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, particularly when they were not delivering tissues; $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% 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 was 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. The Company recorded the disputed invoices in accounts payable and as of March 31, 2020, the
Company believes that it has fully accrued for the outstanding claim against the Company. Proceedings in the ATSCO litigation
have been delayed due to court closures as a result of the COVID-19 pandemic. The Company has entered into new supply
relationships with two domestic and one international company to supply porcine and bovine tissues.
Note
10 – Subsequent Events
On
April 12, 2020 the Company obtained a loan under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, in the amount
of $312,700. As drafted, the note bears interest at 1% per annum and is payable with interest on April 12, 2022.
On April 24, 2020, the Company entered into
a Securities Purchase Agreement (the “April 2020 Purchase Agreement”) with certain investors for the purpose of raising
approximately $1.0 million in gross proceeds for the Company. Pursuant to the terms of the April 2020 Purchase Agreement, the
Company agreed to sell, in a registered direct offering, an aggregate of 1,886,793 shares of the Company’s common stock,
at a purchase price of $0.405 per share, and in a concurrent private placement, warrants to purchase up to 1,886,793 shares
of common stock, at a purchase price of $0.125 per warrant, for a combined purchase price per share and warrant of $0.53. The
warrants are exercisable immediately on the date of issuance at an exercise price of $0.405 per share and will expire five years
following the date of issuance.
The
closing of the sales of these securities under the Purchase Agreement occurred on April 28, 2020. Net proceeds to the Company
from the transactions, after deducting the Placement Agent’s fees and expenses but before paying the Company’s estimated
offering expenses, and excluding the proceeds, if any, from the exercise of the warrants, were $825,786.
On
June 1, 2020, the Company entered into a Securities Purchase Agreement (the “June 2020 Purchase Agreement”) with certain
investors for the purpose of raising approximately $1,333,000 million in gross proceeds for the Company. Pursuant to the terms
of the June 2020 Purchase Agreement, the Company agreed to sell, in a registered direct offering, an aggregate of 2,930,402 shares
of the Company’s common stock at a purchase price of $0.33 per share, and in a concurrent private placement, warrants to
purchase up to 2,930,402 shares of common stock at a purchase price of $0.125 per warrant, for a combined purchase price per share
and warrant of $0.455. The warrants are exercisable immediately on the date of issuance at an exercise price of $0.33 per share
and will expire five years following the date of issuance.
The
closing of the sales of these securities under the June 2020 Purchase Agreement occurred on June 3, 2020. Net proceeds to the
Company from the transactions, after deducting the Placement Agent’s fees and expenses but before paying the Company’s
estimated offering expenses, and excluding the proceeds, if any, from the exercise of the warrants, were $1,161,667.
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, 2019,
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 peripheral vascular and 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”). 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.
VenoValve
Clinical Status
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 Colombia. The first phase of the first-in-man Colombian trial included 10 patients. In addition to providing safety and efficacy
data, the purpose of the first-in-man study is to provide proof of concept, and to provide valuable feedback to make any necessary
product modifications or adjustments to our surgical implantation procedures for the VenoValve 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 December of 2019, we successfully implanted VenoValves in 9 additional
patients, completing the implantations for the first phase of the Colombian first-in-man study. Overall, VenoValves have been
implanted in 11 patients in Colombia. Endpoints for the VenoValve first-in-man study include reflux, measured by doppler, a VCSS
score used by the clinician to measure disease severity, and a VAS score used by the patient to measure pain.
On
April 28, 2020, we released our latest data from the first-in-man Colombia VenoValve trial. For the first five patients to receive
VenoValves, who are all now one-year post VenoValve surgeries, CVI has significantly improved in all five patients when compared
to pre-surgery levels. On average, Venous Clinical Severity Scores (“VCSSs”) have improved 72% for the five patients.
VCSS scores are commonly used to objectively assess outcomes in the treatment of venous disease, and include ten characteristics
including pain, inflammation, skin changes such as pigmentation and induration, the number of active ulcers, and ulcer duration.
The improvements in VCSS scores is significant and indicates that VenoValve patients who had severe CVI pre-surgery, now have
mild CVI or the complete absence of disease at one-year post surgery. The five VenoValve patients that are one-year post surgery
have now completed the first-in-man, clinical study.
On
March 4, 2020, Dr. Jorge Hernando Ulloa, the Primary Investigator for the Company’s study in Colombia presented then current
VenoValve data at the 32nd Annual American Venous Forum meeting on Amelia Island, Florida. Across all 11 patients that have received
VenoValves and when comparing pre-operative levels to data recorded at their most recent office visits, Reflux, VCSS Scores, and
VAS scores have improved 51%, 61%, and 65% respectively. That includes one patient who is currently occluded, and whose VenoValve
is currently not functioning as intended. VenoValve safety incidences have been minor and included one (1) fluid pocket (which
was aspirated), intolerance from Coumadin anticoagulation therapy, and two (2) minor wound infections (treated with antibiotics).
Dr.
Ulloa’s presentation was awarded as the top presentation of the American Venous Forum conference.
Next
steps for the VenoValve include the continued monitoring of the remaining six VenoValve patients in Colombia, the completion of
a series of functional tests mandated by the U.S. Food and Drug Administration (“FDA”) which are necessary for the
filing of an IDE application with the FDA, and approval of the IDE application by the FDA to 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, 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 SVGs.
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 memory 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 the radiation. 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 choice for all CABG patients in addition to the LIMA.
CoreoGraft
Clinical Status
In
January of 2020, we announced the results of a six month, nine sheep, animal feasibility study for the CoreoGraft. Bypasses were
accomplished by attaching the CoreoGrafts from the ascending aorta to the left anterior descending artery, and surgeries were
preformed both on-pump and off-pump. Partners for the feasibility study included the Texas Heart Institute, and American Preclinical
Services.
Test
subjects were evaluated via angiograms and flow monitors during the study, and a full pathology examination of the CoreoGrafts
and the surrounding tissue was performed post necropsy.
The
results from the feasibility study demonstrated that the CoreoGrafts remained patent (open) and fully functional at 30, 90, and
180 day intervals after implantation. In addition, pathology examinations of the grafts and surrounding tissue at the conclusion
of the study showed no signs of thrombosis, infection, aneurysmal degeneration, changes in the lumen, or other problems that are
known to plague and lead to failure of SVGs.
In
addition to exceptional patency, pathology examinations indicated full endothelialization for grafts implanted for 180 days both
throughout the CoreoGrafts and into the left anterior descending arteries. Endothelium is a layer of endothelial cells that naturally
exist throughout healthy veins and arteries that acts as a barrier between blood and the surrounding tissue, which helps promote
the smooth passage of blood. Endothelium are known to produce a variety anti-clotting and other positive characteristics that
are essential to healthy veins and arteries. The presence of full endothelialization within the longer term CoreoGrafts indicates
that the graft is being accepted and assimilated in a manner similar to natural healthy veins and arteries that exist throughout
the vascular system and is an indication of long-term biocompatibility.
Since
we believe the results of the CoreoGraft feasibility study were positive, HJLI will now explore the possibility of conducting
a first-in-man study outside of the U.S., where the CoreoGrafts would be implanted and tested in human subjects.
Results
of Operations
The
following table represents selected items in our statements of operations for the three months ended March 31, 2020 and 2019:
|
|
For
the Three Months Ended
|
|
|
|
March
31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Royalty
income
|
|
$
|
-
|
|
|
$
|
31,243
|
|
Total Revenues
|
|
|
-
|
|
|
|
31,243
|
|
Cost of revenues
|
|
|
-
|
|
|
|
-
|
|
Gross Profit
|
|
|
-
|
|
|
|
31,243
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
997,896
|
|
|
|
1,300,571
|
|
Research and development
expenses
|
|
|
510,624
|
|
|
|
313,013
|
|
Loss
from Operations
|
|
|
(1,508,520
|
)
|
|
|
(1,582,341
|
)
|
|
|
|
|
|
|
|
|
|
Other Expense (Income):
|
|
|
|
|
|
|
|
|
Interest
expense (income), net
|
|
|
(2,633
|
)
|
|
|
(8,615
|
)
|
Change
in fair value of derivative liabilities
|
|
|
(346,129
|
)
|
|
|
-
|
|
Total
Other Expense (Income)
|
|
|
(348,762
|
)
|
|
|
(8,615
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,159,758
|
)
|
|
$
|
(1,573,726
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss Per
Basic and Diluted Common Share:
|
|
$
|
(0.06
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares
Outstanding:
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
18,431,537
|
|
|
|
12,267,446
|
|
Comparison
of the three months ended March 31, 2020 and 2019
Overview
We reported net losses
of $1,159,758 and $1,573,726 for the three months ended March 31, 2020 and 2019, respectively, representing a decrease
in net loss of $413,968, or 26%, resulting primarily from a decrease in operating expenses of $73,821.
Revenues
Revenue
earned during the three months ended March 31, 2019 was $31,243 and consisted entirely of royalty income 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. With
the agreement reaching the end of its term in 2019, there was not any similar revenue in 2020.
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
March 31, 2020, selling, general and administrative expenses decreased by $302,675 or 23%, to $997,896 from $ 1,300,571
for the three months ended March 31, 2019. The decrease is primarily due to decreases of approximately $99,000 in legal
and professional fees primarily in connection to our litigations (see Note 8 - Commitments and Contingencies - Litigations
Claims and Assessments), $135,000 in consulting and outside services due mainly to lower costs to support investor relations
and lower recruiting costs as the Company was not actively recruiting in 2020 as it was in 2019. Other general and administrative
expenses were $66,000 lower in 2020 mainly due to travel expenses being $42,000 lower in 2020 because the human
trial study in the 2019 period required travel.
Research
and Development Expenses
For the three months ended
March 31, 2020, research and development expenses increased by $197,611 or 63%, to $510,624 from $313,013 for the
three months ended March 31, 2019. The increase is primarily due to increases of $77,000 in compensation and related costs
due to a larger team, $61,000 in consulting related to support for our IDE submission, and $70,000 for tissue samples
and other lab costs associated with research and development activities.
Interest
Income
Interest
income of $2,633 and $8,615 was earned during the three months ended March 31, 2020 and 2019, respectively.
Change
in Fair Value of Derivative Liability
For
the quarter ended March 31, 2020, we recorded a gain on the change in fair value of derivative liabilities of $346,129. Our derivative
liabilities are related to warrants issued in connection with our Bridge Offering.
Liquidity
and Capital Resources
We
have incurred losses since inception and negative cash flows from operating activities for the three months ended March 31, 2020.
As of March 31, 2020, we had an accumulated deficit of $57,347,683. Since inception, we have funded our operations primarily
through our IPO, private placements of equity and convertible debt securities as well as modest revenues from royalties, contract
research and sales of the ProCol Vascular Bioprosthesis. To-date in 2020, we have closed three financings providing aggregate
gross proceeds of $2,983,000.
As
of June 5, 2020, we had a cash balance of $1,991,973 and restricted cash balance of $810,055.
We
measure our liquidity in a variety of ways, including the following:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
(unaudited)
|
|
|
|
|
Cash
|
|
$
|
720,131
|
|
|
$
|
1,307,231
|
|
Restricted Cash
|
|
|
810,055
|
|
|
|
810,055
|
|
Working capital (deficiency)
|
|
|
(1,412,686
|
)
|
|
|
(452,434
|
)
|
Based
upon our cash and working capital as of March 31, 2020, 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.
The COVID-19
pandemic has disrupted the global economy and has negatively impacted large populations including people and businesses that
may be directly or indirectly involved with the operation of our Company and the manufacturing, development, and testing of
our product candidates. The full scope and economic impact of COVID-19 is still unknown and there are many risks from
the COVID-19 that could generally and negatively impact economies and healthcare providers in the countries where we
do business, the medical device industry as a whole, and development stage, pre-revenue companies such as HJLI.
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 4 – Significant Accounting Policies in Part 1, Item 1 of this
Quarterly Report on Form 10-Q.