Note
2 – Going Concern and Management’s Liquidity Plan
The
accompanying condensed financial statements have been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The condensed financial statements do not include
any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might
be necessary should the Company be unable to continue as a going concern for the next twelve months from the filing of this Form
10-Q. The Company incurred a net loss of $5,334,644 for the nine months ended September 30, 2019 and had an accumulated deficit
of $53,897,172 at September 30, 2019. Cash used in operating activities was $4,273,179 and $4,911,139 for the nine months ended
September 30, 2019 and 2018, respectively. The aforementioned factors raise substantial doubt about the Company’s ability
to continue as a going concern within one year after the issuance date of the financial statements.
As
of September 30, 2019, the Company had cash balance of $2,943,409, restricted cash of $810,055 and working capital of $1,044,668.
The
Company expects to continue incurring losses for the foreseeable future and will need to raise additional capital to sustain its
operations, pursue its product development initiatives and penetrate markets for the sale of its products.
Management
believes that the Company could have access to capital resources through possible public or private equity offerings, debt financings,
corporate collaborations or other means. However, there is a material risk that the Company will be unable to raise additional
capital or obtain new financing when needed on commercially acceptable terms, if at all. The inability of the Company to raise
needed capital would have a material adverse effect on the Company’s business, financial condition and results of operations,
and ultimately the Company could be forced to curtail or discontinue its operations, liquidate and/or seek reorganization in bankruptcy.
These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
HANCOCK
JAFFE LABORATORIES, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note
3 – Significant Accounting Policies
Basis
of Presentation
The
accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) for interim financial information and Article 8 of Regulation S-X. Accordingly,
they do not include all of the information and disclosures required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of management, such statements include all adjustments (consisting
only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed financial statements
of the Company as of September 30, 2019, and for the three and nine months ended September 30, 2019 and 2018. The results of operations
for the nine months ended September 30, 2019 are not necessarily indicative of the operating results for the full year. These
unaudited condensed financial statements should be read in conjunction with the financial statements and notes thereto for the
year ended December 31, 2018 included in the Company’s Form 10-K filed with the SEC on March 14, 2019. The condensed balance
sheet as of December 31, 2018 has been derived from the Company’s audited financial statements.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures
of contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include the valuation
allowance related to the Company’s deferred tax assets, and the valuation of warrants and derivative liabilities.
Net
Loss per Share
The
Company computes basic and diluted loss per share by dividing net loss attributable to common stockholders by the weighted average
number of common stock outstanding during the period. Net loss attributable to common stockholders consists of net loss, adjusted
for the convertible preferred stock deemed dividend resulting from the 8% cumulative dividend on the Series A and Series B Preferred
Stock (“Preferred Stock”) that were issued in 2016 and 2017 and the beneficial conversion feature recorded in connection
with the conversion of the Preferred Stock. Since the Preferred Stock were converted on June 4, 2018 into common stock in connection
with the Company’s IPO, there was no deemed dividend in the three and nine months ended September 30, 2019.
Basic
and diluted net loss per common share are the same since the inclusion of common stock issuable pursuant to the exercise of warrants
and options, plus the conversion of preferred stock or convertible notes, in the calculation of diluted net loss per common shares
would have been anti-dilutive.
HANCOCK
JAFFE LABORATORIES, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
The
following table summarizes the number of potentially dilutive common stock equivalents excluded from the calculation of diluted
net loss per common share as of September 30, 2019 and 2018:
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Shares of common stock issuable upon exercise of warrants
|
|
|
4,366,960
|
|
|
|
3,780,797
|
|
Shares of common stock issuable upon exercise of options
|
|
|
1,517,000
|
|
|
|
1,940,715
|
|
Potentially dilutive common stock equivalents excluded from diluted net loss
per share
|
|
|
5,883,960
|
|
|
|
5,721,512
|
|
Revenue
Recognition
The
Company recognizes revenue when goods or services are transferred to customers in an amount that reflects the consideration which
it expects to receive in exchange for those goods or services. Revenue is recognized from contracts with customers either at a
“point in time” or “over time”, depending on the facts and circumstances of the arrangement that the Company
evaluates using the following five-step analysis: (i) identification of contract with customer; (ii) determination of performance
obligations; (iii) measurement of the transaction price; (iv) allocation of the transaction price to the performance
obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
The
following table lists the Company’s revenue recognized in the accompanying condensed statements of operations:
|
|
For the Three Months
Ended
|
|
|
For the Nine Months
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Royalty income
|
|
$
|
-
|
|
|
$
|
28,062
|
|
|
$
|
31,243
|
|
|
$
|
88,090
|
|
Contract research - related party
|
|
|
-
|
|
|
|
13,600
|
|
|
|
-
|
|
|
|
68,000
|
|
Total Revenues
|
|
$
|
-
|
|
|
$
|
41,662
|
|
|
$
|
31,243
|
|
|
$
|
156,090
|
|
HANCOCK
JAFFE LABORATORIES, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Royalty
income was earned pursuant to the terms of our March 2016 asset sale agreement with LeMaitre Vascular, Inc., which three-year
term ended on March 18, 2019. After March 18, 2019, we no longer generate royalty revenue from LeMaitre Vascular, Inc.
Contract
research – related party revenue is related to research and development services performed pursuant to a five-year Development
and Manufacturing Agreement dated April 1, 2016 with Hancock Jaffe Laboratory Aesthetics, Inc. (“HJLA Agreement”).
The Company owns a minority interest of 28.0% in Hancock Jaffe Laboratory Aesthetics, Inc.
Information
on Remaining Performance Obligations and Revenue Recognized from Past Performance
Information
about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less is
not disclosed. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with
an original expected duration exceeding one year was not material at September 30, 2019.
Contract
Balances
The
timing of our revenue recognition may differ from the timing of payment by our customers. A receivable is recorded when revenue
is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the
provision of the related services, deferred revenue is recorded until the performance obligations are satisfied. The Company had
deferred revenue of $33,000 as of September 30, 2019 and December 31, 2018 related to cash received in advance for contract research
and development services pursuant to the HJLA Agreement. The Company expects to satisfy its remaining performance obligations
for contract research and development services and recognize the deferred revenue over the next twelve months.
Stock-Based
Compensation
The
Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award.
The fair value of the award is measured on the grant date and recognized over the period services are required to be provided
in exchange for the award, usually the vesting period. Forfeitures of unvested stock options are recorded when they occur.
Concentrations
The
Company maintains cash with major financial institutions. Cash held in United States bank institutions is currently insured by
the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. There were aggregate uninsured
cash balances of $3,503,464 as of September 30, 2019.
For
the three months ended September 30, 2019, the Company recorded no revenues. For the nine months ended September 30, 2019, all
of the Company’s revenues were from royalties as a result of the asset sale agreement with LeMaitre Vascular, Inc. that
was effective from March 18, 2016 to March 18, 2019. During the three and nine months ended September 30, 2018, 67% and 56%, respectively
of the Company’s revenues from operations were from royalties earned from the sale of product by LeMaitre. During the three
and nine months ended September 30, 2018, the balance of the Company’s revenues or 33% and 44%, respectively were from contract
research revenue related to research and development services performed pursuant to the HJLA Agreement.
Subsequent
Events
The
Company evaluated events that have occurred after the balance sheet date through the date the financial statements were issued.
Based upon the evaluation and transactions, the Company did not identify any other subsequent events that would have required
adjustment or disclosure in the financial statements, except as disclosed in Note 10 - Subsequent Events.
HANCOCK
JAFFE LABORATORIES, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note
4 – Cash, Cash Equivalents and Restricted Cash
Cash
and cash equivalents consist principally of deposit accounts and money market accounts as of September 30, 2019 and December 31,
2018.
As
of September 30, 2019, the Company had $810,055 in restricted cash. On January 18, 2019, the Superior Court granted ATSCO, Inc.
(see Note 8 - Commitments and Contingencies - Litigations Claims and Assessments) a Right to Attach Order and Order for
Issuance of Writ of Attachment in the amount of $810,055.
The
following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the balance sheets that sum
to the total of the same amounts shown in the statement of cash flows.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
2,943,409
|
|
|
$
|
2,740,645
|
|
Restricted cash
|
|
|
810,055
|
|
|
|
-
|
|
Total cash, cash equivalents, and restricted cash in the balance sheets
|
|
$
|
3,753,464
|
|
|
$
|
2,740,645
|
|
Note
5 – Property and Equipment
As
of September 30, 2019 and December 31, 2018, property and equipment consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Laboratory equipment
|
|
$
|
214,838
|
|
|
$
|
94,905
|
|
Furniture and fixtures
|
|
|
93,417
|
|
|
|
93,417
|
|
Computer equipment
|
|
|
37,446
|
|
|
|
26,830
|
|
Leasehold improvements
|
|
|
158,092
|
|
|
|
158,092
|
|
Software
|
|
|
220,384
|
|
|
|
-
|
|
Total property and equipment
|
|
|
724,177
|
|
|
|
373,244
|
|
Less: accumulated depreciation
|
|
|
(373,919
|
)
|
|
|
(347,091
|
)
|
Property and equipment, net
|
|
$
|
350,258
|
|
|
$
|
26,153
|
|
Depreciation
expense amounted to $26,828 and $7,310 for the nine months ended September 30, 2019 and 2018, respectively. Depreciation expense
is reflected in general and administrative expenses in the accompanying statements of operations.
HANCOCK
JAFFE LABORATORIES, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note
6 – Right-of-Use Assets and Lease Liabilities
On
September 20, 2017, the Company renewed its operating lease for its manufacturing facility in Irvine, California, effective October
1, 2017, for five years with an option to extend the lease for an additional 60-month term at the end of lease term. The initial
lease rate was $26,838 per month with escalating payments. In connection with the lease, the Company is obligated to pay $7,254
monthly for operating expenses for building repairs and maintenance. The Company has no other operating or financing leases with
terms greater than 12 months.
The
Company adopted ASC Topic 842, Leases (Topic 842) effective January 1, 2019 using the modified-retrospective method and elected
the package of transition practical expedients for expired or existing contracts, which does not require reassessment of previous
conclusions related to contracts containing leases, lease classification and initial direct costs, and therefore the comparative
periods presented are not adjusted. In addition, the Company elected to adopt the short-term lease exception and not apply ASC
Topic 842 to arrangements with lease terms of 12 months or less. On January 1, 2019, upon adoption of ASC Topic 842, the Company
recorded right-of-use assets of $1,099,400, lease liabilities of $1,121,873 and eliminated deferred rent of $22,473. The Company
determined the lease liabilities using the Company’s estimated incremental borrowing rate of 8.5% to estimate the present
value of the remaining monthly lease payments.
Our
operating lease cost is as follows:
|
|
For the three
Months Ended
September 30, 2019
|
|
|
For the Nine
Months Ended
September 30, 2019
|
|
Operating lease cost
|
|
$
|
85,492
|
|
|
$
|
256,475
|
|
Supplemental
cash flow information related to our operating lease is as follows:
|
|
For the three
Months Ended
September 30, 2019
|
|
|
For the Nine
Months Ended
September 30, 2019
|
|
Operating cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease
liabilities
|
|
$
|
82,929
|
|
|
$
|
248,787
|
|
Remaining
lease term and discount rate for our operating lease is as follows:
|
|
September 30, 2019
|
|
Remaining lease term
|
|
|
3.0 years
|
|
Discount rate
|
|
|
8.5
|
%
|
Maturity
of our lease liabilities by fiscal year for our operating lease is as follows:
Three months ended December 31, 2019
|
|
$
|
85,416
|
|
Year ended December 31, 2020
|
|
|
344,229
|
|
Year ended December 31, 2021
|
|
|
354,561
|
|
Year ended December 31, 2022
|
|
|
271,854
|
|
Total
|
|
$
|
1,056,060
|
|
Less: Imputed interest
|
|
|
(133,117
|
)
|
Present value of our lease liability
|
|
$
|
922,943
|
|
HANCOCK
JAFFE LABORATORIES, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note
7 – Accrued Expenses and Accrued Interest – Related Party
As
of September 30, 2019 and December 31, 2018, accrued expenses consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Accrued compensation costs
|
|
$
|
196,774
|
|
|
$
|
288,549
|
|
Accrued professional fees
|
|
|
148,500
|
|
|
|
55,300
|
|
Accrued franchise and sales taxes
|
|
|
30,270
|
|
|
|
26,985
|
|
Accrued research and development
|
|
|
124,622
|
|
|
|
17,064
|
|
Other accrued expenses
|
|
|
-
|
|
|
|
2,500
|
|
Deferred rent
|
|
|
-
|
|
|
|
22,473
|
|
Accrued expenses
|
|
$
|
500,166
|
|
|
$
|
412,871
|
|
Included
in accrued compensation costs in the table above is accrued severance expense of $0 and $166,154 as of September 30, 2019 and
December 31, 2018, respectively, pursuant to the terms of the employment agreement for the Company’s prior Chief Financial
Officer, who was terminated effective July 20, 2018.
Note
8 – Commitments and Contingencies
Litigations
Claims and Assessments
In
the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary
course of business. The Company records legal costs associated with loss contingencies as incurred and accrues for all probable
and estimable settlements.
On
September 21, 2018, ATSCO, Inc., filed a complaint with the Superior Court seeking payment of $809,520 plus legal costs for disputed
invoices to the Company dated from 2015 to June 30, 2018. The Company had entered into a Services and Material Supply Agreement
(“Agreement”), dated March 4, 2016 for ATSCO to supply porcine and bovine tissue. The Company is disputing the amount
owed and that the Agreement called for a fixed monthly fee regardless of whether tissue was delivered to the Company. On January
18, 2019, the Orange County Superior Court granted a Right to Attach Order and Order for Issuance of Writ of Attachment in the
amount of $810,055. We contend at least $188,000 of the ATSCO claim relates to a wholly separate company, and over $500,000 of
the claim is attributable to invoices sent without delivery of any tissue to the Company. The Company also believes it has numerous
defenses and rights of setoff including without limitation: that ATSCO had an obligation to mitigate claimed damages when they
were not delivering tissues and not incurring any costs; $188,000 of the amount that ATSCO is seeking are for invoices to Hancock
Jaffe Laboratory Aesthetics, Inc. (in which the Company owns a minority interest of 28.0%) and is not the obligation of the Company;
the Company has a right of setoff against any amounts owed to ATSCO for 120,000 shares of the Company’s stock transferred
to ATSCO’s principal and owner; the yields of the materials delivered by ATSCO to the Company were inferior; and the Agreement
was constructively terminated. On March 26, 2019, ATSCO filed a First Amended Complaint with the Superior Court increasing its
claim to $1,606,820 plus incidental damages and interest, on the basis of an alleged additional oral promise not alleged in its
original Complaint. The Company recently deposed ATSCO’s sole owner and principal and believes that the merits of its key
defenses have been buttressed and supported as a result. While the Company expects and intends to continue a vigorous defense,
the Company and ATSCO have recently agreed to proceed with informal settlement discussions. A trial date of July 20, 2020 has
been set by the court. The Company recorded the disputed invoices in accounts payable and as of September 30, 2019, the Company
believes that it has fully accrued for the outstanding claims against the Company. The Company has entered into new supply relationships
with one domestic and one international company to supply porcine and bovine tissues.
HANCOCK
JAFFE LABORATORIES, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
On
October 8, 2018, Gusrae Kaplan Nusbaum PLLC (“Gusrae”) filed a complaint with the Supreme Court of the State of New
York seeking payment of $178,926 plus interest and legal costs for invoices to the Company dated from November 2016 to December
2017. In July 2016, the Company retained Gusrae to represent the Company in connection with certain specific matters. The Company
believes that Gusrae has not applied all of the payments made by the Company along with billing irregularities and errors and
is disputing the amount owed. The Company recorded the disputed invoices in accounts payable and as of September 30, 2019, the
Company has fully accrued for the outstanding claim against the Company.
On
May 31, 2019, the Company entered into an agreement with Allen Boxer and Donna Mason (collectively, the “Boxer Parties”)
for the purposes of settling a previously disclosed dispute in which the Boxer Parties claimed to be owed fees for introducing
the Company to Alexander Capital and Network 1 Securities who assisted the Company for the capital raise of the convertible notes
issued in 2017 and 2018, which raised over $5.6 million in gross proceeds. Pursuant to the agreement, the Boxer Parties agreed
to a complete release of claims of fees relating to past and future capital raises and the Company agreed to issue 157,000 restricted
shares of common stock and a five year warrant to purchase 150,000 shares of common stock that vested immediately with an exercise
price of $6.00 per share.
Note
9 –Stockholders’ Equity (Deficiency)
Common
Stock
On
February 7, 2019, the Company entered into an Agreement (“MZ Agreement”) with MZHCI, LLC, a MZ Group Company (“MZ”)
for MZ to provide investor relations advisory services. The MZ Agreement is for a term of twelve (12) months and can be cancelled
by either party at the end of six (6) months with thirty (30) days’ notice. MZ will receive compensation of $8,000 per month
and eighty-five thousand (85,000) restricted shares that vest quarterly over a year, with a 6 month cliff.
On
March 12, 2019, the Company raised $2,704,000 in gross proceeds in a private placement offering of its common stock to certain
accredited investors (the “Offering”). The Company sold an aggregate of 2,329,615 shares of common stock in the Offering
for a purchase price of $1.15 per share pursuant to a share purchase agreement between the Company and each of the investors in
the Offering. Our CEO also participated in the Offering purchasing 18,382 shares at a price of $1.36 per share, the final bid
price of our common stock as reported on The Nasdaq Capital Market on the date of the Offering.
On
April 18, 2019, 6,137 unvested shares were returned to the Company by a consultant as a result of the December 26, 2018 termination
of such consultant’s consulting agreement.
On
May 31, 2019, the Company issued 157,000 restricted shares of common stock to the Boxer Parties valued at $1.90 per share, the
closing price of the Company’s common stock on the date the shares were issued.
On
June 14, 2019, the Company completed a public offering of 3,615,622 shares of its common stock at a price to the public of $1.07
per share, for total gross proceeds of $3,868,716 (the “Public Offering”). The shares were offered pursuant to a registration
statement that was declared effective on June 11, 2019.
Warrants
On
January 3, 2019, the Company entered into an Agreement (“Alere Agreement”) with Alere Financial Partners, a division
of Cova Capital Partners LLC (“Alere”), for Alere to provide capital markets advisory services. The Alere Agreement
was on a month to month basis that could be cancelled by either party with thirty (30) days advance notice. The Company paid a
monthly fee of $7,500 and issued to Alere five-year warrants to purchase 35,000 shares of the Company’s common stock at
an exercise price of $1.59, equal to the closing price of the Company’s common stock on February 7, 2019, the date of approval
by the Company’s board of directors (the “Board”). The warrants vested monthly equally over a 12 month period
provided that the Alere Agreement remained in effect. On June 11, 2019, both parties agreed to terminate the Alere Agreement as
of June 30, 2019 and the unvested warrants as of June 30, 2019 totaling 17,500 were forfeited.
HANCOCK
JAFFE LABORATORIES, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
The
placement agent for the Offering on March 12, 2019 received a warrant to purchase such number of shares of the Company’s
common stock equal to 8% of the total shares of common stock sold in the Offering or 188,108 shares. Such warrant is exercisable
for a period of five years from the date of issuance and has an exercise price of $1.50 per share.
On
May 31, 2019, the Company issued a five-year warrant to purchase 150,000 shares of common stock that vested immediately with an
exercise price of $6.00 per share to the Boxer Parties with an aggregate grant date fair value of $3,000.
The
placement agent for the Public Offering on June 14, 2019 received a warrant to purchase such number of shares of the Company’s
common stock equal to 5% of the total shares of common stock sold in the Public Offering or 180,781 shares. Such warrant is exercisable
for a period from December 8, 2019 through June 11, 2024 and has an exercise price of $1.284 per share.
Stock
Options
On
February 7, 2019, in connection with her Employment Agreement, the Board approved the grant in accordance with the Hancock Jaffe
2016 Omnibus Incentive Plan (the “Option Plan”) of 150,000 non-qualified stock options for the purchase shares of
the Company’s common stock at an exercise price of $1.59 to H. Chris Sarner, our Vice President Regulatory Affairs and Quality
Assurances. The exercise price was equal to the closing price of our common stock on the date that the Board approved the option
grant. The options have a ten-year term and 50,000 of the options will vest on the first anniversary of Ms. Sarner’s employment
with the Company, and the remaining 100,000 options will vest on a quarterly basis over the following two-year period. The options
had grant date fair value of $0.58 per share for an aggregate grant date fair value of $87,000, using the Black Scholes method
with the following assumptions used: stock price of $1.59, risk-free interest rate of 2.47%, volatility of 36.3%, annual rate
of quarterly dividends of 0%, and a contractual term of 5.3 years.
On
February 7, 2019, the Board approved the grant in accordance with the Option Plan of 30,000 non-qualified stock options to purchase
shares of the Company’s common stock to H. Jorge Ulloa as compensation for services provided as the Company’s Primary
Investigator for the first-in-human trials of our VenoValve in Colombia in February and April 2019. The stock options were granted
at an exercise price of $1.59, equal to the closing price of our common stock on the date that the Board approved the option grant.
The options vest monthly over a one (1) year period. The options had grant date fair value of $0.58 per share for an aggregate
grant date fair value of $17,400, using the Black Scholes method with the following assumptions used: stock price of $1.59, risk-free
interest rate of 2.47%, volatility of 36.1%, annual rate of quarterly dividends of 0%, and a contractual term of 5.3 years.
On
January 7, 2019, Dr. Peter Pappas agreed to join the Company’s Medical Advisory Board for a term of two years. The Board
approved in accordance with the Option Plan the grant on March 6, 2019 of 20,000 non-qualified options to purchase shares of the
Company’s common stock to Dr. Pappas as compensation. The stock options were granted at an exercise price of $1.38, equal
to the closing price of our common stock on the date that the Board approved the option grant. The options will vest monthly in
twenty-four (24) equal installments for each month that he remains a member of the Company’s Medical Advisory Board. The
options had grant date fair value of $0.50 per share for an aggregate grant date fair value of $10,000, using the Black Scholes
method with the following assumptions used: stock price of $1.38, risk-free interest rate of 2.50%, volatility of 35.9%, annual
rate of quarterly dividends of 0%, and a contractual term of 5.3 years.
On
July 3, 2019, in connection with his Employment Agreement dated June 24, 2019, the Board approved the grant in accordance with
the Option Plan of 115,000 non-qualified stock options for the purchase of shares of common stock at an exercise price of $2.00
to Brian Roselauf, our Director of Research and Development. The options have a ten-year term and 38,333 of the options will vest
on the first anniversary of Mr. Roselauf’s employment with the Company, and the remaining 76,667 options will vest on a
quarterly basis over the following two-year period. The options had grant date fair value of $0.15 per share for an aggregate
grant date fair value of $17,250, using the Black Scholes method with the following assumptions used: stock price of $1.02, risk-free
interest rate of 1.76%, volatility of 35.9%, annual rate of quarterly dividends of 0%, and a contractual term of 5.3 years.
On
July 3, 2019, the Company granted in accordance with the Option Plan non-qualified stock options for the purchase of an aggregate
of 40,000 shares of common stock at an exercise price of $2.00 to two members of its Medical Advisory Board. The options have
a ten-year term and vest monthly over two years. The options had grant date value of $0.15 per share for an aggregate grant date
value of $6,000, using the Black Scholes method with the following assumptions used: stock price of $1.02, risk-free interest
rate of 1.76%, volatility of 35.9%, annual rate of quarterly dividends of 0%, and a contractual term of 5.3 years.
On
July 3, 2019, the Company granted in accordance with the Option Plan non-qualified stock options for the purchase of an aggregate
of 60,000 shares of common stock at an exercise price of $2.00 to three key employees; Araceli Palacios, Maria Ruiz and Lydia
Sepulveda. The options have a ten-year term and vest quarterly over three years. The options had grant date value of $0.15 per
share for an aggregate grant date value of $9,000, using the Black Scholes method with the following assumptions used: stock price
of $1.02, risk-free interest rate of 1.76%, volatility of 35.9%, annual rate of quarterly dividends of 0%, and a contractual term
of 5.3 years.
HANCOCK
JAFFE LABORATORIES, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
On
July 22, 2016, the Company entered into an employment agreement with Marc H. Glickman, M.D., the Company’s Senior Vice President
and Chief Medical Officer (the “Pre-existing Employment Agreement”). On July 26, 2019, the Company entered an employment
agreement with Dr. Glickman (the “New Employment Agreement”) that superseded the terms of the Pre-existing Employment
Agreement. In connection with entering into the New Employment Agreement, Dr. Glickman’s existing 184,500 options (“Existing
Options”) to purchase Company common stock at $10.00 per share until October 1, 2026 that were granted in connection with
his Pre-existing Employment Agreement, were repriced to $2.00 per share. The Existing Options had the repriced date fair value
of $0.11 per share for an aggregate grant date fair value of $20,295 using the Black Scholes method with the following assumptions
used: stock price of $1.05, risk-free interest rate of 1.84%, volatility of 36.7%, annual rate of quarterly dividends of 0%, and
a contractual term of 3.6 years. Additionally, Dr. Glickman, in connection to the New Employment Agreement was granted in accordance
with the Option Plan stock options (“New Options”) to purchase 180,000 common stock at a price equal to $2.00 per
share exercisable until July 26, 2029, which vest quarterly over a three (3) year period. The New Options had a grant date fair
value of $0.16 per share for an aggregate grant date fair value of $28,800, using the Black Scholes method with the following
assumptions used: stock price of $1.05, risk-free interest rate of 1.86%, volatility of 35.7%, annual rate of quarterly dividends
of 0%, and a contractual term of 5.3 years.
On
September 13, 2019, under the Company’s nonemployee director compensation program,
Robert Gray and Matthew Jenusaitis in connection with their appointment to the Board were each granted 60,000 options to purchase
shares of our common stock at an exercise price of $2.00 per share in accordance with the Option Plan. All of these options vest
in equal quarterly portions over a 3 year period starting from the September 13, 2019 grant date. The Options had grant date fair
value of $0.13 per share for an aggregate grant date fair value of $15,600 using the Black-Scholes method with the following assumptions
used: stock price of $.96, risk-free interest rate of 1.75%, volatility of 35.7%, annual rate of quarterly dividends of 0%, and
a contractual term of 5.3 years.
The
Company recognized $159,865 and $107,491 of stock-based compensation related to stock options during the three months ended September
30, 2019 and 2018, respectively, and recognized $329,454 and $640,988 of stock-based compensation related to stock options during
the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, there was $502,456 of unrecognized
stock-based compensation expense related to outstanding stock options that will be recognized over the weighted average remaining
vesting period of 1.6 years.
Restricted
Stock Units
In
April 2019, Mr. Marcus Robins, a Director on the Board passed away. Per his restricted stock unit Award Agreement, upon his death,
29,183 units representing the non-vested portion of his restricted stock units were forfeited.
On
September 13, 2019, under the Company’s nonemployee director compensation program,
Robert Gray and Matthew Jenusaitis in connection with their appointment to the Board were each granted 78,125 restricted stock
units in accordance with the Option Plan, which based on the Company’s closing stock price on the grant date were valued
at $.96 per unit for an aggregate grant date value of $150,000. These units vest in equal annual portions on the September 13,
2020, September 13, 2021 and September 13, 2022.
Note
10 – Subsequent Events
On
October 14, 2019, the Company received notice from The NASDAQ Stock Market (“Nasdaq”) indicating that, because the
closing bid price for the Company’s common stock had fallen below $1.00 per share for 30 consecutive business days, the
Company no longer complies with the minimum bid price requirement for continued listing on the Nasdaq Capital Market under Rule
5550(a)(2) of Nasdaq Listing Rules. Nasdaq’s notice has no immediate effect on the listing of the Company’s common
stock on the Nasdaq Capital Market. Pursuant to Nasdaq Marketplace Rule 5810(c)(3)(A), the Company has been provided an initial
compliance period of 180 calendar days, or until April 13, 2020, to regain compliance with the minimum bid price requirement.
To regain compliance, the closing bid price of the Company’s common stock must meet or exceed $1.00 per share for a minimum
of 10 consecutive business days prior to April 13, 2020. The Company’s management intends to resolve the situation to allow
for continued listing on the Nasdaq Capital Market.
Item
2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with our unaudited condensed financial statements and notes thereto included
herein. In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private
Securities Litigation Reform Act of 1995, we caution readers regarding certain forward-looking statements in the following discussion
and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities
and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future
operations, strategies, financial results or other developments. Such forward-looking statements
involve significant risks and uncertainties. Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are
beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking
statements made by, or on our behalf. Words such as “anticipate,” “estimate,” “plan,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,”
“should,” “could,” and similar expressions are used to identify forward-looking statements. Such
forward-looking statements also involve other factors which may cause our actual results, performance or achievements to materially
differ from any future results, performance, or achievements expressed or implied by such forward-looking statements and to vary
significantly from reporting period to reporting period. Although management believes that the assumptions made and expectations
reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact,
prove to be correct or that actual future results will not be different from the expectations expressed in this Quarterly Report.
We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events
or otherwise, except as required by applicable law.
The
independent registered public accounting firm’s report on the Company’s financial statements as of December 31, 2018,
and for each of the years in the two-year period then ended, includes a “going concern” explanatory paragraph, that
describes substantial doubt about the Company’s ability to continue as a going concern.
Unless
the context requires otherwise, references in this document to “HJLI”, “we”, “our”, “us”
or the “Company” are to Hancock Jaffe Laboratories, Inc.
Overview
Hancock
Jaffe Laboratories, Inc. is a medical device company developing tissue based solutions that are designed to be life sustaining
or life enhancing for patients with cardiovascular disease, and peripheral arterial and venous disease. The Company’s products
are being developed to address large unmet medical needs by either offering treatments where none currently exist or by substantially
increasing the current standards of care. Our two lead products are: the VenoValve®, a porcine based device to be surgically
implanted in the deep venous system of the leg to treat a debilitating condition called chronic venous insufficiency (“CVI”);
and the CoreoGraft®, a bovine based conduit to be used to revascularize the heart during coronary artery bypass graft (“CABG”)
surgeries. Both of our current products are being developed for approval by the U.S. Food and Drug Administration (“FDA”).
We currently receive tissue for our products from one domestic supplier and one international supplier. Our current
business model is to license, sell, or enter into strategic alliances with large medical device companies with respect to our
products, either prior to or after FDA approval. Our current senior management team has been affiliated with more than 80 products
that have received FDA approval or CE marking. We currently lease a 14,507 sq. ft. manufacturing facility in Irvine, California,
where we manufacture products for our clinical trials and which has previously been FDA certified for commercial manufacturing
of product.
Each
of our product candidates will be required to successfully complete significant clinical trials to demonstrate the safety and
efficacy of the product candidate before it will be able to be approved by the FDA. The completion of these clinical trials will
require a significant amount of capital and the hiring of additional personnel.
We
are in the process of developing the following bioprosthetic implantable devices for cardiovascular disease:
VenoValve
The
VenoValve is a porcine based valve developed at HJLI to be implanted in the deep vein system of the leg to treat a condition known
as Chronic Venous Insufficiency. CVI occurs when the valves in the veins of the leg fail, causing blood to flow backwards and
pool in the lower leg and ankle. The backwards flow of the blood is called reflux. Reflux results in increased pressure in the
veins of the leg, known as venous hypertension. Venous hypertension leads to swelling, discoloration, severe pain, and open sores
called venous ulcers. By reducing reflux, and lowering venous hypertension, the VenoValve has the potential to reduce or eliminate
the symptoms of deep venous, severe CVI, including venous leg ulcers. The VenoValve is designed to be surgically implanted into
the patient on an outpatient basis via a 5 to 6 inch incision in the upper thigh.
There
are presently no FDA approved medical devices to address valvular incompetence, or effective treatments for deep venous CVI. Current
treatment options include compression garments, or constant leg elevation. These treatments are ineffective, as they attempt to
alleviate the symptoms of CVI without addressing the underlying causes of the disease. In addition, compliance with compression
garments and leg elevation is extremely low, especially among the elderly. Valve transplants from other parts of the body have
been attempted, but with very-poor results. Many attempts to create substitute valves have also failed, usually resulting in early
thromboses. The premise behind the VenoValve is that by reducing the underlying causes of CVI, reflux and venous hypertension,
the debilitating symptoms of CVI will decrease, resulting in improvement in the quality of the lives of CVI sufferers.
There
are approximately 2.4 million people in the U.S. that suffer from deep venous CVI due to valvular incompetence. The average person
with a venous ulcer spends 30,000 per year on wound care, resulting in $30 billion of direct medical costs. For those venous ulcers
that do heal, there is a 20% to 40% recurrence rate within one year.
After
consultation with the FDA, as a precursor to the U.S. pivotal trial, we are conducting a small first-in-man study for the VenoValve
in Bogota, Colombia. The first-in-man Bogota trial will include up to 10 patients and in addition to providing safety and efficacy
data, will provide valuable feedback to make any necessary product modifications or adjustments to our surgical implantation procedures
prior to conducting the U.S. pivotal trial. In December of 2018, we received regulatory approval from Instituto Nacional de Vigilancia
de Medicamentos y Alimentos (“INVIMA”), the Colombian equivalent of the FDA. On February 19, 2019, we announced that
the first VenoValve was successfully implanted in a patient in Bogota. Between April of 2019 and August of 2019 we successfully
implanted VenoValves in 7 additional patients. On June 23, 2019, Dr. Jorge Hernando Ulloa, the Primary Investigator for the Company’s
first-in-human VenoValve study in Bogota, Colombia, reported at the 2019 C3 Global Conference in Orlando, Florida that the VenoValve
was working in four out of the first five VenoValve recipients. On July 25, 2019, Dr. Ulloa reported 90 day VenoValve data at
the Second Annual Society of Vascular and Endovascular Surgery Congress of Central America and the Caribbean (“Surgery Congress”).
Dr. Ulloa announced that for the first four patients with working VenoValves, reflux has been reduced an average of sixty-eight
(68%) compared to Pre-VenoValve measurements, and that reflux in all four patients had been reduced to levels seen in normal patients
without CVI. Dr. Ulloa also reported that VCSS scores, a measure of the disease manifestations had improved across all four patients
an average of forty-nine percent (49%), compared to pre-operative levels, and that pain for the four patients, which is measured
by a VAS score, had decreased an average of thirty nine percent (39%). Six-month data on the first five VenoValve patients and
updates on the additional three VenoValve patients is scheduled to be released in late October of 2019. Following the release
of the October data, HJLI expects to begin Pre-Investigational Device Exemption (“IDE”) discussions with the FDA,
with the expectation of filing the IDE application in the second quarter of 2020. Following IDE approval, HJLI will contract with
clinical sites, enroll patients, and begin the U.S. pivotal trial.
CoreoGraft
The
CoreoGraft is a bovine based off the shelf conduit that could potentially be used to revascularize the heart during coronary artery
bypass graft surgery instead of harvesting the saphenous vein from the patient’s leg. In addition to avoiding the invasive
and painful saphenous vein graft (“SVG”) harvest process, HJLI’s CoreoGraft closely matches the size of the
coronary arteries, eliminating graft failures that occur due to size mismatch. In addition, with no graft harvest needed, the
CoreoGraft could also reduce or eliminate the inner thickening that burdens and leads to failure of the SVG. It has been reported
that SVG’s have a 10% to 40% failure rate within one year of implantation when used as grafts for CABG surgery.
In
addition to providing an alternative to SVGs, the CoreoGraft could be used when making grafts from the patients’ own arteries
and veins is not an option. For example, patients with significant arterial and vascular disease often do not have suitable vessels
to be used as grafts. For other patients, such as women who have undergone radiation treatment for breast cancer and have a higher
incidence of heart disease, using the left internal mammary artery (“LIMA”), an artery running inside the ribcage
and close to the sternum, to re-vascularize the left side of the heart, may not be an option if it was damaged by radiation during
breast cancer treatment. Another example are patients undergoing a second CABG surgery. Due in large part to early SVG failures,
patients may need a second CABG surgery. If the SVG was used for the first CABG surgery, the patient may have insufficient veins
to harvest. While the CoreoGraft may start out as a product for patients with no other options, if the CoreoGraft establishes
good short term and long term patency rates, it could become the graft of first choice for all CABG patients in addition to the
LIMA.
HJLI
has begun a pre-clinical, ovine feasibility study for the CoreoGraft. Eight animals were successfully implanted between March
of 2019 and June of 2019. In the early portion of the feasibility study, CoreoGrafts were examined for patency at thirty (30)
days post-surgery. A second group of animals were implanted and evaluated forty-five (45) days post-surgery. On June 27, 2019,
HJLI reported positive results for animals evaluated at both thirty (30) days and forty-five (45) days post-surgery, with no signs
of thrombosis, aneurysmal degeneration, neointimal hyperplasia, changes in the lumen, or other problems that are known to plague
SVGs and attempts by others to create small caliber (3 mm and 4 mm) grafts. On August 14, 2019, HJLI reported that three (3) animal
test subjects were evaluated via angiogram ninety (90) days post CoreoGraft bypass surgery, and that the CoreoGrafts were functioning
very well. The Company also reported that two additional animal test subjects were added to the feasibility study, where CoreoGrafts
were implanted “on-pump” with the use of a cardio pulmonary bypass machine. The Company is testing different implantation
techniques and expects to release six (6) month CoreoGraft results at the conclusion of the CoreoGraft feasibility study in early
December, 2019. Depending of the results of the CoreoGraft feasibility study, HJLI expects to next conduct a good laboratory practice
(“GLP”) animal study, or a first-in-man CoreoGraft study outside of the U.S.
Comparison
of the three months ended September 30, 2019 and 2018
Overview
We
reported net losses of $1,814,895 and $1,468,166 for the three months ended September 30, 2019 and 2018, respectively, representing
an increase in net loss of $346,729 or 24%, resulting primarily from an increase in research and development expenses of $252,374
for our two lead products, VenoValve and CoreoGraft, an increase in selling, general and administrative expenses of $52,351 and
a decrease in gross profit of $41,662 as no revenue was recognized in the three months ended September 30, 2019.
Revenues
Revenues
earned during the three months ended September 30, 2019 were zero. Revenues earned during the three months ended September 30,
2018 consist of royalty income and income from contract research – related party of $28,062 and $13,600, respectively. Royalty
income is earned pursuant to the terms of our March 2016 asset sale agreement with LeMaitre Vascular, Inc., which three-year term
ended on March 18, 2019. Since March 18, 2019, we are no longer generating royalty revenue and we do not expect to generate any
other royalty revenues until one of our product candidates secure regulatory approval and is licensed, if ever. The contract research
revenue is related to research and development services performed pursuant to the HJLA Agreement and no research and development
services were performed during the three months ended September 30, 2019.
As
a developmental stage company, our revenue, if any, is expected to be diminutive and dependent on our ability to commercialize
our product candidates.
Selling,
General and Administrative Expenses
For
the three months ended September 30, 2019, selling, general and administrative expenses increased by $52,351 or 5%, to $1,157,064
from $1,104,713 for the three months ended September 30, 2018. The increase is primarily due to increases of approximately $61,000
in stock compensation expenses, $58,000 in insurance expenses primarily in increased D&O premiums, $57,000 in labor and benefit
expenses, $27,000 in travel expenses and $13,000 in depreciation expense and partially offset by decreases of approximately $115,000
in investor relations expenses and $63,000 in recruiting expenses.
Research
and Development Expenses
For
the three months ended September 30, 2019, research and development expenses increased by $252,374 or 59%, to $676,970 from $424,596
for the three months ended September 30, 2018. The increase is primarily due to an increase of $121,000 in labor expenses associated
with research and development activities supporting the first-in-human trials for the VenoValve occurring in Columbia, which started
in February 2019 and an increase of $112,000 in preclinical animal studies, which started in March 2019, for the CoreoGraft.
Interest
(Income) Expense, Net
For
the three months ended September 30, 2019, interest income, net increased by $12,158 or 174%, to $19,139 from $6,981 in interest
income, net for the three months ended September 30, 2018.
Amortization
of Debt Discount
During
the three months ended September 30, 2018, we recognized non-cash amortization of debt discount income of $12,500. The non-cash
amortization of debt discount expense (income) is related to the embedded conversion option in the convertible notes issued during
the period from June 2017 through January 2018 (“Notes”), as well as the warrants issued with the Notes. Since the
Notes were converted on June 4, 2018 into common stock in connection with the Company’s IPO, there was no amortization of
debt discount in the three months ended September 30, 2019.
Comparison
of the nine months ended September 30, 2019 and 2018
Overview
We
reported net losses of $5,334,644 and $11,261,066 for the nine months ended September 30, 2019 and 2018, respectively, representing
a decrease in net loss of $5,926,422 or 53%, resulting primarily from a decrease in amortization of debt discount of $6,562,736
(see below), a decrease in operating expenses of $804,385, a decrease of $357,121 in interest expense, net, partially offset by
decrease in the gain on extinguishment of convertible note payable of $1,481,317 (see below), a decrease in the gain on the change
in fair value of derivative liabilities of $191,656 (see below) and a decrease of gross profit of $124,847.
Revenues
Revenues
earned during the nine months ended September 30, 2019 decreased by $124,847 to $31,243 from $156,090 for the nine months ended
September 30, 2018 as royalty income and contract research – related party decreased by $56,847 and $68,000, respectively.
Royalty income was earned pursuant to the terms of our March 2016 asset sale agreement with LeMaitre Vascular, Inc., which three-year
term ended on March 18, 2019. Since March 18, 2019, we no longer generate royalty revenue and we do not expect to generate any
other royalty revenues until one of our product candidates secure regulatory approval and is licensed, if ever. The contract research
revenue is related to research and development services performed pursuant to the HJLA Agreement and no research and development
services were performed during the nine months ended September 30, 2019.
As
a developmental stage company, our revenue, if any, is expected to be diminutive and dependent on our ability to commercialize
our product candidates.
Selling,
General and Administrative Expenses
For
the nine months ended September 30, 2019, selling, general and administrative expenses decreased by $1,277,170 or 24%, to $3,989,274
from $5,266,444 for the nine months ended September 30, 2018. The decrease is primarily due to decreases of approximately $902,000
in stock compensation expenses from lower awards of common stock and warrants to consultants and stock options to employees, decrease
in severance expense of $300,000 from the accrual in the nine months ended September 30, 2018 for the termination of the prior
CFO, decreases of approximately $200,000 in labor and benefit expenses during the period as certain personnel focused on research
and development activities partially offset by an increases of approximately $177,000 in insurance expenses primarily in D&O
insurance from being a public company during the nine months ended September 30, 2019 as compared to being a private company for
the first five months of 2018 and an increase in D&O premiums in 2019.
Research
and Development Expenses
For
the nine months ended September 30, 2019, research and development expenses increased by $472,785 or 50%, to $1,418,293 from $945,508
for the nine months ended September 30, 2018. The increase is primarily due to increased labor expenses of $262,000 and increased
supplies, consulting, packaging and outside services of $106,000 associated with research and development activities supporting
the first-in-human trials for the VenoValve occurring in Columbia, which started in February 2019, along with an increase of $115,000
in preclinical animal studies for the CoreoGraft, which started in March 2019.
Interest
(Income) Expense, Net
For
the nine months ended September 30, 2019, interest (income) expense, net decreased by $357,121 or 113%, to $41,680 in interest
income, net from $315,441 in interest expense, net for the nine months ended September 30, 2018, due to the conversion of the
convertible notes into shares of our common stock upon the consummation of our IPO on June 4, 2018. On this date, principal and
interest totaling $5,743,391 owed in connection with the convertible notes were converted into 1,650,537 shares of our common
stock at a conversion price of $3.50 per share. Interest income of $42,612 and $7,473 was earned during the nine months ended
September 30, 2019 and 2018, respectively.
Amortization
of Debt Discount
During
the nine months ended September 30, 2018, we recognized non-cash amortization of debt discount expense of $6,562,736 related to
the embedded conversion option in the convertible notes issued during the period from June 2017 through January 2018 (“Notes”),
as well as the warrants issued with the Notes. Since the Notes were converted on June 4, 2018 into common stock in connection
with the Company’s IPO, there was no amortization of debt discount in the nine months ended September 30, 2019.
Gain
on Extinguishment of Convertible Notes Payable
During
the nine months ended September 30, 2018, we recognized non-cash gain on the extinguishment of convertible notes payable of $1,481,317.
On February 28, 2018, the Notes were amended such that the maturity date was extended to May 15, 2018, the warrants issued in
connection with the convertible notes issued in 2017 became exercisable for the number of shares of common stock equal to 100%
of the total shares issuable upon conversion and the warrants issued in connection with the convertible notes issued in 2018 became
exercisable for the number of shares of common stock equal to 75% of the total shares issuable upon the conversion. The amendment
of the Notes was deemed to be a debt extinguishment. Since the Notes were converted on June 4, 2018 into common stock in connection
with the Company’s IPO, there was no extinguishment of convertible notes payable in the nine months ended September 30,
2019.
Change
in Fair Value of Derivative Liability
For
the nine months ended September 30, 2018, we recorded a gain on the change in fair value of derivative liabilities of $191,656.
The derivative liabilities are related to warrants issued in connection with our Series A preferred stock and Series B preferred
stock financings during the period of 2016 to 2017 (“Preferred Stock”), plus warrants issued in connection with the
Notes, as well as the embedded conversion options in the Notes. Since the Notes and Preferred Stock were converted on June 4,
2018 into common stock in connection with the Company’s IPO, there was no change in fair value of derivative liabilities
in the nine months ended September 30, 2019.
Deemed
Dividend
We
recorded a deemed dividend of $3,310,001 for the nine months ended September 30, 2018. The deemed dividend for the nine months
ended September 30, 2018 resulted primarily from the 8% cumulative dividend on the Preferred Stock. Since the Preferred Stock
were converted on June 4, 2018 into common stock in connection with the Company’s IPO, there was no deemed dividend in the
nine months ended September 30, 2019.
Liquidity
and Capital Resources
We
have incurred losses since inception and negative cash flows from operating activities for the nine months ended September 30,
2019. As of September 30, 2019, we had an accumulated deficit of $53,897,172. Since inception, we have funded our operations primarily
through our IPO, private and public offerings of equity and private placement of convertible debt securities as well as modest
revenues from royalties, contract research and sales of the ProCol Vascular Bioprosthesis.
Net
cash used in operating activities for the nine months ended September 30, 2019 decreased by $637,960, or 13%, to $4,273,179 from
$4,911,139 for the nine months ended September 30, 2018 from lower operating expenses and decreases in working capital for the
nine months ended September 30, 2019 as compared to the comparable period in 2018.
Purchase
of property and equipment for the nine months ended September 30, 2019 was $350,934 and primarily consisted of approximately $210,000
for software to manage compliance, reporting and risk management of the VenoValve clinical study by providing live access, tracking
and multiple project management reports to enhance study data and metrics reporting, approximately $120,00 for Hydrodynamic Test
System for measuring characteristics of the VenoValve and approximately $11,000 for engineering design software. Purchase of property
and equipment for the nine months ended September 30, 2018 was $8,319 for computer equipment and software.
On
March 12, 2019, the Company raised $2,704,000 in gross proceeds in the private placement Offering of its common stock to certain
accredited investors.
On
June 14, 2019, the Company raised $3,868,716 in gross proceeds in the Public Offering of its common stock.
As
of October 29, 2019, we had a cash balance of $2,469,038 and restricted cash balance of $810,055.
We
measure our liquidity in a variety of ways, including the following:
|
|
September
30,
2019
|
|
|
December
31,
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,943,409
|
|
|
$
|
2,740,645
|
|
Restricted Cash
|
|
|
810,055
|
|
|
|
-
|
|
Working capital
|
|
$
|
1,044,668
|
|
|
$
|
1,313,980
|
|
Based
upon our cash and working capital as of September 30, 2019, we will require additional capital resources in order to meet our
obligations as they become due within one year after the date of this Report and sustain operations. These factors, among others,
raise substantial doubt about our ability to continue as a going concern.
We
will require significant amounts of additional capital to continue to fund our operations and complete our research and development
activities. If we are not able to obtain additional cash resources, we will not be able to continue operations. We will continue
seeking additional financing sources to meet our working capital requirements, to make continued investment in research and development
and to make capital expenditures needed for us to maintain and expand our business. We may not be able to obtain additional financing
on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when
we require it, or if we expend capital on projects that are not successful, our ability to continue to support our business growth,
continue research and to respond to business challenges could be significantly limited, or we may have to cease our operations.
If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could
suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to
those of holders of our common stock.
Off-Balance
Sheet Arrangements
None.
Contractual
Obligations
As
a smaller reporting company, we are not required to provide the information requested by paragraph (a)(5) of this Item.
Critical
Accounting Policies and Estimates
For
a description of our critical accounting policies, see Note 3 – Significant Accounting Policies in Part 1, Item 1 of this
Quarterly Report on Form 10-Q.