawal constitute
the “Offering Materials.” These Offering Materials provide information regarding the Offer to Exercise and
instructions as to how you can exercise a Series W Warrant at the temporarily reduced exercise price of $2.00 per share of common
stock. You should read all of the materials carefully before you decide whether to participate in the Offer to Exercise and exercise
a Series W Warrant during the offer period.
Valid
Tender of Warrants
In
order to participate in the Offer to Exercise and exercise a Series W Warrant to receive the number of shares of Company common
stock issuable therefor at the temporarily reduced exercise price of $2.00 per share, you must deliver, or instruct your broker
or other nominee to deliver on your behalf, before the Expiration Date, to Continental Stock Transfer & Trust Company (the
“Depositary Agent”), all of the applicable “Acceptance and Exercise Deliveries” as follows:
| |
(i) |
if
you hold your Series W Warrants electronically in “street name” through a broker or other nominee: |
| |
a. |
an
Agent’s Message (as described below) with respect to a book-entry transfer of your Series W Warrants; |
| |
|
|
| |
b. |
a
book-entry confirmation (as described below) of the transfer of your the Series W Warrants into the Depositary Agent’s
account (or, if applicable, follow the procedures for guaranteed delivery described in this Offer to Exercise); and |
| |
|
|
| |
c. |
a
payment in the amount equal to $2.00 per share multiplied by the number of shares of common stock you elect to purchase pursuant
to the Series W Warrants, which payment will be made through the nominee who holds your Series W Warrants; or |
| |
(ii) |
if
you are the holder of record of your Series W Warrants: |
| |
a. |
a
signed copy of the Election to Participate and Exercise Series W Warrants; |
| |
|
|
| |
b. |
the
original copy of your Series W Warrants or an Affidavit of Loss and Indemnification Agreement (or, if applicable, follow the
procedures for guaranteed delivery described in this Offer to Exercise); and |
| |
|
|
| |
c. |
a
payment in the amount equal to $2.00 per share multiplied by the number of shares of common stock you elect to purchase pursuant
to the Series W Warrants, in the form of a check payable to Continental Stock Transfer & Trust Company as agent for PAVmed
Inc., or by wire transfer to the Company’s escrow account at the Depositary Agent, as set forth in the Election to Participate
and Exercise Series W Warrants; and |
| |
(iii) |
any
other documents required by the Election to Participate and Exercise Series W Warrants. |
The
Depositary Agent must receive all of the Acceptance and Exercise Deliveries on or before the Expiration Date (or as permitted
by the procedures for guaranteed delivery).
Method
of Delivery
For
purposes of the Offer to Exercise, the Depositary Agent will establish an account with respect to the Series W Warrants at the
Depository Trust Company (“DTC”). Any financial institution that is a participant in DTC’s system may
make book-entry delivery of Series W Warrants by causing DTC to transfer those Series W Warrants into the Depositary Agent’s
account in accordance with DTC’s procedures for transfer. Although delivery of Series W Warrants may be effected through
a book-entry transfer into the Depositary Agent’s account at DTC, an Agent’s Message, and any other required documents
must be transmitted to and received by the Depositary Agent at its address set forth below before the Expiration Date.
The
confirmation of a book-entry transfer of Series W Warrants into the Depositary Agent’s account at DTC is referred to herein
as “book-entry confirmation.” Delivery of documents to DTC in accordance with DTC’s procedures will not
constitute delivery to the Depositary Agent unless the Depositary Agent receives book-entry confirmation together with an Agent’s
Message and any other required documents with respect to the shares transferred by book-entry.
The
term “Agent’s Message” means a message transmitted by DTC to, and received by, the Depositary Agent and
forming a part of a book-entry confirmation, stating that DTC has received an express acknowledgement from the DTC participant
tendering Series W Warrants that such DTC participant has received and agrees to be bound by the terms of the Offer to Exercise
and that we may enforce the terms and conditions of the offer against the DTC participant.
Acceptance
and Withdrawal of Offer
If
you properly tender (and do not validly withdraw) your Series W Warrants and the other Acceptance and Exercise Deliveries on or
prior to the Expiration Date, promptly following the Expiration Date, we intend to accept your payment of the exercise price and
your other Acceptance and Exercise Deliveries and direct Continental Stock Transfer & Trust Company, as the Depositary Agent
and our warrant and transfer agent, to issue and deliver to you the number of shares of Company common stock issuable under your
Series W Warrant at the temporarily reduced exercise price of $2.00 per share. See “Description of the Offer to Exercise
— Section 8: Procedure for Participating in Offer to Exercise and Exercising Series W Warrants” below.
If
you change your mind and do not want to participate in the Offer to Exercise, you may withdraw your participation in the Offer
to Exercise or direct your broker or other nominee to withdraw your participation in the Offer to Exercise on your behalf. In
order to rescind previously tendered Series W Warrants, prior to the Expiration Date, your broker or other nominee may rescind
the instruction previously transmitted through the book-entry transfer system, or you or your broker or other nominee may submit
a Notice of Withdrawal to the Depositary Agent by physical delivery to Continental Stock Transfer & Trust Company, 1 State
Street Plaza, 30th Floor, New York, NY 10004, Attn: Reorganization Department, or by facsimile at (212) 616-7610.
Such withdrawal by you or your broker or other nominee must be properly completed and received by the Depositary Agent on
or prior to the Expiration Date, provided that you or your broker or other nominee may also make such withdrawal after March 9,
2018, which is the 40th business day from commencement of the Offer to Exercise, if your Series W Warrants and other
Acceptance and Exercise Deliveries have not been accepted by us prior to that date. If you or your broker or other nominee properly
and timely withdraws your participation, we will promptly: (i) return your Series W Warrants, by delivery of your physical certificate
or through book-entry transfer to the account of your broker or other nominee, and (ii) return the cash paid by you or on your
behalf to exercise your Series W Warrant by check or by transfer to the account of your broker or other nominee, without interest
thereon or deduction therefrom.
Additional
Information
If
you have any question or need assistance, you should contact Continental Stock Transfer & Trust Company, who is acting as
Depositary Agent for the Offer to Exercise. The Depositary Agent may be reached at:
Continental
Stock Transfer & Trust Company
1 State Street Plaza, 30th Floor
New York, NY 10004
Attention: Reorganization Department
Telephone: (917) 262-2378
Facsimile: (212) 616-7610
You
may request additional copies of this document and any of the Offering Materials from the Company. The Company may be reached
at:
PAVmed
Inc.
One Grand Central Place, Suite 4600
New York, New York 10165
Attention: Dennis McGrath, Chief Financial Officer
Telephone: (212) 949-4319
Email: dmm@pavmed.com
Facsimile: 212-697-9877
OUR
BOARD OF DIRECTORS MAKES NO RECOMMENDATION AS TO WHETHER OR NOT YOU SHOULD PARTICIPATE IN THE OFFER TO EXERCISE. YOU MUST MAKE
YOUR OWN DECISION WITH RESPECT TO THE OFFER TO EXERCISE. FOR QUESTIONS REGARDING TAX IMPLICATIONS OR OTHER INVESTMENT-RELATED
QUESTIONS, YOU SHOULD TALK TO YOUR OWN ATTORNEY, ACCOUNTANT AND/OR FINANCIAL PLANNER.
WE
HAVE NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON OUR BEHALF AS TO WHETHER OR NOT YOU SHOULD PARTICIPATE IN THE OFFER
TO EXERCISE. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS DOCUMENT.
THIS
OFFER TO EXERCISE HAS BEEN PREPARED SOLELY FOR THE BENEFIT OF HOLDERS OF SERIES W WARRANTS. DISTRIBUTION OF THIS OFFER TO EXERCISE
TO ANY PERSON OTHER THAN SUCH HOLDERS AND THOSE PERSONS RETAINED TO ADVISE SUCH HOLDERS IS UNAUTHORIZED AND ANY REPRODUCTION OF
THIS OFFER TO EXERCISE OR RELATED DOCUMENTS, IN WHOLE OR IN PART, IS PROHIBITED.
THE
COMPANY HAS FILED WITH THE SEC THE REGISTRATION STATEMENTS THAT, AS SUPPLEMENTED BY THE SUPPLEMENTS, REGISTER THE OFFER AND SALE
OF 2,232,965 OF THE SHARES OF COMPANY COMMON STOCK ISSUABLE UPON EXERCISE OF SERIES W WARRANTS AT THE TEMPORARILY REDUCED
OFFERING PRICE AVAILABLE UNDER THE OFFER TO EXERCISE. THE FOREGOING SECURITIES MAY NOT BE SOLD, NOR MAY OFFERS TO BUY OR EXERCISE
BE ACCEPTED, EXCEPT PURSUANT TO SUCH EFFECTIVE REGISTRATION STATEMENTS. SUCH SECURITIES MAY ONLY BE OFFERED BY MEANS OF THE PROSPECTUSES
INCLUDED IN SUCH REGISTRATION STATEMENTS, AS SUPPLEMENTED BY THE SUPPLEMENTS, COPIES OF WHICH MAY BE OBTAINED FREE OF CHARGE AT
WWW.SEC.GOV OR BY CONTACTING THE COMPANY’S CHIEF FINANCIAL OFFICER AT (212) 949-4319. THESE PROSPECTUSES, AS SUPPLEMENTED
BY THE SUPPLEMENTS, CONTAIN IMPORTANT INFORMATION ABOUT THE SERIES W WARRANTS, AS MODIFIED IN THE MANNER DESCRIBED IN THE OFFER
TO EXERCISE, AND THE SECURITIES UNDERLYING SUCH WARRANTS.
THE
DATE OF THIS OFFER TO EXERCISE IS JANUARY 11, 2018.
TABLE
OF CONTENTS
| |
|
| SUMMARY
OF TERMS |
1 |
| ABOUT
THIS OFFER TO EXERCISE |
9 |
| RISK
FACTORS |
10 |
| DESCRIPTION
OF THE OFFER TO EXERCISE |
31 |
| SECTION
1. FORWARD LOOKING STATEMENTS |
31 |
| SECTION
2. PURPOSES OF THE OFFER TO EXERCISE AND USE OF PROCEEDS; PLANS OR PROPOSALS |
32 |
| SECTION
3. ELIGIBLE WARRANTS |
33 |
| SECTION
4. EXPIRATION DATE |
33 |
| SECTION
5. TERMS OF SERIES W WARRANTS |
33 |
| SECTION
6. CONDITIONS TO THE OFFER TO EXERCISE |
33 |
| SECTION
7. EXTENSION OF OFFER TO EXERCISE PERIOD; TERMINATION; AMENDMENTS |
34 |
| SECTION
8. PROCEDURE FOR PARTICIPATING IN OFFER TO EXERCISE AND EXERCISING SERIES W WARRANTS |
35 |
| SECTION
9. MANNER OF ACCEPTANCE OF PAYMENT AND ISSUANCE OF SHARES |
37 |
| SECTION
10. WITHDRAWAL RIGHTS |
37 |
| SECTION
11. REGISTRATION OF THE EXERCISE OF THE SERIES W WARRANTS |
38 |
| SECTION
12. TRADING MARKET AND PRICE RANGE OF SERIES W WARRANTS AND COMMON STOCK |
38 |
| SECTION
13. SOURCE AND AMOUNT OF FUNDS |
39 |
| SECTION
14. TRANSACTIONS AND AGREEMENTS CONCERNING SERIES W WARRANTS |
39 |
| SECTION
15. INFORMATION REGARDING THE COMPANY |
39 |
| SECTION
16. HISTORICAL AND PRO FORMA FINANCIAL INFORMATION AND OTHER FINANCIAL INFORMATION REGARDING THE COMPANY |
45 |
| SECTION
17. INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN THE OFFER TO EXERCISE |
45 |
| SECTION
18. LEGAL MATTERS AND REGULATORY APPROVALS |
45 |
| SECTION
19. MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES |
46 |
| SECTION
20. ACCOUNTING TREATMENT |
48 |
| SECTION
21. FEES AND EXPENSES |
48 |
| SECTION
22. TRANSFERS |
48 |
| SECTION
23. ADDITIONAL INFORMATION |
49 |
| SECTION
24. INFORMATION REQUESTS |
49 |
SUMMARY
OF TERMS
| Company: |
|
PAVmed
Inc., a Delaware corporation, with principal executive offices at One Grand Central Place, Suite 4600, New York, NY 10165.
The Company’s telephone number is (212) 949-4319. |
| |
|
|
| Eligible
Warrants: |
|
Outstanding
Series W Warrants to purchase 10,567,845 shares of the Company’s common
stock issued in the IPO and in private placements prior to the IPO. In
addition, any subsequently issued Series W Warrants, including the Series W Warrants
that may be issued upon exchange of the Company’s outstanding Series A-1 Warrants,
also are subject to the Offer to Exercise.
|
| |
|
|
| |
|
See
“Description of the Offer to Exercise — Section 3: Eligible Warrants” below. |
| |
|
|
| Expiration
Date: |
|
11:59
p.m. (Eastern Time) on the evening of February 8, 2018, as may be extended by the Company in its sole discretion. |
| |
|
|
| Modified
Exercise Price of Series W Warrants: |
|
The
Company is exercising its discretion in accordance with the Series W Warrant Agreement to temporarily reduce the exercise
price of the Series W Warrants to $2.00 per share for the period that begins on January 11, 2018 and ends on the Expiration
Date. Except as set forth above all other terms of the Series W Warrants will remain the same. |
| |
|
|
| |
|
See
“Description of the Offer to Exercise — Section 5: Terms of Series W Warrants” below. |
| |
|
|
| Partial
Participation Permitted: |
|
You
may elect to participate in the Offer to Exercise with respect to some, all or none of your Series W Warrants. If you elect
to participate in the Offer to Exercise with respect to less than all of your Series W Warrants, then the Company will issue
a new Series W Warrant certificate for that number of warrants that you elect to exclude from the Offer to Exercise,
with an exercise price of $5.00 per share. |
| |
|
|
| Transfers: |
|
The
Series W Warrants are listed for trading on the Capital Market of The Nasdaq Stock Market LLC (“Nasdaq”).
For holders of record of the Series W Warrants, the Series W Warrant Agreement provides that a holder may transfer the Series
W Warrants to a third party upon surrender of such warrant to the warrant agent together with appropriate signatures and instructions
for transfer. Any holder of record of a Series W Warrant who desires to effect a transfer should present the Series W Warrant
to the warrant agent in the manner set forth in the respective Series W Warrant Agreement. If you hold your Series W Warrants
electronically in “street name” through a broker or other nominee, please contact your nominee about the procedures
for transferring your warrants. |
| |
|
|
| Conditions: |
|
The
Offer to Exercise is subject to certain conditions as described herein: |
| |
(i) |
The
Offer to Exercise is conditioned on the Company having in place an effective registration
statement under the Securities Act, for the purpose of registering the exercise of 2,232,965
of the outstanding Series W Warrants at the reduced cash exercise price of
$2.00 per share, and the shares issuable upon such exercise having been registered or
qualified or deemed to be exempt from registration under the securities laws of the state
of residence of the holder of the warrant. In this Offer to Exercise, we refer to this
condition as the “Registration Statement Condition.” The Company has effective
Registration Statements for the issuance of shares upon exercise of such warrants, and
has filed with the SEC the Supplements to the Registration Statements that cover the
exercise of such warrants at the reduced cash exercise price of $2.00 per share. Accordingly,
the Registration Statements, as supplemented by the Supplements, reflect the terms of
the Series W Warrants as modified by this Offer to Exercise. The Company will rely on
the exemption from registration provided by Section 4(a)(2) of the Securities Act for
the exercise of the remaining 8,334,880 of the outstanding Series W Warrants,
which were issued in private placements.
|
| |
|
|
| |
|
The
Company will not complete the Offer to Exercise unless, at such time, the Registration Statements remain effective. If the
Registration Statements cease to be effective, the Company may, in its discretion, extend, terminate or withdraw the Offer
to Exercise. The Company will inform you of any extension of the offer period in the manner described in “Description
of the Offer to Exercise — Section 7: Extension of Offer to Exercise Period; Termination; Amendments.” If
the Company terminates or withdraws the Offer to Exercise, or allows the Offer to Exercise to expire because the Registration
Statements cease to be effective, the Company will return any tendered Series W Warrants promptly following such expiration,
termination or withdrawal. |
| |
|
|
| |
(ii) |
In
addition, we are not making this Offer to Exercise to, nor will we accept any Election to Participate and Exercise Series
W Warrants from or on behalf of, Series W Warrant holders in any state where the Company is prohibited from making the Offer
to Exercise by administrative or judicial action pursuant to a state statute after a good faith effort by the Company to comply
with such statute. |
| |
|
|
| |
(iii) |
In
order to participate in the Offer to Exercise, you must elect to exercise your Series W Warrant, which will be deemed to be
exercised immediately following the Expiration Date should you choose to participate in the Offer to Exercise and follow the
procedures set forth in “Description of the Offer to Exercise — Section 8: Procedure for Participating in Offer
to Exercise and Exercising Series W Warrants” below. |
| |
|
Subject
to the conditions of the Offer to Exercise, we will accept any and all of the Series W Warrants validly tendered and not validly
withdrawn. |
| |
|
|
| |
|
See
“Description of the Offer to Exercise — Section 6: Conditions to the Offer to Exercise” below. |
| |
|
|
| Future
Amendments to the Offer to Exercise: |
|
If
we materially change the terms of the Offer to Exercise we will extend the Expiration Date to the extent required under the
rules of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). |
| |
|
|
| How
to Participate in the Offer to Exercise: |
|
In
order to participate in the Offer to Exercise and exercise a Series W Warrant to receive the number of shares of Company common
stock issuable therefor at the temporarily reduced exercise price of $2.00 per share, you must deliver, or instruct your broker
or other nominee to deliver on your behalf, before the Expiration Date, to the Depositary Agent, Continental Stock Transfer
& Trust Company, all of the applicable Acceptance and Exercise Deliveries as follows: |
| |
(i) |
if
you hold your Series W Warrants electronically in “street name” through a broker or other nominee: |
| |
a. |
an
Agent’s Message with respect to a book-entry transfer of your Series W Warrants; |
| |
|
|
| |
b. |
a
book-entry confirmation of the transfer of your the Series W Warrants into the Depositary Agent’s account (or, if applicable,
follow the procedures for guaranteed delivery described in this Offer to Exercise); and |
| |
|
|
| |
c. |
a
payment in the amount equal to $2.00 per share multiplied by the number of shares of common stock you elect to purchase pursuant
to the Series W Warrants, which payment will be made through the nominee who holds your Series W Warrants; or |
| |
(ii) |
if
you are the holder of record of your Series W Warrants: |
| |
a. |
a
signed copy of the Election to Participate and Exercise Series W Warrants; |
| |
|
|
| |
b. |
the
original copy of your Series W Warrants or an Affidavit of Loss and Indemnification Agreement (or, if applicable, follow the
procedures for guaranteed delivery described in this Offer to Exercise); and |
| |
|
|
| |
c. |
a
payment in the amount equal to $2.00 per share multiplied by the number of shares of common stock you elect to purchase pursuant
to the Series W Warrants, in the form of a check payable to Continental Stock Transfer & Trust Company as agent for
PAVmed Inc., or by wire transfer to the Company’s escrow account at the Depositary Agent, as set forth in the Election
to Participate and Exercise Series W Warrants; and |
| |
(iii) |
any
other documents required by the Election to Participate and Exercise Series W Warrants. |
| |
|
Each
of the Acceptance and Exercise Deliveries must be properly delivered by you or your broker or nominee, before the Expiration
Date (or as permitted by the procedures for guaranteed delivery), to the Depositary Agent by physical delivery to Continental
Stock Transfer & Trust Company, 1 State Street Plaza, 30th Floor, New York, NY 10004, Attn: Reorganization Department,
or by facsimile at (212) 616-7610. If you hold your Series W Warrants electronically in “street name,”
you must direct your broker or other nominee to deliver your Series W Warrants to the Depositary Agent via book-entry transfer. |
| |
|
|
| |
|
See
“Description of the Offer to Exercise — Section 8: Procedure for Participating in Offer to Exercise and Exercising
Series W Warrants” below. |
| |
|
|
| Manner
of Acceptance of Payment: |
|
If
you properly tender (and do not validly withdraw) your Series W Warrants and the other Acceptance and Exercise Deliveries
on or prior to the Expiration Date, promptly following the Expiration Date, we intend to accept your payment of the exercise
price and your other Acceptance and Exercise Deliveries and direct Continental Stock Transfer & Trust Company, as the
Depositary Agent and our transfer agent, to issue and deliver to you the number of shares of Company common stock issuable
under your Series W Warrant promptly following the Expiration Date at the temporarily reduced exercise price of $2.00 per
share. |
| |
|
|
| |
|
See
“Description of the Offer to Exercise — Section 9: Manner of Acceptance and Payment and Issuance of Shares”
below. |
| |
|
|
| Withdrawal
Rights: |
|
If
you change your mind and do not want to participate in the Offer to Exercise, you or your nominee (as applicable) may withdraw
your tender of Series W Warrants at any time prior to the Expiration Date by notifying the Depositary Agent. See “Description
of the Offer to Exercise — Section 10: Withdrawal Rights” below. |
| |
|
|
| |
|
Following
the Expiration Date, you cannot withdraw your Election to Participate and Exercise Series W Warrants, unless we have not accepted
your tendered Series W Warrants and other Acceptance and Exercise Deliveries by March 9, 2018, which is the 40th
business day from the commencement of the Offer to Exercise, in which case you may change your mind and withdraw your
tender after March 9, 2018. |
| |
|
If
you properly and timely withdraw your exercise, we will promptly: (i) return your Series W Warrants, through return of your
physical certificate or book-entry transfer to the account of your broker or other nominee, and (ii) return the cash paid
on your behalf to exercise your Series W Warrant to the account of your broker or other nominee, without interest thereon
or deduction therefrom. |
| |
|
|
| Purpose
of the Offer to Exercise and Use of Proceeds: |
|
The purpose of the Offer to
Exercise is to encourage the exercise of the Series W Warrants by temporarily reducing
the exercise price. If all of the outstanding Series W Warrants are exercised for
cash, the Company would receive gross proceeds of $21,135,690 from such exercises.
The Company intends to use the proceeds from exercise of the Series W Warrants for working
capital and for general corporate purposes.
|
| |
|
|
| Plans
or Proposals: |
|
Series
W Warrants that are exercised by the holders thereof pursuant to the Offer to Exercise will cease to exist. Any Series W Warrants
that are not exercised by the Expiration Date will remain outstanding and will allow for exercise by their holders at the
original exercise price of $5.00 per share until the original expiration date of the applicable Series W Warrants. |
| |
|
|
| |
|
No
plans or proposals described in this Offer to Exercise or in any materials sent to the holders of the Series W Warrants in
connection with this Offer to Exercise relate to or would result in the conditions or transactions described in Regulation
M-A, Item 1006(c)(1) through (10), except for the Rights Offering and except as follows: |
| |
|
|
| |
|
Any
holder of Series W Warrants who elects to exercise such holder’s Series W Warrants
will acquire additional shares of common stock of the Company as a result of such exercise.
As of December 31, 2017, the Company had 14,551,234 shares of common stock outstanding.
The Series W Warrants outstanding as of December 31, 2017 are exercisable for
an aggregate of 10,567,845 shares of common stock. Assuming all such Series W
Warrants are exercised for cash, the Company’s outstanding shares of common
stock would increase to 25,119,079 shares, with the shares issuable upon exercise
of the Series W Warrants representing approximately 42% of the then outstanding
shares of common stock. In such event, the Company would receive gross proceeds of
$21,135,690 from the exercises. See “Description of the Offer to Exercise
— Section 3: Eligible Warrants.”
|
| Registration
of the Exercise of the Series W Warrants: |
|
The
Company has effective Registration Statements that, as supplemented by the Supplements,
cover the exercise of 2,232,965 of the outstanding Series W Warrants at
the reduced cash exercise price of $2.00 per share. Accordingly, the Registration Statements,
as supplemented by the Supplements, reflect the terms of the Series W Warrants as modified
by this Offer to Exercise. The shares of common stock underlying the Series W Warrants
may not be sold, nor may offers to buy or exercise be accepted, except pursuant to such
effective Registration Statements. Such securities may only be offered by means of the
prospectuses included in such Registration Statements, as supplemented by the Supplements,
copies of which may be obtained (when available) free of charge at www.sec.gov
or by contacting the Company’s Chief Financial Officer at (212) 949-4319. The prospectuses,
as supplemented by the Supplements, contain important information about the Series W
Warrants, as modified in the manner described in the Offer to Exercise, and the securities
underlying such Series W Warrants. The continuing effectiveness of the Registration Statements,
as supplemented by the Supplements, is a condition to the Offer to Exercise. The Company
will rely on the exemption from registration provided by Section 4(a)(2) of the Securities
Act for the exercise of the remaining 8,334,880 of the outstanding Series
W Warrants, which were issued in private placements.
|
| |
|
|
| Taxes: |
|
We
recommend that you consult with your own tax advisor with regard to the possibility of any federal, state, local or other
tax consequences of the Offer to Exercise. See “Description of the Offer to Exercise — Section 19: Material
U.S. federal income tax Consequences” below for a discussion of the material U.S. federal income tax consequences
of participating in the Offer to Exercise. |
| |
|
|
| Fees
and Expenses: |
|
The Company has retained Continental
Stock Transfer & Trust Company to act as Depositary Agent. The Company also may retain
an information agent and/or one or more warrant solicitation agents for the Offer
to Exercise. If retained, the
Company expects that the information agent will receive reasonable and customary compensation
for its services, plus reimbursement for expenses, and will be indemnified by the Company
against certain claims and expenses that arise out of the performance of their services.
If retained, the Company
expects that any warrant solicitation agent will use reasonable commercial efforts
to contact holders of the Series W Warrants by mail, telephone, facsimile, or other electronic
means and solicit their participation in the Offer to Exercise. Any warrant solicitation
agent will receive a fee equal to a percentage of the cash exercise prices paid by holders
of the Series W Warrants who participate in the Offer to Exercise. In addition, the Company
expects to reimburse any warrant solicitation agent for its reasonable out-of-pocket
expenses and attorney’s fees, up to a set maximum amount. The Company may also
agree to indemnify any warrant solicitation agent against certain liabilities
in connection with the Offer to Exercise, including certain liabilities under the federal
securities laws.
|
| |
|
|
| |
|
The
Company may also use the services of its officers and employees to solicit holders of the Series W Warrants to participate
in the Offer to Exercise without additional compensation. |
| Interests
of Directors and Executive Officers: |
|
Three
of our directors and one of our executive officers hold an aggregate of 8,049,554
Series W Warrants (including 7,887,094 Series W Warrants held by entities
controlled by them) and may participate in the Offer to Exercise on the same terms and
conditions as the other holders of the Series W Warrants. No such person has entered
into any agreement or otherwise indicated to the Company whether or not such person intends
to participate in the Offer to Exercise. Please see “Description of the
Offer to Exercise — Section 17: Interests of Directors and Officers in the Offer
to Exercise” below.
|
| |
|
|
| Historical
and Pro Forma Financial Information and Other Financial Information: |
|
The
Company has included its financial statements for the fiscal years ended December 31, 2016 and 2015, and for the quarterly
periods ended September 30, 2017 and 2016, in this Offer to Exercise as Annex A and Annex B to the Offering Materials. The
Company has also included pro forma financial information reflecting the effect of the Offer to Exercise as Annex C to the
Offering Materials. In addition, see “Description of the Offer to Exercise — Section 16: Historical and Pro
Forma Financial Information and Other Financial Information Regarding the Company” below. |
| |
|
|
| Additional
Information: |
|
The
Company has filed with the SEC a Tender Offer Statement on Schedule TO of which this Offer to Exercise is a part. This Offer
to Exercise does not contain all of the information contained in the Schedule TO and the exhibits to the Schedule TO. We recommend
that holders of the Series W Warrants review the Schedule TO, including the exhibits, and the Company’s other materials
that have been filed with the SEC, including the prospectuses included in the Registration Statements, as supplemented by
the Supplements, before making a decision on whether to participate in the Offer to Exercise. |
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|
|
| |
|
The
Board of Directors of the Company recognizes that the decision to participate in the Offer to Exercise is an individual one
that should be based on a variety of factors. The holders of the Series W Warrants should consult with their respective professional
advisors if they have questions about their financial or tax situation. The information about this Offer to Exercise from
the Company is limited to the Offering Materials. |
| |
|
|
| |
|
The
Company is subject to the information requirements of Section 13 of the Exchange Act, and in accordance therewith files and
furnishes reports and other information with the SEC. All reports and other documents the Company has filed with the SEC,
including the Schedule TO relating to the Offer to Exercise, or will file with the SEC in the future, can be accessed electronically
on the SEC’s website at www.sec.gov. |
| Information
Requests: |
|
Please
direct questions or requests for assistance regarding this Offer to Exercise, Election to Consent Participate and Exercise
Warrant, and Notice of Withdrawal or other materials, in writing, to the Depositary Agent at the following address: |
| |
|
Continental
Stock Transfer & Trust Company
1 State Street Plaza, 30th Floor
New York, NY 10004
Attention: Reorganization Department
Telephone: (917) 262-2378
Facsimile: (212) 616-7610 |
| |
|
You
may request additional copies of this document and any of the Offering Materials from the Company. The Company may be reached
at: |
| |
|
PAVmed
Inc.
One Grand Central Place, Suite 4600
New York, New York 10165
Attention: Dennis McGrath, Chief Financial Officer
Telephone: (212) 949-4319
Email: dmm@pavmed.com
Facsimile: 212-697-9877 |
ABOUT
THIS OFFER TO EXERCISE
YOU
SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS OFFER TO EXERCISE. WE HAVE NOT AUTHORIZED ANYONE
TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED OR INCORPORATED BY REFERENCE IN THIS OFFER TO EXERCISE AND, IF PROVIDED,
SUCH INFORMATION MUST NOT BE RELIED UPON.
ALTHOUGH OUR BOARD OF DIRECTORS HAS APPROVED
THE OFFER TO EXERCISE, NEITHER THE COMPANY, NOR ITS DIRECTORS, OFFICERS, ADVISORS OR AGENTS, INCLUDING ANY INFORMATION AGENT
OR WARRANT SOLICITATION AGENT, MAKES ANY RECOMMENDATION AS TO WHETHER YOU SHOULD ACCEPT THE OFFER TO EXERCISE. YOU SHOULD
NOT CONSIDER THE BOARD OF DIRECTORS APPROVAL TO BE A RECOMMENDATION AS TO WHETHER YOU SHOULD PARTICIPATE IN THE OFFER TO EXERCISE.
YOU MUST MAKE YOUR OWN DECISION WHETHER TO ACCEPT THE OFFER TO EXERCISE.
RISK
FACTORS
An
investment in our securities is highly speculative and involves a high degree of risk. We face a variety of risks that may affect
our operations or financial results and many of those risks are driven by factors that we cannot control or predict. Before you
elect to participate in the Offer to Exercise, you should carefully consider the following risks, together with the financial
and other information contained in this Offer to Exercise. If any of the following risks actually occurs, our business, prospects,
financial condition and results of operations could be materially adversely affected. In that case, the trading price of our common
stock would likely decline and you may lose all or a part of your investment. Only those investors who can bear the risk of loss
of their entire investment should consider an investment in our securities.
RISKS
RELATED TO THE OFFER TO EXERCISE
Our
Board of Directors makes no recommendation with regard to whether you should accept the Offer to Exercise.
Although
our Board of Directors has approved the Offer to Exercise, it makes no recommendation as to whether holders of Series W Warrants
should accept the Offer to Exercise. We have not retained and do not intend to retain any unaffiliated representative to act solely
on behalf of the holders of Series W Warrants for purposes of negotiating the terms of the Offer to Exercise. We cannot assure
you that the value of the shares issued upon exercise of the Series W Warrants will in the future equal or exceed the exercise
price per share of the Series W Warrants. We do not take a position as to whether you ought to participate in the Offer to Exercise.
Because
we do not have any formal commitments from any of our warrant holders to participate in this Offer to Exercise, the proceeds we
receive from the exercise of warrants may be lower than currently anticipated.
We
do not have any binding commitments from any of our warrant holders to participate in this Offer to Exercise and we cannot assure
you that any of our warrant holders will participate in the Offer to Exercise with respect to all or any part of their Series
W Warrants. Three of our directors and one of our executive officers collectively hold an aggregate of 8,049,554 Series
W Warrants (including 7,887,094 warrants held by entities controlled by them). No such person has entered into any agreement
or otherwise indicated to the Company whether or not such person intends to participate in the Offer to Exercise. Therefore,
there is no certainty that any Series W Warrants will be exercised pursuant to this Offer
to Exercise and, accordingly, the proceeds we receive from the exercise of the warrants, if any, may be lower than currently anticipated.
We
have not obtained and do not intend to obtain a rule from the Internal Revenue Service regarding the income tax consequences of
participation in the Offer to Exercise.
We
have not obtained and do not intend to obtain a ruling from the Internal Revenue Service (“IRS”) regarding
the U.S. federal income tax consequences of amending the Series W Warrants and immediately exercising the amended warrants. You
should consult with your own tax advisor with regard to the possibility of any federal, state, local or other tax consequences
of the Offer to Exercise. See “Description of the Offer to Exercise — Section 19: Material U.S. Federal Income
Tax Consequences.”
If
you choose to participate in the Offer to Exercise, you will be required to exercise your Series W Warrants for common stock,
and will be subject to all the risks associated with being a stockholder of the Company and give up the time value attributable
to your Series W Warrant.
If
you choose to participate in the Offer to Exercise, you will be required to exercise your Series W Warrants prior to the Expiration
Date. As a result, you will be subject to all the risks and uncertainties set forth in these risk factors as a holder of the Company’s
common stock. In addition, you will be giving up the time value attributable to your Series W Warrants by exercising the Series
W Warrants prior to the original expiration date of your Series W Warrant.
There
can be no assurance that we will complete the Rights Offering.
The
Company expects to conduct the Rights Offering promptly following the expiration of this Offer to Exercise. To the extent holders
of Series W Warrants exercise their warrants in this Offer to Exercise, such holders will receive rights in the Rights Offering
with respect to the shares of common stock received upon exercise. However, there can be no assurance that the Company will complete
the Rights Offering on the terms set forth in this Offer to Exercise, or at all, and the Offer to Exercise is not conditioned
in any manner on the Rights Offering. Accordingly, if you elected to exercise in reliance on receiving rights in the Rights Offering,
you may receive less value than you anticipated in return for the payment of the reduced exercise price.
We
will have substantial discretion over the use of proceeds we receive from the exercise of Series W Warrants.
Our
management will retain broad discretion over the use of proceeds from the Offer to Exercise. See “Description of the
Offer to Exercise — Section 2: Purposes of the Offer to Exercise and Use of Proceeds; Plans or Proposals” for
a description of our present intentions with respect to the allocation of the proceeds resulting from exercise of the Series W
Warrants. The amounts and timing of the expenditures may vary significantly depending on numerous factors. The occurrence of certain
unforeseen events or changed business conditions, however, could result in the application of the proceeds resulting from the
exercise of the Series W Warrants in a manner other than as described in this Offer to Exercise.
RISKS
RELATED TO OUR BUSINESS
Since
we have a very 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 very 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:
| |
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respond
to new technologies or technical standards; |
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react
to changing customer requirements and expectations; |
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● |
acquire
other companies to gain new technologies or products that may displace our products; |
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● |
manufacture,
market and sell products; |
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● |
acquire,
prosecute, enforce and defend patents and other intellectual property; |
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devote
resources to the development, production, promotion, support and sale of products; and |
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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:
| |
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the
timing of regulatory approvals of our products and market entry compared to competitive products; |
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the
effectiveness of our products, including any potential side effects, as compared to alternative treatments; |
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● |
the
rate of adoption of our products by hospitals, doctors and nurses and acceptance by the health care community; |
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● |
the
product labeling or product inserts required by regulatory authorities for each of our products; |
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|
● |
the
competitive features of our products, including price, as compared to other similar products; |
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the
availability of insurance or other third-party reimbursement, such as Medicare, for patients using our products; |
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the
extent and success of our marketing efforts and those of our collaborators; and |
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unfavorable
publicity concerning our products or similar products. |
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 Food and Drug Administration (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:
| |
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we
may be forced to recall such product and suspend the marketing of such product; |
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regulatory
authorities may withdraw their approvals of such product; |
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● |
regulatory
authorities may require additional warnings on the label that could diminish the usage or otherwise limit the commercial success
of such products; |
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● |
the
FDA or other regulatory bodies may issue safety alerts, Dear Healthcare Provider letters, press releases or other communications
containing warnings about such product; |
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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; |
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we
may be required to change the way the product is administered or conduct additional clinical trials; |
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we
could be sued and held liable for harm caused to subjects or patients; |
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we
may be subject to litigation or product liability claims; and |
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our
reputation may suffer. |
Any
of these events could prevent us from achieving or maintaining market acceptance of the particular product.
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 our products
failed to perform as designed. 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:
| |
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decreased
demand for our products; |
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|
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● |
injury
to our reputation and significant negative media attention; |
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● |
withdrawal
of patients from clinical studies or cancellation of studies; |
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● |
significant
costs to defend the related litigation and distraction to our management team; |
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substantial
monetary awards to patients; |
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● |
loss
of revenue; and |
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● |
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, or 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. 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.
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
seek to protect our know-how and other unpatented proprietary technology 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. 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.
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:
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increase
the cost of our products; |
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be
expensive and/or time consuming to defend; |
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result
in our being required to pay significant damages to third parties; |
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force
us to cease making or selling products that incorporate the challenged intellectual property; |
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require
us to redesign, reengineer or rebrand our products and technologies; |
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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; |
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require
us to develop alternative non-infringing technology, which could require significant effort and expense; |
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require
us to indemnify third parties pursuant to contracts in which we have agreed to provide indemnification for intellectual property
infringement claims; and |
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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 will depend, 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.
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.
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:
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challenges
associated with cultural differences, languages and distance; |
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differences
in clinical practices, needs, products, modalities and preferences; |
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longer
payment cycles in some countries; |
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credit
risks of many kinds; |
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legal
and regulatory differences and restrictions; |
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currency
exchange fluctuations; |
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foreign
exchange controls that might prevent us from repatriating cash earned in certain countries; |
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political
and economic instability and export restrictions; |
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variability
in sterilization requirements for multi-usage surgical devices; |
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potential
adverse tax consequences; |
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higher
cost associated with doing business internationally; |
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challenges
in implementing educational programs required by our approach to doing business; |
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negative
economic developments in economies around the world and the instability of governments, including the threat of war, terrorist
attacks, epidemic or civil unrest; |
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adverse
changes in laws and governmental policies, especially those affecting trade and investment; |
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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; |
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import
or export licensing requirements imposed by governments; |
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differing
labor standards; |
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differing
levels of protection of intellectual property; |
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the
threat that our operations or property could be subject to nationalization and expropriation; |
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varying
practices of the regulatory, tax, judicial and administrative bodies in the jurisdictions where we operate; and |
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potentially
burdensome taxation and changes in foreign tax. |
RISKS
RELATED TO FINANCIAL POSITION AND CAPITAL RESOURCES
We
have incurred operating losses since our inception and may not be able to achieve profitability.
We
have incurred net losses since our inception. For the nine months ended September 30, 2017 and the years ended December 31, 2016
and 2015, we had net losses of $10,389,113, $5,650,851 and $1,776,600, respectively. To date, we have financed our operations
through our April 2016 IPO, private placements of our common stock, preferred stock and warrants and the incurrence of indebtedness.
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 September 30, 2017 consolidated financial statements, we concluded and stated our recurring losses from operations, recurring
cash flows used in operations, accumulated deficit, and the requirement we raise additional capital in order to fund our ongoing
operations beyond June 30, 2018 raise substantial doubt regarding our ability to continue as a going concern. Additionally, our
independent registered public accounting firm’s report on our consolidated financial statements for December 31, 2016 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 this Offer to Exercise, the Rights Offering and pursuing additional offerings of debt and
/or equity securities. Our consolidated financial statements do not include any adjustments that might result from our inability
to consummate such transactions or additional offerings or our ability to continue as a going concern. Moreover, there is no assurance
if we consummate such transactions or 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:
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continue
our research and development; |
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protect
our intellectual property rights or defend, in litigation or otherwise, any claims that we infringe third-party patents or
other intellectual property rights; |
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fund
our operations; |
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deliver
our new products, if any such products receive regulatory clearance or approval for commercial sale; |
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market
acceptance of our products; |
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the
cost and timing of expanding our sales, marketing and distribution capabilities; |
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the
effect of competing technological and market developments; and |
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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. |
Debt
financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt financing
that we raise may contain terms that are not favorable to us or our stockholders. 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.
RISKS
RELATED TO GOVERNMENT REGULATION
Any
products we may develop may not be approved for sale in the U.S. or in any other country.
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 FDA’s Premarket Approval (“PMA”) process,
a de novo 510(k) pathway, or traditional 510(k). For example, we are following the de novo 510(k) pathway for our
PortIO product and the traditional 510(k) pathway for our CarpX product. 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.
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.
Except
with respect to our PortIO product, for which we will follow a de novo 510(k) pathway, and CarpX, for which we will follow
a traditional 510(k) pathway, the regulatory pathway in the U.S. for approval of the products we are currently developing has
not been determined. However, it is possible that 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 trials also entail significant risk, and the data that
results 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:
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a
future product may not be deemed to be safe and effective; |
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FDA
officials may not find the data from clinical and preclinical studies sufficient; |
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the
FDA may not approve our or our third-party manufacturer’s processes or facilities; or |
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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 that 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.
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:
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imposes
a tax of 2.3% on the retail sales price of medical devices sold after December 31, 2012; and |
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could
result in the imposition of injunctions. |
Although
a moratorium on the medical device tax had previously been in effect, the moratorium expired on December 31, 2017. Absent further
legislative or judicial action, the medical device excise tax applies to sales of taxable medical devices beginning on January
1, 2018.
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:
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our
ability to set a price that we believe is fair for our products; |
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our
ability to generate revenue and achieve or maintain profitability; and |
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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.
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:
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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; |
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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; |
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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; |
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federal
criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating
to healthcare matters; |
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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; |
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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 |
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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.
RISKS
ASSOCIATED WITH OWNERSHIP OF OUR COMMON STOCK
We
may issue shares of our capital stock or debt securities 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. As of the date hereof, we have outstanding 14,551,234
shares of our common stock, 249,667 shares of our Series A convertible preferred stock (“Series A Preferred Stock”)
and 357,259 shares of our Series A-1 convertible preferred stock (“Series A-1 Preferred Stock”). We
also have $5 million in outstanding secured promissory notes held by Scopia Holdings LLC as described below.
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:
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may
significantly reduce the equity interest of investors; |
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may
subordinate the rights of holders of common stock if preferred stock is issued with rights senior to those afforded to our
common stockholders; |
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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 |
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may
adversely affect prevailing market prices for our common stock. |
Similarly,
if we issue additional debt securities, it could result in:
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default
and foreclosure on our assets if our operating revenues were insufficient to pay our debt obligations; |
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acceleration
of our obligations to repay the indebtedness even if we have made all principal and interest payments when due if the debt
security contains covenants that require the maintenance of certain financial ratios or reserves and any such covenant is
breached without a waiver or renegotiation of that covenant; |
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our
immediate payment of all principal and accrued interest, if any, if the debt security is payable on demand; |
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our
inability to obtain additional financing, if necessary, if the debt security contains covenants restricting our ability to
obtain additional financing while such security is outstanding; and |
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our
inability to conduct acquisitions, joint ventures or similar arrangements if the debt security contains covenants restricting
such transactions or the funding thereof or requiring prior approval of the debt holders. |
We
have incurred substantial indebtedness, which could adversely affect our liquidity and results of operations
On
July 3, 2017, we issued to Scopia Holdings LLC (“Scopia”) a senior secured note with an initial principal amount
of $5.0 million pursuant to a Note and Securities Purchase Agreement (the “NSPA”). 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 capitalized by adding
it to the outstanding interest-bearing principal balance of the note. The obligations under the note are secured by all of our
assets and those of our subsidiaries. The note and NSPA 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 Agreement) while any amount under the 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 to Scopia, the related risks for us could intensify. In particular, it could:
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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 capital expenditures and other general corporate purposes; |
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limit,
along with the restrictive covenants of our indebtedness, among other things, our ability to borrow additional funds; |
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limit
our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate; |
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increase
our vulnerability to general adverse economic and industry conditions; and |
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place
us at a competitive disadvantage compared to our competitors that have less debt. |
Despite
our right to capitalize a portion of the interest on Scopia’s note, we may not be able to generate sufficient cash to service
the note as cash payments become due. If we are unable to make payments as they come due or comply with the restrictions and covenants
in Scopia’s note and the NSPA 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 Scopia’s note and the NSPA 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 that are favorable
or acceptable to us. Additionally, we may not be able to amend Scopia’s note and the NSPA 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 and financial position.
Our
management and their affiliates control a substantial interest in us and thus may influence certain actions requiring a stockholder
vote.
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.
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.
Our
common stock is listed on the Nasdaq Capital Market, but we cannot assure you our common stock will continue to trade on this
market or another national securities exchange. In addition, 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 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, a substantial number 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:
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our
ability to successfully commercialize, and realize revenues from sales of, any products we may develop; |
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the
performance, safety and side effects of any products we may develop; |
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the
success of competitive products or technologies; |
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results
of clinical studies of any products we may develop or those of our competitors; |
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regulatory
or legal developments in the U.S. and other countries, especially changes in laws or regulations applicable to any products
we may develop; |
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introductions
and announcements of new products by us, our commercialization partners, or our competitors, and the timing of these introductions
or announcements; |
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actions
taken by regulatory agencies with respect to our products, clinical studies, manufacturing process or sales and marketing
terms; |
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variations
in our financial results or those of companies that are perceived to be similar to us; |
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the
success of our efforts to acquire or in-license additional products or other products we may develop; |
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developments
concerning our collaborations, including but not limited to those with our sources of manufacturing supply and our commercialization
partners; |
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developments
concerning our ability to bring our manufacturing processes to scale in a cost-effective manner; |
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announcements
by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; |
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developments
or disputes concerning patents or other proprietary rights, including patents, litigation matters and our ability to obtain
patent protection for our products; |
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our
ability or inability to raise additional capital and the terms on which we raise it; |
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the
recruitment or departure of key personnel; |
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changes
in the structure of healthcare payment systems; |
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market
conditions in the medical device, pharmaceutical and biotechnology sectors; |
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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; |
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trading
volume of our common stock; |
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sales
of our common stock by us or our stockholders; |
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general
economic, industry and market conditions; and |
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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.
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 15,290,922 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) 10,567,845 shares
issuable upon exercise of our Series W Warrants, (vi) 1,473,640 shares issuable upon exercise of our Series S Warrants,
(vii) 106,000 shares issuable upon exercise of the purchase option granted to the selling agents in our IPO, and (viii)
1,936,924 shares issuable upon exercise of our employee stock options. 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, including certain of our officers and directors, 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.
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.
We
are an “emerging growth company,” 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 IPO, (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 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.
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.
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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; |
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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; |
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our
certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority
stockholders to elect director candidates; |
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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 |
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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.
*
* * * *
The
risks above do not necessarily comprise all of those associated with an investment in the Company. This Offer to Exercise contains
forward looking statements that involve unknown risks, uncertainties and other factors that may cause the actual results, financial
condition, performance or achievements of the Company to be materially different from any future results, performance or achievements
expressed or implied by such forward looking statements. Factors that might cause such a difference include, but are not limited
to, those set out above.
DESCRIPTION
OF THE OFFER TO EXERCISE
Pursuant
to this Offer to Exercise, the Company is offering to holders of its Series W Warrants, with an exercise price of $5.00 per share,
upon the terms and subject to the conditions set forth herein, an opportunity to exercise the Series W Warrants at a temporarily
reduced exercise price of $2.00 per share of common stock. There is no minimum participation requirement with respect to the Offer
to Exercise.
The
Company is exercising its discretion in accordance with the Series W Warrant Agreement to temporarily reduce the exercise price
of the Series W Warrants to $2.00 per share for the period that begins on January 11, 2018, which is the date the materials
relating to this Offer to Exercise are first sent to the holders of the Series W Warrants, and ends at 11:59 p.m. (Eastern Time)
on the Expiration Date, as may be extended by the Company in its sole discretion. Other than as set forth above, the terms of
the Series W Warrants will remain unmodified and in full force and effect.
The
Offer to Exercise is conditioned on the Company having in place an effective registration statement under the Securities Act,
for the purpose of registering the exercise of 2,232,965 of the outstanding Series W Warrants at the reduced cash
exercise price of $2.00 per share, and the shares issuable upon such exercise having been registered or qualified or deemed to
be exempt from registration under the securities laws of the state of residence of the holder of the warrant. In this Offer to
Exercise, we refer to this condition as the “Registration Statement Condition.” The Company has effective Registration
Statements for the issuance of shares upon exercise of such warrants, and has filed with the SEC the Supplements to the Registration
Statements that cover the exercise of such warrants at the reduced cash exercise price of $2.00 per share. Accordingly, the Registration
Statements, as supplemented by the Supplements, reflect the terms of the Series W Warrants as modified by this Offer to Exercise.
The Company will rely on the exemption from registration provided by Section 4(a)(2) of the Securities Act for the exercise of
the remaining 8,334,880 of the outstanding Series W Warrants, which were issued in private placements.
The
Company will not complete the Offer to Exercise unless, at such time, the Registration Statements remain effective. If the Registration
Statements cease to be effective, the Company may, in its discretion, extend, terminate or withdraw the Offer to Exercise. The
Company will inform you of any extension of the offer period in the manner described in “Description of the Offer to
Exercise — Section 7: Extension of Offer to Exercise Period; Termination; Amendments.” If the Company terminates
or withdraws the Offer to Exercise, or allows the Offer to Exercise to expire because the Registration Statements cease to be
effective, the Company will return any tendered Series W Warrants promptly following such expiration, termination or withdrawal.
The
Offer to Exercise is not being made to, nor will tenders be accepted from or on behalf of, holders of Series W Warrants residing
in any jurisdiction in which the making of the Offer to Exercise or acceptance thereof would not be in compliance with the laws
of that jurisdiction.
SECTION
1. FORWARD LOOKING STATEMENTS
This
Offer to Exercise contains forward-looking statements. Although we believe that the expectations reflected in these forward-looking
statements are reasonable, these statements relate to future events or our future financial performance, and involve known and
unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements
to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these
forward-looking statements. Forward-looking statements in this Offer to Exercise include, but are not limited to, statements about:
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limited
operating history; |
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ability
to generate revenue; |
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ability
of our products to achieve regulatory approval and market acceptance; |
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success
in retaining or recruiting, or changes required in, our officers, key employees or directors; |
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expectation
that our existing capital resources will be sufficient to enable us to successfully meet the capital requirements for all
of our current and future products; |
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potential
ability to obtain additional financing when and if needed; |
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ability
to sustain status as a going concern; |
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ability
to protect our intellectual property rights; |
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ability
to complete strategic acquisitions; |
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ability
to manage growth and integrate acquired operations; |
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potential
liquidity and trading of our securities; |
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regulatory
or operational risks; |
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estimates
regarding expenses, future revenue, capital requirements and needs for additional financing; or |
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expectations
regarding the time during which we will be an emerging growth company under the JOBS Act. |
In
some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,”
“intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”
“potential,” “continue” or the negative of these terms or other comparable terminology. These statements
are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown
risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results.
Factors that may cause actual results to differ materially from current expectations include, among other things, those listed
under “Risk Factors” and elsewhere in this Offer to Exercise. Actual events or results may vary significantly from
those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance.
You should read this Offer to Exercise, and the documents that we reference in this Offer to Exercise and have filed with the
SEC, completely and with the understanding that our actual future results may be materially different from any future results
expressed or implied by these forward-looking statements.
More
detailed information about the Company and the risk factors that may affect the realization of forward-looking statements, including
the forward-looking statements in this Offer to Exercise and in our Annual Report on Form 10-K for the year ended December 31,
2016, is set forth in our filings with the SEC, including our other periodic reports filed with the SEC. We urge investors and
security holders to read those documents free of charge at the SEC’s web site at www.sec.gov. We do not undertake
to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise, except
as required by law.
SECTION
2. PURPOSES OF THE OFFER TO EXERCISE AND USE OF PROCEEDS; PLANS OR PROPOSALS
Purpose
of the Offer to Exercise and Use of Proceeds
The purpose of the Offer to Exercise is to
encourage the exercise of the Series W Warrants by temporarily reducing the exercise price. If
all of the outstanding Series W Warrants are exercised for cash, the Company would receive gross proceeds of $21,135,690 from
such exercises. The Company intends to use the proceeds from
exercise of the Series W Warrants for working capital and for general corporate purposes.
Plans
or Proposals
Series
W Warrants that are exercised by the holders thereof pursuant to the Offer to Exercise will cease to exist. Any Series W Warrants
that are not exercised by the Expiration Date will remain outstanding and will allow for exercise by their holders at the original
exercise price of $5.00 per share until the original expiration date of the applicable Series W Warrants.
No
plans or proposals described in this Offer to Exercise or in any materials sent to the holders of the Series W Warrants in connection
with this Offer to Exercise relate to or would result in the conditions or transactions described in Regulation M-A, Item 1006(c)(1)
through (10), except for the Rights Offering and except as follows:
Any
holder of Series W Warrants who elects to exercise such holder’s Series W Warrants will acquire additional shares of
common stock of the Company as a result of such exercise. As of December 31, 2017, the Company had 14,551,234 shares
of common stock outstanding. The Series W Warrants outstanding as of December 31, 2017 are exercisable for an
aggregate of 10,567,845 shares of common stock. Assuming all such Series W Warrants are exercised for
cash, the Company’s outstanding shares of common stock would increase to 25,119,079 shares, with the shares
issuable upon exercise of the Series W Warrants representing approximately 42% of the then outstanding shares of
common stock. In such event, the Company would receive gross proceeds of $21,135,690 from the exercises. See
“Description of the Offer to Exercise — Section 3: Eligible Warrants.”
SECTION
3. ELIGIBLE WARRANTS
Series
W Warrants
The
Series W Warrants that are subject to the Offer to Exercise consist of 10,567,845 outstanding Series W Warrants, with an
exercise price of $5.00 per share. In addition, any subsequently issued Series W Warrants, including the Series W Warrants
that may be issued upon exchange of the Company’s outstanding Series A-1 Warrants, also are subject to the Offer to Exercise.
SECTION
4. EXPIRATION DATE
The
Offer to Exercise will be open through 11:59 p.m. (Eastern Time) on the evening of February 8, 2018, as may be extended
by the Company in its sole discretion.
SECTION
5. TERMS OF SERIES W WARRANTS
In
connection with the Offer to Exercise, the Company has approved a modification to the Series W Warrants, as described below:
Temporary
Reduction in Exercise Price: The Company is exercising its discretion in accordance with the Series W Warrant Agreement to
temporarily reduce the exercise price of the Series W Warrants to $2.00 per share for the period that begins on January 11,
2018, which is the date the materials relating to this Offer to Exercise are first sent to the holders of Series W Warrants, and
ends on the Expiration Date.
Other
Terms: Except as set forth above all other terms of the Series W Warrants will be the same as the original terms of the Series
W Warrants. Any Series W Warrants that are not exercised by the Expiration Date will remain outstanding and will allow for exercise
by their holders at the original exercise price of $5.00 per share until the original expiration date of the applicable Series
W Warrants.
Partial
Participation Permitted: You may elect to participate in the Offer to Exercise with respect to some, all or none of your Series
W Warrants. If you elect to participate in the Offer to Exercise with respect to less than all of your Series W Warrants, then
the Company will issue to you a new Series W Warrant certificate for that number of warrants that you elect
to exclude from the Offer to Exercise, with an exercise price of $5.00 per share.
SECTION
6. CONDITIONS TO THE OFFER TO EXERCISE
The
Offer to Exercise is subject to certain conditions as described herein:
(i) The
Offer to Exercise is conditioned on the Company having in place an effective registration statement under the Securities Act,
for the purpose of registering the exercise of 2,232,965 of the outstanding Series W Warrants at the reduced cash
exercise price of $2.00 per share, and the shares issuable upon such exercise having been registered or qualified or deemed to
be exempt from registration under the securities laws of the state of residence of the holder of the warrant. In this Offer to
Exercise, we refer to this condition as the “Registration Statement Condition.” The Company has effective Registration
Statements for the issuance of shares upon exercise of such warrants, and has filed with the SEC the Supplements to the Registration
Statements that cover the exercise of such warrants at the reduced cash exercise price of $2.00 per share. Accordingly, the Registration
Statements, as supplemented by the Supplements, reflect the terms of the Series W Warrants as modified by this Offer to Exercise.
The Company will rely on the exemption from registration provided by Section 4(a)(2) of the Securities Act for the exercise of
the remaining 8,334,880 of the outstanding Series W Warrants, which were issued in private placements.
The
Company will not complete the Offer to Exercise unless, at such time, the Registration Statements remain effective. If the Registration
Statements cease to be effective, the Company may, in its discretion, extend, terminate or withdraw the Offer to Exercise. The
Company will inform you of any extension of the offer period in the manner described in “Description of the Offer to
Exercise — Section 7: Extension of Offer to Exercise Period; Termination; Amendments.” If the Company terminates
or withdraws the Offer to Exercise, or allows the Offer to Exercise to expire because the Registration Statements cease to be
effective, the Company will return any tendered Series W Warrants promptly following such expiration, termination or withdrawal.
(ii) In
addition, we are not making this Offer to Exercise to, nor will we accept any Election to Participate and Exercise Series W Warrants
from or on behalf of, Series W Warrant holders in any state where the Company is prohibited from making the Offer to Exercise
by administrative or judicial action pursuant to a state statute after a good faith effort by the Company to comply with such
statute.
(iii) In
order to participate in the Offer to Exercise, you must elect to exercise your Series W Warrant, which will be deemed to be exercised
immediately following the Expiration Date should you choose to participate in the Offer to Exercise and follow the procedures
set forth in “Description of the Offer to Exercise — Section 8: Procedure for Participating in Offer to Exercise
and Exercising Series W Warrants” below.
Subject
to the conditions of the Offer to Exercise, we will accept any and all of the Series W Warrants validly tendered and not validly
withdrawn.
SECTION
7. EXTENSION OF OFFER TO EXERCISE PERIOD; TERMINATION; AMENDMENTS
The
Company expressly reserves the right, in its sole discretion and at any time or from time to time, to extend the Expiration Date.
In the event that the Company elects to extend the Expiration Date, it will issue a notice of such extension by press release
or other public announcement, which notice will include the approximate number of Series W Warrants validly tendered pursuant
to the Offer to Exercise based upon the Series W Warrants and other Acceptance and Exercise Deliveries received by the Company
as of such date, and will be issued no later than 9:00 a.m. Eastern time on the next business day after the scheduled Expiration
Date of the Offer to Exercise. There can be no assurance, however, that the Company will exercise its right to extend the Offer
to Exercise.
Amendments
to the Offer to Exercise will be made by written notice thereof to the holders of the Series W Warrants. Material changes to information
previously provided to holders of the Series W Warrants in this Offer to Exercise or in documents furnished subsequent thereto
will be disseminated to holders of Series W Warrants. Also, should the Company, pursuant to the terms and conditions of the Offer
to Exercise, materially amend the Offer to Exercise, the Company will ensure that the Offer to Exercise remains open long enough
to comply with U.S. federal securities laws.
If
the Company materially changes the terms of the Offer to Exercise or the information concerning the Offer to Exercise, or it waives
a material condition of the Offer to Exercise, the Company will extend the Offer to Exercise to the extent required under applicable
law. The minimum period during which an offer must remain open following any material change in the terms of the Offer to Exercise
or information concerning the Offer to Exercise (other than a change in price, change in dealer’s soliciting fee or change
in percentage of securities sought all of which require up to ten (10) additional business days), or any waiver of a material
condition of the Offer to Exercise, will depend on the facts and circumstances, including the relative materiality of such terms,
information or condition.
Under
no circumstances will interest be paid on the exercise price of the Series W Warrants in the Offer to Exercise, regardless of
any extension of, or amendment to, the Offer to Exercise or any delay in issuing common stock upon the exercise of the Series
W Warrants.
SECTION
8. PROCEDURE FOR PARTICIPATING IN OFFER TO EXERCISE AND EXERCISING SERIES W WARRANTS
Valid
Tender of Warrants
In
order to participate in the Offer to Exercise and exercise a Series W Warrant to receive the number of shares of Company common
stock issuable therefor at the temporarily reduced exercise price of $2.00 per share, you must deliver, or instruct your broker
or other nominee to deliver on your behalf, before the Expiration Date, to the Depositary Agent, Continental Stock Transfer &
Trust Company, all of the applicable Acceptance and Exercise Deliveries as follows:
| |
(i) |
if
you hold your Series W Warrants electronically in “street name” through a broker or other nominee: |
| |
a. |
an
Agent’s Message with respect to a book-entry transfer of your Series W Warrants; |
| |
|
|
| |
b. |
a
book-entry confirmation of the transfer of your the Series W Warrants into the Depositary Agent’s account (or, if applicable,
follow the procedures for guaranteed delivery described in this Offer to Exercise); and |
| |
|
|
| |
c. |
a
payment in the amount equal to $2.00 per share multiplied by the number of shares of common stock you elect to purchase pursuant
to the Series W Warrants, which payment will be made through the nominee who holds your Series W Warrants; or |
| |
(ii) |
if
you are the holder of record of your Series W Warrants: |
| |
a. |
a
signed copy of the Election to Participate and Exercise Series W Warrants; |
| |
|
|
| |
b. |
the
original copy of your Series W Warrants or an Affidavit of Loss and Indemnification Agreement (or, if applicable, follow the
procedures for guaranteed delivery described in this Offer to Exercise); and |
| |
|
|
| |
c. |
a
payment in the amount equal to $2.00 per share multiplied by the number of shares of common stock you elect to purchase pursuant
to the Series W Warrants, in the form of a check payable to Continental Stock Transfer & Trust Company as agent for
PAVmed Inc., or by wire transfer to the Company’s escrow account at the Depositary Agent, as set forth in the Election
to Participate and Exercise Series W Warrants; and |
| |
(iii) |
any
other documents required by the Election to Participate and Exercise Series W Warrants. |
The
Depositary Agent must receive all of the Acceptance and Exercise Deliveries on or before the Expiration Date (or as permitted
by the procedures for guaranteed delivery).
Method
of Delivery
For
purposes of the Offer to Exercise, the Depositary Agent will establish an account with respect to the Series W Warrants at DTC.
Any financial institution that is a participant in DTC’s system may make book-entry delivery of Series W Warrants by causing
DTC to transfer those Series W Warrants into the Depositary Agent’s account in accordance with DTC’s procedures for
transfer. Although delivery of Series W Warrants may be effected through a book-entry transfer into the Depositary Agent’s
account at DTC, an Agent’s Message, and any other required documents must be transmitted to and received by the Depositary
Agent at its address set forth below before the Expiration Date (or as permitted by the procedures for guaranteed delivery).
Delivery
of documents to DTC in accordance with DTC’s procedures will not constitute delivery to the Depositary Agent unless the
Depositary Agent receives book-entry confirmation together with an Agent’s Message and any other required documents with
respect to the shares transferred by book-entry.
PLEASE
DO NOT SEND ELECTIONS TO PARTICIPATE AND EXERCISE SERIES W WARRANTS TO US. YOU SHOULD SEND ELECTIONS TO PARTICIPATE AND EXERCISE
SERIES W WARRANTS ONLY TO THE DEPOSITARY, AT ITS OFFICE AS INDICATED IN THE ELECTION TO PARTICIPATE AND EXERCISE SERIES W WARRANTS.
THE DEPOSITARY OR THE COMPANY CAN ANSWER YOUR QUESTIONS REGARDING HOW TO TENDER YOUR SERIES W WARRANTS.
Guarantee
of Signature
No
signature guarantee is required if either:
| |
(a) |
the
Election to Participate and Exercise Series W Warrants is signed by the registered holder of the Series W Warrants exactly
as the name of the registered holder appears on the certificate tendered with the Election to Participate and Exercise Series
W Warrants, the certificates for the shares of common stock are to be issued in the name of the registered holder of the Series
W Warrants and the certificate for the shares of common stock are to be delivered to the person in whose name such shares
of common stock are to be issued; or |
| |
|
|
| |
(b) |
the
Series W Warrants are tendered for the account of a member firm of a registered national securities exchange, a member of
the Financial Industry Regulatory Authority, Inc., or a commercial bank or trust company (not a savings bank or savings and
loan association) having an office, branch or agency in the United States which is a participant in an approval Signature
Guarantee Medallion Program (each such entity, an “Eligible Institution”). |
In
all other cases, an Eligible Institution must guarantee all signatures on the Election to Participate and Exercise Series W Warrants.
Guaranteed
Delivery Procedures
If
a registered owner of Series W Warrants wants to exercise his, her or its Series W Warrants pursuant to the Offer to Exercise,
but the Series W Warrant certificates are not immediately available or time will not permit all required documents to reach the
Depositary prior to the Expiration Date, Series W Warrant holders can still exercise their Series W Warrants pursuant to the Offer
to Exercise if:
| |
(i) |
the
exercise is made by or through an Eligible Institution; |
| |
|
|
| |
(ii) |
the
Depositary must receive by hand, mail or overnight courier on or prior to the Expiration date, a properly completed and duly
executed Notice of Guaranteed Delivery in the form the provided with the Offer to Exercise, with signatures guaranteed by
an Eligible Institution and proper payment of the reduced exercise price of the Series W Warrants; and |
| |
|
|
| |
(iii) |
the
Depositary must receive, within two NASDAQ trading days after the execution of the Notice of Guaranteed Delivery, as provided
in the Offer to Exercise: |
| |
a. |
the
certificates for all physically delivered Series W Warrants (or an Affidavit of Loss and Indemnification Agreement) in proper
form for transfer by delivery, or a book-entry confirmation of the transfer of your the Series W Warrants into the Depositary
Agent’s account of all Series W Warrants delivered electronically; |
| |
|
|
| |
b. |
a
properly completed and duly executed Election to Participate and Exercise Series W Warrants with any required signature guarantees;
and |
| |
|
|
| |
c. |
any
other documents required by the Election to Participate and Exercise Series W Warrants. |
Except
as specifically permitted by this Offer to Exercise, no alternative or contingent exercises will be accepted.
Lost
Warrant Certificates
If
you cannot locate your Series W Warrant certificate(s), please contact the Depositary at the phone number or address below to
obtain an Affidavit of Loss and Indemnification Agreement form:
Continental
Stock Transfer & Trust Company
1
State Street, 30th Floor
New
York, NY 10004-1561
Phone:
917-262-2378
Determination
of Validity of Tender of Series W Warrants
All
questions as to the number of Series W Warrants to be accepted, the validity, form, eligibility (including time of receipt) and
acceptance for exercise pursuant to the Offer to Exercise of any Series W Warrants will be determined by the Company in its sole
discretion, which determinations shall be final and binding on all parties, subject to the judgments of any courts. The Company
reserves the absolute right to reject any or all exercises of Series W Warrants it determines not to be in proper form or to reject
those Series W Warrants, the acceptance of which may, in the opinion of the Company’s counsel, be unlawful. The Company
also reserves the absolute right to waive any of the conditions of the Offer to Exercise and any defect or irregularity in the
exercise of any particular Series W Warrants, and the Company’s interpretation of the terms of the Offer to Exercise (including
the instructions contained in the Election to Participate and Exercise Series W Warrants) will be final and binding on
all parties, subject to the judgments of any court with jurisdiction over the Company.
No
exercise of Series W Warrants will be deemed to be properly made until all defects and irregularities have been cured or waived.
Unless waived, any defects or irregularities in connection with exercises must be cured within such time as the Company shall
determine. Neither the Company nor any other person is or will be obligated to give notice of any defects or irregularities in
exercises and none of them will incur any liability for failure to give any such notice.
SECTION
9. MANNER OF ACCEPTANCE OF PAYMENT AND ISSUANCE OF SHARES
If
you properly tender (and do not validly withdraw) your Series W Warrants and the other Acceptance and Exercise Deliveries on or
prior to the Expiration Date, promptly following the Expiration Date, we intend to accept your payment of the exercise price and
your other Acceptance and Exercise Deliveries and direct Continental Stock Transfer & Trust Company, as the Depositary Agent
and our transfer agent, to issue and deliver to you the number of shares of Company common stock issuable under your Series W
Warrant at the temporarily reduced exercise price of $2.00 per share.
SECTION
10. WITHDRAWAL RIGHTS
If
you change your mind and do not want to participate in the Offer to Exercise, you may withdraw your participation in the Offer
to Exercise or direct your broker or other nominee to withdraw your participation in the Offer to Exercise on your behalf. In
order to rescind previously tendered Series W Warrants, prior to the Expiration Date, your broker or other nominee may rescind
the instruction previously transmitted through the book-entry transfer system, or you or your broker or other nominee may submit
a Notice of Withdrawal to the Depositary Agent by physical delivery to Continental Stock Transfer & Trust Company, 1 State
Street Plaza, 30th Floor, New York, NY 10004, Attn: Reorganization Department, or by facsimile at (212) 616-7610.
Such withdrawal by you or your broker or other nominee must be properly completed and received by the Depositary Agent on
or prior to the Expiration Date, provided that you or your broker or other nominee may also make such withdrawal after March 9,
2018, which is the 40th business day from commencement of the Offer to Exercise, if your Series W Warrants and other
Acceptance and Exercise Deliveries have not been accepted by us prior to that date. If you or your broker or other nominee properly
and timely withdraws your participation, we will promptly: (i) return your Series W Warrants, by delivery of your physical certificate
or through book-entry transfer to the account of your broker or other nominee, and (ii) return the cash paid by you or on your
behalf to exercise your Series W Warrant by check or by transfer to the account of your broker or other nominee, without interest
thereon or deduction therefrom.
All
questions as to the validity, form, eligibility (including time of receipt) and acceptance of any Notice of Withdrawal will be
determined by the Company in its discretion, which determination shall be final and binding on all parties, subject to the judgments
of any courts. The Company reserves the right to reject any or all Notices of Withdrawal that the Company determines not to be
in proper form or the acceptance of which may, in the opinion of the Company’s counsel, be unlawful. The Company also reserves
the right to waive any defect or irregularity in the Notice of Withdrawal, and the Company’s interpretation of the terms
of the Notice of withdrawal will be final and binding on all parties, subject to the judgments of any courts.
No
Notice of Withdrawal will be deemed to be properly made until all defects and irregularities have been cured or waived. Unless
waived, any defects or irregularities in connection with any Notice of Withdrawal must be cured within such time as the Company
shall determine. Neither the Company nor any other person is or will be obligated to give notice of any defects or irregularities
in any Notice of Withdrawal, and no person will incur any liability for failure to give any such notice.
SECTION
11. REGISTRATION OF THE EXERCISE OF THE SERIES W WARRANTS
The
Company has effective Registration Statements that, as supplemented by the Supplements, cover the exercise of 2,232,965
of the Series W Warrants at the reduced cash exercise price of $2.00 per share. The prospectuses including in the Registration
Statements, as supplemented by the Supplements, reflect the terms of the Series W Warrants as modified by this Offer to Exercise.
The shares of common stock underlying the Series W Warrants may not be sold, nor may offers to buy or exercise be accepted, except
pursuant to such effective Registration Statements. Such securities may only be offered by means of the prospectuses included
in such Registration Statements, as supplemented by the Supplements, copies of which may be obtained (when available) free of
charge at www.sec.gov or by contacting the Company’s Chief Financial Officer at (212) 949-4319. The prospectuses,
as supplemented by the Supplements, contain important information about the Series W Warrants, as modified in the manner described
in the Offer to Exercise, and the securities underlying such Series W Warrants. The continuing effectiveness of the Registration
Statements, as supplemented by the Supplements, is a condition to the Offer to Exercise. The Company will rely on the exemption
from registration provided by Section 4(a)(2) of the Securities Act for the exercise of the remaining 8,334,880 of the
Series W Warrants, which were issued in private placements.
SECTION
12. TRADING MARKET AND PRICE RANGE OF SERIES W WARRANTS AND COMMON STOCK
Since
July 27, 2016, the Company’s common stock and the Series W Warrants have been listed on the Nasdaq Capital Market under
the symbols “PAVM” and “PAVMW,” respectively. From April 28, 2016 until July 27, 2016, the Company’s
units, each consisting of one share of common stock and one Series W Warrant, traded on the Nasdaq Capital Market under the symbol
“PAVMU.” On such date, the common stock and Series W Warrants commenced separate trading on the Nasdaq Capital Market,
and the units ceased trading, in connection with separation of each unit into its constituent securities. The following table
shows the high and low sale prices per share of our securities as reported on the Nasdaq Capital Market for the periods indicated:
| | |
Common
Stock | | |
Warrants | |
| | |
High | | |
Low | | |
High | | |
Low | |
| Third
Quarter 2016 (beginning July 27, 2016) | |
$ | 15.24 | | |
$ | 5.00 | | |
$ | 4.85 | | |
$ | 4.00 | |
| Fourth
Quarter 2016 | |
$ | 14.00 | | |
$ | 6.80 | | |
$ | 8.00 | | |
$ | 5.51 | |
| First
Quarter 2017 | |
$ | 8.00 | | |
$ | 4.64 | | |
$ | 5.84 | | |
$ | 2.24 | |
| Second
Quarter 2017 | |
$ | 5.43 | | |
$ | 3.57 | | |
$ | 4.53 | | |
$ | 1.51 | |
| Third
Quarter 2017 | |
$ | 8.59 | | |
$ | 2.86 | | |
$ | 2.65 | | |
$ | 0.98 | |
| Fourth
Quarter 2017 | |
$ | 5.70 | | |
$ | 2.18 | | |
$ | 1.91 | | |
$ | 0.38 | |
SECTION
13. SOURCE AND AMOUNT OF FUNDS
Because
this transaction is solely an offer to holders to exercise their outstanding Series W Warrants, there are no funds or other consideration
being paid to participants. The Company will use its existing working capital to pay the fees and expenses associated with this
Offer to Exercise.
SECTION
14. TRANSACTIONS AND AGREEMENTS CONCERNING SERIES W WARRANTS
None
of the Company’s directors or executive officers participated in any transaction involving the Series W Warrants during
the past 60 days, except as follows:
| ● | On
November 22, 2017, HCFP/Capital Partners IIIB LLC (“CPIIIB”),
an entity controlled by Lishan Aklog, M.D., the Company’s chairman of the board
and chief executive officer, and Ira Scott Greenspan, a member of the Company’s
board of directors, distributed 192,317 Series W Warrants on a pro rata basis to the
holders of CPIIIB’s membership interests.
|
Each
of HCFP/Capital Partners III LLC and Pavilion Venture Partners LLC has entered into an agreement with the Company, pursuant to
which each may exercise the Series W Warrants held by them prior to the IPO on a cashless basis as long as such warrants remain
held by them (or certain permitted transferees). In addition, pursuant to the Series W Warrant Agreement, the Series W Warrants
held by HCFP/Capital Partners III LLC, Pavilion Venture Partners LLC, Dr. Aklog and Mr. Greenspan prior to the IPO are not subject
to redemption as long as such warrants remain held by them.
SECTION
15. INFORMATION REGARDING THE COMPANY
The
following summary highlights selected information regarding the Company. Because it is a summary, it does not contain all of the
information you should consider before making a decision to participate in the Offer to Exercise or exercise your Series W Warrant.
Before making an investment decision, you should read the entire Offer to Exercise carefully, including the “Risk Factors”
section above, the prospectuses included in the Registration Statements, as supplemented by the Supplements, and the Company’s
SEC filings.
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. Our products are
all in the development phase and have not yet received regulatory approval.
The
following is a brief overview of the products currently in our pipeline, including: CarpX, PortIO, NextCath, DisappEAR, NextFlo,
and Caldus. Among other things, we have:
| |
● |
filed
final nonprovisional patent applications for PortIO, CarpX, NextCath, and Caldus and acquired a patent and related patent
applications (one of which was subsequently granted) for NextFlo 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 the DisappEAR
product; |
| |
|
|
| |
● |
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 FDA for our CarpX minimally invasive device designed
to treat carpal tunnel syndrome; |
| |
● |
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 in December
2016, we made 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 with the FDA a pre-submission package and requested an in-person meeting regarding
the submission and review. As we await the meeting date in January 2018, we will continue our planning and development of
an initial commercialization strategy, in partnership with our medical advisors, focused on short-term applications in patients
with poor venous access and future regulatory strategy focused on expanded, longer-term indications and other clinical applications; |
| |
|
|
| |
● |
engaged
a design and contract manufacturing firm to design and develop the DisappEAR product in collaboration with our academic partners
at Tufts University and Harvard Medical School; initiated transfer of laboratory process for creating silk ear tubes into
a commercial setting, and begun testing and optimization of manufacturing processes; |
| |
|
|
|
● |
engaged
design and contract manufacturing firms with experience in extrusions which has completed initial design work on the first
product in the NextCath product, 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; and |
| |
|
|
| |
● |
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. |
| |
|
|
| In addition: |
| |
|
|
| |
● |
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; in collaboration
with our design, engineering and manufacturing partners we have completed proof of principle testing demonstrating we can
deliver temperatures of >90C to a balloon catheter for at least 20 minutes of ablation time and histologically confirmed
tissue necrosis in a wide variety of tissues and organs in a pig model; we are currently optimizing the design of the renal
denervation balloon and catheter and enhancing the design of the infusion device to higher specifications including temperatures
up to 140C and significantly higher flow rates; |
| |
|
|
| |
● |
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; and |
| |
|
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● |
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 not generated revenues to date and have financed our operations through sales of our equity and debt securities as described
below.
We
were incorporated on June 26, 2014 in the State of Delaware under the name PAXmed Inc. In April 2015, we changed our name to PAVmed
Inc.
Recent
Developments
Regulatory
Developments
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.
On
December 17, 2016, we filed a 510(k) premarket notification submission with the FDA for our PortIO Intraosseous Infusion System,
relying upon substantial equivalence to a previously approved predicate device with an indication for use for up to 24 hours.
We 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. Despite
these modifications, the FDA determined that PortIO is not substantially equivalent to the proposed predicate and encouraged us
to instead pursue classification under section 513(f)(2) of the Federal Food, Drug, and Cosmetic Act, also referred to as de novo
classification. We decided to follow the FDA’s recommendation and pursue a de novo classification for PortIO under a broader
indication, with an indication for use up to seven days, as opposed to 24 hours. In this regard, we filed our de novo pre-submission
package with the FDA for PortIO on October 30, 2017.
Initial
Public Offering
In
January 2016, the registration statement on Form S-1 (File No. 333-203569) for our IPO was declared effective by the SEC. On April
28, 2016, we consummated our IPO of 1,060,000 units, each unit consisting of one share of common stock and one warrant to purchase
one share of common stock. The units were sold at an offering price of $5.00 per unit, generating gross proceeds of $5.3 million,
and net cash proceeds of $4.2 million, after deducting cash selling agent discounts and commissions and offering expenses. Upon
consummation of our IPO, our outstanding warrants issued prior to our IPO automatically converted into warrants identical to those
issued in our IPO. We refer to the warrants issued in our IPO and the warrants issued prior to our IPO collectively as “Series
W Warrants.” The Series W Warrants have an exercise price of $5.00 per share, subject to adjustment in the event of stock
dividends, stock splits and similar transactions. The Series W Warrants expire on January 29, 2022, or earlier upon redemption.
Preferred
Stock Financings
On
January 26, 2017, we entered into a Securities Purchase Agreement, pursuant to which we agreed to issue and sell to investors
up to an aggregate of $3,000,000 of units at a price of $6.00 per unit, each unit consisting of one share of Series A Preferred
Stock and one of our Series A Warrants. At closings which took place on January 26, 2017, January 31, 2017 and March 8, 2017,
422,838 of units were sold for aggregate gross proceeds of approximately $2.5 million.
On
August 4, 2017, we entered into a Securities Purchase Agreement, pursuant to which we agreed to issue and sell to investors up
to an aggregate of $600,000 of units at a price of $4.00 per unit, each unit consisting of one share of Series A-1 Preferred Stock
and one Series A-1 Warrant. At a closing which took place on August 4, 2017, 125,000 units were sold for aggregate gross proceeds
of $500,000.
On
November 17, 2017, we completed an exchange of with the holders of 154,837 of the shares of Series A Preferred Stock
and 154,837 of the Series A Warrants, pursuant to which such holders received 1.5 shares of Series A-1 Preferred Stock
for each tendered share of Series A Preferred Stock and one Series A-1 Warrant for each tendered Series A Warrant.
The
Series A Preferred Stock presently has a conversion price of $4.97 per share. The Series A Warrants have an exercise price
of $6.61 per share, are currently exercisable and expire on April 30, 2024. Each Series A Warrant also is exchangeable,
at the option of the holder, for four Series X Warrants. The Series X Warrants will have an exercise price of $6.00 per share,
will become exercisable on October 31, 2018 and will expire on April 30, 2024, or earlier upon redemption. No Series X Warrants
have been issued to date.
The
Series A-1 Preferred Stock has a conversion price of $4.00 per share. The Series A-1 Warrants have an exercise price of $6.67
per share, are currently exercisable and expire on April 30, 2024. Each Series A-1 Warrant also is exchangeable, at the option
of the holder, for either (i) five Series W Warrants or (ii) four Series X-1 Warrants. The Series X-1 Warrants will have an exercise
price of $6.00 per share, will become exercisable on October 31, 2018 and will expire on April 30, 2024, or earlier upon redemption.
No Series X-1 Warrants have been issued to date.
The conversion price of the Series A Preferred
Stock and the exercise price of the Series A Warrants are subject to adjustment in the event of stock dividends, stock splits
and similar transactions, and are subject to weighted average anti-dilution adjustment based on certain subsequent equity sales.
The conversion price of the Series A Preferred Stock and the exercise price of the Series A Warrants will be adjusted as
a result of the Offer to Exercise, with the amount of the adjustment to be determined based on the results of the Offer to
Exercise. The conversion price of the Series A-1 Preferred Stock and the exercise price of the Series X Warrants, Series A-1
Warrants and Series X-1 Warrants are subject to adjustment in the event of stock dividends, stock splits and similar transactions,
but are not subject to anti-dilution adjustment based on subsequent equity sales. Accordingly, the conversion or exercise price,
as applicable, of each such security will not be adjusted as a result of the Offer to Exercise.
Note
Financing
On
June 30, 2017, we entered into the NSPA with Scopia. Effective July 3, 2017, we consummated the sale of securities pursuant to
the agreement, upon the issuance by us of a 15.0% senior secured promissory note with a principal amount of $5,000,000 to Scopia;
the issuance by us of an aggregate of 2,660,000 Series S Warrants to purchase shares of our common stock to Scopia and its designees;
and the delivery by Scopia to us of $4.8 million in cash, representing the principal amount of the secured promissory note net
of Scopia’s costs. As of the date hereof, 1,186,080 of the Series S Warrants have been exercised (including 122,360
on a cashless basis). The Series S Warrants have an exercise price of $0.01 per share, subject to adjustment in the event
of stock dividends, stock splits and similar transactions. The Series S Warrants expire on June 30, 2032.
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 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. 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.
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. We retain the flexibility to fully commercialize our products ourselves or 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. We currently expect to commercialize
our products 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 to commercialize some or all of our products if it is in our
long-term interests. As our pipeline grows, we may choose to jointly commercialize subsets of related products which target certain
medical specialties or healthcare locations.
Where
You Can Find More Information
We
make available free of charge on our website (http://aytubio.com) our Annual Report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after such material
is electronically filed with or furnished to the SEC. We provide electronic or paper copies of filings free of charge upon request.
The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street N.E. Washington,
D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers
that file with the SEC at http://www.sec.gov.
SECTION
16. HISTORICAL AND PRO FORMA FINANCIAL INFORMATION AND OTHER FINANCIAL INFORMATION REGARDING THE COMPANY
The
Company has included the consolidated financial statements of the Company for the fiscal years ended December 31, 2016 and 2015
and the unaudited condensed consolidated interim financial statements for the quarterly period ended September 30, 2017 as Annex
A and Annex B hereto, respectively.
Attached
hereto as Annex C, the Company has included unaudited pro forma financial information reflecting the effect of the Offer
to Exercise. In preparing the attached pro forma condensed financial data, the Company assumed that all holders of Series W Warrants
(other than the Company’s executive officers, directors and their respective affiliates) outstanding as of December
31, 2017 to purchase an aggregate of 2,518,291 shares of common stock elected to participate in the Offer to Exercise and
that the Offer to Exercise was completed as of the end of the quarterly period ended September 30, 2017. The unaudited pro
forma consolidated financial data is presented for informational and illustrative purposes only.
As
of September 30, 2017, the Company had cash totaling $3,111,456 compared to $585,680 at December 31, 2016.
SECTION
17. INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN THE OFFER TO EXERCISE
As
of December 31, 2017, there were outstanding Series W Warrants to purchase an aggregate of 10,567,845 shares of common
stock. The Company’s executive officers and directors, as described below, hold the following Series W Warrants and will
be entitled to participate in the Offer to Exercise on the same terms and conditions as the other holders of Series W Warrants.
However, no such person has entered into any agreement or otherwise indicated to the Company whether or not such person intends
to participate in the Offer to Exercise.
| Name | |
Position
with the Company | |
Number
of Series W Warrants Held | | |
Percentage
of Series W Warrants Held | |
| Lishan
Aklog, M.D. | |
Chairman
and Chief Executive Officer | |
| 7,937,544 | | |
| 75.1 | % |
| Michael
Glennon | |
Vice
Chairman | |
| – | | |
| – | |
| Dennis
M. McGrath | |
Executive
Vice President and Chief Financial Officer | |
| – | | |
| – | |
| Brian
deGuzman, M.D. | |
Chief
Medical Officer | |
| – | | |
| – | |
| Ira
Scott Greenspan | |
Director | |
| 5,694,855 | | |
| 53.9 | % |
| James
L. Cox, M.D. | |
Director | |
| – | | |
| – | |
| Joshua
R. Lamstein | |
Director | |
| 83,717 | | |
| 0.8 | % |
| Ronald
M. Sparks | |
Director | |
| – | | |
| – | |
| David
Weild IV | |
Director | |
| – | | |
| – | |
| David
S. Battleman, M.D. | |
Director | |
| – | | |
| – | |
The
Series W Warrants beneficially owned by Dr. Aklog include 5,646,562 Series W Warrants held by HCFP/Capital Partners III LLC,
an entity controlled by Dr. Aklog and Mr. Greenspan, 2,220,532 Series W Warrants held by Pavilion Venture Partners LLC, an
entity controlled by Dr. Aklog, and 20,000 Series W Warrants held by HCFP/AG LLC, an entity controlled by Dr. Aklog and
Mr. Greenspan. The Series W Warrants beneficially owned by Mr. Greenspan include the Series W Warrants held by HCFP/Capital
Partners III LLC and HCFP/AG LLC. Each of HCFP/Capital Partners III LLC and Pavilion Venture Partners LLC beneficially
owns more than 10% of the Company’s common stock and may be deemed a control person with respect to the Company.
Except
as set forth above, none of the Company’s other directors, executive officers or control persons hold Series W Warrants.
SECTION
18. LEGAL MATTERS AND REGULATORY APPROVALS
We
are not aware of any license or regulatory permit material to our business that might be adversely affected by the Offer to Exercise
and the issuance of the shares of common stock upon the exercise of the Series W Warrants. Our obligations under the Offer to
Exercise are subject to the conditions described in “Description of the Offer to Exercise — Section 6: Conditions
of the Offer to Exercise” above.
SECTION
19. MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The
following is a summary of certain anticipated material U.S. federal income tax consequences that may be applicable to Series W
Warrant holders who participate in the Offer to Exercise. However, we have not requested a ruling from the IRS or any opinion
of counsel with regard to the treatment of warrant holders participating in the exchange and there can be no assurance, as discussed
below, that the IRS will not take a position inconsistent with any portion of this summary.
This
discussion does not address all aspects of U.S. federal income taxation that may be relevant to you in light of your particular
circumstances, or to those Series W Warrant holders who are subject to special rules, such as financial institutions and mutual
funds; banks; insurance companies; investment companies; retirement plans; tax-exempt organizations; dealers or traders in securities;
any person that holds their Series W Warrants as part of a straddle or hedge arrangement; partnerships or other pass-through entities;
persons who are not citizens or residents of the United States or who are foreign corporations, foreign partnerships or foreign
estates or trusts for U.S. federal income tax purposes or whose functional currency is not the U.S. dollar; or persons who are
subject to the alternative minimum tax provisions of the Internal Revenue Code of 1986, as amended (the “Code”).
This discussion is based on current provisions of the Code, Treasury Regulations promulgated thereunder, judicial opinions, administrative
rulings, and published positions of the IRS, all of which are subject to change (possibly with retroactive effect).
This
discussion assumes that Series W Warrant holders hold the Series W Warrants (and will hold their shares of our common stock received
upon the exercise of their amended Series W Warrants) as capital assets (i.e., generally for investment). In addition, the following
discussion does not address the tax consequences of the participation in the Offer to Exercise under foreign, state or local tax
laws. You are urged to consult your tax advisors as to the specific U.S. federal income tax consequences of your participating
in the Offer to Exercise and related reporting obligations, as well as the effects of state, local and non-U.S. tax laws and U.S.
tax laws other than income tax laws.
If
a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) is a beneficial
owner of a Series W Warrant (or a beneficial owner of shares of our common stock received upon exercise of the amended Series
W Warrants), the tax treatment of a partner in the partnership will depend upon the status of the partner and the activities of
the partnership. Any such partnership, and any partner of any such partnership, should consult such partnership or partner’s
own tax advisors about the U.S. federal income tax consequences of participating in the Offer to Exercise.
Anticipated
Tax Treatment of Offer to Exercise
Although
not free from doubt, it is anticipated that the modification of your Series W Warrants followed by an exercise of the modified
Series W Warrants will be treated as an exchange of Series W Warrants for modified warrants, which constitutes a recapitalization
within the meaning of Code Section 368(a)(1)(E) for U.S. federal income tax purposes, followed by the subsequent exercise of the
modified warrants. Under this treatment, it is anticipated that (i) a Series W Warrant holder who participates in the Offer to
Exercise would not recognize any gain or loss as a result of modifying the Series W Warrants, (ii) such holder’s tax basis
in the modified warrants will be equal to the holder’s tax basis in the Series W Warrants, and (iii) such holder’s
holding period of the modified warrants will include the holder’s holding period of the Series W Warrants.
The
IRS has not made a determination, nor has the Company received any opinion of counsel, on the U.S. federal income tax consequences
of the Offer to Exercise or of a holder’s participation in the Offer to Exercise, and there is no published guidance directly
on point. Because of the lack of authority dealing with transactions similar to the Offer to Exercise, the U.S. federal income
tax consequences of the Offer to Exercise are unclear, and alternative characterizations are possible that could require you to
immediately recognize income, gain or loss, or may impact your holding period. Therefore, we urge you to consult your tax advisors
regarding the tax consequences of the Offer to Exercise to you in your particular circumstances, including the consequences of
possible alternative characterizations.
Anticipated
Tax Treatment of the Exercise of the Modified Warrants
Upon
the exercise of a modified warrant for cash, it is anticipated that a holder will not recognize gain or loss and will instead
be treated as acquiring shares of our common stock as a result of such cash exercise. In such a case, it is anticipated that the
holder will have an adjusted tax basis in the common stock so acquired equal to the sum of (i) such holder’s adjusted tax
basis in the modified warrant immediately prior to such exercise plus (ii) the exercise price paid by such holder for the common
stock in connection with exercising such modified warrant. The holding period for the common stock so acquired would begin on
the day after the exercise of the modified warrant.
Distributions
on Common Stock Received upon Exercise of Warrants
After
you exercise the modified warrant, it is anticipated that any distributions you receive in respect of our common stock generally
will be treated as a dividend, subject to tax as ordinary income, to the extent payable out of our current or accumulated earnings
and profits (as determined for U.S. federal income tax purposes), then as a tax-free return of capital to the extent of your tax
basis in the shares of our common stock, and thereafter as gain from the sale or exchange of the stock. Dividends received by
a non-corporate holder currently qualify for taxation at a reduced 20% rate if the holder meets certain holding period and other
applicable requirements. Dividends received by a corporate holder likely will be eligible for the dividends-received deduction
if the holder meets certain holding period and other applicable requirements.
Sale
or Other Taxable Disposition of Common Stock
It
is anticipated that you will generally recognize gain or loss upon the sale, exchange or other taxable disposition of shares of
our common stock equal to the difference between (i) the amount of cash and the fair market value of any property received and
(ii) your adjusted tax basis in the shares of our common stock. Any gain or loss you recognize generally will be treated as a
capital gain or loss. The capital gain or loss will be long-term if your holding period in the common stock is more than one year
at the time of sale, exchange or other taxable disposition and will be short-term if your holding period is one year or less.
Long-term capital gains of individuals and other non-corporate taxpayers are generally eligible for reduced rates of taxation.
The deductibility of capital losses is subject to certain limitations.
Additional
Medicare Tax on Net Investment Income
Certain
holders that are individuals, estates or trusts (other than trusts that are exempt from tax) are subject to a 3.8% tax on “net
investment income” (or “undistributed net investment income” in the case of estates and trusts) for each taxable
year, with such tax applying to the lesser of such income or the excess of such U.S. holder’s adjusted gross income (with
certain adjustments) over a specified amount. “Net investment income” includes, among other things, dividends on and
capital gains from the sale or other disposition of stock. You are urged to consult your tax advisors regarding the applicability
of this tax to your income and gains arising from ownership and disposition of our common stock.
Information
Reporting and Backup Withholding
Information
reporting requirements generally will apply to certain holders with respect to dividends paid on, or, under certain circumstances,
the proceeds of a sale, exchange or other disposition of, common stock. Under the Code and applicable Treasury Regulations, a
holder of common stock may be subject to backup withholding (currently at a rate of 24%) with respect to dividends paid on common
stock, or the proceeds of a sale, exchange or disposition of common stock, unless such holder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact in the manner required, or (b) within a reasonable
period of time, provides a correct taxpayer identification number, certifies that it is not subject to backup withholding (e.g.,
on an IRS Form W-9 or similar form) and otherwise complies with applicable requirements of the backup withholding rules. Backup
withholding is not an additional tax. Any amounts withheld under the backup withholding rules will generally be allowed as a credit
against a holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided the required information
is timely furnished to the IRS. You should consult your tax advisors regarding the application of information reporting and backup
withholding rules to your particular situation, the availability of an exemption therefrom, and the procedure for obtaining such
an exemption, if applicable.
THE
FOREGOING DISCUSSION IS ONLY A GENERAL SUMMARY AND IS NOT A COMPLETE DISCUSSION OF ACTUAL U.S. TAX CONSIDERATIONS THAT MAY BE
RELEVANT TO YOU. YOU ARE URGED TO CONSULT WITH YOUR OWN TAX ADVISORS REGARDING YOUR PARTICULAR SITUATION AS IT RELATES TO THE
TAX CONSEQUENCES OF THE DEEMED EXCHANGE OF SERIES W WARRANTS FOR MODIFIED WARRANTS, THE EXERCISE OF MODIFIED WARRANTS FOR OUR
COMMON STOCK, AND THE OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK.
SECTION
20. ACCOUNTING TREATMENT
If
the Series W Warrants are exercised pursuant to the Offer to Exercise, the Company’s cash will increase by the net aggregate
proceeds from exercise of approximately $21,135,690 million and there will be a corresponding increase to shareholders’
equity for the same amount.
In
addition, the Series W Warrants temporary exercise price is a short-term inducement offer, which under the analogous authoritative
guidance of Financial Accounting Standards Board Accounting Standard Certification 718, Stock Compensation, is accounted
for as a modification to the contractual terms of the Series W Warrant Agreement, wherein, the incremental fair value of the Series
W Warrant resulting from the temporary exercise price modification, if such incremental fair value is an increase, would be recognized
as an expense on the Company’s statement of operations, for each Series W Warrant exercised at the temporary exercise price,
if any.
SECTION
21. FEES AND EXPENSES
The Company has retained Continental Stock
Transfer & Trust Company to act as Depositary Agent. The Company also may retain an information agent and/or one or more
warrant solicitation agents for the Offer to Exercise. If retained, the Company expects that the information agent
will receive reasonable and customary compensation for its services, plus reimbursement for expenses, and will be indemnified
by the Company against certain claims and expenses that arise out of the performance of their services. If retained, the Company
expects that any warrant solicitation agent will use reasonable commercial efforts to contact holders of the Series W Warrants
by mail, telephone, facsimile, or other electronic means and solicit their participation in the Offer to Exercise. Any
warrant solicitation agent will receive a fee equal to a percentage of the cash exercise prices paid by holders of the Series
W Warrants who participate in the Offer to Exercise. In addition, the Company expects to reimburse any warrant solicitation
agent for its reasonable out-of-pocket expenses and attorney’s fees, up to a set maximum amount. The Company may also agree
to indemnify any warrant solicitation agent against certain liabilities in connection with the Offer to Exercise, including
certain liabilities under the federal securities laws.
The
Company may also use the services of its officers and employees to solicit holders of the Series W Warrants to participate in
the Offer to Exercise without additional compensation.
SECTION
22. TRANSFERS
The
Series W Warrants are listed for trading on the Nasdaq Capital Market. For holders of record of the Series W Warrants, the Series
W Warrant Agreement provides that a holder may transfer the Series W Warrants to a third party upon surrender of such warrant
to the warrant agent together with appropriate signatures and instructions for transfer. Any holder of record of a Series W Warrant
who desires to effect a transfer should present the Series W Warrant to the warrant agent in the manner set forth in the respective
Series W Warrant Agreement. If you hold your Series W Warrants electronically in “street name” through a broker or
other nominee, please contact your nominee about the procedures for transferring your warrants.
SECTION
23. ADDITIONAL INFORMATION
The
Company has filed with the SEC a Tender Offer Statement on Schedule TO of which this Offer to Exercise is a part. This Offer to
Exercise does not contain all of the information contained in the Schedule TO and the exhibits to the Schedule TO. We recommend
that holders of the Series W Warrants review the Schedule TO, including the exhibits, and the Company’s other materials
that have been filed with the SEC, including the prospectuses including in the Registration Statements, as supplemented
by the Supplements, before making a decision on whether to participate in the Offer to Exercise.
The
Board of Directors of the Company recognizes that the decision to participate in the Offer to Exercise is an individual one that
should be based on a variety of factors. The holders of the Series W Warrants should consult with their respective professional
advisors if they have questions about their financial or tax situation. The information about this Offer to Exercise from the
Company is limited to the Offering Materials.
The
Company is subject to the information requirements of the Exchange Act, and in accordance therewith files and furnishes reports
and other information with the SEC. All reports and other documents the Company has filed with the SEC, including the Schedule
TO relating to the Offer to Exercise, or will file with the SEC in the future, can be accessed electronically on the SEC’s
website at www.sec.gov.
SECTION
24. INFORMATION REQUESTS
Please
direct questions or requests for assistance regarding this Offer to Exercise, Election to Participate and Exercise Series W Warrants,
and Notice of Withdrawal or other materials, in writing, to the Depositary Agent at the following address.
Continental
Stock Transfer & Trust Company
1
State Street Plaza, 30th Floor
New
York, NY 10004
Attention:
Reorganization Department
Telephone:
(917) 262-2378
Facsimile:
(212) 616-7610
You
may request additional copies of this document and any of the Offering Materials from the Company. The Company may be reached
at:
PAVmed
Inc.
One
Grand Central Place, Suite 4600
New
York, New York 10165
Attention:
Dennis McGrath, Chief Financial Officer
Telephone:
(212) 949-4319
Email:
dmm@pavmed.com
Facsimile:
212-697-9877
*
* * * *
| |
Sincerely, |
| |
|
| |
/s/
Lishan Aklog, M.D. |
| |
Lishan
Aklog, M.D. |
| |
Chairman
and Chief Executive Officer |
| |
PAVmed
Inc. |
Annex
A
PAVMED
INC. AND SUBSIDIARY
INDEX
TO DECEMBER 31, 2016 CONSOLIDATED FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
Board
of Directors and Stockholders
PAVmed
Inc.
We
have audited the accompanying consolidated balance sheets of PAVmed Inc. and Subsidiary (the “Company”) as of December
31, 2016 and 2015, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows
for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform audits of the Company’s internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, 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. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of PAVmed Inc. and Subsidiary as of December 31, 2016 and 2015, and the results of their operations and their cash flows
for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 1 to the consolidated financial statements, the Company’s recurring losses from operations, recurring
cash used in operating activities and accumulated deficit 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 consolidated financial statements. The consolidated
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ CITRIN
COOPERMAN & COMPANY, LLP
New
York, New York
February
16, 2017
PAVMED
INC.
and
SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
| | |
December 31, | | |
December 31, | |
| | |
2016 | | |
2015 | |
| ASSETS | |
| | | |
| | |
| CURRENT
ASSETS | |
| | | |
| | |
| Cash | |
$ | 585,680 | | |
$ | 767,268 | |
| Prepaid
expenses and other current assets | |
| 155,490 | | |
| 8,761 | |
| Total
Current Assets | |
| 741,170 | | |
| 776,029 | |
| Equipment,
net | |
| 18,000 | | |
| — | |
| Deferred
offering costs | |
| 111,249 | | |
| 438,061 | |
| TOTAL
ASSETS | |
$ | 870,419 | | |
$ | 1,214,090 | |
| | |
| | | |
| | |
| LIABILITIES
AND STOCKHOLDERS' (DEFICIT) EQUITY | |
| | | |
| | |
| CURRENT
LIABILITIES | |
| | | |
| | |
| Accounts
payable | |
$ | 949,413 | | |
$ | 165,321 | |
| Accrued
expenses and other current liabilities | |
| 240,073 | | |
| 414,851 | |
| Total
Current Liabilities | |
| 1,189,486 | | |
| 580,172 | |
| COMMITMENTS
AND CONTINGENCIES (NOTE 8) | |
| | | |
| | |
STOCKHOLDERS'
(DEFICIT) EQUITY | |
| | | |
| | |
| Preferred
stock, par value $0.001, 20,000,000 shares authorized; no shares issued and outstanding at December 31, 2016 and 2015 | |
| — | | |
| — | |
| Common
stock, par value $0.001; 50,000,000 shares authorized, 13,330,811 and 12,250,000 shares issued and outstanding at December
31, 2016 and 2015, respectively | |
| 13,331 | | |
| 12,250 | |
| Additional
paid-in capital | |
| 7,369,437 | | |
| 2,672,652 | |
| Accumulated
deficit | |
| (7,701,835 | ) | |
| (2,050,984 | ) |
| TOTAL
STOCKHOLDERS' (DEFICIT) EQUITY | |
| (319,067 | ) | |
| 633,918 | |
| TOTAL
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | |
$ | 870,419 | | |
$ | 1,214,090 | |
See
accompanying notes to the consolidated financial statements.
PAVMED
INC.
and
SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
| | |
Year
Ended December 31, | |
| | |
2016 | | |
2015 | |
| Revenue | |
$ | — | | |
$ | — | |
| General
and administrative expenses | |
| 3,931,264 | | |
| 1,287,273 | |
| Research
and development expenses | |
| 1,719,587 | | |
| 489,327 | |
| Total
operating expenses | |
| 5,650,851 | | |
| 1,776,600 | |
| Net
loss | |
$ | (5,650,851 | ) | |
$ | (1,776,600 | ) |
| Net
loss per share, basic and diluted | |
| (0.44 | ) | |
| (0.16 | ) |
| Weighted
average common shares outstanding - basic and diluted | |
| 12,972,153 | | |
| 11,278,755 | |
See
accompanying notes to the consolidated financial statements.
PAVMED
INC.
and
SUBSIDIARY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
| | |
| | |
| | |
| | |
| | |
Total | |
| | |
| | |
| | |
Additional | | |
| | |
stockholders' | |
| | |
Common
Stock | | |
paid-in | | |
Accumulated | | |
Equity | |
| | |
Shares | | |
Par
Value | | |
capital | | |
deficit | | |
(deficit) | |
| | |
| | |
| | |
| | |
| | |
| |
| Balance
at December 31, 2014 | |
| 10,856,371 | | |
$ | 10,856 | | |
$ | 1,058,356 | | |
$ | (274,384 | ) | |
$ | 794,828 | |
| Warrants
issued for legal services | |
| | | |
| | | |
| 272,357 | | |
| | | |
| 272,357 | |
| Common
stock issued upon exercise of warrants | |
| 1,393,629 | | |
| 1,394 | | |
| 1,248,606 | | |
| | | |
| 1,250,000 | |
| Value
of contributed services of Chief | |
| | | |
| | | |
| | | |
| | | |
| | |
| Executive
Officer and former Chief | |
| | | |
| | | |
| | | |
| | | |
| | |
| Financial
Officer | |
| | | |
| | | |
| 333,333 | | |
| | | |
| 333,333 | |
| Chief
Executive Officer contributed services deemed payable | |
| | | |
| | | |
| (240,000 | ) | |
| | | |
| (240,000 | ) |
| Net
loss | |
| | | |
| | | |
| | | |
| (1,776,600 | ) | |
| (1,776,600 | ) |
| 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 | | |
| | | |
| 3,950,501 | |
| Common
stock issued upon cashless exercise of warrants | |
| 20,811 | | |
| 21 | | |
| (21 | ) | |
| | | |
| — | |
| Stock-based
compensation expense | |
| | | |
| | | |
| 747,365 | | |
| | | |
| 747,365 | |
| Net
loss | |
| | | |
| | | |
| | | |
| (5,650,851 | ) | |
| (5,650,851 | ) |
| Balance
at December 31, 2016 | |
| 13,330,811 | | |
$ | 13,331 | | |
$ | 7,369,437 | | |
$ | (7,701,835 | ) | |
$ | (319,067 | ) |
See
accompanying notes to the consolidated financial statements.
PAVMED
INC.
and
SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| | |
Year
Ended December 31, | |
| | |
2016 | | |
2015 | |
| Cash
flows from operating activities | |
| | | |
| | |
| Net
loss | |
$ | (5,650,851 | ) | |
$ | (1,776,600 | ) |
| Adjustments
to reconcile net loss to net cash used in operating activities | |
| | | |
| | |
| Depreciation
expense | |
| 3,793 | | |
| — | |
| Stock-based
compensation | |
| 747,365 | | |
| — | |
| Expense
attributable to contributed services | |
| — | | |
| 133,333 | |
| Changes
in operating assets and liabilities: | |
| | | |
| | |
| Prepaid
expenses and other current assets | |
| (146,729 | ) | |
| (5,761 | ) |
| Accounts
payable | |
| 877,592 | | |
| 100,572 | |
| Accrued
expenses and other current liabilities | |
| (286,027 | ) | |
| 298,851 | |
| Net
cash used in operating activities | |
| (4,454,857 | ) | |
| (1,249,605 | ) |
| | |
| | | |
| | |
| Cash
flows from investing activities | |
| | | |
| | |
| Purchase
of equipment | |
| (21,793 | ) | |
| — | |
| Net
cash used in investing activities | |
| (21,793 | ) | |
| — | |
| | |
| | | |
| | |
| Cash
flows from financing activities | |
| | | |
| | |
| Proceeds
from issuance of units in connection with initial public offering | |
| 5,300,000 | | |
| — | |
| Payment
of offering costs in connection with initial public offering | |
| (1,004,938 | ) | |
| (72,204 | ) |
| Proceeds
from common stock issued upon exercise of warrants | |
| — | | |
| 1,250,000 | |
| Net
cash provided by financing activities | |
| 4,295,062 | | |
| 1,177,796 | |
| | |
| | | |
| | |
| Net
decrease in cash | |
| (181,588 | ) | |
| (71,809 | ) |
| Cash,
beginning of period | |
| 767,268 | | |
| 839,077 | |
| Cash,
end of period | |
$ | 585,680 | | |
$ | 767,268 | |
| | |
| | | |
| | |
| Supplemental
non-cash financing activities | |
| | | |
| | |
| Deferred
offering costs in connection with initial public offering | |
$ | — | | |
$ | 365,857 | |
| Deferred
offering costs in connection with an in-process financing transaction | |
$ | 111,249 | | |
$ | — | |
| Issuance
of common stock upon cashless exercise of warrants | |
$ | 21 | | |
$ | — | |
See
accompanying notes to the consolidated financial statements.
PAVMED
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — The Company, Description of the Business, and Going Concern
PAVmed
Inc. (“PAVmed” or the “Company”) was organized under the laws of the State of Delaware on June 26, 2014,
originally under the name of PAXmed Inc. On April 19, 2015, the Company changed its name to PAVmed Inc. The Company operates in
one segment as a medical device company organized to advance a broad pipeline of innovative medical technologies from concept
to commercialization using a business model focused on capital and time efficiency.
Initial
Public Offering
On
April 28, 2016, 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 with the issuance of 1,060,000 common stock units at an offering price of $5.00
per unit, with each common stock unit consisting of one share of common stock and one warrant to purchase one share of common
stock at an exercise price of $5.00 per share. The IPO resulted in gross cash proceeds of $5.3 million and net cash proceeds
of $4.2 million, after deducting cash selling agent discounts and commissions and offering expenses. The warrants issued in the
IPO became exercisable on October 28, 2016 and expire on January 29, 2022 or earlier upon redemption by the Company under certain
conditions (see Note 10, Stockholders’ Equity (Deficit)). Upon consummation of the IPO, the Company’s 9,560,295
previously outstanding warrants converted into identical warrants issued in the IPO.
In
connection with the consummation of the IPO, the common stock units were approved for listing on the Nasdaq Capital Market ("Nasdaq")
under the symbol “PAVMU”. Subsequently, the common stock and warrants comprising the common stock units began separate
trading on Nasdaq on July 27, 2016 under the symbols “PAVM” and “PAVMW”, respectively, and the common
stock unit and symbol PAVMU ceased to be quoted and traded on Nasdaq.
Preferred
Stock Units Private Placement
In
January 2017, the Company's Board of Directors authorized the sale of up to 500,000 Preferred Stock Units in a private placement
transaction, with each Preferred Stock Unit consisting of one share of Series A Convertible Preferred Stock and one Series A Warrant,
to purchase one share of common stock at an initial exercise price of $8.00 per share. Subsequently, in January 2017, the Company
completed initial closings of a private placement of 251,334 Preferred Stock Units at a price of $6.00 per unit, resulting in
gross proceeds of approximately $1.5 million and approximately $1.2 million of net proceeds, after deducting placement agent fees
and offering costs. The Preferred Stock Units private placement transaction will remain open through June 30, 2017 for subsequent
closings, if any, in which the remaining 248,666 authorized Preferred Stock Units may be issued. See Note 14, Subsequent Events,
for a discussion of the Preferred Stock Units private placement transaction.
Note
1 — The Company, Description of the Business, and Going Concern (continued)
Going
Concern
The
Company has adopted the provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Codification
("ASC") Topic 205-40, Presentation of Financial Statements - Going Concern (ASC 205-40). 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.
The
Company incurred net losses of $5,650,851, and had net cash flows used in operating activities of $4,454,857 for the year ended
December 31, 2016. At December 31, 2016, the Company had an accumulated deficit of $7,701,835, negative working capital of $448,316
and cash of $585,680. The Company does not expect to experience positive cash flows from operating activities in the near future,
if at all. The Company anticipates incurring operating losses for the next several years as it completes the development of its
products and seeks requested regulatory clearances to market such products. These factors raise substantial doubt about the Company's
ability to continue as a going concern within one year after the date the consolidated financial statements are issued.
The
Company estimates its current cash resources, including the approximately $1.2 million of net proceeds received in the January
2017 initial closings of the Preferred Stock Units private placement transaction (see Note 14, Subsequent Events for a
discussion of the Preferred Stock Units private placement transaction), absent any additional sources of cash, is sufficient to
fund its operations through March 2017. Accordingly, the Company does not have sufficient cash resources to fund its anticipated
operating losses for the next twelve months and the Company must raise additional funds to support its operating and capital needs
beyond March 2017.
The
Company’s ability to fund its operations is dependent upon management's plans, which include raising additional capital,
obtaining regulatory clearance for its products currently under development, commercializing and generating revenues from products
currently under development, and continuing to control expenses. The Company has engaged financial advisory firms to assist with
its financing efforts, including selling additional securities under the Preferred Stock Unit private placement transaction (which
will remain open through June 30, 2017). However, there is no assurance the Company will be successful in these efforts, including
the sale of the remaining authorized Preferred Stock Units.
A
failure to raise sufficient capital, 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.
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, 2016 and 2015. 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 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 stock-based compensation, the fair value of warrants, research and development expenses, contingent
liabilities, the provision or benefit for income taxes and the 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 estimates, actual results could differ materially from those estimates.
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 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.
Deferred
Offering Costs
The
Company capitalizes certain legal, accounting, and other third-party fees directly associated with in-process capital financing
as deferred offering costs. The deferred offering costs are recognized as an offset against the financing proceeds upon consummation
of the offering. The deferred offering costs at December 31, 2016 relate to legal fees incurred with respect to an in-process
financing transaction involving a Preferred Stock Units private placement (see Note 14, Subsequent Events for further details
regarding the Preferred Stock Units private placement transaction). The deferred offering costs at December 31, 2015 relate to
the Company's IPO, and were subsequently recognized as an offset against the gross proceeds of the IPO.
Patent
Costs
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.
Purchased
Patent License Rights
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.
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 |
5
years |
| Computer
equipment |
3
years |
Long-Lived
Assets
The
Company evaluates its long-lived assets, including equipment, for impairment whenever events or changes in circumstances indicate
that 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.
Fair
Value Measurements
Fair
value is defined 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 the measurement date. A three-tier fair value hierarchy which 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. |
At
December 31, 2016 and 2015, the carrying amounts of the Company's financial instruments, including cash, accounts payable, and
accrued expenses, approximate their respective fair value due to the short-term nature of these instruments.
At
December 31, 2016 and 2015, the Company does not have any assets or liabilities required to be measured at fair value in accordance
with FASB ASC Topic 820, Fair Value Measurement.
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 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 the 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 option
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.
Note
2 — Summary of Significant Accounting Policies (continued)
Income
Taxes
The
Company accounts for income taxes using the asset and liability method, as required by FASB ASC Topic 740, Income Taxes (“ASC
Topic 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.
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, 2016 and 2015, or during the years ended
December 31, 2016 and 2015. As of December 31, 2016, 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 is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding
for the period. Diluted net loss per share is computed by dividing the net loss by the sum of the weighted-average number of common
shares outstanding during the reporting period, and, if dilutive, the potential dilutive effects of stock options and warrants
outstanding in accordance with the treasury stock method. As the Company's financial results resulted in a net loss for all periods
presented, basic net loss per share is the same as diluted net loss per share, due to the exclusion of incremental shares resulting
from stock options and warrants as their inclusion would have been anti-dilutive.
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.
Note
2 — Summary of Significant Accounting Policies (continued)
Stock
Split Effected in the Form of a Stock Dividend
On
September 21, 2015, the Company’s board of directors declared a 2.7872582-for-1 stock split to be effected in the form of
a stock dividend. All basic and diluted earnings per share, average shares outstanding information and all applicable footnotes
have been adjusted for the stock split. The number of authorized shares of common stock and preferred stock were not affected
by the stock split and remain at 50,000,000 shares and 20,000,000 shares, respectively.
JOBS
Act Accounting Election
The
Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS
Act”). 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. 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 that are not emerging growth companies.
Recent
Accounting Pronouncements
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 Company is evaluating the impact of this guidance on its consolidated financial statements.
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 Company is evaluating the impact of this guidance on its consolidated financial statements.
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. The Company is currently evaluating the impact of this guidance on its consolidated
financial position, results of operations and cash flows.
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. The Company is currently evaluating the impact of
this guidance on its consolidated financial position, results of operations and cash flows.
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.
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 thereby affecting the guidance contained in ASU 2014-09. ASU 2014-09 and
the subsequent Topic 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). The Company is evaluating the guidance in ASU 2014-09 and the subsequent Topic 606
updates and has not yet determined what, if any, effect this guidance will have on its consolidated results of operations or financial
condition.
Note
3 — Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets consisted of the following as of:
| | |
December
31, | | |
December
31, | |
| | |
2016 | | |
2015 | |
| Security
deposits | |
$ | 48,350 | | |
$ | — | |
| Prepaid
insurance | |
| 35,947 | | |
| — | |
| Advanced
payments to suppliers | |
| 71,193 | | |
| 8,761 | |
| Total
prepaid expenses and other current assets | |
$ | 155,490 | | |
$ | 8,761 | |
Note
4 — Equipment, Net
Equipment,
net consisted of the following as of:
| | |
December
31, | | |
December
31, | |
| | |
2016 | | |
2015 | |
| Research
and development equipment | |
$ | 10,156 | | |
$ | — | |
| Computer
equipment | |
| 11,637 | | |
| — | |
| | |
| 21,793 | | |
| — | |
| Less:
accumulated depreciation | |
| (3,793 | ) | |
| — | |
| Total
Equipment, net | |
$ | 18,000 | | |
$ | — | |
Depreciation
expense for the year ended December 31, 2016 was $3,793. No depreciation expense was incurred during the year ended December 31,
2015.
Note
5 — Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities consisted of the following for the periods indicated:
| | |
December
31, | | |
December
31, | |
| | |
2016 | | |
2015 | |
| Chief
Executive Officer contributed services deemed payable | |
$ | — | | |
$ | 240,000 | |
| Accrued
bonus payable | |
| — | | |
| 124,583 | |
| Accrued
board of director fees | |
| 72,500 | | |
| — | |
| Accrued
vacation | |
| 28,324 | | |
| 5,879 | |
| Accrued
professional fees | |
| 111,249 | | |
| 36,000 | |
| Other | |
| 28,000 | | |
| 8,389 | |
| Total
accrued expenses and other current liabilities | |
$ | 240,073 | | |
$ | 414,851 | |
In
December 2016, the Company reversed the accrued bonus payable previously recognized throughout 2016 as the Company’s board
of directors determined no discretionary bonuses would be paid for 2016. In addition, the Company’s Chief Executive Officer
(“CEO”) waived his right to receive a guaranteed bonus payment due under the CEO Employment Agreement. See Note 8,
Commitments and Contingencies, for further details regarding compensation paid to the CEO.
The
accrued board of director fees at December 31, 2016 represent amounts payable to all non-executive members of the board of directors,
including $10,000 payable to a board member deemed to be a related party.
The
accrued professional fees at December 31, 2016 relate to deferred offering costs incurred with respect to an in-process financing
transaction of a private placement of Preferred Stock Units. See Note 14, Subsequent Events, for a discussion of the Preferred
Stock Units private placement transaction.
Included
in "Other" is $10,000 of accrued expense due to a related party under the HCFP /Strategy Advisory Agreement. See Note
7, Related Party Transactions, for further details regarding the HCFP /Strategy Advisory Agreement.
In
May 2016, the Company paid $364,583 of aggregate accrued compensation due to its CEO upon the successful completion of the Company’s
IPO. The salary and bonus compensation was accrued as of December 31, 2015 as the Company’s IPO closing was deemed probable.
See Note 8, Commitments and Contingencies, for further details regarding compensation paid to the CEO.
Note
6 — Income Taxes
Income
tax (benefit) expense consisted of the following for the year ended December 31, 2016 and 2015:
| | |
December
31, | | |
December
31, | |
| | |
2016 | | |
2015 | |
| Current: | |
| | | |
| | |
| Federal,
state, and local | |
$ | — | | |
$ | — | |
| Deferred: | |
| | | |
| | |
| Federal | |
| (1,945,638 | ) | |
| (593,739 | ) |
| State
and local | |
| (424,840 | ) | |
| (169,758 | ) |
| | |
| (2,370,478 | ) | |
| (763,497 | ) |
| Less:
Valuation allowance | |
| 2,370,478 | | |
| 763,497 | |
| | |
$ | — | | |
$ | — | |
At
December 31, 2016 and 2015, the reconciliation of the federal statutory income tax rate to the effective income tax rate is as
follows:
| | |
December
31, | | |
December
31, | |
| | |
2016 | | |
2015 | |
| U.S.
statutory rate | |
| (35.0 | )% | |
| (35.0 | )% |
| State
income taxes (net of federal benefit) | |
| (7.5 | )% | |
| (10.4 | )% |
| Permanent
differences | |
| 1.8 | % | |
| 3.6 | % |
| Tax
credits | |
| (1.3 | )% | |
| (1.2 | )% |
| Valuation
allowance | |
| 42.0 | % | |
| 43 | % |
| Effective
tax rate | |
| 0.0 | % | |
| 0.0 | % |
At December
31, 2016 and 2015, the approximate tax effects of temporary differences which give rise to the net deferred tax assets are as
follows:
| Noncurrent
deferred tax assets: | |
| | | |
| | |
| Net
operating loss | |
$ | 2,795,050 | | |
$ | 568,721 | |
| Stock-based
compensation | |
| 199,921 | | |
| — | |
| Deferred
compensation | |
| — | | |
| 165,404 | |
| Accrued
expenses | |
| 12,307 | | |
| — | |
| Section
195 deferred start-up costs | |
| 39,746 | | |
| 38,749 | |
| Patent
licenses | |
| 25,466 | | |
| — | |
| Research
and development tax credit carryforwards | |
| 91,535 | | |
| 20,674 | |
| Deferred
tax assets | |
| 3,164,025 | | |
| 793.548 | |
| Less:
valuation allowance | |
| (3,164,025 | ) | |
| (793,548 | ) |
| Deferred
tax assets, net of valuation allowance | |
$ | — | | |
$ | — | |
The
Company has federal and state net operating loss ("NOL") carryforwards of $6,432,797 and $1,243,538 at December 31,
2016 and 2015, respectively. The NOL carryforward amount is available to reduce future taxable income and expires from 2034 to
2036. Additionally, the Company generated $70,861 and $20,674 of estimated research and development tax credit carryforwards during
the years ended December 31, 2016 and 2015, respectively. The research and development tax credit carryforwards are available
to reduce future tax expense and expires from 2035 to 2036.
As
required by ASC Topic 740, a "more-likely-than-not" criterion is applied when evaluating the realization of a deferred
tax asset. The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets.
Based on the Company’s history of operating losses, the Company has concluded it is more-likely-than-not the benefit of
its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax
assets as of December 31, 2016 and 2015.
The
Company files income tax returns in the United States in federal and applicable state jurisdictions. The Company's tax filings
for the year 2015 and for its initial period of operations from June 26, 2014 (inception) through December 31, 2014 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.
Note
7 — Related Party Transactions
Effective
October 2015, the Company entered into a three-year management services agreement with HCP/Advisors LLC, an affiliate of a director
of the Company, which replaced a prior contemplated management services agreement with HCFP LLC, another affiliate of the director
and certain other officers and directors 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 monthly fee of $35,000 commencing as of November 1, 2015, and thereafter, a monthly fee of $25,000.
Under this agreement, the Company incurred fees of $300,000 and $60,000 during the years ended December 31, 2016 and 2015, respectively,
which are included in "General and administrative expenses" in the accompanying consolidated statements of operations.
Effective
September 2016, the Company entered into a consulting agreement with HCFP /Strategy Advisors LLC, an affiliate of certain directors
and officers of the Company (the "HCFP Strategic Advisory Agreement"). Under the HCFP Strategic Advisory Agreement,
HCFP /Strategy Advisors has been engaged for an initial term of five months to provide various strategic 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. The Company incurred expense of $100,000 in the year
ended December 31, 2016 under the HCFP Strategic Advisory Agreement, which is 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 directors and officers of the Company) (the "Swartwood Hesse
Financial Advisory Agreement"). Under the Swartwood Hesse Financial Advisory Agreement, Swartwood Hesse Inc. has been 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 provides for total fee payments to Swartwood Hesse of $15,000, which was paid upon execution
of the agreement. The Company may incur additional fees for investment banking services under a separate written agreement to
be executed between the Company and Swartwood Hesse, Inc. The Company incurred expense of $15,000 in the year ended December 31,
2016 under the Swartwood Hesse Financial Advisory Agreement, which is included in "General and administrative expenses"
in the accompanying consolidated statements of operations.
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 directors and 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
Preferred Stock Units private placement transaction. (See Note 14, Subsequent Events for a discussion of the Preferred Stock Units
private placement transaction.) Under the HCFP /Capital Markets Placement Agent Agreement, HCFP /Capital Markets is to be 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 later of June 30, 2017,
or the completion or termination of any other potential transactions in conjunction with the Preferred Stock Units private placement
transaction.
Note
7 — Related Party Transactions (continued)
Effective
October 1, 2016, the Company and Michael J. Glennon, Vice Chairman and a member of the Company's board of directors, entered into
a consulting agreement (the "Glennon Consulting Agreement"), under which Mr. Glennon provides the Company with services
and advice relating to the successful development and commercialization of medical device products, including interfacing with
outsourced contract manufacturers, assisting with development of the supply chain and establishing commercialization channels
with independent distributors and strategic corporate partners, and providing such other services as requested by the Company’s
Chairman and CEO. As compensation for his services, Mr. Glennon was due an initial payment of $37,500 upon execution of the consulting
agreement and a monthly retainer of $12,500 for each month thereafter. 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. The Glennon Consulting Agreement may be terminated by either party upon 30 days’ prior
written notice, except either party may terminate the Glennon Consulting Agreement immediately for cause (which includes an uncured
material breach of the agreement). The Glennon Consulting Agreement also will terminate immediately if the parties agree to the
employment of Mr. Glennon on a full-time basis.
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 "P. Glennon Consulting Agreement").
Under the terms of the P. Glennon Consulting Agreement, Mr. P. 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 of 20,000
stock options on November 28, 2016, with an exercise price of $9.50 per share, and vesting ratably on a quarterly basis commencing
December 31, 2016 through September 30, 2019.
In
September 2015, the Company exercised an option to purchase for $10,000 a patent from Pavilion Holdings Group LLC (PHG), a medical
device holding company founded by the Company's CEO and Chairman, Vice Chairman, and Chief Medical Officer. The payment was recognized
as an expense at the time of payment and is included in general and administrative expenses in the accompanying consolidated statement
of operations for the year ended December 31, 2015.
Note
8 — 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 (the “CEO Employment Agreement”) for
a five-year term with an initial base salary of $240,000 per year, from November 1, 2014 to October 31, 2015. The base salary
of $240,000 from November 1, 2014 to October 31, 2015, along with a $124,583 bonus payment, was payable to the CEO only upon and
subject to the consummation of the Company's IPO. As of December 31, 2015, the Company determined the likelihood of the IPO was
probable and, therefore, a liability of $364,583 was recognized at December 31, 2015. In May 2016, as a result of the closing
of the Company’s IPO on April 28, 2016, the accrued salary and bonus compensation payable at December 31, 2015 was paid
to the CEO. Effective November 1, 2015, the base salary was increased to $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. The CEO Employment Agreement provides for a guaranteed bonus equal to 50% of base salary, beginning
on January 1 of each year effective January 1, 2016. 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. 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.”
Chief
Financial Officer Employment Agreement
Effective
October 8, 2015, the Company entered into a two-year employment agreement with its Chief Financial Officer (the “CFO Employment
Agreement”) with a base salary of $275,000 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. The Company also agreed to
reimburse up to $2,200 per month to cover temporary housing and travel expenses for up to 12 months and to reimburse additional
relocation expenses in the future. On April 28, 2016, upon the consummation of the IPO, the Chief Financial Officer also was granted
a stock option to purchase 125,000 shares of the Company’s common stock with an exercise price equal to $5.00 per share.
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 CEO with “good
reason”.
Chief
Medical Officer Employment Agreement
Effective
July 1, 2016, the Company entered into a five-year employment agreement with its Chief Medical Officer (the “CMO Employment
Agreement”) with a base salary of $285,000 per year, plus an initial bonus of $50,000 for services provided before
the agreement's effective date. 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 April 28, 2016, upon the consummation of the IPO, the Chief
Medical Officer also 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. 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”.
Contributed
Services
The
Company's CEO and former CFO were not paid a salary during the period June 26, 2014 (inception) through October 2015. The Company
has recognized the value of their services as contributed services by recognizing $333,333 of compensation expenses in general
and administration expenses in the consolidated statement of operations for the year ended December 31, 2015, and additional paid-in
capital in the consolidated balance sheet at December 31, 2015.
Note
8 — Commitments and Contingencies (continued)
Leases
The
Company leases space for its corporate office, which initially provided for two consecutive six month terms beginning on February
1, 2016, rent payments of $9,500 per month and the option to cancel the lease agreement at the end of the initial six-month
term at the election of the Company. Subsequently, the lease agreement was amended to add approximately 200 sq. ft. of rentable
office space at an additional rate of $4,400 per month, and extended the lease term through May 31, 2017. Total rent expense under
this office space lease arrangement for the year ended December 31, 2016 was $134,356. At December 31, 2016, the Company’s
aggregate future minimum lease payments were $71,400 through the May 31, 2017 lease termination date.
Beginning
on May 1, 2015, the Company rents access to a research and development facility for monthly rent of $1,000 on a month-to-month
basis. Either the landlord or the Company may cancel this rental arrangement at any time. Total rental expense under this facility
lease arrangement amounted to $12,000 and $8,000 for the years ended December 31, 2016 and 2015, 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, or cash flows.
Note
9 — Agreement Related to Intellectual Property Right
Tufts
Patent License Agreement - Antibiotic-Eluting 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 antibiotic-eluting 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 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. The Company recognized as expense the acquired intellectual property
rights as of the transaction date on the basis of the costs of an intangible asset purchased from others for use in a research
and development activity, and for which there are no alternative future uses, are research and development expense at the time
the costs are incurred. Accordingly, the Company recognized the $50,000 payment as research and development expenses 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.
Note
10 — Stockholders’ Equity (Deficit)
Preferred
Stock
The
Company is authorized to issue 20,000,000 shares of preferred stock with a 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, 2016 and
2015, there were no shares of preferred stock issued or outstanding.
In
January 2017, the Company's board of directors authorized the sale of up to 500,000 Preferred Stock Units in a private placement
transaction, with each Preferred Stock Unit consisting of one share of Series A Convertible Preferred Stock and one Series A Warrant,
to purchase one share of common stock at an initial exercise price of $8.00 per share. Subsequently, in January 2017, the Company
completed initial closings of a private placement of 251,334 Preferred Stock Units at a price of $6.00 per unit, resulting in
gross proceeds of approximately $1.5 million and approximately $1.2 million of net proceeds, after deducting placement agent fees
and offering costs. The Preferred Stock Units private placement will remain open through June 30, 2017 for subsequent closings,
if any, in which the remaining 248,666 authorized Preferred Stock Units may be issued. See Note 14, Subsequent Events for
a discussion of the Preferred Stock Units private placement transaction.
Common
Stock
The
Company is authorized to issue 50,000,000 shares of common stock with a par value of $0.001 per share. There were 13,330,811 and
12,250,000 shares of common stock outstanding as of December 31, 2016 and 2015, respectively.
In
connection with the organization of the Company in June 2014, a total of 8,083,049 shares of the Company's common stock and 8,710,182
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. The terms and conditions
of the Founders' Warrants converted into the same terms and conditions of the warrants issued in the Company's IPO.
In
June 2014 and July 2014, in a private placement (Private Placement 1), a total of 418,089 units, consisting of one share of common
stock and one warrant, were sold to the initial investor investors ("Initial Investors") for an aggregate purchase price
of $75,000 less offering costs of $7,500. In November 2014, the Company completed another private placement (Private Placement
2) of 2,355,233 units, consisting of one share of common stock and one warrant, raising $845,000 in gross offering proceeds less
offering costs of $46,500. The warrants issued in the 2014 private placements ("Private Placement Warrants") converted
into the same terms and conditions of the warrants issued in the Company's IPO.
In
September 2015, the Company issued 1,393,629 shares of common stock in connection with the exercise of 1,393,629 Private Placement
Warrants.
On
April 28, 2016, the Company's IPO was consummated with the issuance of 1,060,000 units at an offering price of $5.00 per unit,
with each unit consisting of one share of common stock and one warrant. The IPO resulted in gross cash proceeds of $5.3
million and $4.2 million of net cash proceeds, after deducting cash selling agent discounts and commissions and offering expenses.
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.
Note
10 — Stockholders’ Equity (Deficit) (continued)
In
November 2016, the Company issued 20,732 shares of common stock resulting from the exercise of 40,000 warrants on a cashless basis.
In
December 2016, the Company issued 79 shares of common stock resulting from the exercise of 200 warrants on a cashless basis.
Warrants
The
table below summarizes warrants outstanding and warrant activity during the years ended December 31, 2016 and 2015:
| Balance
at December 31, 2014 | |
| 10,856,370 | |
| Issued | |
| 97,554 | |
| Exercised | |
| (1,393,629 | ) |
| Balance at
December 31, 2015 | |
| 9,560,295 | |
| Issued
in connection with IPO | |
| 1,060,000 | |
| Exercised | |
| (40,200 | ) |
| Balance
at December 31, 2016 | |
| 10,580,095 | |
The
9,560,295 warrants outstanding as of December 31, 2015 automatically converted into warrants having the same terms and conditions
as the 1,060,000 warrants issued in the Company’s IPO on April 28, 2016, including a $5.00 per share warrant exercise price
and a warrant term of six years.
The
warrants issued in the IPO have an exercise price of $5.00 per share 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.
Commencing
April 28, 2017, the Company may redeem the outstanding 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 warrants are exercised prior to the date specified in the notice of redemption.
On and after the redemption date, a record holder of a warrant will have no further rights except to receive the redemption price
for such holder's warrant upon surrender of such warrant.
In
August 2015, the Company issued 97,554 warrants with an exercise price of $5.00 to an outside advisor in exchange for services.
The estimated fair value of the warrants was $272,357 using the Black-Scholes option pricing model with the following assumptions:
fair value of underlying common stock of $5.00, dividend yield of 0%, expected volatility of 58%, risk-free interest rate of 2.3%,
and an expected term of six years.
In
September 2015, certain holders of the Private Placement Warrants exercised 1,393,629 warrants for aggregate proceeds to the Company
of $1,250,000.
Note
10 — Stockholders’ Equity (Deficit) (continued)
In
November 2016, 40,000 warrants were exercised on a cashless basis, resulting in the issuance of 20,732 shares of common stock.
In
December 2016, 200 warrants were exercised on a cashless basis, resulting in the issuance of 79 shares of common stock.
The
Company filed a Registration Statement on Form S-1 (File No. 333-214288), declared effective February 3, 2017, to register the
issuance of 1,020,000 shares of the Company’s common stock upon the exercise of 1,020,000 remaining unexercised warrants
issued in the Company’s IPO. The Registration Statement also registers (i) the issuance of 1,062,031 shares of the Company's
common stock upon the exercise of 1,062,031 of the unexercised 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 (but only in the event such
warrants are exercised prior to being publicly transferred pursuant to Rule 144). In January 2017, the Company's CEO executed
a transaction with a shareholder who had previously purchased shares of common stock and warrants in the Company's private financings
prior to its IPO, under which the CEO purchased 25,000 warrants from the shareholder. Accordingly, the shares of common stock
underlying the 25,000 warrants were not registered within the Registration Statement on Form S-1 (File No. 333-214288) as discussed
above.
Unit
Purchase Options
On
April 28, 2016, the Company issued unit purchase options to the selling agents in the Company’s IPO. The unit purchase options
provide for the purchase of 53,000 units at an exercise price of $5.50 per unit. Each unit covered by the unit purchase options
is identical to the units sold in the Company’s IPO and consists of one share of common stock and one warrant to purchase
a share of common stock at $5.00 per share. The Company estimated the fair value of the unit purchase options issued to the selling
agents was $105,100, which was accounted for as offering costs of the Company's IPO. The fair value of the unit purchase options
was determined using a Black-Scholes option pricing model with the following assumptions: fair value of the underlying unit of
$5.00, dividend yield of 0.00%, expected volatility of 50%, risk free rate of 1.28% and remaining contractual term of 4.6 years.
Note
11 — Stock Based Compensation
In
November 2014, the Company’s board of directors and stockholders adopted the 2014 Long-Term Incentive Equity Plan (the “2014
Stock Plan”). The 2014 Stock Plan 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 2014 Stock Plan reserves 1,951,081 shares of common stock for issuance in accordance with the 2014 Stock Plan’s terms.
At December 31, 2016, there were 317,768 shares of common stock available for grant under the 2014 Stock Plan.
The following
table summarizes information about stock options for the periods presented below:
| | |
| | |
Weighted | | |
| |
| | |
Number | | |
Average | | |
Aggregate | |
| | |
Stock | | |
Exercise | | |
Intrinsic | |
| | |
Options | | |
Price | | |
Value | |
| Outstanding
at December 31, 2015 | |
| — | | |
$ | — | | |
| | |
| Granted | |
| 1,633,313 | | |
$ | 5.14 | | |
| | |
| Exercised | |
| — | | |
$ | — | | |
| | |
| Forfeited | |
| — | | |
$ | — | | |
| | |
| Outstanding
at December 31, 2016 | |
| 1,633,313 | | |
$ | 5.14 | | |
$ | 3,017,795 | |
| Vested
and exercisable at December 31, 2016 | |
| 356,719 | | |
$ | 5.05 | | |
$ | 670,621 | |
| Vested
or expected to vest at December 31, 2016 | |
| 1,633,313 | | |
$ | 5.14 | | |
| | |
On
April 28, 2016, upon the closing of the Company’s IPO, a total of 1,588,313 stock options were granted, including 961,178
to management, 487,770 to members of the board of directors, and 139,365 to members of the Company’s medical advisory board.
The stock options have a ten year contractual term from date of grant, an exercise price of $5.00 per share, and vest 3/36 on
the third month after the grant date and 1/36 on each successive month thereafter for the following 33 months.
In
November 2016, the Company granted 25,000 stock options to a new member of the Company's medical advisory board, with a ten year
contractual term from date of grant, an exercise price of $10.50 per share, and vesting ratably on a quarterly basis commencing
December 31, 2016 and ending September 30, 2019.
In
November 2016, the Company granted 20,000 stock options to a (related party) consultant, with a ten year contractual term from
date of grant, an exercise price of $9.50 per share, and vesting ratably on a quarterly basis commencing December 31, 2016 and
ending September 30, 2019.
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, 2016, to the extent the exercise price is less than the quoted price.
The
weighted average remaining contractual term of stock options outstanding was 9.3 years at December 31, 2016. The weighted average
remaining contractual term of stock options vested and exercisable was 9.3 years at December 31, 2016.
Note
11 — Stock Based Compensation (continued)
The
cost of stock-based compensation awards granted to employees and directors is determined based on the grant-date fair value for
stock options granted to employees and members of the board of directors and the vesting date fair value for stock options granted
to non-employees, with the cost recognized on a straight-line basis over the award’s requisite service period. Stock-based
compensation expense for the years ended December 31, 2016 and 2015 was recognized as follows:
| | |
Year
Ended | |
| | |
December
31, | |
| | |
2016 | | |
2015 | |
| General
and administrative expenses | |
$ | 664,068 | | |
$ | — | |
| Research
and development expenses | |
| 83,297 | | |
| — | |
| | |
$ | 747,365 | | |
$ | — | |
At
December 31, 2016, there was $2,196,566 of total unrecognized compensation cost related to stock options, which is expected to
be recognized over the next 2.3 years (which represents the weighted average remaining requisite service periods for such awards).
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.
Stock
options issued to employees:
The
grant date fair value of stock options granted to employees and members of the board of directors was $1.32 per share, calculated
using the following Black-Scholes valuation model assumptions:
| | |
Year
Ended December
31, | |
| | |
2016 | | |
2015 | |
| Risk-free
interest rate | |
| 1.40 | % | |
| — | % |
| Expected
term of options (in years) | |
| 5.8 | | |
| — | |
| Expected
stock price volatility | |
| 50 | % | |
| — | % |
| Expected
dividend yield | |
| 0 | % | |
| — | % |
Stock
options issued to non-employees:
The weighted
average fair value of stock options granted to non-employees was $5.60 per share as of December 31, 2016, with such fair value
calculated using the following weighted-average Black-Scholes valuation model assumptions:
| | |
Year
Ended | |
| | |
December
31, | |
| | |
2016 | | |
2015 | |
| Risk-free
interest rate | |
| 1.85 | % | |
| —% | |
| Expected
term of options (in years) | |
| 9.6 | | |
| —% | |
| Expected
stock price volatility | |
| 60 | % | |
| —% | |
| Expected
dividend yield | |
| 0 | % | |
| —% | |
Note
11 — Stock Based Compensation (continued)
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.
Note
12 —Loss Per Share
Basic
loss per share is calculated by dividing the loss by the weighted-average number of shares of common stock outstanding for the
period, without consideration for potential dilutive common shares. Since the Company was in a loss position for all periods presented,
basic net loss per share is the same as diluted net loss per share as the inclusion of all potential dilutive common shares would
have been anti-dilutive.
The
following table sets forth the comparison of basic and fully diluted net loss per share for the periods indicated:
| | |
Year
Ended | |
| | |
December
31, | |
| | |
2016 | | |
2015 | |
| Net
loss attributable to common stockholders | |
$ | 5,650,851 | | |
$ | 1,776,600 | |
| Weighted-average
common shares outstanding | |
| 12,972,153 | | |
| 11,278,755 | |
| Net
loss per common share - basic and diluted | |
$ | (0.44 | ) | |
$ | (0.16 | ) |
The
following securities at December 31, 2016 and 2015 have been excluded from the computation of diluted weighted shares outstanding,
as their inclusion would be anti-dilutive:
| | |
December
31, | |
| | |
2016 | | |
2015 | |
| Warrants | |
| 10,580,095 | | |
| 9,560,295 | |
| Stock
options | |
| 1,633,313 | | |
| — | |
| Unit
purchase options as to shares of common stock | |
| 53,000 | | |
| — | |
| Unit
purchase options as to shares underlying warrants | |
| 53,000 | | |
| — | |
| Total | |
| 12,319,408 | | |
| 9,560,295 | |
In
January 2017, the Company's board of directors authorized the sale of up to 500,000 Preferred Stock Units in a private placement
transaction, with each Preferred Stock Unit consisting of one share of Series A Convertible Preferred Stock and one Series A Warrant,
to purchase one share of common stock at an initial exercise price of $8.00 per share. Subsequently, in January 2017, the Company
completed initial closings of a private placement of 251,334 Preferred Stock Units. (See Note 14, Subsequent Events for
a discussion of the Preferred Stock Units private placement transaction.) While the Series A Convertible Preferred Stock and Series
A Warrants are convertible into common shares, if they had been outstanding at December 31, 2016, they would have been excluded
from the computation of diluted weighted average shares outstanding, as their inclusion would be anti-dilutive.
Note
13 — Selected Quarterly Financial Data (unaudited)
The
following tables contain (unaudited) quarterly financial statement information for the years ended December 31, 2016 and 2015.
The Company believes the following information includes all normal recurring adjustments necessary for a fair presentation of
the information for the periods presented. The operating results for any quarter are not necessarily indicative of financial results
for any future period.
| | |
2016
Quarters Ended: |
| | |
March
31 | |
June
30 | |
September
30 | |
December
31 |
| Revenues | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
| General
and administrative expenses | |
| 517,739 | | |
| 959,734 | | |
| 1,350,248 | | |
| 1,103,543 | |
| Research
and development expenses | |
| 179,141 | | |
| 355,001 | | |
| 578,474 | | |
| 606,971 | |
| Total
operating expenses | |
| 696,880 | | |
| 1,314,735 | | |
| 1,928,722 | | |
| 1,710,514 | |
| Net
loss | |
| (696,880 | ) | |
| (1,314,735 | ) | |
| (1,928,722 | ) | |
| (1,710,514 | ) |
| Net
loss per share, basic and diluted(1) | |
$ | (0.06 | ) | |
$ | (0.10 | ) | |
$ | (0.14 | ) | |
$ | (0.13 | ) |
| Weighted
average common shares outstanding - basic and diluted | |
| 12,250,000 | | |
| 12,299,495 | | |
| 13,310,000 | | |
| 13,317,672 | |
| | |
2015
Quarters Ended: |
| | |
March
31 | |
June
30 | |
September
30 | |
December
31 |
| Revenues | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
| General
and administrative expenses | |
| 130,337 | | |
| 293,158 | | |
| 274,371 | | |
| 589,407 | |
| Research
and development expenses | |
| 16,000 | | |
| 67,450 | | |
| 264,532 | | |
| 141,345 | |
| Total
operating expenses | |
| 146,337 | | |
| 360,608 | | |
| 538,903 | | |
| 730,752 | |
| Net
loss | |
| (146,337 | ) | |
| (360,608 | ) | |
| (538,903 | ) | |
| (730,752 | ) |
| Net
loss per share, basic and diluted(1) | |
$ | (0.01 | ) | |
$ | (0.03 | ) | |
$ | (0.05 | ) | |
$ | (0.06 | ) |
| Weighted
average common shares outstanding - basic and diluted | |
| 10,856,371 | | |
| 10,856,371 | | |
| 11,138,505 | | |
| 12,250,000 | |
| (1) | Net
loss per share, basic and diluted is computed independently for each quarter and year
presented, and as such, the sum of the quarters may not equal the full year amounts.
|
Note
14 — Subsequent Events
Preferred
Stock Units Private Placement Transaction
In
January 2017, the Company's board of directors authorized the sale of up to 500,000 preferred stock units (the "Preferred
Stock Units") in a private placement transaction, with each Preferred Stock Unit consisting of one share of Series A Convertible
Preferred Stock ("Series A Convertible Preferred Share") and one Series A Warrant ("Series A Warrant"), as
discussed below. Subsequently, in January 2017, the Company completed initial closings of a private placement of 251,334 Preferred
Stock Units at a price of $6.00 per unit, resulting in gross proceeds of approximately $1.5 million and approximately $1.2 million
of net proceeds, after deducting placement agent fees and offering costs. The Preferred Stock Units private placement transaction
will remain open through June 30, 2017 for subsequent closings, if any, in which the remaining 248,666 authorized Preferred Stock
Units may be issued.
Registration
Rights Agreement
In
connection with the Preferred Stock Units private placement, the Company has entered into a registration rights agreement (the
"Registration Rights Agreement") with participating private placement investors, requiring the Company to file a registration
statement with the Securities and Exchange Commission registering for resale the maximum number of common shares that could be
issued upon conversion of the issued Series A Convertible Preferred Shares and the exercise of the Series A Warrants or, if converted
as described below, the Series X Common Warrants. The Registration Rights Agreement requires the Company to file a registration
statement registering the underlying common shares no later than sixty (60) days from the closing of the Preferred Stock Units
private placement and to use commercially reasonable best efforts to have such registration statement declared effective no later
than one hundred and fifty (150) days from the private placement closing. Delays in the filing of the registration statement or
maintaining its effectiveness would result in the Company having to pay damages of 2% of each investor's subscription amount on
the date of a Filing Failure, Effectiveness Failure, and Maintenance Failure, as well as every 30th day thereafter
(pro-rated for periods totaling less than 30 days) until the failure is cured.
Series
A Convertible Preferred Shares
The
Series A Convertible Preferred Shares have a par value of $0.001 per share and a stated value of $6.00 per share and are convertible
into common shares at the holders’ election initially at a stated conversion price of $6.00 per share. The holders of the
Series A Convertible Preferred Shares may elect conversion at any time after the Company has obtained shareholder approval of
the private placement transaction in accordance with Nasdaq Stock Market Rule 5635(d). The conversion price of the Series A Convertible
Preferred shares will be reduced by a prescribed formula should any subsequent issuances of convertible securities by the Company
be sold at a price lower than the conversion price of the Series A Convertible Preferred Shares immediately prior to such issuance.
The Series A Convertible Preferred Shares have a liquidation preference, provide for dividends at an 8% annual rate which is compounded
quarterly. The dividends may be settled, after April 1, 2017, at the option of the Company, through any combination of the issuance
of additional Series A Convertible Preferred Shares, common shares and /or cash payment. The Series A Convertible Preferred Shares
have no voting rights. In the case of a Deemed Liquidation Event, the Series A Convertible Preferred Shares can become redeemable
at the election of at least two-thirds of holders of the then outstanding Series A Convertible Preferred Shares 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.
Note
14 — Subsequent Events (continued)
Series
A Warrants
Each
of the Series A Warrants may be exercised after the Company obtains shareholder approval of the private placement transaction,
for one share of common stock at an initial exercise price of $8.00 per share. The exercise price of the Series A Warrants will
be reduced by a prescribed formula 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. The Series A Warrants may be
exercised any time after the Company has obtained shareholder approval of the private placement in accordance with Nasdaq Stock
Market Rule 5635(d) (“Initial Exercise Date”) and expire after the close of business on April 30, 2024. If at any
time after the six (6) month anniversary of the date of the Closing, there is no effective registration statement registering,
or no current prospectus available for, the resale of the shares underlying the Series A Warrants, then the Series A Warrants
may also be exercised, in whole or in part, at such time by means of a “cashless exercise”.
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.
The
Series A Warrants are not subject to redemption.
Series
A Warrants Exchange Option
Each
Series A Warrant constituting a component of each Unit can be exchanged through April 30, 2024 for four (4) Series X Warrants.
Each Series X Warrant is exercisable for one share of Common Stock at an initial exercise price of $6.00 per share (the “Series
X Exercise Price”). The Series X Warrants are exercisable at any time after the later of (i) the date the final stockholder
approval has been obtained under Nasdaq Stock Market Rule 5635(d) and (ii) October 31, 2018, and until April 30, 2024. The Series
X Exercise Price and number of shares of Common Stock issuable upon exercise of a Series X Warrant are subject to appropriate
adjustment in the event of stock dividends, stock splits or similar events affecting the common stock. Holders may exercise Series
X Warrants by paying the exercise price in cash or, at any time after the six-month anniversary of the Closing Date, if there
is no effective Registration Statement registering, or no current prospectus available for, the resale of the Series X Warrant
Shares by the holder, then the Series X Warrant may also be exercised, in whole or in part, at such time by means of a “cashless
exercise”. At any time after April 30, 2019, the Company, may at its option, redeem all, but not less than all, of the outstanding
Series X Warrants at a price of $0.01 per Series X Warrant if the volume weighted average price per share of the Common Stock
has been at least $18.00 (as adjusted for stock splits, stock dividends, or similar events occurring after the Closing Date) for
twenty Trading Days out of the thirty Trading Day period ending three Business Days prior to the notice of redemption in addition
to certain other conditions.
On
February 10, 2017, there were 251,334 Series A Warrants issued and outstanding which if fully exchanged for Series X Warrants
would result in an aggregate issuance of 1,005,336 Series X Warrants.
Other
Matters
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 events requiring adjustments to the consolidated financial statements or disclosures therein.
Annex
B
PAVMED
INC. AND SUBSIDIARY
INDEX
TO SEPTEMBER 30, 2017 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PAVMED
INC.
and
SUBSIDIARY
CONDENSED
CONSOLIDATED BALANCE SHEETS
(unaudited)
| | |
September
30, 2017 | | |
December
31, 2016 | |
| Assets | |
| | | |
| | |
| Current
assets | |
| | | |
| | |
| Cash | |
$ | 3,111,456 | | |
$ | 585,680 | |
| Prepaid
expenses and other current assets | |
| 103,272 | | |
| 155,490 | |
| Total
current assets | |
| 3,214,728 | | |
| 741,170 | |
| Equipment,
net | |
| 17,994 | | |
| 18,000 | |
| Deferred
offering costs | |
| — | | |
| 111,249 | |
| Total
assets | |
$ | 3,232,722 | | |
$ | 870,419 | |
| | |
| | | |
| | |
| Liabilities,
Preferred Stock, and Stockholders’ Deficit | |
| | | |
| | |
| Current
liabilities | |
| | | |
| | |
| Accounts
payable | |
$ | 991,693 | | |
$ | 949,413 | |
| Accrued
expenses and other current liabilities | |
| 354,289 | | |
| 240,073 | |
| Accrued
interest expense | |
| 187,500 | | |
| — | |
| Series
A Warrants | |
| 4,731,557 | | |
| — | |
| Derivative
liability | |
| 1,298,113 | | |
| — | |
| Total
current liabilities | |
| 7,563,152 | | |
| 1,189,486 | |
| | |
| | | |
| | |
| Senior
Secured Note, net of $3,417,233 unamortized debt discount | |
| 1,582,767 | | |
| — | |
| | |
| | | |
| | |
| Total
liabilities | |
$ | 9,145,919 | | |
$ | 1,189,486 | |
| | |
| | | |
| | |
| COMMITMENTS
AND CONTINGENCIES (NOTE 10) | |
| | | |
| | |
| | |
| | | |
| | |
| Preferred
Stock | |
| | | |
| | |
| par value
$0.001, 20,000,000 shares authorized; | |
| | | |
| | |
| Series
A Convertible Preferred Stock, par value $0.001, 422,838 and 0 shares issued and outstanding at September 30, 2017 and December
31, 2016, respectively | |
| — | | |
| — | |
| | |
| | | |
| | |
| Stockholders’
Deficit | |
| | | |
| | |
| Series
A-1 Convertible Preferred Stock, par value $0.001, 125,000 and 0 shares issued and outstanding at September 30, 2017 and December
31, 2016 respectively | |
| 189,550 | | |
| — | |
| Common stock,
par value $0.001; 50,000,000 shares authorized, 13,343,061 and 13,330,811 shares issued and outstanding at September 30, 2017
and December 31, 2016, respectively | |
| 13,343 | | |
| 13,331 | |
| Additional
paid-in capital | |
| 12,157,358 | | |
| 7,369,437 | |
| Accumulated
deficit | |
| (18,273,448 | ) | |
| (7,701,835 | ) |
| Total
Stockholders’ Deficit | |
| (5,913,197 | ) | |
| (319,067 | ) |
| Total
Liabilities, Series A Convertible Preferred Stock, and Stockholders’ Deficit | |
$ | 3,232,722 | | |
$ | 870,419 | |
See
accompanying notes to the unaudited condensed consolidated financial statements.
PAVMED
INC.
and
SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| | |
Three
Months Ended | | |
Nine
Months Ended | |
| | |
September
30, | | |
September
30, | |
| | |
2017 | | |
2016 | | |
2017 | | |
2016 | |
| Revenue | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
| | |
| | | |
| | | |
| | | |
| | |
| General
and administrative expenses | |
| 1,263,122 | | |
| 1,350,248 | | |
| 4,082,366 | | |
| 2,827,721 | |
| Research
and development expenses | |
| 704,866 | | |
| 578,474 | | |
| 2,063,319 | | |
| 1,112,616 | |
| Total
operating expenses | |
| 1,967,988 | | |
| 1,928,722 | | |
| 6,145,685 | | |
| 3,940,337 | |
| | |
| | | |
| | | |
| | | |
| | |
| Loss
from operations | |
| (1,967,988 | ) | |
| (1,928,722 | ) | |
| (6,145,685 | ) | |
| (3,940,337 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Other
income (expense) | |
| | | |
| | | |
| | | |
| | |
| Interest
expense | |
| (362,142 | ) | |
| — | | |
| (362,142 | ) | |
| — | |
| Loss
on the issuance of Series A Preferred Stock Units | |
| — | | |
| — | | |
| (3,124,285 | ) | |
| — | |
| Change
in fair value of Series A Warrants liability | |
| (2,215,671 | ) | |
| — | | |
| (680,851 | ) | |
| — | |
| Change
in fair value of derivative liability | |
| (583,517 | ) | |
| — | | |
| (76,150 | ) | |
| — | |
| Other
income (expense), net | |
| (3,161,330 | ) | |
| — | | |
| (4,243,428 | ) | |
| — | |
| | |
| | | |
| | | |
| | | |
| | |
| Loss
before income tax | |
| (5,129,318 | ) | |
| (1,928,722 | ) | |
| (10,389,113 | ) | |
| (3,940,337 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Income
tax | |
| — | | |
| — | | |
| — | | |
| — | |
| | |
| | | |
| | | |
| | | |
| | |
| Net
loss | |
| (5,129,318 | ) | |
| (1,928,722 | ) | |
| (10,389,113 | ) | |
| (3,940,337 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Series
A Convertible Preferred Stock dividends | |
| (52,299 | ) | |
| — | | |
| (130,010 | ) | |
| — | |
| Series
A-1 Convertible Preferred Stock dividends | |
| (6,196 | ) | |
| — | | |
| (6,196 | ) | |
| — | |
| Deemed
dividend Series A-1 Convertible Preferred Stock | |
| (182,500 | ) | |
| — | | |
| (182,500 | ) | |
| — | |
| | |
| | | |
| | | |
| | | |
| | |
| Net
loss attributable to common stockholders | |
$ | (5,370,313 | ) | |
$ | (1,928,722 | ) | |
$ | (10,707,819 | ) | |
$ | (3,940,337 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Net
loss attributable to common stockholders per share, basic and diluted | |
$ | (0.40 | ) | |
$ | (0.14 | ) | |
$ | (0.80 | ) | |
$ | (0.31 | ) |
| |
| | | |
| | | |
| | | |
| | |
| Weighted
average common shares outstanding - basic and diluted | |
| 13,332,629 | | |
| 13,310,000 | | |
| 13,331,585 | | |
| 12,855,714 | |
See
accompanying notes to the unaudited condensed consolidated financial statements.
PAVMED
INC.
and
SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF
SERIES
A CONVERTIBLE PREFERRED STOCK
and
STOCKHOLDERS’ DEFICIT
(unaudited)
| | |
| | |
| | |
Stockholders’
Deficit | |
| | |
Series
A | | |
Series
A-1 | | |
| | |
| | |
| | |
| |
| | |
Convertible | | |
Convertible | | |
| | |
Additional | | |
| | |
Total | |
| | |
Preferred
Stock | | |
Preferred
Stock | | |
Common
Stock | | |
Paid-In | | |
Accumulated | | |
Stockholders | |
| | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
(Deficit) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Balance
at December 31, 2016 | |
| — | | |
$ | — | | |
| — | | |
| — | | |
| 13,330,811 | | |
$ | 13,331 | | |
$ | 7,369,437 | | |
$ | (7,701,835 | ) | |
$ | (319,067 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Issuance
of Series A Convertible Preferred Stock | |
| 422,838 | | |
| — | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Issuance
of Series A-1 Convertible Preferred Stock and Series A-1 Warrants | |
| | | |
| | | |
| 125,000 | | |
| 7,050 | | |
| | | |
| | | |
| 492,950 | | |
| | | |
| 500,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Series
A-1 Convertible Preferred Stock deemed dividend | |
| | | |
| | | |
| | | |
| 182,500 | | |
| | | |
| | | |
| | | |
| (182,500 | ) | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Issuance
of Series S Warrants in connection with Senior Secured Note | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 3.434,452 | | |
| | | |
| 3,434,452 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Common
stock issued upon exercise of warrants | |
| | | |
| | | |
| | | |
| | | |
| 12,250 | | |
| 12 | | |
| 61,238 | | |
| | | |
| 61,250 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Stock-based
compensation | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 799,281 | | |
| | | |
| 799,281 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net
loss | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (10,389,113 | ) | |
| (10,389,113 | ) |
| Balance
at September 30, 2017 | |
| 422,838 | | |
$ | — | | |
| 125,000 | | |
$ | 189,550 | | |
| 13,343,061 | | |
$ | 13,343 | | |
$ | 12,157,358 | | |
$ | (18,273,448 | ) | |
$ | (5,913,197 | ) |
See
accompanying notes to the unaudited condensed consolidated financial statements.
PAVMED
INC.
and
SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| | |
Nine
Months Ended September 30, | |
| | |
2017 | | |
2016 | |
| Cash
flows from operating activities | |
| | | |
| | |
| Net
loss | |
$ | (10,389,113 | ) | |
$ | (3,940,337 | ) |
| Adjustments
to reconcile net loss to net cash used in operating activities | |
| | | |
| | |
| Depreciation
expense | |
| 5,307 | | |
| 2,315 | |
| Stock-based
compensation | |
| 799,281 | | |
| 499,628 | |
| Loss
on the issuance of Preferred Stock Units | |
| 3,124,285 | | |
| — | |
| Change
in fair value of Series A Warrants | |
| 680,851 | | |
| — | |
| Change
in fair value of derivative liability | |
| 76,150 | | |
| — | |
| Amortization
of discount on Senior Secured Note | |
| 174,642 | | |
| — | |
| Accrued
interest expense - Senior Secured Note | |
| 187,500 | | |
| — | |
| Changes
in operating assets and liabilities: | |
| | | |
| | |
| Prepaid
expenses and other current assets | |
| 52,218 | | |
| (169,057 | ) |
| Accounts
payable | |
| 42,280 | | |
| 538,063 | |
| Accrued
expenses and other current liabilities | |
| 225,465 | | |
| (182,499 | ) |
| Net
cash flows used in operating activities | |
| (5,021,134 | ) | |
| (3,251,887 | ) |
| | |
| | | |
| | |
| Cash
flows from investing activities | |
| | | |
| | |
| Purchase
of equipment | |
| (5,301 | ) | |
| (21,793 | ) |
| Net
cash flows used in investing activities | |
| (5,301 | ) | |
| (21,793 | ) |
| | |
| | | |
| | |
| Cash
flows from financing activities | |
| | | |
| | |
| Proceeds
from issuance of Series A Preferred Stock Units | |
| 2,537,012 | | |
| — | |
| Payment
of offering costs in connection with Series A Preferred Stock Units | |
| (388,628 | ) | |
| — | |
| Proceeds
from issuance of Series A-1 Preferred Stock Units | |
| 500,000 | | |
| — | |
| Proceeds
from issuance of senior secured note payable | |
| 4,842,577 | | |
| — | |
| Proceeds
from issuance of units in connection with initial public offering | |
| — | | |
| 5,300,000 | |
| Payment
of offering costs in connection with initial public offering | |
| — | | |
| (1,004,938 | ) |
| Proceeds
from common stock issued upon exercise of warrants | |
| 61,250 | | |
| — | |
| Net
cash flows provided by financing activities | |
| 7,552,211 | | |
| 4,295,062 | |
| | |
| | | |
| | |
| Net
increase in cash | |
| 2,525,776 | | |
| 1,021,382 | |
| Cash,
beginning of period | |
| 585,680 | | |
| 767,268 | |
| Cash,
end of period | |
$ | 3,111,456 | | |
$ | 1,788,650 | |
| | |
| | | |
| | |
| Supplemental
non-cash financing activities | |
| | | |
| | |
| Fair
value of Series A Warrants - issue dates (aggregate) | |
$ | 4,050,706 | | |
$ | — | |
| Fair
value of derivative liability - issue dates (aggregate) | |
$ | 1,221,963 | | |
$ | — | |
| Fair
value of Series A-1 Warrant - issue date | |
$ | 310,450 | | |
$ | — | |
| Fair
value of Series A-1 Convertible Preferred Stock - issue date | |
$ | 7,050 | | |
$ | — | |
| Fair
value of senior secured note - issue date | |
$ | 1,408,125 | | |
$ | — | |
| Fair
value of Series-S Warrants - issue date | |
$ | 3,434,452 | | |
$ | — | |
| | |
| | | |
| | |
| Deferred
offering costs in connection with initial public offering | |
$ | — | | |
$ | 272,356 | |
See
accompanying notes to the unaudited condensed consolidated financial statements.
PAVMED
INC. AND SUBSIDIARY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — The Company, Description of the Business, and Going Concern
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 before 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 nine months ended September 30, 2017, the Company has raised approximately $7.5 million of net cash proceeds resulting
from three transactions, including: the 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.
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.
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 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 (“Scopia Note”),
and 2,660,000 Series S Warrants to purchase shares of common stock of the Company.
The
Scopia 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, with the remaining unpaid interest added to and increasing the outstanding interest-bearing
principal balance of the Scopia Note by such amount. The aggregate remaining unpaid principal balance of the Scopia 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.
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 further information with respect to the Series S Warrants.
Note
1 — The Company, Description of the Business, and Going Concern (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, which was subsequently amended on October 18,
2017, 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).
At
the August 4, 2017 closing of the Series A-1 Preferred Stock Units private placement, a total of 125,000 Series A-1 Preferred
Stock Units were issued 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.
A
Series A-1 Preferred Stock Unit was 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.
See
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.
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 (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).
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.
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.
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, Series A Convertible Preferred Stock, Series A Warrant, and the Series X Warrants
which may be issued upon the exchange of Series A Warrants.
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, the Company completes the development process of its products, including
regulatory approvals, and thereafter, begins to commercialize and achieve substantial acceptance in the marketplace for the first
of a series of products in its medical device portfolio.
The
Company incurred a net loss attributable to common stockholders of $10,707,819 and had net cash flows used in operating activities
of $5,021,134 for the nine months ended September 30, 2017. At September 30, 2017, the Company had an accumulated deficit of $18,273,448
and working capital of $1,681,246, adjusted to exclude the Series A Warrants liability of $4,731,557 and the Series A Convertible
Preferred Stock embedded conversion option derivative liability of $1,298,113. In the near future, the Company anticipates incurring
operating losses and does not expect to experience positive cash flows from operating activities and may continue to incur operating
losses for the next several years as it completes the development of its products, seeks regulatory approvals, and begin to market
such products. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one
year after the date the unaudited condensed consolidated financial statements are issued.
The
Company estimates its current cash resources absent any additional sources of cash, is sufficient to fund its operations into
the quarter ended June 30, 2018. Accordingly, the Company does not have sufficient cash resources to fund its anticipated operating
losses beyond the twelve months after the date these unaudited condensed consolidated financial statements are issued. Therefore,
the Company must raise additional cash to support its operating and capital needs beyond the quarter ended June 30, 2018.
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 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 unaudited condensed consolidated
financial statements are issued.
The
Company’s unaudited condensed 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 unaudited condensed
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.
Note
2 — Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary.
All intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”),
and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial
reporting. As permitted under SEC rules, certain footnotes or other financial information normally required by U.S. GAAP have
been condensed or omitted, and accordingly the balance sheet as of December 31, 2016 has been derived from audited consolidated
financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.
These condensed consolidated financial statements have been prepared on the same basis as the Company’s annual financial
statements and in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the Company’s financial information. The accompanying unaudited condensed consolidated financial
statements and related financial information should be read in conjunction with the audited financial statements and related notes
thereto as of and for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K filed with the
SEC.
The
results of operations for the nine months ended September 30, 2017 are not necessarily indicative of the results to be expected
for the year ending December 31, 2017 or for any other interim period or for any other future periods.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make 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 unaudited condensed
consolidated financial statements include those related to the fair value of warrants, the fair value of derivative liability,
stock-based compensation, research and development expenses, the provision or benefit for income taxes and the 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 estimates, actual results could differ materially
from those estimates.
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 an in-process financing transaction involving the Series A Preferred Stock Units private placement
transaction, with such transaction discussed in Note 13, Series A Convertible Preferred Stock, Shareholders’ 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.
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 |
|
5
years |
| Computer
equipment |
|
3
years |
Long-Lived
Assets
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.
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 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
carrying values of cash, accounts payable, and accrued expenses, approximate their respective fair value due to the short-term
nature of these financial instruments at September 30, 2017 and December 31, 2016.
At
September 30, 2017, the Series A Convertible Preferred Stock conversion option embedded derivative liability and the Series A
Warrants liability were initially and are subsequently measured at fair value in accordance with FASB ASC 820, using a Monte Carlo
simulation valuation model, using the Company’s common stock price and certain Level 3 inputs to take into account the probabilities
of certain events occurring over the life of the respective financial instrument. 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 ASC 820. See Note 3, Financial
Instruments Fair Value Measurements, for further information regarding the estimated fair value of these financial instruments.
The
non-recurring issue-date fair values of 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 and the Series A-1 Convertible Preferred Stock and Series A-1 Warrants
issued in the Series A-1 Preferred Stock Units private placement, utilized the Company’s common stock price and certain
Level 3 inputs in the development of discounted cash flow analyses and Black-Scholes valuation models. Further information regarding
such non-recurring issue-date fair values is discussed in 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.
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.
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 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 the 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 option
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. 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 September 30, 2017 and December 31, 2016, or
recognized during the three and nine months ended September 30, 2017 and 2016. As of September 30, 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 is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of
shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss 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 for all periods presented, diluted net loss per share is the same as basic
net loss per share, due to the exclusion of incremental shares resulting from common stock equivalents as their inclusion would
have been anti-dilutive.
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,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS
Act”). 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. 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 that are not emerging growth companies.
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 Company is evaluating the impact of this guidance on its consolidated financial statements.
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 Company is evaluating the impact of this guidance on its 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.
Note
3 — Financial Instruments Fair Value Measurements
Recurring
Fair Value Measurements
The
following fair value hierarchy table presents information about each major category of the Company’s financial instruments
measured at fair value on a recurring basis as of September 30, 2017. There were no such financial instruments as of December
31, 2016.
| | |
Fair
Value Measurement on a Recurring Basis at Reporting Date Using: | |
| | |
Quoted | | |
| | |
| | |
| |
| | |
Prices
in | | |
| | |
| | |
| |
| | |
Active | | |
| | |
| | |
| |
| | |
Markets | | |
Significant | | |
| | |
| |
| | |
for | | |
Other | | |
Significant | | |
| |
| | |
Identical | | |
Observable | | |
Unobservable | | |
| |
| | |
Items | | |
Inputs | | |
Inputs | | |
| |
| | |
Level-1 | | |
Level-2 | | |
Level-3 | | |
Total | |
| September
30, 2017 | |
| | | |
| | | |
| | | |
| | |
| Liabilities | |
| | | |
| | | |
| | | |
| | |
| Series
A Warrants | |
$ | — | | |
$ | — | | |
$ | 4,731,557 | | |
$ | 4,731,557 | |
| Series
A Convertible Preferred Stock conversion | |
| | | |
| | | |
| | | |
| | |
| option
embedded derivative liability | |
| — | | |
| — | | |
| 1,298,113 | | |
| 1,298,113 | |
| Total
liabilities | |
$ | — | | |
$ | — | | |
$ | 6,029,670 | | |
$ | 6,029,670 | |
The
Series A Preferred Stock Units were issued in three closings in the three months ended March 31, 2017, with each such unit comprised
of one share of Series A Convertible Preferred Stock and one Series A Warrant - with each, at the option of the holder, convertible
into and exercisable for, respectively, a share of the Company’s common stock. See Note 13, Series A Convertible Preferred
Stock, Stockholders’ Deficit, and Warrants for 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, which is accounted for as an embedded derivative
and bifurcated from its host financial instrument, were determined to be derivatives under FASB ASC 815, as, along with other
provisions, their conversion price and exercise price, respectively, are subject to potential adjustment resulting from future
financing transactions, under certain conditions.
The
Series A Warrants and the Series A Convertible Preferred Stock conversion option embedded derivative are each classified as a
current liability on the unaudited condensed consolidated balance sheet, and were initially measured at fair value at the time
of issuance and are subsequently remeasured at fair value at each reporting period, with changes in fair value recognized as other
income or expense in the unaudited condensed consolidated statement of operations.
A
reconciliation of the Series A Warrants liability and the Series A Convertible Preferred Stock conversion option embedded derivative
liability for the nine months ended September 30, 2017 is a follows:
| | |
| | |
Series
A | |
| | |
| | |
Convertible | |
| | |
| | |
Preferred
Stock | |
| | |
| | |
Conversion
Option | |
| | |
Series
A | | |
Embedded | |
| | |
Warrants | | |
Derivative | |
| | |
Liability | | |
Liability | |
| Balance at
December 31, 2016 | |
$ | — | | |
$ | — | |
| Initial
fair value on dates of issuance | |
| 4,050,706 | | |
| 1,221,963 | |
| Change
in fair value | |
| 680,851 | | |
| 76,150 | |
| Balance
at September 30, 2017 | |
$ | 4,731,557 | | |
$ | 1,298,113 | |
In
the nine months ended September 30, 2017, the change in fair values resulted in the recognition of: an expense of $680,851 with
respect to the Series A Warrants liability; and, an expense of $76,150 with respect to the Series A Convertible Preferred Stock
conversion option embedded derivative liability. As the Series A Preferred Stock Units were issued in the three months ended March
31, 2017, there was no comparable amount in the prior year period.
Note
3 — Financial Instruments Fair Value Measurements (continued)
The
fair value of the Series A Warrants liability and the Series A Convertible Preferred Stock conversion option embedded derivative
liability was determined 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 the life of the respective financial
instrument. The resulting estimated fair value is subjective and is affected by changes in inputs to the valuation model including
the Company’s common stock price, and 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 dilutive transactions; and, the risk-free
rates based on U.S. Treasury security yields. Changes in these assumptions can materially affect the estimated fair value of each
financial instrument. The Series A Warrants liability and the Series A Convertible Preferred Stock conversion option embedded
derivative liability estimated fair value and the underlying assumptions as of the dates indicated, are as follows:
| | |
| | |
Issue | |
| | |
| | |
Dates’ | |
| | |
| | |
Aggregated | |
| | |
September
30, | | |
Weighted | |
| Series
A Warrants Liability | |
2017 | | |
Average | |
| Fair
value per Series A Warrant | |
$ | 11.19 | | |
$ | 9.58 | |
| Series
A Warrants outstanding | |
| 422,838 | | |
| 422,838 | |
| Calculated
aggregate fair value | |
$ | 4,731,557 | | |
$ | 4,050,706 | |
| Value
of common stock | |
$ | 5.43 | | |
$ | 5.73 | |
| Exercise
price per share | |
$ | 6.65 | | |
$ | 8.00 | |
| Expected
term (years) | |
| 6.59 | | |
| 7.21 | |
| Volatility | |
| 53 | % | |
| 47 | % |
| Risk
free rate | |
| 2.1 | % | |
| 2.3 | % |
| Dividend
yield | |
| 0 | % | |
| 0 | % |
| | |
| | |
Issue | |
| | |
| | |
Dates’ | |
| | |
| | |
Aggregated | |
| Series
A Convertible Preferred Stock | |
September
30, | | |
Weighted | |
| Conversion
Option Embedded Derivative Liability | |
2017 | | |
Average | |
| Fair
value per conversion option | |
$ | 3.07 | | |
$ | 2.89 | |
| Series
A Convertible Preferred Stock shares outstanding | |
| 422,838 | | |
| 422,838 | |
| Calculated
aggregate fair value | |
$ | 1,298,113 | | |
$ | 1,221,963 | |
| Value
of common stock | |
$ | 5.43 | | |
$ | 5.73 | |
| Conversion
price per share | |
$ | 4.99 | | |
$ | 6.00 | |
| Expected
term (years) | |
| 6.59 | | |
| 7.21 | |
| Volatility | |
| 53 | % | |
| 47 | % |
| Risk-free
interest rate | |
| 2.1 | % | |
| 2.3 | % |
| Dividend
yield | |
| 0 | % | |
| 0 | % |
Non-recurring
Fair Value Measurements
The
non-recurring issue-date fair values of 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, are presented in Note 12, Note and Securities Purchase Agreement,
Senior Secured Note, and Series S Warrants.
The
non-recurring issue-date fair values of the Series A-1 Convertible Preferred Stock and Series A-1 Warrants issued in the Series
A-1 Preferred Stock Units private placement are presented in Note 13, Series A Convertible Preferred Stock, Stockholders’
Deficit, and Warrants.
Note
4 — Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets consisted of the following as of:
| | |
September
30, | | |
December
31, | |
| | |
2017 | | |
2016 | |
| Security
deposits | |
$ | 14,250 | | |
$ | 48,350 | |
| Prepaid
insurance | |
| 30,230 | | |
| 35,947 | |
| Advanced
payments to suppliers | |
| 58,792 | | |
| 71,193 | |
| Total
prepaid expenses and other current assets | |
$ | 103,272 | | |
$ | 155,490 | |
Note
5 — Equipment, Net
Equipment,
net consisted of the following as of:
| | |
September
30, | | |
December
31, | |
| | |
2017 | | |
2016 | |
| Research
and development equipment | |
$ | 13,656 | | |
$ | 10,156 | |
| Computer
equipment | |
| 13,438 | | |
| 11,637 | |
| | |
| 27,094 | | |
| 21,793 | |
| Less:
accumulated depreciation | |
| (9,100 | ) | |
| (3,793 | ) |
| Equipment,
net | |
$ | 17,994 | | |
$ | 18,000 | |
Depreciation
expense was $1,802 and $5,307 for the three and nine months ended September 30, 2017, respectively, and $1,478 and $2,315 for
the three and nine months ended September 30, 2016, respectively.
Note
6 — Agreement Related to Intellectual Property Right
Tufts
Patent License Agreement - Antibiotic-Eluting 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 antibiotic-eluting 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 $21,945 and $42,496 in the three and nine months
ended September 30, 2017, respectively.
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.
Note
7 — Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities consisted of the following for the periods indicated:
| | |
September
30, | | |
December
31, | |
| | |
2017 | | |
2016 | |
| Accrued
bonus | |
$ | 116,650 | | |
$ | — | |
| Accrued
payroll | |
| 62,544 | | |
| — | |
| Accrued
vacation | |
| 44,178 | | |
| 28,324 | |
| Accrued
board of director fees | |
| 79,167 | | |
| 72,500 | |
| Accrued
professional fees | |
| — | | |
| 111,249 | |
| Accrued
operating expenses | |
| 51,750 | | |
| 28,000 | |
| Total
accrued expenses and other current liabilities | |
$ | 354,289 | | |
$ | 240,073 | |
At
September 30, 2017, the accrued bonus represents the estimated amount recognized on a pro rata basis during 2017 of the guaranteed
bonus payment to the Company’s Chief Executive Officer (“CEO”) under the CEO Employment Agreement. 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 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
September 30, 2017, the accrued payroll represents earned but unpaid salary for the period July 1, 2017 through September 30,
2017, payable to the Company’s CEO. In this regard, 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 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 - 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 September 30, 2017 and December 31, 2016 represent amounts payable to all non-executive members
of the board of directors, including $10,000 payable to a board member deemed to be a related party, at each of September 30,
2017 and December 31, 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. See Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants,
for a discussion of the Series A Preferred Stock Units private placement transaction.
Included
in accrued operating expenses at December 31, 2016, is $10,000 due to HCFP/Strategy Advisors LLC, a related party. See Note 9,
Related Party Transactions, for further details regarding HCFP/Strategy Advisors LLC.
Note
8 — Income Taxes
In
the nine months ended September 30, 2017 and 2016, the Company recognized a deferred tax benefit which was fully offset by a corresponding
valuation allowance. As required by ASC Topic 740, a “more-likely-than-not” criterion is applied when evaluating the
realization of a deferred tax asset. The Company has evaluated the positive and negative evidence bearing upon the realizability
of its deferred tax assets. Based on the Company’s history of operating losses, the Company has concluded it is more-likely-than-not
the benefit of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance
for deferred tax assets as of September 30, 2017 and December 31, 2016.
Note
9 — 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 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 monthly 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 $75,000 and $225,000 in each of the three and nine months
ended September 30, 2017 and 2016, respectively, which are included in “General and administrative expenses” in the
accompanying unaudited condensed consolidated statements of operations.
Effective
September 2016, the Company and HCFP/Strategy Advisors LLC, an affiliate of certain directors and officers of the Company, entered
into a management consulting agreement referred to as the “HCFP Strategic Advisory Agreement”, which, as discussed
below, expired on May 14, 2017. 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 to May 14, 2017, and obligating the Company to make three payments of $20,000
per month in 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,
at June 30, 2017, the Company recognized a $10,000 accrued expense liability for a HCFP/Strategy Advisors LLC vendor invoice dated
June 30, 2017, with payment of such invoice in July 2017, for professional services fees 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 separate and apart from the previously expired HCFP Strategic Advisory Agreement.
The
Company incurred expense of $0 and $80,000 in the three and nine months ended September 30, 2017, respectively, and $30,000 in
the three and nine months ended September 30, 2016, under the HCFP Strategic Advisory Agreement and the HCFP/Strategy Advisors
LLC discrete invoice dated June 30, 2017, as noted above, which is included in “General and administrative expenses”
in the accompanying unaudited condensed 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 directors and 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 previously paid and
recognized as expense upon execution of the agreement.
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 directors and 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 $0 and $177,576 of fees paid to HCFP/Capital Markets in connection with the issuances of Series A Preferred Stock
Units in the three and nine months ended September 30, 2017, respectively, which are included in “Loss on the issuance of
preferred stock units” in the accompanying unaudited condensed consolidated statements of operations.
Note
9 — 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
10 — 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 (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, including the 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 - 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 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, 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. Additionally, the
Company will reimburse Mr. McGrath up to $2,250 per month for housing and travel expenses for up to 12 months. Mr. McGrath was
granted a stock option to purchase up to 250,000 shares of common stock, at an exercise price of $5.95 per share. The stock option
vests in 12 equal quarterly installments on the last day of each fiscal quarter, commencing on June 30, 2017 through March 31,
2020. The employment agreement with Mr. McGrath 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”.
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
CMO (the “CMO Employment Agreement”) with a base annual salary of $285,000, plus an initial bonus of $50,000
for services provided before the agreement’s effective date. 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,
upon the consummation of the IPO, Dr. deGuzman 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. The employment agreement with Dr. deGuzman 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”.
Note
10 — Commitments and Contingencies (continued)
Leases
The
Company leases office space for its corporate office, which initially provided for two consecutive six month terms beginning on
February 1, 2016, rent payments of $9,500 per month and the option to cancel the lease agreement at the end of the initial
six-month term at the election of the Company. Subsequently, the lease agreement was amended to add additional office space at
an additional rate of $4,400 per month, and 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. Effective March 1, 2017, the rented office space was reduced,
resulting in a $650 per month reduction of the monthly lease payment, and effective August 1, 2017, the rented office space was
further reduced, resulting in a $3,938 per month reduction of the monthly lease payment. 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 $33,863 and $117,351 for the three and nine
months ended September 30, 2017, respectively, and $41,406 and $92,656 for the three and nine months ended September 30, 2016,
respectively. At September 30, 2017, the Company’s future minimum lease payments totaled $123,690 for the period October
1, 2017 to September 30, 2018, with respect to the lease arrangement on a month-to-month basis.
Additionally,
beginning on May 1, 2015, 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 $0 and $2,000 for the three and
nine months ended September 30, 2017, respectively, and $3,000 and $9,000 for the three and nine months ended September 30, 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, or cash flows.
Note
11 — 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
2014 Stock Plan reserves a total of 2,951,081 shares of common stock, which includes a share reservation increase of 1,000,000
shares of common stock approved by the stockholders on October 4, 2017, for issuance in accordance with the 2014 Stock Plan’s
terms. Stock options granted outside the 2014 Stock Plan amounted to 250,000 in the nine months ended September 30, 2017 and 250,854
on April 28, 2016. Common stock of the Company available for grant under the 2014 Stock Plan was 530,011 shares as of September
30, 2017 and, upon the stockholders approval of the share reservation increase, 1,530,011 shares as of October 4, 2017.
The
following table summarizes information about stock options for the periods presented below:
| | |
| | |
Weighted | | |
| |
| | |
Number | | |
Average | | |
Aggregate | |
| | |
Stock | | |
Exercise | | |
Intrinsic | |
| | |
Options | | |
Price | | |
Value | |
| Outstanding
at December 31, 2016 | |
| 1,633,313 | | |
$ | 5.14 | | |
| | |
| Granted | |
| 365,000 | | |
$ | 5.36 | | |
| | |
| Exercised | |
| — | | |
$ | — | | |
| | |
| Forfeited | |
| (76,389 | ) | |
$ | 5.00 | | |
| | |
| Outstanding
at September 30, 2017 | |
| 1,921,924 | | |
$ | 5.19 | | |
$ | 805,127 | |
| Vested
and exercisable at September 30, 2017 | |
| 807,972 | | |
$ | 5.13 | | |
$ | 331,839 | |
| Unvested
at September 30, 2017 | |
| 1,113,952 | | |
$ | 5.23 | | |
$ | 473,288 | |
In
March 2017, the Company granted 250,000 stock options to the Company’s new Chief Financial Officer, with such stock options
granted outside the 2014 Stock Plan, having a ten year contractual term from date of grant, an exercise price of $5.95 per share,
and vesting ratably on a quarterly basis commencing June 30, 2017 and ending March 31, 2020. In March 2017, the Company granted
25,000 stock options to a new member of the Company’s medical advisory board, with a ten year contractual term from date
of grant, an exercise price of $5.01 per share, and vesting ratably on a quarterly basis commencing June 30, 2017 and ending March
31, 2020. In July 2017, the Company granted 50,000 stock options to the Company’s Corporate Controller, with a ten year
contractual term from date of grant, an exercise price of $4.50 per share, and vesting ratably on a quarterly basis commencing
September 30, 2017 and ending June 30, 2020. In August 2017, the Company granted 40,000 stock options to a new member of the Board
of Directors, with a ten year contractual term from date of grant, an exercise price of $2.98 per share, and vesting ratably on
a quarterly basis commencing September 30, 2017 and ending June 30, 2020. Subsequently, in October 2017, the Company granted 15,000
stock options to a consultant, with a ten year contractual term from date of grant, and exercise price of $5.11 per share, and
vesting ratably on an annual basis over a three year period commencing October 2018.
In
March 2017, in connection with his separation from the Company, 76,389 stock options were forfeited which were previously granted
to the Company’s former Chief Financial Officer, as discussed below.
On
April 28, 2016, upon the closing of the Company’s IPO, a total of 1,588,313 stock options were granted, including 961,178
to management, 487,770 to members of the board of directors, and 139,365 to members of the Company’s medical advisory board.
The stock options granted on April 28, 2016, have a ten year contractual term from date of grant, an exercise price of $5.00 per
share, and vest 3/36 on July 28, 2016, and 1/36 on each successive month thereafter from Aug 28, 2016 to April 28, 2019. In November
2016, the Company granted 25,000 stock options to a new member of the Company’s medical advisory board, with a ten year
contractual term from date of grant, an exercise price of $10.50 per share, and vesting ratably on a quarterly basis commencing
December 31, 2016 and ending September 30, 2019. In November 2016, the Company granted 20,000 stock options to a (related party)
consultant, with a ten year contractual term from date of grant, an exercise price of $9.50 per share, and vesting ratably on
a quarterly basis commencing December 31, 2016 and ending September 30, 2019.
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 September 30, 2017, to the extent the exercise price is less than the quoted price.
The
weighted average remaining contractual term of stock options outstanding was 8.6 years at September 30, 2017. The weighted average
remaining contractual term of stock options vested and exercisable was 8.3 years at September 30, 2017.
Note
11 — Stock Based Compensation (continued)
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 for the three and nine months ended September
30, 2017 and 2016 was recognized as follows:
| | |
Three
Months Ended | | |
Nine
Months Ended | |
| | |
September
30, | | |
September
30, | |
| | |
2017 | | |
2016 | | |
2017 | | |
2016 | |
| General
and administrative expenses | |
$ | 241,401 | | |
$ | 292,085 | | |
$ | 707,588 | | |
$ | 447,232 | |
| Research
and development expenses | |
| 30,900 | | |
| 30,900 | | |
| 91,693 | | |
| 52,396 | |
| | |
$ | 272,301 | | |
$ | 322,985 | | |
$ | 799,281 | | |
$ | 499,628 | |
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 previously awarded to the Company’s former CFO. Previously, on April 28, 2016, upon the closing
of the Company’s IPO, the former CFO was granted a stock option to purchase 125,000 shares of common stock with an exercise
price equal to $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
September 30, 2017, there was $2,098,291 of total unrecognized compensation cost related to stock options, which is expected to
be recognized over the next 1.7 years, which represents the weighted average remaining requisite service periods for such awards.
The
weighted average fair value of stock options granted to employees and members of the board of directors was $1.57 per share during
the nine months ended September 30, 2017 and $1.32 per share during the nine months ended September 30, 2016, calculated using
the following Black-Scholes valuation model assumptions:
| | |
Nine
Months Ended September 30, | |
| | |
2017 | | |
2016 | |
| Risk
free interest rate | |
| 1.53 | % | |
| 1.40 | % |
| Expected
term of stock options (in years) | |
| 5.8 | | |
| 5.8 | |
| Expected
stock price volatility | |
| 50 | % | |
| 50 | % |
| Expected
dividend yield | |
| 0 | % | |
| 0 | % |
The
weighted average fair value of stock options granted to non-employees was $4.32 per share at September 30, 2017 and $11.45 at
September 30, 2016, with such fair values calculated using the following weighted-average Black-Scholes valuation model assumptions:
| | |
Nine
Months Ended September 30, | |
| | |
2017 | | |
2016 | |
| Risk
free interest rate | |
| 2.19 | % | |
| 1.54 | % |
| Expected
term of stock options (in years) | |
| 9.0 | | |
| 9.6 | |
| Expected
stock price volatility | |
| 60 | % | |
| 60 | % |
| Expected
dividend yield | |
| 0 | % | |
| 0 | % |
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.
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 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 (“Scopia Note”),
and 2,660,000 Series S Warrants to purchase shares of common stock of the Company.
The
Scopia Note and the Series S Warrants are freestanding financial instruments, as the Series S Warrants were immediately legally
detachable from the Scopia Note and were immediately exercisable. The Series-S Warrants are classified as equity in the condensed
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 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 as debt discount, amortized as interest expense over the term of the Scopia Note. See below for
issue-date fair value information.
The
Scopia 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 due, with the remaining unpaid portion added to and increasing the outstanding interest-bearing
principal balance of the Scopia Note by such amount of the deferred interest payment. The aggregate remaining unpaid principal
balance of the Scopia Note is due on June 30, 2019.
Interest
expense recognized was $362,142, including $187,500 with respect to the semi-annual interest payment and $174,642 with respect
to the amortization of debt discount, in the three and nine months ended September 30, 2017. The Scopia Note remaining unamortized
debt discount is $3,417,233 at September 30, 2017.
At
the discretion of the Company, the aggregate principal balance of the Scopia Note and any earned and unpaid interest may be repaid
at any time without penalty or premium. Additionally, under the Scopia Note, if at the Company’s discretion, it sells its
implantable intraosseous vascular access device (the “PortIO Product”), then the Scopia Note holders’ may require
the Company to repay the then outstanding aggregate principal amount of the Scopia 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 Scopia Note remains outstanding.
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 Scopia Note holders may request the Company to repay the then aggregate remaining unpaid principal balance of the
Scopia Note. Notwithstanding, such Note and Securities Purchase Agreement provision has been rendered moot, as the FDA has
indicated the PortIO Product will be reviewed for approval under a regulatory pathway other than a 510(k) clearance; |
| |
|
| ● |
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 the earned
but unpaid salary amount deferred until the earlier to occur 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 Scopia Note is repaid in full; and, |
| |
|
| ● |
The
Company agreed to use its commercially reasonable best efforts to file a registration statement with the U.S. Securities and
Exchange Commission (SEC) registering for resale of all of the shares of common stock underlying the Series S Warrants with
such registration statement having an effectiveness date on or before November 27, 2017. |
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 Scopia 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 Scopia Note are guaranteed by the Company, and the obligations under the Scopia 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 Scopia 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 Scopia Note.
The
Scopia 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 Scopia Note. The Series S
Warrants issue-date fair value of $10.0 million was estimated using a Black-Scholes valuation model using the following assumptions:
| | |
Issue | |
| Series
S Warrants | |
Date | |
| Exercise
price per share | |
$ | 0.01 | |
| Value
of common stock | |
$ | 4.50 | |
| Expected
term (years) | |
| 15.0 | |
| Volatility | |
| 48 | % |
| Risk
free rate | |
| 2.4 | % |
| Dividend
yield | |
| 0 | % |
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. At September 30, 2017,
a total of 422,838 shares of Series A Convertible Preferred Stock (classified in temporary equity), and 125,000 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 (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”). 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.
Subsequently,
on October 20, 2017, the Company initiated an exchange offer (Series A Exchange Offer), to the 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, to exchange one Series A Warrant for one Series A-1 Warrant. The Series A Exchange Offer expires
November 17, 2017. See below for a discussion of the Series A-1 Convertible Preferred Stock and Series A-1 Warrants.
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 exchange ratio; 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.
The
Series A Warrant and the Series A Convertible Preferred Stock conversion option, which is accounted for as an embedded derivative
and bifurcated from its host financial instrument, 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 an aggregate loss of $3,124,285, resulting from
the aggregate initial fair value of the Series A Warrant liability and the Series A Convertible Preferred Stock conversion option
embedded derivative liability being in excess of the Series A Preferred Stock Units issuance gross proceeds, 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 | |
| | |
Issue
Dates | |
| | |
(Aggregate) | |
| Series
A Preferred Stock Units issuance gross proceeds | |
$ | 2,537,012 | |
| Less:
Series A Warrants initial fair value(1) | |
| (4,050,706 | ) |
| Less:
Series A Convertible Preferred Stock conversion option embedded derivative liability initial fair value(1) | |
| (1,221,963 | ) |
| Excess
of initial fair value over gross proceeds | |
| (2,735,657 | ) |
| Offering
costs of the issuance of the Series A Preferred Stock Units | |
| (388,628 | ) |
| Loss
on issuance of Series A Preferred Stock Units | |
$ | (3,124,285 | ) |
| |
(1) |
See
Note 3, Financial Instruments Fair Value Measurements, for information with respect to the fair value of the Series
A Convertible Preferred Stock embedded derivative liability and the Series A Warrants liability. |
Note
13 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Preferred
Stock (continued)
Series
A Preferred Stock Units Private Placement (continued)
The
Company has filed an effective registration statement on Form S-1 (File No. 333-216963) 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. Such 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 such 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
The
Series A Convertible Preferred Stock 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). 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 conversion ratio equal
to its stated value divided by a conversion price of $4.99 per share, subject to further adjustment. The Series A Convertible
Preferred Stock conversion price is subject to further reduction by a prescribed formula should any subsequent issuances of convertible
securities by the Company be at a price lower than such conversion price immediately prior to such new issuance. In this regard,
at issuance, the Series A Convertible Preferred Stock conversion price was initially $6.00 per share, and was subsequently adjusted
to $5.00 per share upon the issuance of the Series S Warrants on July 3, 2017, and then to $4.99 per share upon the issuance of
the Series A-1 Preferred Stock Units on August 4, 2017, with such conversion price subject to further adjustment as noted above.
As
of September 30, 2017, there were 422,838 shares of Series A Convertible Preferred Stock issued and outstanding. Subsequently,
in November 2017, at the election of the holder, 8,334 shares of Series A Convertible Preferred Stock were converted into 10,021
shares of common stock of the Company.
The
Series A Convertible Preferred Stock conversion option is accounted for as an embedded derivative and bifurcated from Series A
Convertible Preferred Stock host financial instrument, under 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 Convertible
Preferred Stock conversion option embedded derivative is classified as a current liability on the unaudited condensed consolidated
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 unaudited condensed consolidated statement
of operations. See Note 3, Financial Instruments Fair Value Measurements, for further detail regarding the fair value of
the Series A Convertible Preferred Stock conversion option embedded derivative liability.
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 embedded derivative liability being
in excess of the Preferred Stock Units issuance gross proceeds, with such excess recognized as a current period loss in the unaudited
condensed consolidated statement of operations, as discussed above.
The
Series A Convertible Preferred Stock provides for dividends at an 8% annual rate, 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 September 30, 2017, Series
A Convertible Preferred Stock dividends totaling $130,010 or a payment-in-kind of 21,711 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, as such, the Company has not recognized a Series A Convertible Preferred Stock dividend payable liability as of September
30, 2017, and will not recognize such dividend payable liability until they are declared by the Company’s Board of Directors.
Notwithstanding, the Company has presented such dividend value as a component of the loss attributable to common stockholders
in the calculation of basic and diluted net loss per share.
Note
13 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Preferred
Stock (continued)
Series
A Convertible Preferred Stock (Continued)
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.
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 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.
Subsequently,
on October 18, 2017, upon approval by the unanimous vote of the Series A-1 Preferred Stock Units holders, the Series A-1 Preferred
Stock Units private placement transaction documents were amended: to remove the requirement for the Company to file with the SEC
an initial registration statement within sixty days of the August 4, 2017 closing date; to provide for the exchange of one Series
A-1 Warrant for five Series W Warrants; to exchange one Series A-1 Warrant for four Series X-1 Warrants, with such Series X-1
Warrants replacing the 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 Series A-1 Preferred Stock Units Securities Purchase Agreement. Additionally,
as the Company’s Series A Warrants can be exchanged for four Series X Warrants, the Series X-1 Warrants were instituted
for issuance upon the exchange of the corresponding Series A-1 Warrant. See below for a discussion of the Series W Warrants or
Series X-1 Warrants issued upon the exchange of the Series A-1 Warrants, and the Series X Warrants issued upon the exchange of
the Series A Warrants.
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.
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 determined using a combination of the Series A-1 Convertible Preferred Stock’s
present value of its cash flows and incorporating 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 determined 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:
| | |
Issue | |
| Series
A-1 Convertible Preferred Stock | |
Date | |
| Aggregate
fair value | |
$ | 189,550 | |
| Required
rate of return | |
| 27.0 | % |
| Series
A-1 Convertible Preferred Stock shares | |
| 125,000 | |
| Conversion
ratio | |
| 1.0 | x |
| Stated
Value per share - conversion ratio numerator | |
$ | 4.00 | |
| Conversion
price per share - conversion ratio denominator | |
$ | 4.00 | |
| Value
of common stock | |
$ | 2.98 | |
| Expected
term (years) | |
| 6.74 | |
| Volatility | |
| 52 | % |
| Risk
free rate | |
| 2.0 | % |
| Dividend
yield | |
| 0 | % |
| | |
Issue | |
| Series
A-1 Convertible Preferred Stock | |
Date | |
| Aggregate
fair value | |
$ | 310,450 | |
| Series
A-1 Warrants | |
| 125,000 | |
| Exercise
price per share | |
$ | 6.00 | |
| Value
of common stock | |
$ | 2.98 | |
| Expected
term (years) | |
| 6.74 | |
| Volatility | |
| 52 | % |
| Risk
free rate | |
| 2.0 | % |
| Dividend
yield | |
| 0 | % |
The
registration rights agreement, as amended, entered into in connection with the Series A-1 Preferred Stock Units private placement,
requires the Company to file with the SEC a registration statement registering for resale the maximum number of common shares
issuable upon conversion of the Series A-1 Convertible Preferred Shares and the exercise of the Series A-1 Warrants or, the Series
W or Series X-1 Warrants issued in exchange for the Series A-1 Warrants (as discussed below). The Company expects such registration
statement to also register the resale of the Series W Warrants and the Series X-1 Warrants, and will register the initial issuance
of shares of common stock of the Company underlying the Series W Warrants and the Series X-1 Warrants to the extent each such
warrants are publicly sold prior to their respective exercise. Such registration rights agreement requires the Company to use
commercially reasonable best efforts to have such registration statement declared effective no later than one hundred and fifty
(150) days from the August 4, 2017 closing date. If such registration statement is not effective by the contractually agreed upon
date or such 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.
Note
13 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Preferred
Stock (continued)
Series
A-1 Convertible Preferred Stock
The
Series A-1 Convertible Preferred Stock has a par value of $0.001 per share, no voting rights, a stated value of $4.00 per share,
was immediately convertible upon its issuance, and, at the election of the holders, is convertible into a number of shares of
common stock at a conversion ratio equal to its stated value divided by a conversion price of $4.00 per share, with such conversion
price 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. As of September 30, 2017, there were
125,000 shares of Series A-1 Convertible Preferred Stock issue and outstanding.
The
Series A-1 Preferred Stock Units private placement cash proceeds allocated to the Series A-1 Convertible Preferred Stock, as discussed
above, 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.
The
Series A-1 Convertible Preferred Stock provides for dividends at an 8% annual rate, 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 September
30, 2017, Series A-1 Convertible Preferred Stock dividends totaling $6,196 or a payment-in-kind of 1,551 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, as such, the Company has not recognized a Series A-1 Convertible Preferred Stock dividend payable
liability as of September 30, 2017, and will not recognize such dividend payable liability until they are declared by the Company’s
Board of Directors. Notwithstanding, the Company has presented such dividend value as a component of the loss attributable to
common stockholders in the calculation of basic and diluted net loss per share.
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. There were 13,343,061 and
13,330,811 shares of common stock outstanding as of September 30, 2017 and December 31, 2016, respectively.
Pre-Initial
Public Offering
In
connection with the organization of the Company in June 2014, 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 (Private Placement 1), a total of 418,089 units, consisting of one share of common
stock and one warrant, were sold to the initial investor investors (“Initial Investors”) for an aggregate purchase
price of $75,000 less offering costs of $7,500. In November 2014, the Company completed another private placement (Private Placement
2) of 2,355,233 units, consisting of one share of common stock and one warrant, raising $845,000 in gross offering proceeds less
offering costs of $46,500. Taken together, the Private Placement 1 warrants and Private Placement 2 warrants are referred to collectively
as the “Private Placement Warrants”. Subsequently, in September 2015, 1,393,629 shares of common stock were issued
as a result of the exercise of 1,393,629 Private Placement Warrants for cash proceeds of $1.25 million.
In
August 2015, the Company issued 97,554 warrants to an outside advisor in exchange for services.
The
9,560,295 remaining unexercised warrants discussed above, were subsequently converted into identical Series W Warrants issued
in the Company’s April 28, 2016 initial public offering (“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.
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” - 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
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.
Post-Initial
Public Offering
In
March 2017 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.
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.
Subsequently,
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; and, in November 2017 122,080 shares of common stock were issued, resulting from the cashless exercise
of 122,360 Series S Warrants.
Subsequently,
in November 2017, 10,021 shares of common stock were issued, resulting from, at the election of the holder, the conversion of
8,334 shares of Series A Convertible Preferred Stock.
Note
13 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Warrants
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. Generally, warrants are classified as equity, but may be classified as a derivative liability if the warrant
agreement provides for cash settlement or has certain exercise price adjustment provisions.
The
following table summarizes outstanding warrants to purchase common stock at the dates indicated:
| | |
Warrants
Exercisable at | | |
| |
| | |
| | |
Weighted | | |
| | |
Weighted | | |
| |
| | |
| | |
Average | | |
| | |
Average | | |
| |
| | |
September
30, 2017 | | |
Exercise
Price /Share | | |
December
31, 2016 | | |
Exercise
Price | | |
Expiration
Date | |
| Equity
classified warrants | |
| | | |
| | | |
| | | |
| | | |
| | |
| Series
W Warrants | |
| 10,567,845 | | |
$ | 5.00 | | |
| 10,580,095 | | |
$ | 5.00 | | |
| January
2022 | |
| Unit
Purchase Options | |
| | | |
| | | |
| | | |
| | | |
| | |
| Series
W Warrants | |
| 53,000 | | |
$ | 5.00 | | |
| 53,000 | | |
$ | 5.00 | | |
| January
2022 | |
| Series
S Warrants | |
| 2,660,000 | | |
$ | 0.01 | | |
| — | | |
$ | — | | |
| June
2032 | |
| Series
A-1 Warrants | |
| 125,000 | | |
$ | 6.67 | | |
| — | | |
$ | — | | |
| April
2024 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Liability
classified warrants | |
| | | |
| | | |
| | | |
| | | |
| | |
| Series
A Warrants | |
| 422,838 | | |
$ | 6.65 | | |
| — | | |
$ | — | | |
| April
2024 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total | |
| 13,828,683 | | |
$ | 4.11 | | |
| 10,580,095 | | |
$ | 5.00 | | |
| | |
Equity-Classified
Warrants
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 date of the Company’s IPO were automatically
converted into identical Series W Warrants issued in the Company’s 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 September 30, 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. 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, respectively.
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.
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. Separately, in January
2017, the Company’s CEO purchased 25,000 IPO Warrants (issued prior to the IPO) from a shareholder who had previously purchased
shares of common stock and warrants in the Company’s private financings prior to its IPO, with shares of common stock underlying
such IPO Warrants purchased by the CEO not included in the February 2017 Form S-1.
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 (“Scopia Note”), and
2,660,000 Series S Warrants to purchase shares of common stock of the Company. 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 their expiration date will be automatically exercised
on a cashless basis.
The
Scopia Note and the Series S Warrants are freestanding financial instruments, as the Series S Warrants were immediately legally
detachable from the Scopia Note and were immediately exercisable. The Series-S Warrants are classified as equity in the condensed
consolidated balance sheet. The Scopia Note net cash proceeds were 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. 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 Scopia Note and Series S Warrants.
As
of September 30, 2017, there were 2,660,000 Series S Warrants issued and outstanding. Subsequently, in October 2017, 532,000 Series
S Warrants were exercised for cash proceeds of $5,320, resulting in the issuance of a corresponding number of shares of common
stock; and, in November 2017, 122,360 Series S Warrants were exercised on a cashless basis, resulting in the issuance of 122,080
shares of common stock.
Series
A-1 Warrants
The
Series A-1 Warrants were exercisable upon their issuance and expire after the close of business on April 30, 2024, and each may
be exercised for one share of common stock 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,
as a result of the October 18, 2017 amendment discussed above, through April 30, 2024, each Series A-1 Warrant, at the option
of the holder, may be exchanged into five Series W Warrants or 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 September 30, 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.
A
Series A-1 Warrant may be exercised for one share of common stock 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, as a result of the October 18, 2017 amendment discussed above, through April 30, 2024, each Series
A-1 Warrant, at the option of the holder, may be exchanged into five Series W Warrants or 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 September 30, 2017,
no Series A-1 Warrants had been exchanged for Series W Warrants nor Series X-1 Warrants.
If
at any time after the six month anniversary of the Series A-1 Preferred Stock Units August 4, 2017 closing date, there is not
an effective registration statement registering, or no current prospectus available for, the resale of the shares underlying the
Series A-1 Warrants, then the Series A-1 Warrants may be exercised, in whole or in part, at such time by means of a “cashless
exercise”. 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.
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 September 30, 2017, no Series A-1 Warrants had been exchanged for Series W Warrants nor Series X-1 Warrants.
Notwithstanding, the 125,000 Series A-1 Warrants issued and outstanding at September 30, 2017, if exchanged, would result in the
issuance of 625,000 such Series W Warrants or the issuance of 500,000 such Series X-1 Warrants.
As
more fully discussed above, 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 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 Series X-1 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-1 Warrants are exercisable commencing on the
first trading day following October 31, 2018 - as it is the later of (i) the May 21, 2017 stockholder approval in accordance with
Nasdaq Stock Market Rule 5635(d) of the Series A Preferred Stock Units private placement; or (ii) October 31, 2018. The Series
X-1 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-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
X Warrants Issued Upon Exchange of Series A Warrants
A
Series A Warrant, as discussed below, at the election of the holder, may be exchanged for four Series X Warrants. As of September
30, 2017, no Series A Warrants had been exchanged for Series X Warrants. Notwithstanding, the 422,838 Series A Warrants issued
and outstanding at September 30, 2017, if exchanged, would result in the issuance of 1,691,352 such 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 - as it is the later of (i) the May 21, 2017 stockholder approval in accordance with Nasdaq Stock Market Rule
5635(d) of the Series A Preferred Stock Units private placement; or (ii) 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.
Note
13 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Warrants
(continued)
Liability-Classified
Warrants
Common
stock warrants are accounted for as derivative liabilities if the warrants allow for cash settlement or provide for modification
of the warrant exercise price in the event subsequent sales of common stock are at a lower price per share than the then-current
warrant exercise price, as is the case for the Series A Warrants. The Company classifies derivative warrant liabilities on the
condensed consolidated balance sheet as a current liability, 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 condensed consolidated statement of operations. If upon the occurrence of an event resulting in the warrant liability or
the embedded derivative liability to be 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.
Series
A Warrants
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 of $6.65 per share, with such exercise price
initially $8.00 per share at issuance, and 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. 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 above.
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.
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 unaudited condensed 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 condensed consolidated statement of operations. See Note 3, Financial
Instruments Fair Value Measurements, for further detail regarding the fair value of the Series A Warrants liability.
Unit
Purchase Options
On
April 28, 2016, the Company issued 53,000 unit purchase options to the selling agents in the Company’s IPO (“UPO”),
with such unit purchase options enabling the holder to purchase at an exercise price of $5.50 per unit, with each such unit being
identical to the unit issued in the Company’s IPO, and thus comprised of one share of common stock and one Series W Warrant
to purchase a share of common stock of the Company at an exercise price of $5.00 per share, as discussed above. The estimated
the fair value of such unit purchase options was $105,100, which was accounted for as offering costs of the Company’s IPO,
and was 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%.
Note
14 —Loss Per Share
The
following table sets forth basic and diluted net loss per share - as reported and net loss per share attributable to common stockholders
for the periods indicated:
| | |
Three
Months Ended
September 30, | | |
Nine
Months Ended
September 30, | |
| | |
2017 | | |
2016 | | |
2017 | | |
2016 | |
| Numerator | |
| | | |
| | | |
| | | |
| | |
| Net
loss - as reported | |
$ | (5,129,318 | ) | |
$ | (1,928,722 | ) | |
$ | (10,389,113 | ) | |
$ | (3,940,337 | ) |
| Series
A Convertible Preferred Stock undeclared and accumulated dividends(1) | |
| (52,299 | ) | |
| — | | |
| (130,010 | ) | |
| — | |
| Series
A-1 Convertible Preferred Stock undeclared and accumulated dividends(2) | |
| (6,196 | ) | |
| — | | |
| (6,196 | ) | |
| — | |
| Deemed
dividend Series A-1 Convertible Preferred Stock(3) | |
| (182,500 | ) | |
| | | |
| (182,500 | ) | |
| — | |
| Net
loss attributable to common stockholders(4) | |
$ | (5,370,313 | ) | |
$ | (1,928,722 | ) | |
$ | (10,707,819 | ) | |
$ | (3,940,337 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Denominator | |
| | | |
| | | |
| | | |
| | |
| Weighted-average
common shares outstanding | |
| 13,332,629 | | |
| 13,310,000 | | |
| 13,331,585 | | |
| 12,855,714 | |
| | |
| | | |
| | | |
| | | |
| | |
| Loss
per share | |
| | | |
| | | |
| | | |
| | |
| Basic
and diluted(5) | |
| | | |
| | | |
| | | |
| | |
| -
Net loss - as reported | |
$ | (0.38 | ) | |
$ | (0.14 | ) | |
$ | (0.78 | ) | |
$ | (0.31 | ) |
| -
Net loss attributable to common stockholders | |
$ | (0.40 | ) | |
$ | (0.14 | ) | |
$ | (0.80 | ) | |
$ | (0.31 | ) |
| (1) |
The
Series A Convertible Preferred Stock provides for dividends at an 8% annual rate, 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 election of the Company, through
any combination of the issuance of additional Series A Convertible Preferred Stock, common shares, and /or cash payment. As
of September 30, 2017, Series A Convertible Preferred Stock dividends totaling $130,010 or a payment-in-kind of 21,711 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, as such, the Company has not recognized a Series A Convertible Preferred Stock
dividend payable liability as of September 30, 2017, and will not recognize such dividend payable liability until they are
declared by the Company’s Board of Directors. |
| |
|
| (2) |
The
Series A-1 Convertible Preferred Stock provides for dividends at an 8% annual rate, compounded quarterly, accumulate, and
are payable in arrears upon being declared by our 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 election of the Company, through any combination
of the issuance of additional Series A-1 Convertible Preferred Stock, common shares, and /or cash payment. As of September
30, 2017, Series A-1 Convertible Preferred Stock dividends totaling $6,196 or a payment-in-kind of 1,551 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, as such, the Company has not recognized a Series A-1 Convertible Preferred Stock dividend
payable liability as of September 30, 2017, and will not recognize such dividend payable liability until they are declared
by the Company’s Board of Directors. . |
| |
|
| (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) |
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. |
| |
|
| (4) |
Basic
net loss per share is calculated by dividing the loss by the weighted-average number of shares of common stock outstanding
for the period, without consideration for potential dilutive common shares. As the Company was in a loss position for all
periods presented, diluted net loss per share is the same as basic net loss per share as the inclusion of incremental shares
resulting from common stock equivalents would be anti-dilutive. |
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:
| | |
September
30, | |
| | |
2017 | | |
2016 | |
| Stock
Options | |
| 1,921,924 | | |
| 1,588,313 | |
| Unit
purchase options as to shares of common stock | |
| 53,000 | | |
| 53,000 | |
| Unit
purchase options as to shares underlying Series W Warrants | |
| 53,000 | | |
| 53,000 | |
| Series
W Warrants(8) | |
| 10,567,845 | | |
| 10,620,295 | |
| Series
A Convertible Preferred Stock(5) | |
| 422,838 | | |
| — | |
| Series
A Warrants(6) | |
| 422,838 | | |
| — | |
| Series
X Warrants(6) | |
| — | | |
| — | |
| Series
A-1 Convertible Preferred Stock(7) | |
| 125,000 | | |
| — | |
| Series
A-1 Warrants(8) | |
| 125,000 | | |
| — | |
| Series
X-1 Warrants(8) | |
| — | | |
| — | |
| Series
S Warrants | |
| 2,660,000 | | |
| — | |
| Total | |
| 16,351,445 | | |
| 12,314,608 | |
| (5) |
The
422,838 shares of Series A Convertible Preferred Stock, at the election of the holder, if-converted into a number of shares
of common stock at a conversion ratio equal to its $6.00 per share stated value divided by a conversion price of $4.99 per
share, with such conversion price subject to further reduction, would result in 508,422 incremental shares of newly-issued
common stock at September 30, 2017. |
| |
|
| (6) |
The
422,838 Series A Warrants, at the election of the holder, may be exchanged for four Series X Warrants under the terms of the
Series A Warrant agreement. 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 not exercisable for shares of common stock at September
30, 2017, and would not result in common stock equivalent incremental shares for purposes of diluted weighted average shares
outstanding at such date. At September 30, 2017, no Series A Warrants had been exchanged for Series X Warrants. |
| |
|
| (7) |
The
125,000 shares of Series A-1 Convertible Preferred Stock, at the election of the holder, if-converted into a number of shares
of common stock at a conversion ratio equal to its $4.00 per share stated value divided by a conversion price of $4.00 per
share, with such conversion price not subject to further adjustment, would result in 125,000 incremental shares of newly-issued
common stock at September 30, 2017. |
| |
|
| (8) |
The
125,000 Series A-1 Warrants, 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. 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 are therefore not exercisable for shares
of common stock at September 30, 2017, and would not result in common stock equivalent incremental shares for purposes of
diluted weighted average shares outstanding at such date. At September 30, 2017, no Series A-1 Warrants had been exchanged
for Series W Warrants or Series X1 Warrants. |
Note
15 — Subsequent Events
Other
Matters
Except
as otherwise noted herein, the Company has evaluated subsequent events through the date of filing of this Quarterly Report on
Form 10-Q, and determined there to be no events requiring adjustments to the unaudited condensed consolidated financial statements
or disclosures therein.
Annex
C
PAVMED
INC.
PRO
FORMA CONSOLIDATED BALANCE SHEET
PRO
FORMA FINANCIAL INFORMATION
SEPTEMBER
30, 2017
(unaudited)
The
following PAVmed Inc. (“PAVmed” or “the Company”) unaudited Pro Forma Consolidated Balance Sheet as of
September 30, 2017 and the corresponding unaudited pro forma financial information, each as presented in Annex C herein, result
from giving effect to certain pro forma adjustments of the Series W Warrants Offer-to-Exercise, as if the transaction occurred
on September 30, 2017 and to reflect participation at the temporary exercise price for the number of Series W Warrants presently
issued and outstanding to non-affiliate holders. The pro forma adjustments are based upon available information and assumptions
deemed to be reasonable.
The
unaudited proforma financial information is presented for illustrative purposes only and does not purport to represent what the
Company’s actual financial position would have been had the transaction actually completed on the date indicated, and is
not indicative of its future financial condition.
Such
pro forma adjustments were applied to the Company’s historical unaudited consolidated balance sheet and other financial
statements and notes thereto as of and for the nine months ended September 30, 2017, included in the Company’s Quarterly
Report on Form 10-Q for the period ended September 30, 2017 filed with the SEC on November 14, 2017;
The
unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2017 and the corresponding unaudited pro forma financial information
has been prepared for inclusion in the Company’s Schedule TO Annex C herein, in conjunction with the Company’s Series
W Warrants Offer to Exercise transaction, as such transaction is more fully described in the Schedule TO.
The
unaudited Pro Forma Consolidated Balance Sheet and unaudited pro forma financial information presented in Annex C herein should
be read in conjunction with the Company’s historical unaudited consolidated financial statements and notes thereto as of
and for the nine months ended September 30, 2017, included in the Company’s Quarterly Report on Form 10-Q for the period
ended September 30, 2017 filed with the SEC on November 14, 2017.
PAVMED
INC.
and
SUBSIDIARY
PRO
FORMA CONSOLIDATED BALANCE SHEET
(unaudited)
| | |
Actual | | |
| |
| | |
Pro Forma | |
| | |
As Reported | | |
| |
| | |
Adjusted | |
| | |
September
30, | | |
| |
Pro Forma | | |
September
30, | |
| | |
2017 | | |
Notes | |
Adjustments | | |
2017 | |
| Assets | |
| | | |
| |
| | | |
| | |
| Current
assets | |
| | | |
| |
| | | |
| | |
| Cash | |
$ | 3,111,456 | | |
(a) | |
$ | 5,036,582 | | |
$ | 8,098,038 | |
| | |
| | | |
(b) | |
| (50,000 | ) | |
| | |
| Prepaid
expenses and other current assets | |
| 103,272 | | |
| |
| — | | |
| 103,272 | |
| Total
current assets | |
| 3,214,728 | | |
| |
| 4,986,582 | | |
| 8,201,310 | |
| Equipment, net | |
| 17,994 | | |
| |
| — | | |
| 17,994 | |
| Deferred
offering costs | |
| — | | |
| |
| — | | |
| — | |
| Total
assets | |
$ | 3,232,722 | | |
| |
$ | 4,986,582 | | |
$ | 8,219,304 | |
| | |
| | | |
| |
| | | |
| | |
| Liabilities,
Preferred Stock, and Stockholders’ Deficit | |
| | | |
| |
| | | |
| | |
| Current
liabilities | |
| | | |
| |
| | | |
| | |
| Accounts payable | |
$ | 991,693 | | |
| |
$ | — | | |
$ | 991,693 | |
| Accrued expenses and
other current liabilities | |
| 354,289 | | |
| |
| — | | |
| 354,289 | |
| Accrued interest expense | |
| 187,500 | | |
| |
| — | | |
| 187,500 | |
| Series A Warrants | |
| 4,731,557 | | |
| |
| — | | |
| 4,731,557 | |
| Derivative
liability | |
| 1,298,113 | | |
| |
| — | | |
| 1,298,113 | |
| Total
current liabilities | |
| 7,563,152 | | |
| |
| — | | |
| 7,563,152 | |
| | |
| | | |
| |
| | | |
| | |
| Senior
Secured Note, net of $3,417,233 unamortized debt discount | |
| 1,582,767 | | |
| |
| — | | |
| 1,582,767 | |
| | |
| | | |
| |
| | | |
| | |
| Total
liabilities | |
$ | 9,145,919 | | |
| |
$ | — | | |
$ | 9,145,919 | |
| | |
| | | |
| |
| | | |
| | |
| COMMITMENTS AND CONTINGENCIES | |
| | | |
| |
| | | |
| | |
| | |
| | | |
| |
| | | |
| | |
| Preferred
Stock | |
| | | |
| |
| | | |
| | |
| par value $0.001, 20,000,000 shares authorized; | |
| | | |
| |
| | | |
| | |
| Series
A Convertible Preferred Stock, par value $0.001, 422,838 shares issued and outstanding at September 30, 2017 | |
| — | | |
| |
| — | | |
| — | |
| | |
| | | |
| |
| | | |
| | |
| Stockholders’
Deficit | |
| | | |
| |
| | | |
| | |
| Series A-1 Convertible
Preferred Stock, par value $0.001, 125,000 shares issued and outstanding at September 30, 2017 | |
| 189,550 | | |
| |
| — | | |
| 189,550 | |
| | |
| | | |
| |
| | | |
| | |
| Common stock, par value
$0.001; 50,000,000 shares authorized, 13,343,061 shares issued and outstanding at September 30, 2017 | |
| 13,343 | | |
(a) | |
| 2,518 | | |
| 15,861 | |
| | |
| | | |
| |
| | | |
| | |
| Additional paid-in capital | |
| 12,157,358 | | |
(a) | |
| 5,034,064 | | |
| 18,022,824 | |
| | |
| | | |
(b) | |
| (50,000 | ) | |
| | |
| | |
| | | |
(c) | |
| 881,402 | | |
| | |
| | |
| | | |
| |
| | | |
| | |
| Accumulated
deficit | |
| (18,273,448 | ) | |
(c) | |
| (881,402 | ) | |
| (19,154,850 | ) |
| Total
Stockholders’ Deficit | |
| (5,913,197 | ) | |
| |
| 4,986,582 | | |
| (926,615 | ) |
| | |
| | | |
| |
| | | |
| | |
| Total
Liabilities, Series A Convertible Preferred Stock, and Stockholders’ Deficit | |
$ | 3,232,722 | | |
| |
$ | 4,986,582 | | |
$ | 8,219,304 | |
See
accompanying notes to the unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2017.
PAVMED
INC. AND SUBSIDIARY
NOTES
TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2017
Note
1 — The Company, Description of the Business, and Going Concern
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. The Company realized approximately $4.2 million of net cash proceeds
resulting from the Company’s IPO on April 28, 2016. In the nine months ended September 30, 2017, the Company has raised
approximately $7.5 million of net cash proceeds resulting from three transactions, including: the 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. See Note 4, Series A Convertible Preferred
Stock, Stockholders’ Deficit, and Warrants, for a discussion of the Company’s common stock and warrants issued
before the Company’s IPO.
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 4, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for a further discussion of the
Company’s common stock and Series W 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 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 (“Scopia Note”),
and 2,660,000 Series S Warrants to purchase shares of common stock of the Company.
The
Scopia 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, with the remaining unpaid interest added to and increasing the outstanding interest-bearing
principal balance of the Scopia Note by such amount. The aggregate remaining unpaid principal balance of the Scopia 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.
See
Note 4, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for further information with respect
to the Series S Warrants.
Note
1 — The Company, Description of the Business, and Going Concern (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, which was subsequently amended on October 18,
2017, 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).
At
the August 4, 2017 closing of the Series A-1 Preferred Stock Units private placement, a total of 125,000 Series A-1 Preferred
Stock Units were issued 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.
A
Series A-1 Preferred Stock Unit was 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.
See
Note 4, 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.
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 (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).
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.
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.
See
Note 4, 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.
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, the Company completes the development process of its products, including
regulatory approvals, and thereafter, begins to commercialize and achieve substantial acceptance in the marketplace for the first
of a series of products in its medical device portfolio.
The
Company incurred a historical net loss attributable to common stockholders of $10,707,819 and had historical net cash flows used
in operating activities of $5,021,134 for the nine months ended September 30, 2017. At September 30, 2017, the Company had a historical
accumulated deficit of $18,273,448 and historical working capital of $1,681,246, adjusted to exclude the historical Series A Warrants
liability of $4,731,557 and the historical Series A Convertible Preferred Stock embedded conversion option derivative liability
of $1,298,113. In the near future, the Company anticipates incurring operating losses and does not expect to experience positive
cash flows from operating activities and may continue to incur operating losses for the next several years as it completes the
development of its products, seeks regulatory approvals, and begin to market such products. These factors raise substantial doubt
about the Company’s ability to continue as a going concern within one year after the date the unaudited condensed consolidated
financial statements are issued.
The
Company estimates its current (actual) cash resources absent any additional sources of cash, is sufficient to fund its operations
into the quarter ended June 30, 2018. Accordingly, the Company does not have sufficient cash resources to fund its anticipated
operating losses beyond the twelve months after the date these unaudited condensed consolidated financial statements are issued.
Therefore, the Company must raise additional cash to support its operating and capital needs beyond the quarter ended June 30,
2018.
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 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 unaudited condensed consolidated
financial statements are issued.
The
Company’s historical unaudited condensed 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 historical
unaudited condensed 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.
Note
2 — Summary Description of Series W Warrants Offer-to-Exercise Transaction, Basis of Presentation, Pro Forma Adjustments,
and Significant Accounting Policies
Summary
Description of Series W Warrants Offer-To-Exercise Transaction
The
Series W Warrants have a contractual 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. See Note 4, Series A Convertible Preferred Stock, Stockholders’
Deficit, and Warrants, for a further discussion of the Series W Warrants.
As
provided for in the Series W Warrant agreement, the Company is offering to holders of Series W Warrants a temporary exercise price
of $2.00 per share, as more fully described in the Schedule TO herein (“Series W Warrants Offer-to-Exercise”).
As
of December 31, 2017, there were 10,567,845 Series W Warrants issued and outstanding and eligible to participate in the Series
W Warrants Offer-to-Exercise, with such number of Series W Warrants inclusive of 8,049,554 Series W Warrants held, either directly
and /or indirectly, by certain of the Company’s executive officers and directors (affiliates), who are entitled to participate
in the Series W Warrants Offer-to-Exercise. Notwithstanding, the Pro Forma Consolidated Balance Sheet includes only the assumed
exercise of Series W Warrants issued and outstanding to non-affiliates, as if the Series W Warrants held by affiliates do not
intend to participate in the Series W Warrants Offer to Exercise, resulting in 2,518,291 Series W Warrants estimated to participate
in the Series W Warrants Offer-to-Exercise transaction.
As
of December 31, 2017, there were 279,837 Series A-1 Warrants issued and outstanding. The Series A-1 Warrants were exercisable
upon their 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 election of the holder, may be exchanged into five Series W Warrants or four Series X-1
Warrants. See Note 4, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants, for a further discussion
of the Series W Warrants or Series X-1 Warrants issued upon the exchange of a Series A-1 Warrant. As of December 31, 2017, no
Series A-1 Warrants had been exchanged for Series W Warrants nor Series X-1 Warrants. As the issuance of Series W Warrants upon
the exchange of Series A-1 Warrants is solely at the election of the Series A-1 Warrant holder, such unissued Series W Warrants
have not been included in the pro forma adjustment of the number of Series W Warrants estimated to participate in the Series W
Warrant Offer-to-Exchange. If all of the Series A-1 Warrants were exchanged for Series W Warrants according to their contractual
terms and prior to the termination date of the Series W Warrant Offer-to-Exercise, an additional 1,399,185 Series W Warrants would
be eligible to participate in the Offer-to-Exercise.
Basis
of Presentation
The
accompanying PAVmed Inc. (“PAVmed” or “the Company”) unaudited Pro Forma Consolidated Balance Sheet as
of September 30, 2017 and the corresponding unaudited pro forma financial information, each as presented in Annex C herein, result
from the effect of certain pro forma adjustments to give effect to the Series W Warrants Offer-to-Exercise, as if the number of
Series W Warrants estimated to participate in the Series W Warrants Offer-to-Exercise were exercised at the temporary exercise
price on September 30, 2017, along with other related pro forma adjustments, with such pro forma adjustments based upon available
information and assumptions deemed to be reasonable.
The
pro forma adjustments,
as further discussed below, were applied to the Company’s historical unaudited consolidated balance sheet and other
financial statements and notes thereto as of and for the nine months ended September 30, 2017, included in the Company’s
Quarterly Report on Form 10-Q for the period ended September 30, 2017 filed with the SEC on November 14, 2017. Such historical
unaudited balance sheet and other financial statements and notes thereto, include the accounts of the Company and its wholly-owned
subsidiary, with all intercompany transactions and balances eliminated in consolidation, and each were prepared in accordance
with accounting principles generally accepted in the United States of America (“GAAP”), and applicable rules and regulations
of the United States Securities and Exchange Commission (“SEC”).
The
unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2017 and the corresponding unaudited pro forma financial information
has been prepared for inclusion in the Company’s Schedule TO Annex C herein, in conjunction with the Company’s Series
W Warrants Offer to Exercise transaction. The unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2017 and the
corresponding unaudited pro forma financial information presented in Annex C herein is solely for illustrative purposes only and
does not purport to represent in accordance with GAAP nor applicable rules and regulations of the SEC, what the actual consolidated
financial condition of the Company would have been had the Series W Warrants Offer to Exercise transaction actually been completed
on the pro forma adjustment date indicated, and is not indicative of the Company’s future consolidated financial condition.
Note
2 — Summary Description of Series W Warrants Offer-to-Exercise Transaction, Basis of Presentation, Pro Forma Adjustments,
and Significant Accounting Policies, and (continued)
The
unaudited Pro Forma Consolidated Balance Sheet and unaudited pro forma financial information presented in Annex C herein should
be read in conjunction with the Company’s historical unaudited consolidated financial statements and notes thereto as of
and for the nine months ended September 30, 2017, included in the Company’s Quarterly Report on Form 10-Q for the period
ended September 30, 2017 filed with the SEC on November 14, 2017.
Pro
Forma Adjustments
The
unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2017, and the corresponding unaudited pro forma financial information,
each as presented in Annex C herein, result from the effect of certain pro forma adjustments to give effect to the Series W Warrants
Offer-to-Exercise, as if the Series W Warrants estimated to participate in the Series W Warrants Offer-to-Exercise were exercised
at the temporary exercise price of $2.00 per share on September 30, 2017, along with the other related pro forma adjustments,
as follows:
| |
(a) |
The
exercise at the temporary exercise price of $2.00 per
share of the 2,518,291 Series W Warrants estimated to participate in the Series W Warrants Offer-to-Exercise, resulting
in gross proceeds of $5,036,582. This does not include 8,049,554 warrants held by affiliates that are eligible to participate
but for illustration purposes are reflected as if the affiliates do not intend to participate in the Series W Warrants Offer-to-Exercise.
Also not included are the currently unissued 1,399,185 Series W Warrants which may be issued upon the exchange of all 279,837
Series A-1 Warrants issued and outstanding, as described above. While the Series W Warrants issued upon exchange of the Series
A-1 Warrants are eligible to participate in the Series W Warrants Offer-to-Exercise, such Series W Warrants have not been
included in the pro forma adjustment as they are currently unissued. |
| |
|
|
| |
(b) |
Estimated
transaction expenses of $50,000 related to the Series W Warrants Offer-to-Exercise transaction. |
| |
|
|
| |
(c) |
Expense
related to the modification of the Series W Warrants resulting from the temporary exercise price of $2.00 per share. In this
regard, the Series W Warrants temporary exercise price of $2.00 per share is a short-term inducement offer, which under the
analogous authoritative guidance of FASB ASC 718, Stock Compensation, is accounted for as a modification to the contractual
terms of the Series W Warrant Agreement, wherein, the incremental fair value of the Series W Warrant resulting from the temporary
exercise price modification, if such incremental fair value is an increase, would be recognized as an expense on the Company’s
statement of operations, for each Series W Warrant exercised at the temporary exercise price, if any. |
| |
|
|
| |
|
The
temporary exercise price of $2.00 per share as compared to the contractual exercise price of $5.00 per share, resulted in
a pro forma Series W Warrant modification expense of $881,402, assuming the exercise of all the 2,518,291 Series W Warrants
estimated to participate in the Series W Warrants Offer-to-Exercise transaction. |
| |
|
|
| |
|
The
Series W Warrants estimated fair values was determined using a Black-Scholes option pricing model for each of the $2.00 temporary
exercise price and the $5.00 contractual exercise price, with the following assumptions: |
| | |
Temporary | | |
Contractual | |
| | |
Exercise | | |
Exercise | |
| | |
Price | | |
Price | |
| Series W Warrants | |
$2.00 | | |
$5.00 | |
| Fair value /Series W-Warrant | |
$ | 0.35 | | |
$ | — | |
| Exercise price per share | |
$ | 2.00 | | |
$ | 5.00 | |
| Value of common stock | |
$ | 2.33 | | |
$ | 2.33 | |
| Expected term | |
| 20
Days | | |
| 20
Days | |
| Volatility | |
| 50 | % | |
| 50 | % |
| Risk free interest rate | |
| 1.8 | % | |
| 1.8 | % |
| Dividend yield | |
| 0 | % | |
| 0 | % |
| |
|
The
value of the common stock and the risk free interest rate were as of December 27, 2017, which was the day before the Company
issued a press release on December 28, 2017 announcing the Series W Warrant Offer-to-Exercise transaction. |
Note
2 — Summary Description of Series W Warrants Offer-to-Exercise Transaction, Basis of Presentation, Pro Forma Adjustments,
and Significant Accounting Policies, and (continued)
Significant
Accounting Policies
The
significant accounting policies used in the preparation of the unaudited Pro Forma Consolidated Balance Sheet as of September
30, 2017, and the corresponding unaudited pro forma financial information, each as presented in Annex C herein, are consistent
with the significant accounting policies used in the preparation of the Company’s historical unaudited consolidated financial
statements and notes thereto, as of and for the nine months ended September 30, 2017, included in the Company’s Quarterly
Report on Form 10-Q for the period ended September 30, 2017 filed with the SEC on November 14, 2017.
JOBS
Act Accounting Election
The
Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS
Act”). 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. 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 that are not emerging growth companies.
Note
3 — Financial Instruments Fair Value Measurements
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 to be 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.
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. |
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 at September 30, 2017 and December 31, 2016.
Note
3 — Financial Instruments Fair Value Measurements (continued)
Recurring
Fair Value Measurements
At
September 30, 2017, the Series A Convertible Preferred Stock conversion option embedded derivative liability and the Series A
Warrants liability were initially and are subsequently measured at fair value in accordance with FASB ASC 820, using a Monte Carlo
simulation valuation model, using the Company’s common stock price and certain Level 3 inputs to take into account the probabilities
of certain events occurring over the life of the respective financial instrument. 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 ASC 820. The following
fair value hierarchy table presents information about each major category of the Company’s financial instruments measured
at fair value on a recurring basis as of September 30, 2017.
| | |
Fair
Value Measurement on a Recurring Basis at Reporting Date Using: | |
| | |
Quoted | | |
| | |
| | |
| |
| | |
Prices
in | | |
| | |
| | |
| |
| | |
Active | | |
| | |
| | |
| |
| | |
Markets | | |
Significant | | |
| | |
| |
| | |
for | | |
Other | | |
Significant | | |
| |
| | |
Identical | | |
Observable | | |
Unobservable | | |
| |
| | |
Items | | |
Inputs | | |
Inputs | | |
| |
| | |
Level-1 | | |
Level-2 | | |
Level-3 | | |
Total | |
| September 30, 2017 | |
| | | |
| | | |
| | | |
| | |
| Liabilities | |
| | | |
| | | |
| | | |
| | |
| Series
A Warrants | |
$ | — | | |
$ | — | | |
$ | 4,731,557 | | |
$ | 4,731,557 | |
| Series
A Convertible Preferred Stock conversion option embedded derivative liability | |
| — | | |
| — | | |
| 1,298,113 | | |
| 1,298,113 | |
| Total
liabilities | |
$ | — | | |
$ | — | | |
$ | 6,029,670 | | |
$ | 6,029,670 | |
The
Series A Preferred Stock Units were issued in three closings in the three months ended March 31, 2017, with each such unit comprised
of one share of Series A Convertible Preferred Stock and one Series A Warrant - with each, at the option of the holder, convertible
into and exercisable for, respectively, a share of the Company’s common stock. See Note 4, Series A Convertible Preferred
Stock, Stockholders’ Deficit, and Warrants for 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, which is accounted for as an embedded derivative
and bifurcated from its host financial instrument, were determined to be derivatives under FASB ASC 815, as, along with other
provisions, their conversion price and exercise price, respectively, are subject to potential adjustment resulting from future
financing transactions, under certain conditions.
The
Series A Warrants and the Series A Convertible Preferred Stock conversion option embedded derivative are each classified as a
current liability on the unaudited condensed consolidated balance sheet, and were initially measured at fair value at the time
of issuance and are subsequently remeasured at fair value at each reporting period, with changes in fair value recognized as other
income or expense in the unaudited condensed consolidated statement of operations.
A
reconciliation of the Series A Warrants liability and the Series A Convertible Preferred Stock conversion option embedded derivative
liability for the nine months ended September 30, 2017 is a follows:
| | |
| | |
Series A | |
| | |
| | |
Convertible | |
| | |
| | |
Preferred Stock | |
| | |
| | |
Conversion Option | |
| | |
Series A | | |
Embedded | |
| | |
Warrants | | |
Derivative | |
| | |
Liability | | |
Liability | |
| Balance at December 31, 2016 | |
$ | — | | |
$ | — | |
| Initial fair value on dates
of issuance | |
| 4,050,706 | | |
| 1,221,963 | |
| Change in fair
value | |
| 680,851 | | |
| 76,150 | |
| Balance at September 30, 2017 | |
$ | 4,731,557 | | |
$ | 1,298,113 | |
In
the nine months ended September 30, 2017, the change in fair values resulted in the recognition of: an expense of $680,851 with
respect to the Series A Warrants liability; and, an expense of $76,150 with respect to the Series A Convertible Preferred Stock
conversion option embedded derivative liability. As the Series A Preferred Stock Units were issued in the three months ended March
31, 2017, there was no comparable amount in the prior year period.
Note
3 — Financial Instruments Fair Value Measurements (continued)
The
fair value of the Series A Warrants liability and the Series A Convertible Preferred Stock conversion option embedded derivative
liability was determined 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 the life of the respective financial
instrument. The resulting estimated fair value is subjective and is affected by changes in inputs to the valuation model including
the Company’s common stock price, and 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 dilutive transactions; and, the risk-free
rates based on U.S. Treasury security yields. Changes in these assumptions can materially affect the estimated fair value of each
financial instrument. The Series A Warrants liability and the Series A Convertible Preferred Stock conversion option embedded
derivative liability estimated fair value and the underlying assumptions as of the dates indicated, are as follows:
| | |
| | |
Issue | |
| | |
| | |
Dates’ | |
| | |
| | |
Aggregated | |
| | |
September 30, | | |
Weighted | |
| Series A Warrants Liability | |
2017 | | |
Average | |
| Fair value per Series A
Warrant | |
$ | 11.19 | | |
$ | 9.58 | |
| Series A Warrants outstanding | |
| 422,838 | | |
| 422,838 | |
| Calculated aggregate fair value | |
$ | 4,731,557 | | |
$ | 4,050,706 | |
| Value of common stock | |
$ | 5.43 | | |
$ | 5.73 | |
| Exercise price per share | |
$ | 6.65 | | |
$ | 8.00 | |
| Expected term (years) | |
| 6.59 | | |
| 7.21 | |
| Volatility | |
| 53 | % | |
| 47 | % |
| Risk free rate | |
| 2.1 | % | |
| 2.3 | % |
| Dividend yield | |
| 0 | % | |
| 0 | % |
| | |
| | |
Issue | |
| | |
| | |
Dates’ | |
| | |
| | |
Aggregated | |
| Series A Convertible Preferred Stock | |
September 30, | | |
Weighted | |
| Conversion Option Embedded
Derivative Liability | |
2017 | | |
Average | |
| Fair value per conversion option | |
$ | 3.07 | | |
$ | 2.89 | |
| Series A Convertible Preferred Stock
shares outstanding | |
| 422,838 | | |
| 422,838 | |
| Calculated aggregate fair value | |
$ | 1,298,113 | | |
$ | 1,221,963 | |
| Value of common stock | |
$ | 5.43 | | |
$ | 5.73 | |
| Conversion price per share | |
$ | 4.99 | | |
$ | 6.00 | |
| Expected term (years) | |
| 6.59 | | |
| 7.21 | |
| Volatility | |
| 53 | % | |
| 47 | % |
| Risk-free interest rate | |
| 2.1 | % | |
| 2.3 | % |
| Dividend yield | |
| 0 | % | |
| 0 | % |
Non-recurring
Fair Value Measurements
The
non-recurring issue-date fair values of the Series A-1 Warrants issued in the Series A-1 Preferred Stock Units private placement,
utilized the Company’s common stock price and certain Level 3 inputs in the development of discounted cash flow analyses
and Black-Scholes valuation models, and are presented in Note 4, Series A Convertible Preferred Stock, Stockholders’
Deficit, and Warrants.
Note
4 — 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. At September 30, 2017,
and December 31, 2017, a total of 422,838 and 249,667 shares, respectively, of Series A Convertible Preferred
Stock (classified in temporary equity), and 125,000 and 357,259 shares, respectively, 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 (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”). 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.
Subsequently,
on October 20, 2017, the Company initiated an exchange offer (Series A Exchange Offer), to the 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, to exchange one Series A Warrant for one Series A-1 Warrant. At the Series A Exchange Offer
November 17, 2017 expiration 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 and 154,837 Series A Warrants were exchanged for 154,837 Series A-1 Warrants.
See below for a discussion of the Series A-1 Convertible Preferred Stock and Series A-1 Warrants.
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 exchange ratio; 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.
The
Series A Warrant and the Series A Convertible Preferred Stock conversion option, which is accounted for as an embedded derivative
and bifurcated from its host financial instrument, 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 an aggregate loss of $3,124,285, resulting from
the aggregate initial fair value of the Series A Warrant liability and the Series A Convertible Preferred Stock conversion option
embedded derivative liability being in excess of the Series A Preferred Stock Units issuance gross proceeds, 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 | |
| | |
Issue Dates | |
| | |
(Aggregate) | |
| Series A Preferred Stock
Units issuance gross proceeds | |
$ | 2,537,012 | |
| Less: Series A Warrants
initial fair value(1) | |
| (4,050,706 | ) |
| Less: Series
A Convertible Preferred Stock conversion option embedded derivative liability initial fair value(1) | |
| (1,221,963 | ) |
| Excess of initial fair value over gross
proceeds | |
| (2,735,657 | ) |
| Offering costs
of the issuance of the Series A Preferred Stock Units | |
| (388,628 | ) |
| Loss on issuance
of Series A Preferred Stock Units | |
$ | (3,124,285 | ) |
| |
(1) |
See
Note 3, Financial Instruments Fair Value Measurements, for information with respect to the fair value of the Series
A Convertible Preferred Stock embedded derivative liability and the Series A Warrants liability. |
Note4
— Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Preferred
Stock (continued)
Series
A Preferred Stock Units Private Placement (continued)
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
The
Series A Convertible Preferred Stock 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). 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 conversion ratio equal
to its stated value divided by a conversion price of $4.97 per share, subject to further adjustment. The Series A Convertible
Preferred Stock conversion price is subject to further reduction by a prescribed formula should any subsequent issuances of convertible
securities by the Company be at a price lower than such conversion price immediately prior to such new issuance. In this regard,
at issuance, the Series A Convertible Preferred Stock conversion price was initially $6.00 per share, and was subsequently adjusted
to $5.00 per share upon the issuance of the Series S Warrants on July 3, 2017, to $4.99 per share upon the issuance of the Series
A-1 Preferred Stock Units on August 4, 2017, and then to $4.97 per share upon the issuance of Series A-1 Convertible Preferred
Stock on November 17, 2017 in connection with the Series A Exchange Offer, with such conversion price subject to further adjustment
as noted above. The exercise of the Series W Warrants at the temporarily reduced exercise price of the Offer to Exercise may result
in a further adjustment to the Series A Convertible Preferred Stock conversion price.
As
of September 30, 2017, there were 422,838 shares of Series A Convertible Preferred Stock issued and outstanding. 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, in December 2017, 10,000 shares of Series A Convertible Preferred Stock were
converted into 12,072 shares of common stock of the Company. As noted above, on the Series A Exchange Offer November 17, 2017
expiration 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.
The
Series A Convertible Preferred Stock conversion option is accounted for as an embedded derivative and bifurcated from Series A
Convertible Preferred Stock host financial instrument, under 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 Convertible
Preferred Stock conversion option embedded derivative is classified as a current liability on the unaudited condensed consolidated
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 unaudited condensed consolidated statement
of operations. See Note 3, Financial Instruments Fair Value Measurements, for further detail regarding the fair value of
the Series A Convertible Preferred Stock conversion option embedded derivative liability.
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 embedded derivative liability being
in excess of the Preferred Stock Units issuance gross proceeds, with such excess recognized as a current period loss in the unaudited
condensed consolidated statement of operations, as discussed above.
Note
4— Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Preferred
Stock (continued)
Series
A Convertible Preferred Stock (Continued)
The
Series A Convertible Preferred Stock provides for dividends at an 8% annual rate, 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 September 30, 2017, Series
A Convertible Preferred Stock dividends totaling $130,010 or a payment-in-kind of 21,711 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, as such, the Company has not recognized a Series A Convertible Preferred Stock dividend payable liability as of September
30, 2017, and will not recognize such dividend payable liability until they are declared by the Company’s Board of Directors.
Notwithstanding, the Company has presented such dividend value as a component of the loss attributable to common stockholders
in the calculation of basic and diluted net loss per share.
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.
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 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.
Subsequently,
on October 18, 2017, the Series A-1 Preferred Stock Units transaction documents Amendment No. 1 was approved by the unanimous
vote of the Series A-1 Convertible Preferred Stock holders, with such Amendment No. 1 removing the requirement for the Company
to file with the SEC an initial registration statement within sixty days of the August 4, 2017 private placement closing date;
to provide for the exchange of one Series A-1 Warrant for five Series W Warrants; to exchange one Series A-1 Warrant for four
Series X-1 Warrants, with such Series X-1 Warrants replacing the 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 Series A-1 Preferred
Stock Units Securities Purchase Agreement. Additionally, as the Company’s Series A Warrants can be exchanged for four Series
X Warrants, the Series X-1 Warrants were instituted for issuance upon the exchange of the corresponding Series A-1 Warrant. See
below for a discussion of the Series W Warrants or Series X-1 Warrants issued upon the exchange of the Series A-1 Warrants, and
the Series X Warrants issued upon the exchange of the Series A Warrants. Further, the Series A-1 Preferred Stock Units transaction
documents Amendment No. 2 was approved by the unanimous vote of the Series A-1 Convertible Preferred Stock holders on December
29, 2017, with such Amendment No. 2 changing the registration statement effectiveness due date to within 210 days from 150 days
of the Series A-1 Private Placement August 4, 2017 closing date.
Note4
— 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 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.
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 determined using a combination of the Series A-1 Convertible Preferred Stock’s
present value of its cash flows and incorporating 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 determined 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:
| | |
Issue | |
| Series A-1 Convertible
Preferred Stock | |
Date | |
| Aggregate fair value | |
$ | 189,550 | |
| Required rate of return | |
| 27.0 | % |
| Series A-1 Convertible Preferred Stock
shares | |
| 125,000 | |
| Conversion ratio | |
| 1.0 | x |
| Stated Value per share - conversion ratio numerator | |
$ | 4.00 | |
| Conversion price per share - conversion ratio denominator | |
$ | 4.00 | |
| Value of common stock | |
$ | 2.98 | |
| Expected term (years) | |
| 6.74 | |
| Volatility | |
| 52 | % |
| Risk free rate | |
| 2.0 | % |
| Dividend yield | |
| 0 | % |
| | |
Issue | |
| Series A-1 Convertible
Preferred Stock | |
Date | |
| Aggregate fair value | |
$ | 310,450 | |
| Series A-1 Warrants | |
| 125,000 | |
| Exercise price per share | |
$ | 6.00 | |
| Value of common stock | |
$ | 2.98 | |
| Expected term (years) | |
| 6.74 | |
| Volatility | |
| 52 | % |
| Risk free rate | |
| 2.0 | % |
| Dividend yield | |
| 0 | % |
The
Company filed a registration statement on Form S-1 (File No. 333-222234), declared effective January 8, 2017, (“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.
Note
4 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Preferred
Stock (continued)
Series
A-1 Convertible Preferred Stock
The
Series A-1 Convertible Preferred Stock has a par value of $0.001 per share, no voting rights, a stated value of $4.00 per share,
was immediately convertible upon its issuance, and, at the election of the holders, is convertible into a number of shares of
common stock at a conversion ratio equal to its stated value divided by a conversion price of $4.00 per share, with such conversion
price 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. As of September 30, 2017, there were
125,000 shares of Series A-1 Convertible Preferred Stock issue and outstanding. As noted above, on the Series A Exchange Offer
November 17, 2017 expiration 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 357,259 shares of Series A-1
Convertible Preferred Stock issued and outstanding.
The
Series A-1 Preferred Stock Units private placement cash proceeds allocated to the Series A-1 Convertible Preferred Stock, as discussed
above, 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.
The
Series A-1 Convertible Preferred Stock provides for dividends at an 8% annual rate, 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 September
30, 2017, Series A-1 Convertible Preferred Stock dividends totaling $6,196 or a payment-in-kind of 1,551 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, as such, the Company has not recognized a Series A-1 Convertible Preferred Stock dividend payable
liability as of September 30, 2017, and will not recognize such dividend payable liability until they are declared by the Company’s
Board of Directors. Notwithstanding, the Company has presented such dividend value as a component of the loss attributable to
common stockholders in the calculation of basic and diluted net loss per share.
Common
Stock
The
Company is authorized to issue 50,000,000 shares of common stock with a par value of $0.001 per share.
The
historical issued and outstanding shares of common stock were 14,551,234 shares at December 31, 2017, 13,343,061 shares as of
September 30, 2017 and 13,330,811 shares at December 31, 2016.
The
pro forma issued and outstanding shares of common stock would have been 17,069,525 shares at December 31, 2017 and 15,861,352
shares as of September 30, 2017, resulting from the pro forma issuance of shares of common stock upon the assumed exercise of
all the 2,518,291 estimated participating Series W Warrants in the Series W Warrants Offer-to-Exercise transaction.
Pre-Initial
Public Offering
In
connection with the organization of the Company in June 2014, 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 (Private Placement 1), a total of 418,089 units, consisting of one share of common
stock and one warrant, were sold to the initial investor investors (“Initial Investors”) for an aggregate purchase
price of $75,000 less offering costs of $7,500. In November 2014, the Company completed another private placement (Private Placement
2) of 2,355,233 units, consisting of one share of common stock and one warrant, raising $845,000 in gross offering proceeds less
offering costs of $46,500. Taken together, the Private Placement 1 warrants and Private Placement 2 warrants are referred to collectively
as the “Private Placement Warrants”. Subsequently, in September 2015, 1,393,629 shares of common stock were issued
as a result of the exercise of 1,393,629 Private Placement Warrants for cash proceeds of $1.25 million.
Note
4 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Common
Stock (continued)
In
August 2015, the Company issued 97,554 warrants to an outside advisor in exchange for services.
The
9,560,295 remaining unexercised warrants discussed above, were subsequently converted into Series W Warrants as issued in the
Company’s April 28, 2016 initial public offering (“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.
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” - 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
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.
Post-Initial
Public Offering
In
March 2017 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. 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.
Subsequently,
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.
Subsequently,
at the election of their respective holders, in November 2017, 10,021 shares of common stock were issued upon the conversion of
8,334 shares of Series A Convertible Preferred Stock, and in December 2017, 12,072 shares of common stock were issued upon the
conversion of 10,000 shares of Series A Convertible Preferred Stock.
Unit
Purchase Options
On
April 28, 2016, the Company issued 53,000 unit purchase options to the selling agents in the Company’s IPO (“UPO”),
with such unit purchase options enabling the holder to purchase at an exercise price of $5.50 per unit, with each such unit being
identical to the unit issued in the Company’s IPO, and thus comprised of one share of common stock and one Series W Warrant
to purchase a share of common stock of the Company at an exercise price of $5.00 per share, as discussed above. The estimated
the fair value of such unit purchase options was $105,100, which was accounted for as offering costs of the Company’s IPO,
and was 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%.
Note4
— Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Warrants
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. Generally, warrants are classified as equity, but may be classified as a derivative liability if the warrant
agreement provides for cash settlement or has certain exercise price adjustment provisions.
The
following table summarizes outstanding warrants to purchase common stock at the dates indicated:
| | |
Warrants
Exercisable at | | |
| |
| | |
| | |
Weighted | | |
| | |
Weighted | | |
| |
| | |
| | |
Average | | |
| | |
Average | | |
| |
| | |
September 30, | | |
Exercise | | |
December 31, | | |
Exercise | | |
Expiration | |
| | |
2017 | | |
Price
/Share | | |
2016 | | |
Price | | |
Date | |
| Equity classified warrants | |
| | | |
| | | |
| | | |
| | | |
| | |
| Series
W Warrants | |
| 10,567,845 | | |
$ | 5.00 | | |
| 10,580,095 | | |
$ | 5.00 | | |
| January
2022 | |
| Unit Purchase Options
- Series W Warrants | |
| 53,000 | | |
$ | 5.00 | | |
| 53,000 | | |
$ | 5.00 | | |
| January
2022 | |
| Series S Warrants | |
| 2,660,000 | | |
$ | 0.01 | | |
| — | | |
$ | — | | |
| June
2032 | |
| Series A-1 Warrants | |
| 125,000 | | |
$ | 6.67 | | |
| — | | |
$ | — | | |
| April
2024 | |
| Liability classified warrants | |
| | | |
| | | |
| | | |
| | | |
| | |
| Series
A Warrants | |
| 422,838 | | |
$ | 6.65 | | |
| — | | |
$ | — | | |
| April
2024 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total | |
| 13,828,683 | | |
$ | 4.11 | | |
| 10,580,095 | | |
$ | 5.00 | | |
| | |
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 date of the Company’s IPO were automatically
converted into Series W Warrants issued in the Company’s 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.
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. 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, respectively.
As
of September 30, 2017 and December 31, 2017, there were 10,567,845 Series W Warrants issued and outstanding on an actual historical
basis, and 8,049,554 Series W Warrants issued and outstanding on a pro forma basis, as revised for the pro forma adjustment of
the September 30, 2017 exercise of 2,518,291 Series W Warrants.
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.
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 certain Series W Warrants issued prior to the Company’s IPO, but only in the
event such certain Series Warrants are publicly transferred pursuant to Rule 144 prior to their exercise, or (ii) the resale of
such 1,062,031 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. Separately, in January 2017, the Company’s CEO purchased 25,000 Series W Warrants issued
prior to the Company’s IPO, from a shareholder who had previously purchased shares of common stock and warrants in the Company’s
pre-IPO private financings, with shares of common stock underlying such IPO Warrants purchased by the CEO not included in the
February 2017 Form S-1.
Note
4 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Warrants
(continued)
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 (“Scopia Note”), and
2,660,000 Series S Warrants to purchase shares of common stock of the Company. 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 their expiration date will be automatically exercised
on a cashless basis.
The
Scopia Note and the Series S Warrants are freestanding financial instruments, as the Series S Warrants were immediately legally
detachable from the Scopia Note and were immediately exercisable. The Series-S Warrants are classified as equity in the condensed
consolidated balance sheet. The Scopia Note net cash proceeds were 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.
As
of September 30, 2017, there were 2,660,000 Series S Warrants issued and outstanding. Subsequently, in October 2017, 532,000 Series
S Warrants were exercised for cash proceeds of $5,320, resulting in the issuance of a corresponding number of shares of common
stock; in November 2017, 122,360 Series S Warrants were exercised on a cashless basis, resulting in the issuance of 122,080 shares
of common stock; and in November 2017, 532,000 Series S Warrants were exercised for cash proceeds of $5,320, resulting in the
issuance of a corresponding number of shares of common stock. Accordingly, at December 31, 2017, there were 1,473,640 Series S
Warrants issued and outstanding.
As
required by the Note and Security Purchase Agreement between the Company and Scopia, the Company filed a registration statement
on Form S-3 (File No. 333-221406), declared effective January 8, 2017, (“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.
Series
A-1 Warrants
The
Series A-1 Warrants were exercisable upon their issuance and expire after the close of business on April 30, 2024, and each may
be exercised for one share of common stock 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 five Series W Warrants or
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 September 30, 2017 and December 31, 2017, no Series A-1 Warrants had been exchanged for Series W Warrants nor Series
X-1 Warrants. As the issuance of Series W Warrants upon the exchange of Series A-1 Warrants is solely at the election of the Series
A-1 Warrant holder, such unissued Series W Warrants are contingently issuable and therefore have not been included in the pro
forma adjustment of the number of Series W Warrants estimated to participate in the Series W Warrant Offer-to-Exchange.
As
of September 30, 2017, there were 125,000 Series A-1 Warrants issued and outstanding. As noted above, on the Series A Exchange
Offer November 17, 2017 expiration date, a total of 154,837 Series A Warrants were exchanged for 154,837 Series A-1 Warrants.
Accordingly, as of December 31, 2017, there were 279,837 Series A-1 Warrants issued and outstanding.
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.
Note
4 — 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 September 30, 2017 and December 31, 2017, no Series A-1 Warrants had been exchanged for Series W Warrants
nor Series X-1 Warrants. Notwithstanding, the 125,000 and 279,837 Series A-1 Warrants issued and outstanding at September 30,
2017 and December 31, 2017, respectively, if exchanged, would result in the issuance of 625,000 and 1,399,185, respectively, of
such Series W Warrants or the issuance of 500,000 or 1,119,348, respectively, of such Series X-1 Warrants.
As
more fully discussed above, 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 above.
As
the issuance of Series W Warrants upon the exchange of Series A-1 Warrants is solely
at the election of the Series A-1 Warrant holder, such unissued Series W Warrants are contingently issuable and therefore have
not been included in the pro forma adjustment of the number of Series W Warrants estimated to participate in the Series W Warrant
Offer- to-Exchange.
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 Series X-1 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-1 Warrants are exercisable commencing on the
first trading day following October 31, 2018 - as it is the later of (i) the May 21, 2017 stockholder approval in accordance with
Nasdaq Stock Market Rule 5635(d) of the Series A Preferred Stock Units private placement; or (ii) October 31, 2018. The Series
X-1 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-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
X Warrants Issued Upon Exchange of Series A Warrants
A
Series A Warrant, as discussed below, at the election of the holder, may be exchanged for four Series X Warrants. As of September
30, 2017, no Series A Warrants had been exchanged for Series X Warrants. Notwithstanding, the 422,838 Series A Warrants issued
and outstanding at September 30, 2017, if exchanged, would result in the issuance of 1,691,352 such 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 - as it is the later of (i) the May 21, 2017 stockholder approval in accordance with Nasdaq Stock Market Rule
5635(d) of the Series A Preferred Stock Units private placement; or (ii) 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.
Note
4 — Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants (continued)
Warrants
(continued)
Liability-Classified
Warrants
Common
stock warrants are accounted for as derivative liabilities if the warrants allow for cash settlement or provide for modification
of the warrant exercise price in the event subsequent sales of common stock are at a lower price per share than the then-current
warrant exercise price, as is the case for the Series A Warrants. The Company classifies derivative warrant liabilities on the
condensed consolidated balance sheet as a current liability, 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 condensed consolidated statement of operations. If upon the occurrence of an event resulting in the warrant liability or
the embedded derivative liability to be 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.
Series
A Warrants
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 of $6.65 per share, with such exercise price
initially $8.00 per share at issuance, and 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. 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 above.
As
of September 30, 2017, no Series A Warrants had been exchanged for Series X Warrants.
As noted above, on the Series A Exchange Offer November 17, 2017 expiration date, a total of 154,837 Series A Warrants were exchanged
for 154,837 Series A-1 Warrants. Accordingly, as of December 31, 2017, there were 268,001 Series A Warrants issued and outstanding.
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.
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 unaudited condensed 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 condensed consolidated statement of operations. See Note 3, Financial
Instruments Fair Value Measurements, for further detail regarding the fair value of the Series A Warrants liability.
Note
5 —Loss Per Share
Basic
and diluted net loss per share for the periods indicated, both on an as reported basis and on a net loss per share attributable
to common stockholders basis, on a historical basis and on a pro forma basis resulting from the issuance of 2,518,291 shares of
common stock upon the assumed exercise of all the estimated participating Series W Warrants in the Series W Warrants Offer-to-Exercise
transaction, with such issued shares of common stock issued on January 1, 2017, is as follows:
| | |
Nine | | |
| |
| | |
Months | | |
Year | |
| | |
Ended | | |
Ended | |
| | |
2017 | | |
2016 | |
| Numerator | |
| | | |
| | |
| Net
loss - as reported - historical | |
$ | (10,389,113 | ) | |
$ | (5,650,851 | ) |
| Expense - Series
W Warrant temporary exercise price modification - pro forma | |
| (881,402 | ) | |
| | |
| Net loss - as
reported - pro forma | |
| (11,270,515 | ) | |
| | |
| | |
| | | |
| | |
| Series A Convertible Preferred Stock
undeclared and accumulated dividends - historical(1) | |
| (130,010 | ) | |
| — | |
| Series A-1 Convertible Preferred Stock
undeclared and accumulated dividends - historical(2) | |
| (6,196 | ) | |
| — | |
| Deemed dividend
Series A-1 Convertible Preferred Stock - historical(3) | |
| (182,500 | ) | |
| | |
| | |
| | | |
| | |
| Net
loss attributable to common stockholders - historical(4) | |
$ | (10,707,819 | ) | |
$ | (5,650,851 | ) |
| Net
loss attributable to common stockholders - pro forma(4) | |
$ | (11,589,221 | ) | |
| | |
| | |
| | | |
| | |
| Denominator | |
| | | |
| | |
| Weighted-average
common stock outstanding - historical | |
| 13,331,585 | | |
| 12,972,153 | |
| Common stock
issued upon exercise of Series W Warrants Offer-to-Exchange - pro forma | |
| 2,518,291 | | |
| | |
| Weighted-average
common shares outstanding - pro forma | |
| 15,849,876 | | |
| | |
| | |
| | | |
| | |
| Loss per share | |
| | | |
| | |
| Basic and diluted(5) | |
| | | |
| | |
| -
Net loss - as reported - historical | |
$ | (0.78 | ) | |
$ | (0.44 | ) |
| -
Net loss - as reported - pro forma | |
$ | (0.71 | ) | |
| | |
| | |
| | | |
| | |
| -
Net loss attributable to common stockholders - historical | |
$ | (0.80 | ) | |
$ | (0.44 | ) |
| -
Net loss attributable to common stockholders - pro forma | |
$ | (0.73 | ) | |
| | |
| (1) |
The
Series A Convertible Preferred Stock provides for dividends at an 8% annual rate, 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 election of the Company, through
any combination of the issuance of additional Series A Convertible Preferred Stock, common shares, and /or cash payment. As
of September 30, 2017, Series A Convertible Preferred Stock dividends totaling $130,010 or a payment-in-kind of 21,711 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, as such, the Company has not recognized a Series A Convertible Preferred Stock
dividend payable liability as of September 30, 2017, and will not recognize such dividend payable liability until they are
declared by the Company’s Board of Directors. |
| |
|
| (2) |
The
Series A-1 Convertible Preferred Stock provides for dividends at an 8% annual rate, compounded quarterly, accumulate, and
are payable in arrears upon being declared by our 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 election of the Company, through any combination
of the issuance of additional Series A-1 Convertible Preferred Stock, common shares, and /or cash payment. As of September
30, 2017, Series A-1 Convertible Preferred Stock dividends totaling $6,196 or a payment-in-kind of 1,551 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, as such, the Company has not recognized a Series A-1 Convertible Preferred Stock dividend
payable liability as of September 30, 2017, and will not recognize such dividend payable liability until they are declared
by the Company’s Board of Directors. |
Note
5 —Loss Per Share (continued)
| (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) |
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. |
| |
|
| (5) |
Basic
net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number
of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss by
the sum of the weighted-average number of common shares outstanding during the reporting period, and, if dilutive, the weighted
average 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 for all periods presented, diluted net loss per
share is the same as basic net loss per share, due to the exclusion of incremental shares resulting from common stock equivalents
as their inclusion would have been anti-dilutive. |
The
following common stock equivalents have been excluded from the computation of diluted weighted average shares outstanding as their
inclusion would be anti-dilutive:
| | |
September 30, | | |
December 31, | |
| | |
2017 | | |
2016 | |
| | |
Pro
Forma | | |
Historical | |
| Stock Options | |
| 1,921,924 | | |
| 1,633,313 | |
| Unit purchase options as to shares of
common stock | |
| 53,000 | | |
| 53,000 | |
| Unit purchase options as to shares underlying
Series W Warrants | |
| 53,000 | | |
| 53,000 | |
| Series W Warrants(6)(10) | |
| 8,049,554 | | |
| 10,580,095 | |
| Series A Convertible
Preferred Stock(7) | |
| 422,838 | | |
| — | |
| Series A Warrants(8) | |
| 422,838 | | |
| — | |
| Series X Warrants(8) | |
| — | | |
| — | |
| Series A-1 Convertible
Preferred Stock(9) | |
| 125,000 | | |
| — | |
| Series A-1 Warrants(10) | |
| 125,000 | | |
| — | |
| Series X-1 Warrants(10) | |
| — | | |
| — | |
| Series
S Warrants(11) | |
| 2,660,000 | | |
| — | |
| Total | |
| 13,833,154 | | |
| 12,319,408 | |
| (6) |
As
of September 30, 2017 and December 31, 2017, there were 10,567,845 Series W Warrants issued and outstanding on an actual historical
basis, and 8,049,554 Series W Warrants issued and outstanding on a pro forma basis, as revised for the pro forma adjustment
of the September 30, 2017 exercise of 2,518,291 Series W Warrants. |
| |
|
| (7) |
The
422,838 shares of Series A Convertible Preferred Stock, issued and outstanding as of September 30, 2017, at the election of
the holder, if-converted into a number of shares of common stock at a conversion ratio equal to its $6.00 per share stated
value divided by a conversion price of $4.99 per share, with such conversion price subject to further reduction, would result
in 508,422 incremental shares of newly-issued common stock at September 30, 2017. Additionally, the 249,667 shares of Series
A Convertible Preferred Stock, issued and outstanding as of December 31, 2017, at the election of the holder, if-converted
into a number of shares of common stock at a conversion ratio equal to its $6.00 per share stated value divided by a conversion
price of $4.97 per share, with such conversion price subject to further reduction, would result in 301,416 incremental shares
of newly-issued common stock at December 31, 2017. |
| |
|
| (8) |
The
422,838 and 268,001 Series A Warrants, issued and outstanding at September 30, 2017 and December 31, 2017, respectively, at
the election of the holder, may be exchanged for four Series X Warrants under the terms of the Series A Warrant agreement.
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 not exercisable for shares of common stock at September 30, 2017 and December 31, 2017,
and would not result in common stock equivalent incremental shares for purposes of diluted weighted average shares outstanding
on such dates. At September 30, 2017 and December 31, 2017, no Series A Warrants had been exchanged for Series X Warrants.
|
Note
5 —Loss Per Share (continued)
| (9) |
The
125,000 and 357,259 shares of Series A-1 Convertible Preferred Stock, issued and outstanding at September 30, 2017 and December
31, 2017, respectively, at the election of the holder, if-converted into a number of shares of common stock at a conversion
ratio equal to its $4.00 per share stated value divided by a conversion price of $4.00 per share, with such conversion price
not subject to further adjustment, would result in 125,000 and 357,259 incremental shares of newly-issued common stock at
September 30, 2017 and December 31, 2017, respectively. |
| |
|
| (10) |
The
125,000 and 279,837 Series A-1 Warrants, issued and outstanding at September 30, 2017 and December 31, 2017, respectively,
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. 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 are therefore not exercisable for shares of common stock at September
30, 2017 and December 31, 2017, and would not result in common stock equivalent incremental shares for purposes of diluted
weighted average shares outstanding on such dates. At September 30, 2017 and December 31, 2017, no Series A-1 Warrants had
been exchanged for Series W Warrants or Series X1 Warrants. |
| |
|
| (11) |
As
of September 30, 2017, there were 2,660,000 Series S Warrants issued and outstanding. Subsequently, in October 2017, 532,000
Series S Warrants were exercised for cash proceeds of $5,320, resulting in the issuance of a corresponding number of shares
of common stock; in November 2017, 122,360 Series S Warrants were exercised on a cashless basis, resulting in the issuance
of 122,080 shares of common stock; and in November 2017, 532,000 Series S Warrants were exercised for cash proceeds of $5,320,
resulting in the issuance of a corresponding number of shares of common stock. Accordingly, at December 31, 2017, there were
1,473,640 Series S Warrants issued and outstanding. |
