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Financial Instruments Fair Value Measurements

6 Months Ended

Jun. 30, 2023

Financial Instruments Fair Value Measurements

Note 10 — Financial Instruments Fair Value Measurements

Recurring Fair Value Measurements

The fair value hierarchy table for the periods indicated is as follows:

	Fair Value Measurement on a Recurring Basis at Reporting Date Using¹
	Level-1 Inputs		Level-2 Inputs		Level-3 Inputs		Total
June 30, 2023
Senior Secured Convertible Note - April 2022	$	—	$	—	$	19,530	$	19,530
Senior Secured Convertible Note - September 2022		—		—		11,850		11,850
Lucid Senior Secured Convertible Note - March 2023		—		—		11,610		11,610
Derivative liability		—		—		260		260
Totals	$	—	$	—	$	43,250	$	43,250

	Level-1 Inputs		Level-2 Inputs		Level-3 Inputs		Total
December 31, 2022
Senior Secured Convertible Note - April 2022	$	—	$	—	$	22,000	$	22,000
Senior Secured Convertible Note - September 2022		—		—		11,650		11,650
Totals	$	—	$	—	$	33,650	$	33,650

1	There were no transfers between the respective Levels during the period ended June 30, 2023.

As discussed in Note 11, Debt, the Company issued Senior Secured Convertible Notes dated April 4, 2022 and September 8, 2022, with an initial $27.5 million face value principal (“April 2022 Senior Convertible Note”) and an initial $11.25 million face value principal (“September 2022 Senior Convertible Note”), respectively. Both convertible notes are accounted for under the ASC 825-10-15-4 fair value option (“FVO”) election, wherein, the financial instrument is initially measured at its issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date.

As discussed in Note 11, Debt, Lucid Diagnostics issued a Senior Secured Convertible Note dated March 21, 2023, with an initial $11.1 million face value principal (“Lucid March 2023 Senior Convertible Note”). This convertible note is also accounted for under the ASC 825-10-15-4 fair value option (“FVO”) election, wherein, the financial instrument is initially measured at its issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date.

The estimated fair value of the financial instruments classified within the Level 3 category was determined using both observable inputs and unobservable inputs. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs.

The estimated fair value of the Lucid March 2023 Senior Convertible Note as of each of March 21, 2023 and June 30, 2023, and the estimated fair value of the April 2022 Senior Convertible Note and the September 2022 Senior Convertible Note as of June 30, 2023, were computed using a Monte Carlo simulation of the present value of its cash flows using a synthetic credit rating analysis and a required rate-of-return, using the following assumptions:

	April 2022 Senior Convertible Note: June 30, 2023			September 2022 Senior Convertible Note: June 30, 2023			Lucid March 2023 Senior Convertible Note: March 21, 2023			Lucid March 2023 Senior Convertible Note: June 30, 2023
Fair Value	$	19,530		$	11,850		$	11,900		$	11,610
Face value principal payable	$	18,554		$	11,250		$	11,111		$	11,111
Required rate of return		11.400	%		11.300	%		11.00	%		11.00	%
Conversion Price	$	5.00		$	5.00		$	5.00		$	5.00
Value of common stock	$	0.41		$	0.41		$	1.54		$	1.39
Expected term (years)		0.29			1.19			2.00			1.73
Volatility		200.00	%		200.00	%		75.00	%		70.00	%
Risk free rate		5.29	%		5.21	%		4.09	%		4.89	%
Dividend yield		—	%		—	%		—	%		—	%

Note 10 — Financial Instruments Fair Value Measurements - continued

Derivative Liability - Written Protective Put

The Company, through its majority-owned subsidiary Veris Health, entered into a Research and Development Agreement, with an effective date of May 31, 2023, with an unrelated third-party technical services provider (the “May 31, 2023 R&D Agreement”). The principal service to be provided by the service provider under the May 31, 2023 R&D Agreement was the continued development of the electronics and firmware for the Veris Health implantable physiologic monitor.

As discussed in Note 14, Common Stock and Common Stock Purchase Warrants, 1.5 million shares of PAVmed common stock were issued to the service provider as the consideration for a $750 portion of the services to be rendered under the May 31, 2023 R&D Agreement. The issued shares of common stock are (contingently) settlement-in-full of the consideration obligations of the Company under the May 31, 2023 R&D Agreement, subject-to a contractual “minimum fair market value” as such amount is discussed below.

The resolution of the contingent settlement-in-full with respect to the issued shares of common stock of the Company is predicated on and subject-to such issued shares having a $750 minimum “fair market value” (as defined), with such derived fair market value computed using a contractual formula based on the PAVmed Inc. common stock volume weighted average price per share (“VWAP”) during the last ten days of the six month anniversary of the May 31, 2023 R&D Agreement.

If the fair market value, as such amount is computed as described above, is equal-to or greater than $750, then no further contractual consideration is required. However, if such fair market value is less than $750, then, the Company will incur an additional contractual consideration obligation in amount equal to the difference between the required minimum fair market value of $750 and the contractual formula based computed fair market value. At the election of the Company, the additional contractual consideration obligation, if any, may be paid in cash or settled with the issue of additional shares of PAVmed common stock.

The contingent additional contractual consideration obligation is deemed to be a separate unit-of-account, in the form of a written protective put, and recognized as a derivative liability measured at estimated fair value. The derivative liability had an initial May 31, 2023 estimated fair value of approximately $262 which was recognized as a current period charge classified in other income (expense) in the accompanying (unaudited) condensed consolidated statement of operations. Further, such recognized derivative liability is further remeasured at estimated fair value as of each quarterly reporting period date, with changes in the estimated fair value recognized as current period other income (expense), with such remeasurement recognized through the date of the final determination and settlement or extinguishment of the contingent additional contractual consideration obligation, if any. In this regard, as of June 30, 2023, the remeasured estimated fair value was approximately $260, with the change in the estimated fair value recognized as other income (expense).

The estimated fair value of the written protective put derivative liability, as such is discussed above, were computed using a Monte Carlo simulation to generate stock price paths (assuming geometric-Brownian motion) of the PAVmed Inc. common stock to compute the respective written protective put expected fair value, with the principal assumptions of such estimated fair value computation, for the respective measurement dates noted, as follows:

	As of: May 31, 2023			As of: June 30, 2023
Fair Value	$	262		$	260
Contractual minimum effective conversion price	$	0.50		$	0.50
Price per share	$	0.40		$	0.41
Remaining expected term (years)		0.50			0.42
Volatility		160.00	%		200.00	%
Risk free rate		5.30	%		5.30	%
Dividend yield		—	%		—	%

The estimated fair values recognized with respect to the senior secured convertible debt and the written protective put derivative liability, as each is discussed above, utilized PAVmed and Lucid Diagnostics common stock prices, along with certain Level 3 inputs (as presented in the respective tables above), in the development of Monte Carlo simulation models, discounted cash flow analyses, and /or Black-Scholes valuation models. The estimated fair values are subjective and are affected by changes in inputs to the valuation models and analyses, including the respective common stock prices, the dividend yields, the risk-free rates based on U.S. Treasury security yields, and certain other Level-3 inputs including, assumptions regarding the estimated volatility in the value of the respective common stock prices. Changes in these assumptions can materially affect the recognized estimated fair values.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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