Pavmed Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing is unaudited and compares results with the corresponding 2016 periods.
Business context
Pavmed is an early-stage medical-device company developing a pipeline that includes PortIO, CarpX, NextCath, DisappEAR, NextFlo and Caldus. It had generated no revenue through June 30, 2017. PortIO’s FDA 510(k) submission was under review; the company anticipated a 510(k) submission for CarpX in the near future. Management said its development and regulatory plans depend on available capital.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Operating expenses | $2.02 million | $1.31 million | $4.18 million | $2.01 million |
| Operating loss | $2.02 million | $1.31 million | $4.18 million | $2.01 million |
| Net loss | $0.99 million | $1.31 million | $5.26 million | $2.01 million |
| Net loss attributable to common stockholders | $1.04 million | $1.31 million | $5.34 million | $2.01 million |
| Loss per share, basic and diluted | $0.08 | $0.10 | $0.40 | $0.16 |
For Q2, G&A rose 38% to $1.32 million and R&D rose 98% to $0.70 million year over year. For the first six months, G&A increased 91% to $2.82 million and R&D increased 154% to $1.36 million, principally reflecting higher professional services and product-development activity. No meaningful revenue margin was reported because there were no sales.
Six-month operating cash use was $2.65 million, compared with $2.03 million in 2016; investing cash use was $5,301, and financing provided $2.15 million. Cash declined to $82,052 at June 30, 2017 from $585,680 at December 31, 2016. At quarter-end, total assets were $226,480, total liabilities were $5.28 million, and stockholders’ deficit was $5.05 million. The filing reports negative working capital of $1.84 million after excluding warrant and derivative liabilities.
Changes, financing and unusual items
- Six-month operating expenses more than doubled year over year. The six-month common-stockholder loss also increased substantially, primarily due in part to a $3.12 million charge on issuance of Series A Preferred Stock Units.
- Q2 reported net loss was lower year over year despite higher operating expenses, largely reflecting noncash gains from fair-value decreases in Series A warrant and embedded derivative liabilities: $748,423 and $283,302, respectively. For the six-month period, the corresponding gains were $1.53 million and $507,367. These Level 3 valuations rely on significant estimates.
- The Series A financing generated approximately $2.5 million gross and $2.1 million net proceeds. Its preferred shares carry an 8% annual dividend, compounded quarterly; $77,711 had accrued by June 30, with payment-in-kind terms applying for the initial years. The preferred conversion price and warrant exercise price were subsequently adjusted downward.
- After quarter-end, on July 3, the company received $4.8 million net proceeds from a $5.0 million senior secured note bearing 15% interest and maturing June 30, 2019. The debt is secured by company and subsidiary assets. The lender also received 2.66 million warrants exercisable at $0.01 per share. Note covenants include restrictions on additional debt and liens, a PortIO-related sales covenant after FDA clearance, and an option to redeem debt from PortIO sale proceeds.
- On August 4, the company raised $500,000 in a Series A-1 preferred-unit placement. Management estimated the July and August financing proceeds, together with available cash, would fund operations into the quarter ending June 30, 2018, but said additional capital would be required beyond that period.
Outlook, risks and contingencies
Management disclosed substantial doubt about the company’s ability to continue as a going concern within one year after issuance of the financial statements. It anticipated continuing losses and negative operating cash flows while developing products and pursuing regulatory approvals. Continued operations depend on raising capital, obtaining approvals, commercializing products and controlling expenses; management gave no assurance these efforts would succeed.
Key risks include product-development and FDA-clearance uncertainty, lack of revenue, dependence on future financing, potential dilution from preferred securities and warrants, and the high-cost secured debt. The company also disclosed registration-rights obligations that can trigger damages if required resale registrations are not timely filed or maintained. It reported no pending legal actions and no off-balance-sheet arrangements. The CEO agreed, under the July financing, to reduced monthly salary payments with amounts deferred until PortIO clearance or repayment of the note.
Important facts for investors to verify
- Current cash runway, subsequent cash use and financing needs relative to management’s estimate of funding into Q2 2018.
- PortIO FDA review status and timing, and progress toward the anticipated CarpX submission.
- Note terms, security interests, covenants, repayment capacity and any PortIO-sale redemption rights.
- Potential dilution from the 2.66 million low-strike Series S warrants, preferred-stock conversion adjustments and other outstanding warrants.
- Fair-value assumptions and their impact on reported earnings, and the accrued preferred dividends and registration-rights obligations.