Lucid Diagnostics Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued Overview Operations Overview We are a commercial-stage medical diagnostics technology company focused on the millions of patients with long-standing gastroesophageal reflux disease (“GERD”) who are at risk of developing esophageal precancer and cancer, specifically highly lethal esophageal adenocarcinoma (“EAC”), which is expected to lead to approximately 16,000 U.S. deaths in 2021. We believe that our lead products, the EsoGuard Esophageal DNA Test performed on samples collected with the EsoCheck Esophageal Cell Collection Device, constitute the first and only commercially available diagnostic test capable of serving as a widespread screening tool to prevent EAC deaths, through early detection of esophageal precancer in at-risk GERD patients. ● EsoGuard is a DNA test performed on surface esophageal cells collected with EsoCheck in a brief noninvasive office procedure which has been shown to be over 90% sensitive and specific at detecting Barrett’s Esophagus (“BE”), a precancerous condition of the esophagus and all conditions along the BE-EAC spectrum, including on samples collected with EsoCheck (Moinova, et al. Sci Transl Med. 2018 Jan 17;10(424): eaao5848). ● EsoCheck is an FDA 510(k) and CE Mark cleared noninvasive swallowable balloon capsule catheter capable of sampling surface esophageal cells in a less than five-minute office procedure. We believe its proprietary Collect+Protect ™ technology makes it the only noninvasive esophageal cell collection device capable of anatomically targeted and protected sampling to prevent dilution and contamination during device withdrawal. EsoGuard is commercialized in the U.S. as a laboratory developed test (“LDT”) performed at our laboratory partner, ResearchDx Inc., d/b/a PacificDx (“RDx”), located in Irvine, CA. RDx’s laboratory is certified under the Clinical Laboratory Improvement Amendments (“CLIA”). RDx also manufactures our EsoGuard Specimen Kits. EsoCheck is commercialized in the U.S. as a 510(k) cleared esophageal cell collection device currently manufactured for us by our contract manufacturing partner, Sage Product Development Inc., located in Foxborough, MA. We are in the process of transferring EsoCheck manufacturing to Coastline International Inc., a high-volume manufacturer headquartered in San Diego, CA with plants in Mexico. Both EsoGuard and EsoCheck recently completed the CE Mark certification process. EsoGuard, used with EsoCheck, was granted FDA Breakthrough Device designation and is the subject of two large, actively enrolling, international multicenter PMA clinical trials. EsoGuard’s PLA code 0114U secured final Medicare payment determination of $1,938.01, effective January 1, 2021. The CLIA certified laboratory where the EsoGuard assay is performed has begun to submit claims and receive out-of-network private insurance payments. We are awaiting Medicare local coverage determination. We are also aggressively pursuing EsoGuard U.S. private payor payment and coverage as well as payment in Europe. Our initial EsoGuard commercialization efforts have focused on gastroenterology (“GI”) physicians. EsoGuard testing has accelerated as pandemic-related healthcare facility limitations have eased. We have utilized a hybrid sales model of full-time sales management supervising senior independent sales representatives and supported by full-time clinical specialists. We are significantly expanding our full-time commercial team and currently employ a national director of sales, seven regional business managers, three clinical specialists and a sales operations manager. We are contracted with approximately fifty independent sales representatives and are actively recruiting full-time territory managers in each region to specifically call on either GI or primary care physicians. We are working to expand EsoGuard commercialization across multiple channels by targeting primary care physicians and consumers in addition to GI physicians. To assure sufficient testing capacity and geographic coverage, as part of this expansion, we are building our own network of Lucid Test Centers, staffed by Lucid-employed clinical personnel, where patients can undergo the EsoCheck procedure and have the sample sent for EsoGuard testing, starting with three test centers launched in the Phoenix metropolitan area and have recently announced we have expanded our test centers into Utah, Nevada, and Colorado. We also are establishing an EsoGuard Telemedicine Program, in partnership with UpScript, LLC, an independent third-party telemedicine provider, that can accommodate EsoGuard self-referrals from direct-to-consumer marketing. We are a majority owned subsidiary of PAVmed Inc. (“PAVmed”). We are party to an amended and restated patent license agreement with Case Western Reserve University (“CWRU”), dated August 23, 2021 (“Amended CWRU License Agreement”), which provides for the exclusive worldwide license of the intellectual property rights for the proprietary technologies underlying EsoCheck and EsoGuard. 29 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued Impact of the COVID-19 Pandemic Previously, in December 2019, an outbreak of a novel strain of a coronavirus occurred. The coronavirus spread on a global basis to other countries, including the United States of America. On March 11, 2020, the United Nations World Health Organization (“WHO”) declared a pandemic resulting from the spread of the coronavirus, with such pandemic commonly referred to by its resulting illness, “COVID-19”. The COVID-19 pandemic is ongoing, and we continue to monitor its continuing impact on the United States national economy, the global economy, and our business. The COVID-19 pandemic may have an adverse impact on our operations, supply chains, and distribution systems and/or those of our contractors of our laboratory partner, and increase our expenses, including as a result of impacts associated with preventive and precautionary measures being taken, restrictions on travel, quarantine polices, and social distancing. Such adverse impact may include, for example, the inability of our employees and/or those of our contractors or laboratory partner to perform their work or curtail their services provided to us. We expect the significance of the COVID-19 pandemic, including the extent of its effect on our financial condition and operational results and cash flows, to be dictated by the success of United States and global efforts to mitigate the spread of and /or to contain the coronavirus and the impact of such efforts. In addition, the spread of the coronavirus has disrupted the United States’ healthcare and healthcare regulatory systems which could divert healthcare resources away from, or materially delay FDA approval with respect to our products. Furthermore, our clinical trials have been and may be further affected by the COVID-19 pandemic, as site initiation and patient enrollment may be delayed, for example, due to prioritization of hospital resources toward the virus and /or illness response, as well as travel restrictions imposed by governments, and the inability to access clinical test sites for initiation and monitoring. The COVID-19 pandemic may have an adverse impact on the economies and financial markets of many countries, including the United States, resulting in an economic downturn that could adversely affect demand for our products and services and/or our product candidates. Although we are continuing to monitor and assess the effects of the COVID-19 pandemic on our business, the ultimate impact of the COVID-19 pandemic (or a similar health epidemic) is highly uncertain and subject to change. Any such effect could have a materially adverse impact on our consolidated financial condition, consolidated results of operations, and /or consolidated cash flows. 30 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued Results of Operations Overview Revenue Revenue is recognized with respect to the EsoGuard Commercialization Agreement, dated August 1, 2021, between the Company and RDx, CLIA certified commercial laboratory service provider. Cost of revenue The cost of revenue recognized with respect to the revenue recognized under the EsoGuard Commercialization Agreement is inclusive of: a royalty fee incurred under the Amended CWRU License Agreement; the MSA Fee (as defined and discussed herein below) allocated to cost of revenue, which is principally employee related costs of PAVmed employees engaged in the administration to patients of the EsoCheck cell sample collection procedure (principally at the LUCID Test Centers); the EsoCheck devices and EsoGuard mailers (cell sample shipping costs) distributed to medical practitioners locations and the LUCID Test Centers; and LUCID Test Centers operating expenses, including rent expense and supplies. Commercial operations expenses Commercial operations expenses consist primarily of the portion of the MSA Fee allocated to commercial operations, which are principally employee related costs of PAVmed employees engaged in s sales and marketing activities, along with advertising and promotion expenses, and personnel and fees with respect to third-party payor reimbursement contract negotiation and management. We anticipate our commercial operations expenses will increase in the future, as we anticipate an increase in the number of personnel engaged in the introduction and expansion of our commercial sales and marketing operations as we execute on our business strategy. General and Administrative Expenses General and administrative expenses consist primarily of professional fees, accounting and legal services, consultants and expenses associated with obtaining and maintaining patents within our intellectual property portfolio, along with the portion of the MSA Fee allocated to general and administrative expenses. We anticipate our general and administrative expenses will increase in the future, as we anticipate an increase in the MSA Fee allocated to general and administrative expense, related to continued expansion of our overall business operations. We also anticipate expenses related to being a public company, including professional services fees for legal, accounting, tax, audit and regulatory services associated with maintaining compliance as a public company, along with insurance premiums, investor relations, and other corporate expenses. 31 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued Research and Development Expenses Research and development expenses are recognized in the period they are incurred and consist principally of internal and external expenses incurred for the development of our technologies and conducting clinical trials, including: ● consulting costs charged to us by various external contract research organizations we contract with to conduct preclinical studies and engineering studies; ● costs associated with regulatory filings; ● patent license fees; ● cost of laboratory supplies and acquiring, developing, and manufacturing preclinical prototypes; ● product design engineering studies; ● fees associated with conducting clinical trials for our EsoGuard diagnostic assay; and ● MSA Fee allocated to research and development, as such MSA Fee are discussed below. We plan to incur research and development expenses for the foreseeable future as we continue the development of our existing products as well as new innovations. Our research and development activities are focused principally on obtaining FDA approvals and developing product improvements or extending the utility of the lead products in our pipeline, including EsoCheck and EsoGuard. Interest Expense Interest expense recognized is with respect to a Senior Unsecured Promissory Note, dated June 1, 2021, with a face value principal of $22.4 million, an annual interest rate of 7.875%, and a contractual maturity date of May 18, 2028, issued by us to PAVmed. The Senior Unsecured Promissory Note replaced the $22.4 million aggregate outstanding and payable balance of the Due To: PAVmed Inc., as of June 1, 2021. The Senior Unsecured Promissory Note provided for the partial or full repayment of the face value principal and accrued but unpaid interest thereon by the issue of shares of our common stock, at the election of PAVmed Inc., at a conversion price of $1.42 per share of Lucid Diagnostics Inc. common stock. Subsequent to September 30, 2021, on October 13, 2021, we issued 15,803,200 shares of our common stock to PAVmed upon the election by PAVmed to convert the $22.4 million face value principal under the terms of a Senior Unsecured Promissory Note, dated June 1, 2021. See our accompanying unaudited condensed financial statements Note 5, Due To: PAVmed Inc. , for a discussion of the Senior Unsecured Promissory Note dated June 1, 2021 issued by us to PAVmed. Authorized Shares Increase and Stock-Split - October 6, 2021 Subsequent to September 30, 2021, effective October 6, 2021, our board of directors: increased the authorized shares of common stock to 100.0 million shares; and declared a 1.411-to-1.0 common stock-split. The number of shares of our common stock and the stock options and restricted stock awards granted under the Lucid Diagnostics Inc. 2018 Equity Plan, and the corresponding stock option exercise price per share; the fair value per share of the stock options and restricted stock awards; and the Senior Unsecured Promissory Note conversion price per share, for all periods presented, as applicable, have been adjusted for such common stock split. 32 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued Management Services Agreement (MSA) We are a majority-owned subsidiary of PAVmed, which has a majority equity ownership interest and has financial control of Lucid Diagnostics. Our daily operations are managed by personnel employed by PAVmed, for which we incur a service fee (the “MSA Fee”), according to the provisions of a Management Services Agreement (“MSA”) with PAVmed. The MSA Fee is charged on a quarterly basis and is subject-to periodic adjustment corresponding with changes in the number of PAVmed. employees providing services to us, with the change in the MSA Fee approved by each of the Lucid Diagnostics and PAVmeds board of directors. The MSA does not have a termination date, but may be terminated by the Lucid Diagnostics board of directors. The classification of the MSA Fee between cost-of-revenue, commercial operations, general and administrative expense, and research and development expense is based on the PAVmed quarterly classification of employee salary expense. In this regard, PAVmed classifies employee salary expense as cost-of-revenue for employees engaged in service delivery under the EsoGuard Commercialization Agreement, and commercial operations for employees performing sales, marketing, and reimbursement activities and functions, general and administrative, and research and development except for those employees who are engaged in product and services engineering development and design and /or clinical trials activities, for which such employee salary is classified as research and development expense. See our accompanying unaudited condensed financial statements Note 4, Related Party Transactions - PAVmed Inc. - Management Services Agreement , for a discussion of the MSA between Lucid Diagnostics and PAVmed. Presentation of Dollar Amounts All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are presented in whole dollars, if not otherwise indicated as being presented as dollars in millions, except for the number of shares and per share amounts. 33 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued Three months ended September 30, 2021 versus September 30, 2020 Revenue In the three months ended September 30, 2021, revenue was $0.2 million as compared to no revenue in the corresponding period in the prior year. The $0.2 million increase principally relates to our EsoGuard Commercialization Agreement, dated August 1, 2021, with RDx (the EsoGuard Commercialization Agreement”) which resulted in revenue recognition of $0.1 million per month in each of August and September 2021. Cost of revenue In the three months ended September 30, 2021, cost of revenue was approximately $0.1 million as compared to no cost of revenue for the corresponding period in the prior year. The $0.1 million increase principally relates to costs associated with our commercialization agreement that started in August 2021. Commercial operations expenses In the three months ended September 30, 2021, commercial operations costs were approximately $1.0 million as compared to $0.3 million for the corresponding period in the prior year, with the $0.7 million increase principally resulting from: ● approximately $0.4 million increase with respect to increased commercial operations, including advertising and marketing expenditures; ● approximately $0.1 million of higher stock-based compensation with respect to stock options and restricted stock awards granted to employees of PAVmed members of the board of directors of Lucid Diagnostics, and the three physician inventors of the intellectual property licensed under the Amended CWRU License Agreement (the “Physician Inventors”); and ● approximately $0.2 million increase in the MSA Fee allocated to commercial operations expenses resulting from increased commercial operations personnel in sales and payor reimbursement management. General and administrative expenses In the three months ended September 30, 2021, general and administrative costs were approximately $3.4 million as compared to $0.5 million for the corresponding period in the prior year, with the $2.9 million increase principally related to: ● approximately $1.1 million increase in professional services fees for legal, accounting, and audit services; and ● approximately $1.8 million of higher stock-based compensation with respect to stock options and restricted stock awards granted to employees of PAVmed members of the board of directors of Lucid Diagnostics, and the Physician Inventors. Research and development expenses In the three months ended September 30, 2021, research and development costs were approximately $2.2 million, compared to $1.2 million for the corresponding period in the prior year, with the $1.0 million increase principally related to: ● approximately $0.9 million increase with respect to the EsoGuard clinical trial and EsoCheck development costs and consulting fees; and ● approximately $0.1 million increase in the MSA Fee allocated to research and development expense, resulting from higher expenses associated with increased clinical trial personnel. 34 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued Comparison of the nine months ended September 30, 2021 and 2020 Revenue In the nine months ended September 30, 2021, revenue was $0.2 million as compared to no revenue in the corresponding period in the prior year. The $0.2 million increase principally relates to our EsoGuard Commercialization Agreement, dated August 1, 2021, which resulted in revenue recognition of $0.1 million per month in each of August and September 2021. Cost of revenue In the nine months ended September 30, 2021, cost of revenue was approximately $0.1 million as compared to no cost of revenue for the corresponding period in the prior year. The $0.1 million increase principally relates to costs associated with the EsoGuard Commercialization Agreement which commenced in August 2021. Commercial operations expenses In the nine months ended September 30, 2021, commercial operations costs were approximately $2.7 million as compared to $0.7 million for the corresponding period in the prior year, with the $2.0 million increase principally resulting from: ● approximately $1.1 million in increased commercial operations, including advertising and marketing expenditures; ● approximately $0.2 million in travel related expenses; and ● approximately $0.7 million increase in the MSA Fee allocated to general and administrative expense, resulting from higher expenses associated with increased commercial operations personnel in sales and payor reimbursement management. General and administrative expenses In the nine months ended September 30, 2021, general and administrative expenses were approximately $7.7 million as compared to $1.3 million for the nine months ended September 30, 2020, with the increase of $6.4 million principally related to: ● approximately $1.8 million in in professional services fees for legal, accounting, and audit services; ● approximately $4.2 million of higher stock-based compensation with respect to stock options and restricted stock awards granted to employees of PAVmed Inc., members of the board of directors of Lucid Diagnostics, and the Physician Inventors; and ● approximately $0.4 million increase in the MSA Fee allocated to general and administrative expense, resulting from higher expenses associated with increased commercial operations personnel in sales and payor reimbursement management. Research and development expenses In the nine months ended September 30, 2021, general and administrative expenses were approximately $5.8 million as compared to $3.6 million for the nine months ended September 30, 2020, with the $2.2 million increase principally related to: ● approximately $1.9 million increase with respect to the EsoGuard clinical trial and EsoCheck development costs and consulting fees; ● approximately $0.3 million increase in the MSA Fee allocated to research and development expense resulting from higher research and development expenses associated with increased personnel. See our unaudited condensed financial statements as of and for the three-month and nine-month periods years ended September 30, 2021 and 2020 for each of: Note 4, Related Party Transactions - PAVmed Inc. , for a discussion of the consulting fee expense and stock based compensation expense recognized with respect to the Physician Inventors consulting agreements and stock options and restricted awards; and the MSA between Lucid Diagnostics and PAVmed; and Note 9, Stock-Based Compensation , for information regarding each of the Lucid Diagnostics 2018 Long-Term Incentive Equity Plan and the PAVmed 2014 Long-Term Incentive Equity Plan. 35 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued Liquidity and Capital Resources Due To: PAVmed Inc. & Senior Unsecured Promissory Note Issued to PAVmed Inc. Since inception, our operations have been funded by PAVmed providing working capital cash advances and the payment by PAVmed of certain operating expenses on-our-behalf. Additionally, our daily operations are managed by personnel employed by PAVmed, for which we incur a MSA Fee expense according to the provisions of the MSA discussed above. As of September 30, 2021, we had a Due To: PAVmed Inc. payment obligation liability of an aggregate of approximately $24.2 million, comprised of: $22.4 million Senior Unsecured Promissory Note, as discussed below; approximately $0.6 million of interest expense payable with respect to the Senior Unsecured Promissory Note; and approximately $1.2 million of MSA Fee payable. Subsequent to September 30, 2021, on October 13, 2021, we issued 15,803,200 shares of our common stock to PAVmed upon the election by PAVmed Inc. to convert the $22.4 million face value principal under the terms of a Senior Unsecured Promissory Note. The Senior Unsecured Promissory Note was issued by us to PAVmed with a face value principal of $22,400,000, an annual interest rate of 7.875%, and a maturity date of May 18, 2028. The Senior Unsecured Promissory Note replaced the $22.4 million aggregate outstanding and payable balance of the Due To: PAVmed Inc., as of June 1, 2021. The Senior Unsecured Promissory Note provided for the partial or full repayment of the face value principal and accrued but unpaid interest thereon by the issue of shares of our common stock, at the election of PAVmed, at a conversion price of $1.42 per share of our common stock. See our accompanying unaudited condensed financial statements Note 5, Due To: PAVmed Inc. , for a discussion of the Senior Unsecured Promissory Note dated June 1, 2021 issued by us to PAVmed and for amounts payable to PAVmed by us as of September 30, 2021. Lucid Diagnostics Inc. Initial Public Offering - October 18, 2021 Subsequent to September 30, 2021, on October 18, 2021, we completed an initial public offering (“IPO”) of our common stock under an effective registration statement on Form S-1 (SEC File No. 333-259721), wherein a total of 5.0 million shares of our common stock were issued, with such total shares inclusive of 571,428 shares issued to PAVmed, at an IPO price of $14.00 per share, resulting gross proceeds of $70.0 million, before underwriting fees of $4.9 million, and approximately $0.7 million of offering costs incurred by us. Upon the consummation of the IPO, there were a total of 34,917,907 shares of common stock of our issued and outstanding, of which 27,927,190 were held by PAVmed, 4,428,572 shares were held by other IPO investors, and the remaining shares held by each of the initial investors in Lucid Diagnostics, as discussed in our accompanying unaudited condensed financial statements Note 10, Stockholders’ Equity. We are subject to all of the risks and uncertainties typically faced by medical device and diagnostic companies that devote substantially all of their efforts to the commercialization of their initial product and services and ongoing research and development activities and conducting clinical trials. We expect to continue to experience recurring losses from operations and we will continue to fund our operations with debt and/or equity financing transactions. Notwithstanding, however, with the cash on-hand as of the date hereof, of which is inclusive of the cash proceeds resulting from the as a result of our IPO, we expect to be able to fund its future operations for one year from the date of the issue of our unaudited condensed financial statements, as included herein in this Quarterly Report on Form 10-Q for the period ended September 30, 2021. 36 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued Critical Accounting Policies The discussion and analysis of our (unaudited) financial condition and consolidated results of operations is based on our unaudited condensed financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The preparation of these unaudited condensed financial statements requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, and equity, along with the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of expenses during the corresponding periods. In accordance with U.S. GAAP, we base our estimates on historical experience and on various other assumptions we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Please see Note 2, Summary of Significant Accounting Policies and Recent Accounting Standards Updates , of our unaudited condensed consolidated financial statements included herein in this Form 10-Q, for a summary of significant accounting policies. 37