PAVmed Inc. — Q3 2018 Form 10-Q
Business context and period. Unaudited results for the three and nine months ended September 30, 2018. PAVmed is an early-stage medical-device developer with products at different development and regulatory stages. It reported no revenue, and its ability to generate revenue depends on completing development, obtaining regulatory clearances and commercializing its products.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Operating expenses | $2.57 million | $1.97 million | $7.25 million | $6.15 million |
| Net loss attributable to PAVmed | $3.25 million | $5.13 million | $11.14 million | $10.39 million |
| Net loss attributable to common stockholders | $3.31 million | $5.37 million | $11.85 million | $10.71 million |
| Loss per common share, basic and diluted | $0.12 | $0.40 | $0.57 | $0.80 |
- Q3 general and administrative expense rose 11% to $1.40 million; research and development expense rose 66% to $1.17 million. For the first nine months, G&A increased 7% to $4.37 million and R&D increased 40% to $2.88 million. R&D growth reflected increased development activity, personnel and stock compensation, and a $272,553 EsoCheck license fee.
- Cash was $9.24 million at September 30, 2018, versus $1.54 million at December 31, 2017. Current assets were $9.36 million and current liabilities $5.83 million. Management reported working capital of $1.40 million, treating the $5.38 million note principal as current due at maturity.
- Operating cash use was $5.77 million for the nine months, compared with $5.02 million in 2017; investing cash use was $23,464. Financing provided $13.50 million, principally from 2018 public and rights offerings. Ending cash was $9.24 million.
- The Scopia senior secured note had $5.38 million principal outstanding, bears 15% annual interest, is secured by company assets, and matures June 30, 2019. Its balance-sheet carrying amount was $3.26 million after unamortized debt discount. Nine-month interest expense, including discount amortization, was $1.71 million.
Material changes and unusual items
- Common shares outstanding increased to 26.54 million from 14.55 million at year-end 2017, principally following a January public offering and June rights offering. The June offering issued 9 million shares and 9 million Series Z warrants; the filing reports $13.5 million net proceeds in total from the two main 2018 offerings.
- In March, Series A and A-1 preferred shares and warrants were exchanged for Series B preferred shares and Series Z warrants. Series B pays an 8% annual dividend, generally payable in kind through October 2021. The exchange produced a $726,531 deemed dividend for common-stockholder loss calculations.
- The Series Z warrant exercise price was reduced from $3.00 to $1.60 effective June 1, generating a $1.14 million non-cash modification expense. Other 2018 non-cash warrant and option exchange expenses included $349,796 and $766,456. These items, and debt-discount amortization, affect reported losses and comparability.
- Total warrants outstanding were 18.45 million at quarter-end, in addition to preferred stock and options; potential dilution is significant. The filing also reports 22.83 million anti-dilutive common-stock equivalents excluded from diluted loss per share.
Outlook, risks and contingencies
- Management expects continued operating losses and negative operating cash flow for the foreseeable future. The filing states that substantial doubt exists about the company’s ability to continue as a going concern within one year after issuance. Plans include raising additional capital, refinancing the note at maturity, obtaining regulatory clearances, commercializing products and controlling costs; success is not assured.
- Product milestones are plans, not financial guidance: CarpX’s FDA review was delayed pending a recommended pre-submission meeting expected in early January 2019; PortIO is pursuing a de novo pathway and a seven-day animal study was scheduled for late November 2018; EsoCheck’s device 510(k) submission was expected before year-end 2018, with initial commercialization targeted for the first half of 2019. The filing provides no revenue or earnings guidance.
- A former financial adviser sued for alleged breach of contract, seeking at least $125,400. PAVmed considers the claim without merit; the outcome and any loss estimate were uncertain, and no accrual was recorded.
- The EsoCheck license includes milestone and royalty obligations and permits CWRU, in certain circumstances if milestones are missed, to require transfer of up to 100% of PAVmed’s Lucid shares. The filing says Scopia waived specified potential conflicts involving Lucid and the license.
- Management said disclosure controls were effective as of September 30, 2018 and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm available cash, actual operating cash burn and financing needs against the June 30, 2019 secured-note maturity and refinancing plans.
- Track FDA meeting outcomes, submission timing and clearance pathways for CarpX, PortIO and EsoCheck, and whether stated development and commercialization targets are achieved.
- Review the full terms and potential dilution from Series Z warrants, Series B preferred dividends, options and other outstanding securities.
- Assess the impact of the adviser litigation and the EsoCheck license’s milestone, royalty and potential Lucid-share transfer provisions.
- Distinguish recurring operating costs and cash requirements from non-cash debt-discount amortization, preferred-stock dividends and warrant modification or exchange accounting.