Lucid Diagnostics Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our consolidated financial condition and results of operations should be read together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements involving risks and uncertainties and should be read together with the “Forward-Looking Statements” and “Risk Factors” sections of this Annual Report on Form 10-K for a discussion of important factors which could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Unless the context otherwise requires, references herein to “we”, “us”, and “our”, and to the “Company” or “Lucid” are to Lucid Diagnostics Inc. and its subsidiaries LucidDx Labs Inc. (“LucidDx Labs”) and CapNostics, LLC (“CapNostics”). Overview Lucid Diagnostics Inc. (“Lucid”) is a commercial-stage medical diagnostics technology company focused on the millions of patients with gastroesophageal reflux disease (“GERD”), also known as chronic heartburn, acid reflux or simply reflux, who are at risk of developing esophageal precancer and cancer, specifically highly lethal esophageal adenocarcinoma (“EAC”). References in this Form 10-K to “we,” “us” and “our” are to Lucid and, unless the context otherwise requires, its subsidiaries. We believe that our flagship product, the EsoGuard Esophageal DNA Test, performed on samples collected with the EsoCheck Esophageal Cell Collection Device, constitutes the first and only commercially available diagnostic test capable of serving as a widespread screening tool to prevent esophageal adenocarcinoma (“EAC”) deaths, through early detection of esophageal precancer in at-risk gastroesophageal reflux disease (“GERD,” also commonly known as chronic heartburn, acid reflux or simply reflux) patients. EsoGuard is a bisulfite-converted next-generation sequencing (NGS) DNA assay performed on surface esophageal cells collected with EsoCheck. It quantifies methylation at 31 sites on two genes, Vimentin (VIM) and Cyclin A1 (CCNA1). The assay was evaluated in a 408-patient multicenter case-control study published in Science Translational Medicine and showed greater than 90% sensitivity and specificity at detecting esophageal precancer 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). EsoGuard is commercially available in the U.S. as a Laboratory Developed Test (LDT) performed at our CLIA-certified laboratory. Cell samples, including those collected with EsoCheck, as discussed below, are sent to our laboratory, for testing and analyses using our proprietary EsoGuard NGS DNA assay. EsoCheck is an FDA 510(k) and CE Mark cleared noninvasive swallowable balloon capsule catheter device capable of sampling surface esophageal cells in a less than five-minute office. It consists of a vitamin pill-sized rigid plastic capsule tethered to a thin silicone catheter from which a soft silicone balloon with textured ridges emerges to gently swab surface esophageal cells. When vacuum suction is applied, the balloon and sampled cells are pulled into the capsule, protecting them from contamination and dilution by cells outside of the targeted region during device withdrawal. We believe this proprietary Collect+Protect™ technology makes EsoCheck the only noninvasive esophageal cell collection device capable of such anatomically targeted and protected sampling. EsoGuard and EsoCheck are based on patented technology licensed by Lucid from Case Western Reserve University (“CWRU”). EsoGuard and EsoCheck have been developed to provide an accurate, non-invasive, patient-friendly screening test for the early detection of adenocarcinoma of the esophagus (“EAC”) and Barrett’s Esophagus (“BE”), including dysplastic BE and related pre-cursors to EAC in patients with chronic gastroesophageal reflux (“GERD”). Recent Developments Business Status of Clinical Trials We are currently seeking to accelerate our collection of clinical utility data through a range of trials that can be efficiently executed. These efforts include a planned investigator-initiated, retrospective analysis of prospectively collected data on the approximately 400 San Antonio fire fighters who underwent testing as part of a community-sponsored cancer awareness event (in respect of which we expect to publish results in the first half of 2023) ; an ongoing investigator-initiated, retrospective, single-center, study with 500 patients (in respect of which we expect to publish results mid-2023), a virtual-patient randomized controlled trial with intended recruitment of 100-200 physician participants (in respect of which we expect to publish results this year) ; a Lucid-sponsored multi-center, prospective, observational study with 500 patients; and a Lucid-sponsored registry at existing Lucid Test Centers, whereby all patients undergoing EsoCheck testing will be given the opportunity to provide informed consent and contribute data about their risk factors, EsoGuard results, and subsequent diagnostic and/or therapeutic journey. Both Lucid-sponsored observational/registry studies expect to have preliminary results and/or interim analysis before the end of 2023. As previously disclosed, consequently, we have decided to delay for the time being the two previously commenced clinical trials, the “EsoGuard screening study” (“BE-1”) and the “EsoGuard case-control study” (“BE-2”), as we are devoting our clinical resources to the studies cited above, which we expect will more efficiently generate the clinical data we are currently prioritzing to drive EsoGuard commercialization. 44 LucidDx Labs Laboratory Operations Update On February 14, 2023, we and our subsidiary, LucidDx Labs Inc., entered into an agreement (the “MSA Termination Agreement ”) with RDx, pursuant to which the parties mutually agreed to terminate the MSA-RDx without cause. The termination was effective as February 10, 2023. Until the termination of the MSA-RDx, RDx had continued to provide certain testing and related services for the Laboratory in accordance with the terms of the MSA-RDx. Recently, however, we accelerated the development of internal resources necessary to operate the Laboratory entirely on its own. Accordingly, we believe that termination of the MSA-RDx will improve the efficiency of the performance of the EsoGuard assay. Among other things, the MSA Termination Agreement reduces the remaining amounts of the earnout payments and management fees due under the APA-RDx and the MSA-RDx to $725,000 (from the $3,450,000 that would otherwise have been payable under the APA and MSA if the MSA had remained in effect through the balance of its stated term), resulting in a net savings to us of $2,725,000. The payment was satisfied through the issuance of 553,436 shares of Lucid Diagnostics’ common stock on February 25, 2023. we were not required to make any cash payments in connection with the termination. #CheckYourFoodTube Events In January 2023, we successfully completed our first #CheckYourFoodTube Precancer Testing Event, in partnership with Rachelle Hamblin, M.D., M.P.H., and the San Antonio Fire Department (SAFD), to detect esophageal precancer in at-risk members of the department. The SAFD testing event was held over two weekends in January, which has been designated as Firefighter Cancer Awareness Month by the International Association of Fire Fighters (IAFF). A total of 391 members, nearly one-quarter of the department, who were deemed by Dr. Hamblin to be at-risk for esophageal precancer, underwent a brief, on-site, noninvasive cell collection procedure, performed by our clinical personnel using EsoCheck. Firefighters with suspected esophageal precancer based on a positive EsoGuard result were identified, including some less than forty years of age, and will undergo appropriate monitoring and treatment, as indicated by clinical practice guidelines, to prevent progression to esophageal cancer. These events, which we look to expand across the country, are an extension of our expanding satellite Lucid Test Center (sLTC) program, which brings our precancer testing directly to patients—at their physician’s office and now at large testing day events. We demonstrated that our nurse practitioners can each perform up to fifty EsoCheck procedures in a day, and our laboratory team handled over two hundred incoming samples in a day, while maintaining turnaround times at target. These successes provide an excellent foundation for future testing events as we continue to drive EsoGuard commercialization using all the tools at our disposal. Payroll and Benefit Expense Reimbursement Agreement On November 30, 2022, PAVmed and we entered into a payroll and benefit expense reimbursement agreement (the “PBERA”). Historically, PAVmed has paid for certain payroll and benefit-related expenses in respect of our personnel on our behalf, and we have reimbursed PAVmed for the same. Pursuant to the PBERA, PAVmed will continue to pay such expenses, and we will continue to reimburse PAVmed for the same. The PBERA now provides that the expenses will be reimbursed on a quarterly basis or at such other frequency as the parties may determine, in cash or, subject to approval by PAVmed’s and our boards of directors, in shares of our common stock, with such shares valued at the volume weighted average price of such stock during the final ten trading days preceding the later of the two dates on which such stock issuance is approved by PAVmed’s and our boards of directors (subject to a floor price of $0.40 per share), or in a combination of cash and shares. However, in no event shall we issue any shares of our common stock to PAVmed in satisfaction of all or any portion of the expenses if the issuance of such shares of our common stock would exceed the maximum number of shares of common stock that we may issue under the rules or regulations of The Nasdaq Stock Market LLC (“Nasdaq”), unless we obtain the approval of our stockholders as required by the applicable rules of the Nasdaq for issuances of shares of our common stock in excess of such amount. Financing Series A Preferred Stock Offering On March 7, 2023, we entered into subscription agreements for the sale of 13,625 shares of Series A preferred stock (the “ Series A Preferred Stock ”). Each share of the Series A Preferred Stock has a stated value of $1,000 and a conversion price of $1.394. The terms of the Series A Preferred Stock also include a one times preference on liquidation and a right to receive dividends equal to 20% of the number of shares into which such Series A Preferred Stock is convertible, payable on the one-year and two-year anniversary of the issuance date. The Series A Preferred Stock is a non-voting security, other than with respect to limited matters related to changes in terms of the Series A Preferred Stock. The aggregate gross proceeds from the sale of shares in such offering were $13.625 million. 45 Private Placement - Securities Purchase Agreement Effective as of March 13, 2023, we entered into a Securities Purchase Agreement (“SPA”) with an accredited institutional investor (“Investor”, “Lender”, and /or “Holder”), pursuant to which we agreed to sell, and the Investor agreed to purchase a Senior Secured Convertible Note with a face value principal of $11.1 million (the “March 2023 Senior Convertible Note”). The issuance of the March 2023 Senior Convertible Note is subject to customary closing conditions. The March 2023 Senior Secured Convertible Note would have a 7.875% annual stated interest rate, a contractual conversion price of $5.00 per share of the Company’s common stock (subject to standard adjustments in the event of any stock split, stock dividend, stock combination, recapitalization or other similar transaction), and a contractual maturity date of the two-year anniversary of the date of issuance. The March 2023 Senior Convertible Note would be convertible into or otherwise paid in shares of the Company’s common stock. Under the March 2023 Senior Convertible Note, the Company would be subject to certain customary affirmative and negative covenants regarding the incurrence of indebtedness, the existence of liens, the repayment of indebtedness and the making of investments, the payment of cash in respect of dividends, distributions or redemptions, the transfer of assets, the maturity of other indebtedness, and transactions with affiliates, among other customary matters. Under the March 2023 Senior Convertible Note, the Company would also be subject to financial covenants requiring that (i) the amount of our available cash equal or exceed $5.0 million at all times, (ii) the ratio of (a) the outstanding principal amount of the notes issued under the SPA, accrued and unpaid interest thereon and accrued and unpaid late charges to (b) the Company’s average market capitalization over the prior ten trading days, not exceed 30%, and (iii) that the Company’s market capitalization shall at no time be less than an amount to be agreed upon. Committed Equity Facility and ATM Facility In March 2022, we entered into a committed equity facility with an affiliate of Cantor Fitzgerald (“Cantor”). Under the terms of the facility, Cantor has committed to purchase up to $50 million of our common stock from time to time upon our request. While there are distinct differences, the facility is structured similarly to a traditional at-the-market equity facility, insofar as it allows us to raise primary capital on a periodic basis at prices based on the existing market price. Through December 31, 2022, 680,263 shares of our common stock were issued under this facility for total proceeds of $1.8 million. In November 2022, Lucid Diagnostics also entered into an “at-the-market offering” for up to $6.5 million of its common stock that may be offered and sold under a Controlled Equity Offering Agreement between Lucid Diagnostics and Cantor Fitzgerald & Co. In the year ended December 31, 2022, there were no Lucid Diagnostics shares sold through their at-the-market equity facility. Subsequent to December 31, 2022, through March 9, 2023, Lucid Diagnostics sold 230,068 shares through its at-the-market equity facility for approximately $0.3 million. 46 Results of Operations Overview Revenue The Company recognized revenue resulting from the delivery of patient EsoGuard test results when the Company considered the collection of such consideration to be probable to the extent that it is unconstrained. Additionally, revenue was recognized with respect to the EsoGuard Commercialization Agreement, dated August 1, 2021, between the Company and RDx, a CLIA certified commercial laboratory service provider. On February 25, 2022, the EsoGuard Commercialization Agreement was terminated upon the execution of an Asset Purchase Agreement between the Company’s wholly-owned subsidiary of LucidDx Labs Inc. and RDx. Cost of revenue Cost of revenues recognized from the delivery of patient EsoGuard test results includes costs related to EsoCheck device usage, shipment of test collection kits, royalties and the cost of services to process tests and provide results to physicians. We incur expenses for tests in the period in which the activities occur, therefore, gross margin as a percentage of revenue may vary from quarter to quarter due to costs being incurred in one period that relate to revenues recognized in a later period. We expect that gross margin for our services will continue to fluctuate and be affected by EsoGuard test volume, our operating efficiencies, patient compliance rates, payer mix, the levels of reimbursement, and payment patterns of payers and patients. 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. Sales and marketing expenses Sales and marketing expenses consist primarily of salaries and related costs for employees engaged in sales and marketing activities, as well as the portion of the MSA Fee allocated to sales and marketing expenses, which are principally employee related costs of PAVmed employees who are performing services for the Company. We anticipate our sales and marketing expenses will increase in the future, as we anticipate an increase in payroll and related expenses related to 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 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, employees involved in third-party payor reimbursement contract negotiations and regulatory services associated with maintaining compliance as a public company, along with insurance premiums, investor relations, and other corporate expenses. 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 clinical and preclinical studies and engineering design and development; ● 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, including our clinical trials, are focused principally on obtaining FDA approvals, facilitating insurer reimbursement, encouraging physician adoption and developing product improvements or extending the utility of the lead products in our pipeline, including EsoCheck and EsoGuard. 47 Results of Operations - continued Overview - continued Presentation of Dollar Amounts All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are presented as dollars in millions, except for per share amounts. The year ended December 31, 2022 as compared to the year ended December 31, 2021 Revenue In the year ended December 31, 2022, revenue was $0.4 million as compared to $0.5 million in the prior year. The $0.1 million decrease principally relates to the termination of the EsoGuard Commercialization Agreement with RDx, as the Company transitioned to its own laboratory operations effective February 25, 2022. The decrease was partially offset by revenue for our EsoGuard Esophageal DNA Test performed in our own CLIA laboratory for the year ended December 31, 2022. Cost of revenue In the year ended December 31, 2022, cost of revenue was approximately $3.6 million as compared to $0.6 million in the prior year. The $3.0 million increase principally related to: ● approximately $0.6 million increase in compensation related costs as a result of an increase in headcount; ● approximately $0.7 million increase in EsoCheck and EsoGuard supplies usage costs; and ● approximately $1.7 million increase in laboratory operations costs. Sales and marketing expenses In the year ended December 31, 2022, sales and marketing costs were approximately $16.1 million, compared to $5.3 million in the prior year. The net increase of $10.8 million was principally related to: ● approximately $8.1 million increase in compensation related costs principally as a result of an increase in headcount; ● approximately $1.4 million increase in stock-based compensation from RSA grants to Lucid and PAVmed employees and non-employees, and an increase in stock options granted corresponding with the increase in headcount; ● approximately $1.5 million increase in consulting and outside professional services fees and for EsoCheck and EsoGuard; ● approximately $0.2 million increase general business expenses; and ● approximately $0.4 million decrease in the MSA fee allocation from PAVmed due to less sales and marketing related activities incurred through PAVmed. General and administrative expenses In the year ended December 31, 2022, general and administrative costs were approximately $23.7 million, compared to $12.8 million in the prior year. The net increase of $10.9 million was principally related to: ● approximately $0.6 million increase in compensation related costs principally as a result of an increase in headcount; ● approximately $2.0 million increase in stock-based compensation from RSA grants to Lucid and PAVmed employees and non-employees, and an increase in stock options granted corresponding with the increase in headcount; ● approximately $5.0 million increase in consulting services related to patents, regulatory compliance, legal processes for contract review, transition of public relations and investor relations firms, and public company expenses; ● approximately $1.8 million increase in the MSA fee allocation from PAVmed related to the growth and expansion of our business and the services incurred through PAVmed; and ● approximately $1.5 million increase in general business expenses. 48 Results of Operations - continued The year ended December 31, 2022 as compared to the year ended December 31, 2021 - continued Research and development expenses In the year ended December 31, 2022, research and development costs were approximately $11.5 million, compared to $9.3 million in the prior year. The net increase of $2.2 million was principally related to: ● approximately $1.4 million increase in development costs, particularly in clinical trial activities and outside professional and consulting fees with respect to EsoCheck, EsoCure and EsoGuard; ● approximately $0.2 million increase in compensation related costs and related to expanded clinical and engineering staff; and ● approximately $0.6 million increase in the MSA fee allocation from PAVmed related to the growth and expansion of our business and the services incurred through PAVmed. See our accompanying consolidated financial statements for each of: Note 5 , Related Party Transactions, 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 stock awards and for a discussion of the MSA between Lucid Diagnostics and PAVmed; and Note 14 , Stock-Based Compensation , for information regarding each of the Lucid Diagnostics 2018 Equity Plan and the PAVmed Inc. 2014 Equity Plan. Amortization of Acquired Intangible Assets In the year ended December 31, 2022, the amortization of acquired intangible assets was approximately $1.6 million as compared to no intangible asset amortization in the prior year. The increase was principally related to the purchase of laboratory licenses and certifications and laboratory information management software in Q1 2022 and the amortization of a defensive asset. 49 Liquidity and Capital Resources Our current operational activities are principally focused on the commercialization of EsoGuard. We are expanding commercialization across multiple sales channels, including: the communication to and education of medical practitioners and clinicians regarding EsoGuard; and the establishment of Lucid Diagnostics Test Centers for the collection of cell samples using EsoCheck. Additionally, we are developing expanded clinical evidence to support insurance reimbursement adoption by government and private insurers. Further, as resources permit, the Company also intends to pursue development of other products and services, including EsoCure, an Esophageal Ablation Device. Our ability to generate revenue depends upon our ability to successfully advance the commercialization of EsoGuard, while also completing the clinical studies, product and service development, and necessary regulatory approval thereof. There are no assurances, however, we will be able to obtain an adequate level of financial resources required for the long-term commercialization and development of our products and services. Prior to our initial public offering (“IPO”) of our common stock in October 2021, our operations were funded by PAVmed, inclusive of providing working capital cash advances and the payment of certain operating expenses on our behalf. Additionally, certain of our operations continue to be managed by PAVmed personnel, for which we incur expense according to the provisions of a MSA between us and PAVmed. See Note 5 , Related Party Transactions, for a discussion of the MSA. 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 will continue to fund our operations with debt and equity financing transactions. Notwithstanding, however, with our cash on-hand as of the date hereof and committed equity sources of financing, the Company expects to be able to fund its operations and meet its financial obligations as they become due for the one year period from the date of the issue of the Company’s consolidated financial statements, as included herein in this Form 10-K. Series A Preferred Stock Offering On March 7, 2023, we entered into subscription agreements for the sale of 13,625 shares of Series A preferred stock (the “ Series A Preferred Stock ”). Each share of the Series A Preferred Stock has a stated value of $1,000 and a conversion price of $1.394. The terms of the Series A Preferred Stock also include a one times preference on liquidation and a right to receive dividends equal to 20% of the number of shares into which such Series A Preferred Stock is convertible, payable on the one-year and two-year anniversary of the issuance date. The Series A Preferred Stock is a non-voting security, other than with respect to limited matters related to changes in terms of the Series A Preferred Stock. The aggregate gross proceeds from the sale of shares in such offering were $13.625 million. Private Placement - Securities Purchase Agreement Effective as of March 13, 2023, we entered into a Securities Purchase Agreement (“SPA”) with an accredited institutional investor (“Investor”, “Lender”, and /or “Holder”), pursuant to which we agreed to sell, and the Investor agreed to purchase a Senior Secured Convertible Note with a face value principal of $11.1 million (the “March 2023 Senior Convertible Note”). The issuance of the March 2023 Senior Convertible Note is subject to customary closing conditions. The March 2023 Senior Secured Convertible Note would have a 7.875% annual stated interest rate, a contractual conversion price of $5.00 per share of the Company’s common stock (subject to standard adjustments in the event of any stock split, stock dividend, stock combination, recapitalization or other similar transaction), and a contractual maturity date of the two-year anniversary of the date of issuance. The March 2023 Senior Convertible Note would be convertible into or otherwise paid in shares of the Company’s common stock. Under the March 2023 Senior Convertible Note, the Company would be subject to certain customary affirmative and negative covenants regarding the incurrence of indebtedness, the existence of liens, the repayment of indebtedness and the making of investments, the payment of cash in respect of dividends, distributions or redemptions, the transfer of assets, the maturity of other indebtedness, and transactions with affiliates, among other customary matters. Under the March 2023 Senior Convertible Note, the Company would also be subject to financial covenants requiring that (i) the amount of our available cash equal or exceed $5.0 million at all times, (ii) the ratio of (a) the outstanding principal amount of the notes issued under the SPA, accrued and unpaid interest thereon and accrued and unpaid late charges to (b) the Company’s average market capitalization over the prior ten trading days, not exceed 30%, and (iii) that the Company’s market capitalization shall at no time be less than an amount to be agreed upon. Committed Equity Facility and ATM Facility In March 2022, we entered into a committed equity facility with Cantor. Under the terms of the committed equity facility, Cantor has committed to purchase up to $50 million of our common stock from time to time at our request. While there are distinct differences, the committed equity facility is structured similarly to a traditional at-the-market equity facility, insofar as it allows us to raise primary equity capital on a periodic basis at prices based on the existing market price. As of December 31, 2022, under the committed equity facility, a total of 680,263 shares of common stock of the Company were issued for proceeds of approximately $1.8 million. In November 2022, Lucid Diagnostics also entered into an “at-the-market offering” for up to $6.5 million of its common stock that may be offered and sold under a Controlled Equity Offering Agreement between Lucid Diagnostics and Cantor Fitzgerald & Co. In the year ended December 31, 2022, there were no shares sold through their at-the-market equity facility. Subsequent to December 31, 2022, through March 9, 2023, Lucid Diagnostics sold 230,068 shares through its at-the-market equity facility for approximately $0.3 million. 50 Due To: PAVmed Inc. Since our inception in May 2018 through our IPO in October 2021, our operations were funded by PAVmed providing working capital cash advances and the payment by PAVmed of certain operating expenses on our behalf. Additionally, our daily operations have been and continue to be principally managed by personnel employed by PAVmed, for which we incur a MSA Fee expense. The MSA Fee is charged on a monthly basis and is subject-to periodic adjustment corresponding with changes in the services provided by PAVmed Inc. personnel to the Company, with any such change in the MSA Fee being subject to approval of the Lucid Diagnostics Inc. and PAVmed Inc. boards of directors. In this regard, in August 2022, the boards of directors of Lucid Diagnostics Inc. and PAVmed Inc. approved a sixth amendment to the MSA to increase the MSA Fee to $550 per month from $390 per month, with such increase effective on a prospective basis commencing July 1, 2022. Pursuant to the sixth amendment, the parties agreed PAVmed Inc. may elect to receive payment of the monthly MSA Fee in cash or in shares of our common stock, with such shares valued at the volume weighted average price (“VWAP”) during the final ten trading days of the applicable month (subject to a floor price of $0.70 per share). However, in no event will PAVmed Inc. be entitled to receive under the MSA, as amended, more than 7,709,836 shares of our common stock (representing 19.99% of our outstanding shares of common stock as of immediately prior to the execution of the sixth amendment). The shares that may be issued under the MSA, as amended, are being offered and sold in transactions exempt from registration under the Securities Act of 1933, as amended, in reliance on the exemption afforded under Section 4(a)(2) thereof. In accordance with the MSA, on November 30, 2022 PAVmed has elected to receive payment of $1.65 million in aggregated monthly fees under the MSA through the issuance of 750,818 shares of Lucid Diagnostics Inc. Common Stock. On November 30, 2022, the Company and PAVmed entered into a payroll and benefit expense reimbursement agreement (the “PBERA”). Historically, PAVmed has paid for certain payroll and benefit-related expenses in respect of the Company’s personnel on behalf of the Company, and the Company has reimbursed PAVmed for the same. Pursuant to the PBERA, PAVmed will continue to pay such expenses, and the Company will continue to reimburse PAVmed for the same. The PBERA now provides that the expenses will be reimbursed on a quarterly basis or at such other frequency as the parties may determine, in cash or, subject to approval by the board of directors of each of PAVmed and the Company, in shares of the Company’s common stock, with such shares valued at the volume weighted average price of such stock during the final ten trading days preceding the later of the two dates on which such stock issuance is approved by the board of directors of each of PAVmed and the Company (subject to a floor price of $0.40 per share), or in a combination of cash and shares. However, in no event shall the Company issue any shares of its common stock to PAVmed in satisfaction of all or any portion of the expenses if the issuance of such shares of its common stock would exceed the maximum number of shares of common stock that the Issuer may issue under the rules or regulations of The Nasdaq Stock Market LLC (“Nasdaq”), unless the Company obtains the approval of its stockholders as required by the applicable rules of the Nasdaq for issuances of shares of its common stock in excess of such amount. In accordance with the PBERA, on November 30, 2022, PAVmed elected for the Company to reimburse PAVmed for $2.7 million in accrued and unreimbursed payroll and benefit-related expenses paid by PAVmed on behalf of the Company through the third quarter of 2022 through the issuance of 1,479,326 shares of the Company’s common stock. As previously disclosed, on October 5, 2021, PAVmed Subsidiary Corp., a wholly owned subsidiary of PAVmed (“PAVmed Sub”), acquired 100% of the outstanding membership interest of CapNostics, LLC from a third party, for a purchase price of approximately $2.1 million. Also as previously disclosed, effective as of April 1, 2022, pursuant to an assignment agreement (as amended and supplemented to date, the “CapNostics Assignment Agreement”) between PAVmed Sub and the Company, PAVmed Sub assigned the interests to the Company and, in consideration for the interests, the Company agreed to pay to PAVmed Sub an amount in cash equal to the purchase price paid by PAVmed Sub to the third party. On November 30, 2022, pursuant to a supplement to the CapNostics Assignment Agreement, the Company, PAVmed Sub and PAVmed agreed that the Company would pay the price for the interests through the issuance to PAVmed of 1,145,086 shares of the Company’s common stock. As of December 31, 2022, we had a Due To: PAVmed Inc. payment obligation liability of an aggregate of approximately $5.0 million payable for the reimbursement of employee related costs and certain operating expenses paid by PAVmed on our behalf. See our accompanying consolidated financial statements Note 6 , Due To PAVmed Inc. 51 Critical Accounting Policies and Significant Judgments and Estimates The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP. The preparation of these consolidated 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 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. While our significant accounting policies are described in more detail in our consolidated financial notes, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements. Research and Development Expenses Research and development expenses are recognized as incurred and include the salary and stock-based compensation of employees engaged in product research and development activities, and the costs related to the Company’s various contract research service providers, suppliers, engineering studies, supplies, and outsourced testing and consulting fees, as well as depreciation expense and rental costs for equipment used in research and development activities, and fees incurred for access to certain facilities of contract research service providers. Stock-Based Compensation Stock-based awards are made to members of the board of directors of the Company, the Company’s employees and non-employees, under each of the Lucid Diagnostics Inc. 2018 Equity Plan and the PAVmed Inc. 2014 Equity Plan. The grant-date estimated fair value of the stock-based award is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective stock-based award, with such straight-line recognition adjusted, as applicable, so the cumulative expense recognized is at-least equal-to-or-greater-than the estimated fair value of the vested portion of the respective stock-based award as of the reporting date. The Company uses the Black-Scholes valuation model to estimate the fair value of stock options granted under both the PAVmed Inc. 2014 Equity Plan and the Lucid Diagnostics Inc. 2018 Equity Plan, which requires the Company to make certain weighted-average valuation estimates and assumptions for stock-based awards, principally as follows: ● With respect to the PAVmed Inc. 2014 Equity Plan, the expected stock price volatility is based on the historical stock price volatility of PAVmed Inc. common stock and the volatilities of similar entities within the medical device industry over the period commensurate with the expected term with respect to stock options granted to the board of directors and employees in the years ended December 31, 2022 and 2021; ● With respect to stock options granted under the Lucid Diagnostics Inc. 2018 Equity Plan, the expected stock price volatility was based on the historical stock price volatility of similar entities within the medical device industry over the period commensurate with the expected term with respect to stock options granted to employees in the years ended December 31, 2022 and 2021; ● The risk-free interest rate is based on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period commensurate with either the expected term or the remaining contractual term, as applicable, of the stock option; and, ● The expected dividend yield is based on annual dividends of $0.00 as there have not been dividends paid to-date, and there is no plan to pay dividends for the foreseeable future. The price per share of Lucid Diagnostics Inc. common stock used in the computation of estimated fair value of stock options and restricted stock awards granted under the Lucid Diagnostics Inc. 2018 Equity Plan is as follows: (i) for the period October 14, 2021 to December 31, 2022 it is its quoted closing price per share; and (ii) for the period January 1, 2021 to October 14, 2021, it was estimated using a probability-weighted average expected return methodology (“PWERM”), which involves the determination of equity value under various exit scenarios and an estimation of the return to the common stockholders under each scenario. The price per share of PAVmed Inc. common stock used in the computation of estimated fair value of stock options and restricted stock awards granted under the PAVmed Inc. 2014 Equity Plan is its quoted closing price per share. Recent Accounting Standards Updates Adopted In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40), (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, by eliminating the beneficial conversion and cash conversion accounting models previously contained in ASC 470-20 that required separate accounting for embedded conversion features. ASU 2020-06 also simplified the assessment of a financial instrument settlement to determine whether a contract is an entity’s own equity qualifies for equity classification by removing certain conditions from ASC 815-4-25. The ASU 2020-06 amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company’s adoption of the ASU 2020-06 guidance as of January 1, 2021 did not have an effect on the Company’s consolidated financial statements. 52 In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes: Simplifying the Accounting for Income Taxes”, (“ASU 2019-12”). The guidance of ASU 2019-12 removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation, and calculating income taxes in interim periods, and adds revised guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. Adoption of the guidance of ASU 2019-12 is required for annual and interim financial statements beginning after December 15, 2020. The Company’s adoption of the ASU 2019-12 guidance as of January 1, 2021 did not have an effect on the Company’s consolidated financial statements. Effective December 31, 2021, the Company adopted FASB ASC Topic 842, Leases, (“ASC 842”). ASC 842 established 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 are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The Company’s adoption of ASC 842 did not have an effect on the Company’s consolidated financial statements. See Note 10, Leases. Off-Balance sheet arrangements We do not have any off-balance sheet arrangements. Item 7A. Quantitative and Qualitative Disclosure About Market Risk Not applicable.