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 $1,573,726 for the three months ended March 31, 2019 and had an accumulated deficit of
$50,136,254 at March 31, 2019. Cash used in operating activities was $1,493,555 and $1,625,419 for the three months ended March
31, 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 March 31, 2019, the Company had cash balance of $2,752,511, restricted cash of $810,055 and working capital of $1,107,139.
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 March 31, 2019, and for the three months ended March 31, 2019 and 2018. The results of operations for the
three months ended March 31, 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 months ended March 31, 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 March 31, 2019 and 2018:
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Shares of common stock issuable upon conversion of preferred stock
|
|
|
-
|
|
|
|
629,746
|
|
Shares of common stock issuable upon exercise of preferred stock warrants and the subsequent conversion of the preferred stock issued therewith
|
|
|
-
|
|
|
|
50,285
|
|
Shares of common stock issuable upon the conversion of convertible debt
|
|
|
-
|
|
|
|
470,666
|
|
Shares of common stock issuable upon exercise of warrants
|
|
|
4,003,679
|
|
|
|
633,761
|
|
Shares of common stock issuable upon exercise of options
|
|
|
1,182,624
|
|
|
|
1,422,000
|
|
Potentially dilutive common stock equivalents excluded from diluted net loss per
share
|
|
|
5,186,303
|
|
|
|
3,206,458
|
|
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
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Royalty income
|
|
$
|
31,243
|
|
|
$
|
31,065
|
|
HANCOCK
JAFFE LABORATORIES, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Royalty
revenue, which is based on resales of ProCol Vascular Bioprosthesis to third-parties, will be recorded when the third-party sale
occurs and the performance obligation has been satisfied.
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 March 31, 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 March 31, 2019 and December 31, 2018 related to cash received in advance for contract research
and development services. 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 $3,312,566 as of March 31, 2019.
For
the three months ended March 31, 2019 and 2018, all of the Company’s revenues were from royalties as a result of the three-year
Post-Acquisition Supply Agreement with LeMaitre Vascular, Inc. that was effective from March 18, 2016 to March 18, 2019.
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.
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 March 31, 2019 and December 31, 2018.
As
of March 31, 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, which the Company plans on appealing.
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.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
2,752,511
|
|
|
$
|
2,740,645
|
|
Restricted cash
|
|
|
810,055
|
|
|
|
-
|
|
Total cash, cash equivalents, and restricted cash in the balance sheet
|
|
$
|
3,562,566
|
|
|
$
|
2,740,645
|
|
Note
5 – Property and Equipment
As
of March 31, 2019 and December 31, 2018, property and equipment consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Lab equipment
|
|
$
|
94,905
|
|
|
$
|
94,905
|
|
Furniture and fixtures
|
|
|
93,417
|
|
|
|
93,417
|
|
Computer software and equipment
|
|
|
28,629
|
|
|
|
26,830
|
|
Leasehold improvements
|
|
|
158,092
|
|
|
|
158,092
|
|
Total property and equipment
|
|
|
375,043
|
|
|
|
373,244
|
|
Less: accumulated depreciation
|
|
|
(350,156
|
)
|
|
|
(347,091
|
)
|
Property and equipment, net
|
|
$
|
24,887
|
|
|
$
|
26,153
|
|
Depreciation
expense amounted to $3,065 and $2,380 for the three months ended March 31, 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 prospective approach. In addition, the Company
elected not to 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
March 31, 2019
|
|
Operating lease cost
|
|
$
|
84,492
|
|
Supplemental
cash flow information related to our operating lease is as follows:
|
|
For the Three Months Ended
March 31, 2019
|
|
Operating cash flow information:
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
82,929
|
|
Remaining
lease term and discount rate for our operating lease is as follows:
|
|
March 31,
2019
|
|
Remaining lease term
|
|
|
4 years
|
|
Discount rate
|
|
|
8.5
|
%
|
Maturity
of our lease liabilities by fiscal year for our operating lease is as follows:
Nine months ended December 31, 2019
|
|
$
|
251,274
|
|
Year ended December 31, 2020
|
|
|
344,229
|
|
Year ended December 31, 2021
|
|
|
354,561
|
|
Year ended December 31, 2022
|
|
|
271,854
|
|
Total
|
|
$
|
1,221,918
|
|
Less: Imputed interest
|
|
|
(166,355
|
)
|
Present value of our lease liability
|
|
$
|
1,055,563
|
|
HANCOCK
JAFFE LABORATORIES, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note
7 – Accrued Expenses and Accrued Interest – Related Party
As
of March 31, 2019 and December 31, 2018, accrued expenses consist of the following:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Accrued
compensation costs
|
|
$
|
274,035
|
|
|
$
|
288,549
|
|
Accrued
professional fees
|
|
|
118,138
|
|
|
|
55,300
|
|
Deferred
rent
|
|
|
-
|
|
|
|
22,473
|
|
Accrued
franchise taxes
|
|
|
27,107
|
|
|
|
26,985
|
|
Accrued
stock compensation expense
|
|
|
19,254
|
|
|
|
-
|
|
Accrued
research and development
|
|
|
-
|
|
|
|
17,064
|
|
Other
accrued expenses
|
|
|
-
|
|
|
|
2,500
|
|
Accrued
expenses
|
|
$
|
438,534
|
|
|
$
|
412,871
|
|
Included
in accrued compensation costs in the table above is accrued severance expense of $92,308 and $166,154 for the three months ended
March 31, 2019 and year ended 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 25, 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 tissue delivered. The Company
believes it has numerous defenses and rights of setoff including without limitation: that ATSCO had an obligation to mitigate
the fees when they were not delivering tissues and not incurring any costs; $173,400 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% as
described in Note 4 to the Financial Statements – Significant Accounting Policies -
Investments
) and is not the
obligation of HJLI; the Company has a right of setoff against any amounts owed to ATSCO for 120,000 shares of HJLI stock
transferred to ATSCO’s principal and owner; the yields of the materials delivered by ATSCO to HJLI was inferior; and
the Agreement was constructively terminated. On January 18, 2019, the Superior Court granted a Right to Attach Order and
Order for Issuance of Writ of Attachment in the amount of $810,055, which the Company plans on appealing. The attachment
order is not a binding ruling on the merits of the case and the Company plans on filing a Cross-Complaint for abuse of
process and excessive and wrongful attachment as $173,400 of the claim is to a wholly separate company, and over $500,000 of
the claim is attributable to invoices sent without delivery of any tissue. 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 continues to firmly believe it has
numerous meritorious defenses to the new claim, including those described above, and expects to continue a vigorous
defense and to continue pursuing its Cross-Complaint. The Company recorded the disputed invoices in accounts payable and as
of March 31, 2019, the Company believes that it has fully accrued for the outstanding claim against the Company. A Mandatory
Settlement Conference is scheduled for July 26, 2019 and the Jury Trial is scheduled for September 9, 2019. The Company has
entered into new supply relationships with two 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 March 31, 2019, the Company
has fully accrued for the outstanding claim against the Company.
The
Company has been contacted by an individual that claims to be owed a fee for introducing the Company to Alexander Capital, who
was the placement agent for the capital raise of the convertible notes issued in 2017 and 2018. The Company has conducted its
own factual investigation and legal analysis and believes that the claim is without merit. The individual has threatened to file
a lawsuit, and in the event that a lawsuit is filed, the Company would have numerous defenses including without limitation that
the individual was unlicensed to provide the services he alleges he provided.
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. If the MZ Agreement is terminated by MZ at the end of six months, MZ forfeits the restricted shares.
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.
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
is on a month to month basis that can be cancelled by either party with thirty (30) days advance notice. The Company will pay
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 warrants shall vest equally monthly over a 12 month period provided that the Alere
Agreement remains in effect.
HANCOCK
JAFFE LABORATORIES, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
The
placement agent for the March 12, 2019 Offering is entitled to 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 will be exercisable
for a period of five years from the date of issuance and will have an exercise price of $1.50 per share.
Stock
Options
On
February 7, 2019, in connection with her Employment Agreement, the Company granted non-qualified stock options for the purchase
of 150,000 shares of 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 February 7, 2019, 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 Company’s board of directors approved the grant of 30,000 non-qualified 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 Company’s
board of directors approved 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.
The
Company recognized $82,720 and $137,376 of stock-based compensation related to stock options during the three months ended March
31, 2019 and 2018, respectively. As of March 31, 2019, there was $680,246 of unrecognized stock-based compensation expense related
to outstanding stock options that will be recognized over the weighted average remaining vesting period of 1.4 years.
Restricted
Stock Units
In
April 2019, Mr. Marcus Robins, a Director on the Company’s Board of Directors 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.
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 development stage company developing biologic-based solutions that are designed to be life sustaining
or life enhancing for patients with cardiovascular disease, and peripheral arterial and venous disease. HJLI’s products
are being developed to address large unmet medical needs by either offering treatments where none currently exist or by substantially
increasing the type of treatment. Our two lead products which we are developing 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. Our current products are being developed for approval by the U.S. Food and Drug Administration
(“FDA”). 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. For example, we developed, manufactured, and obtained
FDA pre-market approval for the ProCol Vascular Bioprosthesis, a product for hemodialysis vascular access, which we sold to LeMaitre
Vascular in March of 2016. 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 was 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. 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. Initially, the VenoValve will 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 medical or nonsurgical treatments for reflux occurring in the deep vein system. Compression garments or constant
leg elevation address the symptoms, but ignore the underlying cause. Compliance with compression garments and leg elevation is
extremely low, especially among the elderly. When CVI is isolated to the superficial veins, ablation or surgical excision of the
affected saphenous vein is an option. For the deep vein system, valve transplants have been attempted but with very-poor results.
Another potential option, the creation of valves using fibrous tissue, has only been performed in few centers worldwide. We believe
that the reestablishment of proper direction of venous flow to the heart is the only reasonable remedy to the problem of reflux
based CVI. Currently, however, there is no known devices or medicines available that would restore venous flow in the deep venous
system.
The
initial potential U.S. market for the first iteration of the VenoValve are the 2.6 million severe CVI sufferers with deep venous
reflux. Future iterations of the VenoValve may also be appropriate for the superficial vein system, which would increase the potential
market to all of the 4.8 million severe CVI sufferers with deep vein or superficial vein reflux.
We
are conducting a small first-in-human study of between 5 to 10 patients for the VenoValve overseas prior to initiating our pivotal
U.S. trial. The first-in-human study will provide us with valuable feedback to make any necessary product modifications or adjustments
to our surgical implantation procedures prior to conducting our 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 U.S. Food and Drug Administration, for our first-in-human trial for the VenoValve. On February 19, 2019, we announced that
the first VenoValve was successfully implanted in a patient in Bogota, Colombia, that the VenoValve appears to be functioning
as it should, and that there were no signs of any early adverse events. On April 11, 2019, we announced that the VenoValve was
implanted in four additional patents and that the surgeries went well and there were no early signs of adverse events.
We expect preliminary results from the first-in-human study to be made public in June of 2019, with additional study results to
be made available in the fourth quarter of 2019.
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 the SVG.
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 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.
Comparison
of the three months ended March 31, 2019 and 2018
Overview
We
reported net losses of $1,573,726 and $4,747,487 for the three months ended March 31, 2019 and 2018, respectively, representing
a decrease in net loss of $3,173,761, or 67%, resulting primarily from a decrease in amortization of debt discount of $4,569,757
(see below) and a decrease of $219,077 in interest expense, net, partially offset by decrease in the gain on extinguishment of
convertible note payable of $1,524,791 (see below) and an increase in operating expenses of $126,083.
Revenues
Revenues
earned during the three months ended March 31, 2019 and 2018 were flat and consist entirely of royalty income of $31,243 and $31,065,
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. After March 18, 2019, we will no longer generate royalty revenue until one
of our product candidates that secure regulatory approval is licensed, if ever.
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, 2019, selling, general and administrative expenses increased by $53,563 or 4%, to $1,300,571
from $1,247,008 for the three months ended March 31, 2018. The increase is primarily due to increases of approximately $66,000
in insurance expenses primarily in D&O insurance from being a public company and $86,000 in legal and professional
fees primarily in connection to our litigations (see Note 8 - Commitments and Contingencies -
Litigations Claims and Assessments)
,
partially offset by a decrease of approximately $98,000 in labor and benefit expenses during the period as certain personnel focused
on research and development activities.
Research
and Development Expenses
For
the three months ended March 31, 2019, research and development expenses increased by $72,520 or 30%, to $313,013 from $240,493
for the three months ended March 31, 2018. The increase is primarily due to increased labor costs, benefits and supplies and materials
associated with research and development activities supporting the first-in-human trials for the VenoValve occurring in February
and April 2019 in Columbia.
Interest
Expense
For
the three months ended March 31, 2019, interest expense, net decreased by $219,077, or 104%, as compared to the three months ended
March 31, 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 $9,081 was earned during
the three months ended March 31, 2019.
Amortization
of Debt Discount
During
the three months ended March 31, 2018, we recognized non-cash amortization of debt discount expense of $4,569,757 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 March 31, 2019.
Gain
on extinguishment of convertible notes payable
During
the three months ended March 31, 2018, we recognized non-cash gain on the extinguishment of convertible notes payable of $1,524,791.
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 three months ended March 31, 2019.
Change
in Fair Value of Derivative Liability
For
the three months ended March 31, 2018, we recorded a gain on the change in fair value of derivative liabilities of $35,623. 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 three months ended March 31, 2019.
Deemed
Dividend
We
recorded a deemed dividend of $129,141 for the three months ended March 31, 2018. The deemed dividend for the three months ended
March 31, 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 three months
ended March 31, 2019.
Liquidity
and Capital Resources
We
have incurred losses since inception and negative cash flows from operating activities for the three months ended March 31, 2019.
As of March 31, 2019, we had an accumulated deficit of $50,136,254. 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.
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. 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 March
29, 2019, the Company filed a registration statement with the Securities and Exchange Commission for the resale of the shares
sold in the Offering. The registration statement was declared effective on April 29, 2019.
As
of May 8, 2019, we had a cash balance of $2,105,061 and restricted cash balance of $810,055.
We
measure our liquidity in a variety of ways, including the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,752,511
|
|
|
$
|
2,740,645
|
|
Restricted Cash
|
|
|
810,055
|
|
|
|
|
|
Working capital
|
|
$
|
1,107,139
|
|
|
$
|
1,313,980
|
|
Based
upon our cash and working capital as of March 31, 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 4 – Significant Accounting Policies in Part 1, Item 1 of this
Quarterly Report on Form 10-Q.