Note
2 – Going Concern and Management’s Liquidity Plan
The
accompanying unaudited 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 unaudited 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 $4,761,483 and $5,334,644 for the nine months ended September 30,
2020 and 2019, respectively, and had an accumulated deficit of $60,949,408 at September 30, 2020. Cash used in operating activities
was $5,063,516 and $4,273,179 for the nine months ended September 30, 2020 and 2019, 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.
The
Company expects to continue incurring losses for the foreseeable future and recognizes the need to raise additional capital to
sustain its operations, pursue its product development initiatives and penetrate markets for the sale of its products. Toward
that end, the Company has completed five separate equity sales in 2020 through the filing date of this report raising aggregate
net proceeds of approximately $12,200,000 (see Notes 10 and 11). As of September 30, 2020, the Company had cash balances of $5,629,003
and working capital of $4,062,232. Management believes the proceeds from these transactions should provide sufficient
cash to sustain the Company’s operations at least one year after the issuance date of these financial statements.
If
necessary, after one year, management believes that the Company could have access to additional 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, or if it will be successful in implementing its business plan and developing its medical devices. Further, the COVID-19
pandemic has disrupted the global economy and eroded capital markets which makes it more difficult to obtain the financing that
we need to fund and continue our operations. 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, 2020 and December 31, 2019, and for the three and nine months ended September 30, 2020 and
2019. The results of operations for the three and nine months ended September 30, 2020 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, 2019 included in the Company’s Form 10-K filed with the SEC on March 18,
2020. The condensed balance sheet as of December 31, 2019 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.
HANCOCK
JAFFE LABORATORIES, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Fair
Value of Financial Instruments
The
Company measures the fair value of financial assets and liabilities based on the guidance of Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) ASC 820 “Fair Value Measurements and Disclosures”
(“ASC 820”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about
fair value measurements.
FASB
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may
be used to measure fair value:
Level
1
|
Quoted
prices available in active markets for identical assets or liabilities trading in active markets.
|
|
|
Level
2
|
Observable
inputs other than quoted prices included in Level 1, such as quotable prices for similar assets and liabilities in active
markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data.
|
|
|
Level
3
|
Unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
This includes certain pricing models, discounted cash flow methodologies and similar valuation techniques that use significant
unobservable inputs.
|
Financial
instruments, including accounts receivable and accounts payable are carried at cost, which management believes approximates fair
value due to the short-term nature of these instruments. The Company’s other financial instruments include notes payable,
the carrying value of which approximates fair value, as the notes bear terms and conditions comparable to market for obligations
with similar terms and maturities. Derivative liabilities are accounted for at fair value on a recurring basis.
On
September 15, 2020, the fair value of derivative liabilities was reclassified to equity when the Company’s stockholders
approved the increase of its authorized shares of capital stock. (See Note 10 –Stockholders’ Equity (Deficiency) Common
Stock). Accordingly, there is no fair value of derivative liabilities as of September 30, 2020.
The
following table sets forth a summary of the changes in the fair value of Level 3 derivative liabilities that are measured at fair
value on a recurring basis:
|
|
Derivative
|
|
|
|
Liabilities
|
|
Balance
– January 1, 2020
|
|
$
|
-
|
|
Derivative
liabilities associated with the issuance of common stock warrants
|
|
|
513,534
|
|
Derivative
liabilities associated with the issuance of placement agent warrants
|
|
|
32,502
|
|
Change
in fair value of derivative liabilities
|
|
|
(346,129
|
)
|
Balance
– March 31,2020
|
|
|
199,907
|
|
Change
in fair value of derivative liabilities
|
|
|
81,276
|
|
Balance
June 30, 2020
|
|
|
281,183
|
|
Change
in fair value of derivative liabilities
|
|
|
53,046
|
|
Reclassification
of warrant derivatives to equity
|
|
|
(334,229
|
)
|
Balance
– September 30, 2020
|
|
$
|
-
|
|
HANCOCK
JAFFE LABORATORIES, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Derivative
Liabilities
On
February 25, 2020 in connection with a private placement of its securities (Note 10), the Company issued warrants to purchase
1,430,000 shares of its common stock. The Company determined these warrants were derivative financial instruments when
issued.
Derivative
financial instruments are recorded as a liability at fair value and are marked-to-market as of each balance sheet date. The change
in fair value at each balance sheet date is recorded as a change in the fair value of derivative liabilities on the statement
of operations for each reporting period. The fair value of the derivative liabilities was determined using a Monte Carlo simulation,
incorporating observable market data and requiring judgment and estimates. The Company reassesses the classification of the financial
instruments at each balance sheet date. If the classification changes as a result of events during the period, the financial instrument
is marked to market and reclassified as of the date of the event that caused the reclassification. On September 15, 2020, the
fair value of derivative liabilities was reclassified to equity when the Company’s stockholders approved the increase of
its authorized shares of capital stock. (See Note 10 –Stockholders’ Equity (Deficiency) Common Stock).
The
Company recorded a gain on the change in fair value of derivative liabilities of $211,807 during the nine months ended September
30, 2020 and a loss on the change in fair value of derivative liabilities of $53,046 during the quarter ended September 30, 2020.
Sequencing
Policy
On
July 15, 2020, the Company adopted a sequencing policy, whereby, in the event that reclassification of contracts from equity to
assets or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient authorized
shares, shares will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest
grants receiving the first allocation of shares. Pursuant to ASC 815, issuances of securities to the Company’s employees
and directors, or to compensate grantees in a share-based payment arrangement, are not subject to the sequencing policy.
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 Preferred Stock (see Note
10 - Stockholders Equity (Deficiency) Series C Convertible Preferred Stock). 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, would have been
anti-dilutive.
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, 2020 and 2019:
|
|
September
30,
|
|
|
|
2020
|
|
|
2019
|
|
Shares
of common stock issuable upon exercise of warrants
|
|
|
34,022,068
|
|
|
|
4,366,960
|
|
Shares
of common stock issuable upon exercise of options
|
|
|
5,315,540
|
|
|
|
1,517,000
|
|
Potentially
dilutive common stock equivalents excluded from diluted net loss per share
|
|
|
39,337,608
|
|
|
|
5,883,960
|
|
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.
HANCOCK
JAFFE LABORATORIES, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
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 $5,379,003 and $1,867,286 as of September 30, 2020 and December 31, 2019, respectively. The Company periodically
evaluates the financial stability of the financial institutions with whom it maintains its cash balances. As of September 30,
2020, and as of the date of filing this report, the Company is not aware of any circumstances which would indicate they are not
financially sound.
For
the nine months ended September 30, 2019, 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. The Company
did not have any similar revenue in the nine months ended September 30, 2020.
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 11 - Subsequent Events.
Recent
Accounting Pronouncements
In
December 2019, the FASB issued ASU No. 2019-12,Simplifying the Accounting for Income Taxes, which is intended to simplify various
aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction
that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax
law. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim
periods within those fiscal years, and early adoption is permitted. We are currently evaluating the impact that this guidance
will have on our condensed financial statements.
Note
4 – Restricted Cash
As
of September 30, 2020, the Company did not have any restricted cash. Previously, the Company had maintained a restricted cash
balance in connection with a vendor litigation matter with ATSCO, Inc. (see Note 9 - Commitments and Contingencies - Litigations
Claims and Assessments). The matter was resolved on July 20, 2020, and on August 28, 2020 ATSCO took possession of the restricted
cash as full settlement of the dispute.
The
following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the balance sheet as of September
30, 2019 and that sum to the total of the same amounts shown in the statement of cash flows for the nine months ending September
30, 2019 with the comparative cash balance without restricted cash as of September 30, 2020.
|
|
As
of September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Cash
and cash equivalents
|
|
$
|
5,629,003
|
|
|
$
|
2,943,409
|
|
Restricted
cash
|
|
|
-
|
|
|
|
810,055
|
|
Total
cash, cash equivalents, and restricted cash in the balance sheets
|
|
$
|
5,629,003
|
|
|
$
|
3,753,464
|
|
HANCOCK
JAFFE LABORATORIES, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note
5 – Property and Equipment
As
of September 30, 2020 and December 31, 2019, property and equipment consist of the following:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Laboratory
equipment
|
|
$
|
332,126
|
|
|
$
|
214,838
|
|
Furniture
and fixtures
|
|
|
93,417
|
|
|
|
93,417
|
|
Computer
software and equipment
|
|
|
61,771
|
|
|
|
50,403
|
|
Leasehold
improvements
|
|
|
158,092
|
|
|
|
158,092
|
|
Construction
Work in Progress – Software
|
|
|
244,479
|
|
|
|
220,384
|
|
|
|
|
889,885
|
|
|
|
737,134
|
|
Less:
accumulated depreciation
|
|
|
(464,359
|
)
|
|
|
(393,107
|
)
|
Property
and equipment, net
|
|
$
|
425,526
|
|
|
$
|
344,027
|
|
Depreciation
expense amounted to $66,857 and $26,828 for the nine months ended September 30, 2020 and 2019, respectively. Depreciation expense
is reflected in general and administrative expenses in the accompanying statements of operations.
Note
6 – Right-of-Use Assets and Lease Liability
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 Accounting Standards Codification (“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 Topic 842 to arrangements with lease terms of 12 months or less. On January 1, 2019,
upon adoption of 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.
HANCOCK
JAFFE LABORATORIES, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Our
operating lease cost is as follows:
|
|
For
the Three Months Ended
September
30,
|
|
|
For
the Nine
Months
Ended
September
30,
|
|
|
|
2020
|
|
|
2020
|
|
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,
|
|
|
For
the Nine
Months
Ended
September
30,
|
|
|
|
2020
|
|
|
2020
|
|
Operating
Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
paid for amounts in the measurement of lease liabilities
|
|
$
|
85,416
|
|
|
$
|
256,248
|
|
Remaining
lease term and discount rate for our operating lease is as follows:
|
|
September
30,
2020
|
|
Remaining
lease term
|
|
|
2
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, 2020
|
|
$
|
87,981
|
|
Year
ended December 31, 2021
|
|
|
354,561
|
|
Year
Ended December 31, 2022
|
|
|
271,854
|
|
Total
|
|
$
|
714,396
|
|
Less:
Imputed Interest
|
|
|
(74,277
|
)
|
Present
value of our lease liability
|
|
$
|
640,119
|
|
HANCOCK
JAFFE LABORATORIES, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note
7 – Accrued Expenses and Accrued Interest
As
of September 30, 2020, and December 31, 2019, accrued expenses consist of the following:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Accrued
compensation costs
|
|
$
|
233,428
|
|
|
$
|
151,858
|
|
Accrued
professional fees
|
|
|
23,000
|
|
|
|
141,310
|
|
Accrued
franchise taxes
|
|
|
25,607
|
|
|
|
30,270
|
|
Accrued
research and development
|
|
|
5,637
|
|
|
|
-
|
|
Other
accrued expenses
|
|
|
-
|
|
|
|
10,000
|
|
Accrued
expenses
|
|
$
|
287,672
|
|
|
$
|
333,438
|
|
Note
8 – Note Payable
On
April 12, 2020, the Company obtained loan (the “Loan”) in the amount of $312,700, pursuant to the Paycheck Protection
Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020.
The
Loan, which was in the form of a Note dated April 12, 2020, matures on April 12, 2022 and bears interest at a rate of 1% per annum,
payable monthly commencing on November 12, 2020. The Note may be prepaid at any time before maturity with no prepayment penalties.
Funds from the Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments,
rent, utilities, and interest on other debt obligations incurred before February 15, 2020. The Company believes it has used the
entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are
used for qualifying expenses as described in the CARES Act.
As
of September 30, 2020, the note payable balance was $312,700.
Note
9 – 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., a vendor, filed a lawsuit 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 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 (the “Disputed Amount”) and on March 21, 2019, the Santa Clara, CA sheriff department served
the Writ of Attachment and took custody of and was holding the Disputed Amount (see Note 4 – Restricted Cash). On
July 20, 2020, the Company and ATSCO agreed to settle the dispute. Pursuant to the terms of the settlement, the Company agreed
to release the Disputed Amount of restricted cash in exchange for a full release from all claims made by ATSCO related to this
matter. On August 28, 2020, ATSCO took possession of the Restricted Cash. Accordingly, as of September 30, 2020, the Company has
removed the restricted cash and related accounts payable from its financial statements.
The
Company has replaced ATSCO and has entered into new supply relationships with two domestic and one international company to supply
porcine and bovine tissues.
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 June 30, 2020, the Company
has fully accrued for the outstanding claim against the Company.
On
July 9, 2020, the Company was served with a civil complaint filed in the Superior Court for the State of California, County of
Orange by a former employee, Robert Rankin, who resigned as the Company’s Chief Financial Officer, Secretary and Treasurer
on March 30, 2020. The complaint asserts several causes of action, including a cause of action for failure to timely pay Mr. Rankin’s
accrued and unused vacation and three months’ severance under his July 16, 2018 employment agreement with the Company. The
complaint seeks, among other things, back pay, unpaid wages, compensatory damages, punitive damages, attorneys’ fees, and
costs. The Company intends to vigorously defend the claims, investigate the allegations, and assert counterclaims.
HANCOCK
JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note
10 –Stockholders’ Equity (Deficiency)
On
September 15, 2020, the Company completed a special meeting of stockholders (the “Special Meeting”). At the Special
Meeting, the Company’s stockholders, among other things, (i) approved an amendment to the Company’s Amended and Restated
Certificate of Incorporation (the “A&R Certificate of Incorporation”) to increase the aggregate number of authorized
shares of common stock by 200,000,000 shares from 50,000,000 to 250,000,000 shares; (ii) approved an amendment to the A&R
Certificate of Incorporation to reduce the vote required to amend, repeal, or adopt any provisions of the A&R Certificate
of Incorporation from the approval of 66 2/3% of the voting power of the shares of the then outstanding voting stock of the Company
entitled to vote to a majority of such shares; and (iii) approved a reverse stock split of the Company’s common stock at
a ratio of between one-for-five and one-for-twenty-five, with such ratio to be determined at the sole discretion of the Company’s
Board of Directors (the “Board”) and with such reverse stock split to be effected at such time and date, if at all,
as determined by the Board in its sole discretion.
Common
Stock
On
February 25, 2020, the Company raised $650,000 in gross proceeds through a private placement bridge offering of its common stock
and warrants to purchase its common stock to certain accredited investors (the “Bridge Offering”). The Company sold
an aggregate of 1,300,000 shares of common stock and warrants to purchase 1,300,000 shares of common stock in the Bridge Offering
pursuant to a securities purchase agreement between the Company and each of the investors in the Bridge Offering (the “Purchase
Agreement”). The warrants are exercisable for a the period commencing the date the Company’s stockholders approve
either an increase in the number of the Company’s authorized shares or a reverse stock split and ending on February 25,
2025 and have an exercise price of $0.79 per share. Pursuant to the terms of the Purchase Agreement, the Company agreed to hold
a meeting of its stockholders on or prior to May 25, 2020 for the purpose of seeking approval of either an increase in the number
of shares of common stock the Company is authorized to issue or a reverse split of the Company’s common stock (a “Capital
Event”). The Company did not hold a meeting until September 15, 2020, at which time the Company’s stockholders approved
various measures including those comprising a Capital Event.
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 April 2020 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 $811,641.
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 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.
HANCOCK
JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
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.
On
July 17, 2020, the Company entered into an Underwriting Agreement relating to a firm commitment public offering (the “Public
Offering”) of 12,500,000 units (the “Units”), consisting of an aggregate of 12,500,000 shares of common stock
and warrants to purchase up to 12,500,000 shares of common stock at a public offering price of $0.32 per Unit. Pursuant to the
terms of the Underwriting Agreement, the underwriters also exercised their overallotment option in full, purchasing an additional
1,875,000 shares of common stock and warrants to purchase up to 1,875,000 shares of common stock for an aggregate purchase of
14,375,000 shares and warrants to purchase up to 14,375,000 shares of common stock. The warrants have an initial exercise price
of $0.32 per share, subject to customary adjustments, and will expire seven years from the date of issuance. Exercisability of
the warrants was subject to stockholder approval of an increase in the number of authorized shares of common stock or a reverse
stock split, in either case, in an amount sufficient to permit exercise in full of the warrants, which was obtained on September
15, 2020.
Pursuant
to the Underwriting Agreement, the Company also issued to the underwriters as compensation a warrant to purchase up to 750,000
shares of common stock with substantially the same terms as the warrants issued in the Public Offering.
The
closing of this transaction occurred on July 21, 2020. Net proceeds to the Company, after deducting the underwriters and placement
agent’s fees and expenses, including the Company’s estimated offering expenses, and excluding the proceeds, if any,
from the exercise of the warrants issued in the Public Offering, were $3,882,000. As of the July 21, 2020 closing, did
not have sufficient authorized common shares to share settle all outstanding stock options and warrants.
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 was for an initial term of twelve (12) months with six-month
automatic extension periods. MZ received cash compensation of $8,000 per month and eighty-five thousand (85,000) restricted shares
which vested quarterly over the initial twelve-month term. Effective on July 24, 2020, the Company and MZ terminated the agreement.
Series
C Convertible Preferred Stock
In
a private placement occurring concurrently with the Public Offering, the Company entered into a Securities Purchase Agreement
with certain investors pursuant to which the Company agreed to sell 4,205,406 shares of its Series C Convertible Preferred Stock
(the “Preferred Stock”) and warrants to purchase up to 6,078,125 shares of its common stock for a combined purchase
price per share and warrant of $0.37. Pursuant to its terms, the Preferred Stock may convert into 6,078,125 shares of common
stock. The warrants issued have an initial per share exercise price of $0.32, subject to customary adjustments, and will expire
seven years from the date of issuance.
The
gross proceeds were $1,556,000 and the net proceeds to the Company
from the transaction, after deducting the underwriters and placement agent’s fees and expenses, including the Company’s
estimated offering expenses, and excluding the proceeds, if any, from the exercise of the warrants issued in the private placement,
were $1,358,000.
The
holders of the Company’s Preferred Stock vote with holders of the Common Stock, and with any other shares of preferred
stock that vote with the Common Stock, with each holder of Preferred Stock being entitled to one vote per share of Preferred Stock,
and are entitled to receive 8% non-compounding cumulative dividends, payable when, as and if declared by the Board of Directors.
The Series C Preferred Stock ranks senior to the common stock as to dividends and the distribution of assets in the event of
any liquidation, dissolution, or winding up of the Company, either voluntary or involuntary or any sale of the Company.
HANCOCK
JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
In
the event of any liquidation, dissolution, or winding up of the Company, either voluntary or involuntary, or any sale of the Company,
the holders of Preferred Stock are entitled to receive, before and in preference to any distribution of any of the assets
to the holders of the common stock, or any other series of the Company’s preferred stock that is junior to the Preferred Stock, an amount per share equal to $0.37 for each outstanding share of Preferred Stock (the “Original
Series C Issue Price”), plus all accrued but unpaid dividends thereon through the date of such event.
As
of September 30, 2020, the holders of Preferred Stock are entitled to receive a liquidation preference payment of $0.37 per share,
plus accrued and unpaid dividends totaling, in the aggregate, $23,859. During the three and nine months ended September
30, 2020, the Company recognized the $23,859 as a deemed dividend for the purpose of calculating loss attributable to common stockholders
and loss per share. The liquidation preference of the Preferred Stock is subordinate and ranks junior to all indebtedness
of the Company.
The
Company may elect to convert the Preferred Stock to common stock in the event the Company either (i) consummates a merger,
or (ii) raises an aggregate of at least $8,000,000 in gross proceeds in a transaction or series of transactions within any twelve
(12) month period. In the event the Company elects to effect such a conversion, each share of Series C Preferred Stock is convertible
into 1.445 shares of common stock.
The
Company determined that the Preferred Stock represented permanent equity due to the absence of a redemption feature and the embedded
conversion option was clearly and closely related to the equity host and did not require bifurcation. The $2,431,250 fair value
of the warrants was calculated using the Black-Scholes option pricing model, using the $0.44 stock price, an expected term of
7.0 years, volatility of 118.7%, a risk-free rate of 0.47% and expected dividends of 0.00%. The $1,556,000 of gross proceeds were
allocated on a relative fair value basis of $607,220 to the Preferred Stock and $948,781 to the warrants. The Preferred Stock
includes a contingent beneficial conversion feature (“BCF”) which was valued at its $2,067,155 intrinsic value using
the commitment date stock price of $0.44 per share and the effective conversion price of $0.10 per share, but was limited to the
$607,220 of proceeds that were allocated to the Preferred Stock. The contingent BCF will be recognized when the contingency is
resolved. If the BCF is recognized, it will be recorded as a deemed dividend for the purposes of calculating earnings per share.
In addition, since the Company does not have retained earnings, the dividend will be recorded against additional paid-in capital.
Warrants
Certain
investors in the Public Offering agreed with the underwriter to enter into a lock-up and voting agreement (the “Lock-Up
and Voting Agreements”) whereby each such investor was subject to a lock-up period through July 21, 2020 and agreed to vote
all shares of common stock each beneficially owned on the closing date of the Public Offering with respect to any proposals presented
to the stockholders of the Company. Additionally, certain investors that agreed to enter into the Lock-Up and Voting Agreements,
as consideration for their waiver of certain rights described in the April 2020 Purchase Agreement and June 2020 Purchase Agreement,
were issued unregistered warrants (the “Waiver Warrants”) to purchase an aggregate of 3,495,000 shares of common
stock. These warrants were substantially similar to the warrants issued in the concurrent private placement, except that they
warrants have a term of five (5) years, an exercise price equal to $0.37 per share and carry piggy-back registration rights.
Exercisability
of the warrants issued in the February 25 transaction was subject to stockholder approval of a Capital Event. The warrants
issued in the April and June transactions were immediately exercisable. Exercisability of the warrants issued in
the July Public Offering and Private Placement was subject to the later to occur of (i) date that the Company files an amendment
to its amended and restated certificate of incorporation to reflecting stockholder approval of either an increase in the number
of our authorized shares of Common Stock or a reverse stock split (in either case in an amount sufficient to permit the conversion
in full of the Preferred Stock and exercise in full of the warrants), and (ii) the date of approval as may be required by the
applicable rules and regulations of The Nasdaq Stock Market LLC (or any successor entity) from the stockholders of the Company
with respect to the transactions contemplated by the Securities Purchase Agreement, including the issuance of all of the shares
issuable upon conversion of the Preferred Stock and warrants in excess of 19.99% of the issued and outstanding common stock on
the closing date of the private placement.
On
June 15, 2020, the Company filed a registration statement covering the warrants issued in the April and June transactions. The
registration statement was declared effective on June 23, 2020. At the Special Meeting held on September 15, 2020, the Company’s
stockholders approved measures comprising a Capital Event, as defined in the February transaction, increasing the authorized common
shares by an amount sufficient to cover the exercise of warrants purchased in that transaction as well as the Public Offering
and Private Placement, and including common shares issuable upon conversion of the Company’s Series C Preferred Stock. The
Company filed its amended and restated certificate of incorporation on September 17, 2020 and filed a registration statement
covering the warrants issued in the February and July transactions. This registration statement became effective on October 22,
2020, such that all of the warrants issued in 2020 are now exercisable.
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. 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)
In
addition to the warrants issued to investors in the Bridge Offering described above, the placement agent received a warrant to
purchase 130,000 shares of the Company’s common stock containing substantially the same terms as the warrant issued
to investors in that transaction. The Company determined that all of the warrants issued in connection with the Bridge
Offering were derivative instruments because the Company did not have control of the obligation to obtain shareholder approval
by May 25, 2020 to increase the number of authorized shares or to approve a reverse stock split. The accounting treatment of derivative
financial instruments requires that the Company record the warrants as a liability at fair value and mark-to-market the instruments
at fair values as of each subsequent balance sheet date. Any change in fair value is recorded as a change in the fair value of
derivative liabilities for each reporting period at each balance sheet date.
The
fair value of the warrants was determined using a Monte Carlo simulation, incorporating observable market data and requiring judgment
and estimates. The Company reassesses the classification at each balance sheet date. If the classification changes as a result
of events during the period, the contract will be reclassified as of the date of the event that causes the reclassification.
The
warrant derivatives were valued as of the February 25, 2020 issuance date, as of the quarter ended March 31, 2020, as of June
30, 2020, and as of September 15, 2020 when the Company’s stockholders approved an increase in authorized shares in an amount
sufficient to allow full exercise of these warrants. The value at issuance was $546,036 and was recorded as a derivative liability.
The value of the derivative liability was $199,907 at March 31, 2020, $281,183 at June 30, 2020, and $334,229 at September 15,
2020.
The
derivative liability increased $53,046 and decreased $211,807 during the three and nine months ended September 30, 2020, respectively.
The changes in derivative liability is reflected in Other Income on the Condensed Statement of Operations.
On
September 15, 2020, the fair value of derivative liabilities was reclassified to equity when the Company’s stockholders
approved items comprising a Capital Event. Accordingly, there is no fair value of derivative liabilities as of September 30, 2020.
The
following inputs and assumptions were used for the valuation of the derivative liability:
|
|
February 25, 2020
|
|
|
March 31, 2020
|
|
|
June 30, 2020
|
|
|
September 15, 2020
|
|
Stock Price
|
|
$
|
0.70
|
|
|
$
|
0.295
|
|
|
$
|
0.3859
|
|
|
$
|
0.4346
|
|
Projected Volatility
|
|
|
97.1
|
%
|
|
|
102.7
|
%
|
|
|
102.7
|
%
|
|
|
110.7
|
%
|
Risk-Free Rate
|
|
|
1.36
|
%
|
|
|
0.38
|
%
|
|
|
0.29
|
%
|
|
|
0.31
|
%
|
|
●
|
It
was assumed the stock price would fluctuate with the Company’s projected volatility.
|
|
|
|
|
●
|
The
projected volatility was based on the historical volatility of the Company.
|
|
|
|
|
●
|
If
the Company was required to pay the fair value of the warrant in cash as of May 25, 2020, the obligation was discounted at
the Company’s estimated cost of debt based on short-term C-CCC bond ratings of 19.5% and 28.5%.
|
|
|
|
|
●
|
The
likelihood of the Company calling a shareholder meeting and achieving shareholder approval was 90% as of February 25, 2020.
|
|
|
|
|
●
|
As
June 30, 2020, the Company projected shareholder approval would not be obtained until approximately 8/31/20. No mandatory
exercise was allowed prior to that date.
|
|
|
|
|
●
|
Until
the Company obtained shareholder approval to increase the authorized shares on September 15, 2020, we assumed the warrant
holders have an option to require the Company to pay the fair value of the warrants. The derivative value at that date was
$334,229.
|
HANCOCK
JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Warrant
Exercises
During
the three and nine months ending September 30, 2020, warrants to purchase 1,818,682 shares of common stock were exercised
resulting in proceeds to the Company of $631,626.
Stock
Options
From
time to time, the Company issues options for the purchase of its common stock to employees and others. On July 18, 2020, the Company
granted 100,000 options to each of its four independent directors and a total of 2,650,000 options to various executive officers,
other employees and a consultant. The exercise price for these stock options is $0.40 per share, the closing price of the Company’s
stock on the business day preceding the grant date. The Company recognized $194,421 and $159,865 of stock-based compensation related
to stock options during the three months ended September 30, 2020 and 2019, respectively, and recognized $363,027 and $329,454
of stock-based compensation related to stock options during the nine months ended September 30, 2020 and 2019, respectively. As
of September 30, 2020, there was $1,138,934 of unrecognized stock-based compensation expense related to outstanding stock options
that will be recognized over the weighted average remaining vesting period of 2.5 years.
Restricted
Stock Units
On
September 13, 2019, under the Company’s nonemployee director compensation program, the Company granted two of its independent directors 78,125 restricted a stock units each in connection with their appointment to the Board in accordance with the Option
Plan, which, based on the Company’s closing stock price on the grant date were valued at $0.96 per unit for an aggregate
grant date value of $150,000. These units vest in equal annual portions on the anniversary of their grant.
Note
11 – Subsequent Events
On
October 7, 2020, the Company entered into a Securities Purchase Agreement (the “October 2020 Purchase Agreement”)
with certain investors for the purpose of raising approximately $5,100,000 million in gross proceeds for the Company. Pursuant
to the terms of the October 2020 Purchase Agreement, the Company agreed to sell, in a registered direct offering, an aggregate
of 9,532,709 shares of the Company’s common stock at a purchase price of $0.41 per share, and in a concurrent private placement,
warrants to purchase up to 9,532,709 shares of common stock at a purchase price of $0.125 per warrant, for a combined purchase
price per share and warrant of $0.535. The warrants are exercisable immediately on the date of issuance at an exercise price of
$0.41 per share and will expire five years following the date of issuance.
The
closing of the sales of these securities under the October 2020 Purchase Agreement occurred on October 9, 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 approximately $4,450,000.
On November 10, 2020 the Company agreed
to pay Spartan Capital Securities LLC $355,000 in cash, and warrants to purchase 440,449 shares of common stock at a purchase
price of $0.32 per share, and warrants to purchase 451,402 shares of common stock at a purchase price of $0.41 per share. These
amounts were in dispute and were paid pursuant to an investment banking agreement dated February 12, 2020 in connection with financings
which occurred in July and October. The investment banking agreement has now been terminated with no further obligations.
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 50 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 products will be required to successfully complete significant clinical trials to demonstrate the safety and efficacy of
the product before it will be able to be approved by the FDA.
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 venous system of the leg to treat severe CVI.
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 current version of the VenoValve is designed to be surgically implanted into
the patient 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 generally ineffective, as they
attempt to alleviate the symptoms of CVI without addressing the underlying causes of the disease. In addition, we believe that
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.
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 11 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 Colombia. Between April of 2019 and December of 2019, we successfully implanted VenoValves in 10 additional
patients, completing the implantations for the first phase of the Colombian first-in-man study. Overall, VenoValves have been
implanted in 11 patients. 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.
Nine
of 11 patients have now completed the one-year first-in-man
trial. For those nine patients, reflux has improved an average of 50%, Venous Clinical Severity Scores (“VCSSs”)
have improved an average of 58%, and VAS scores, which are used by patients to measure pain, have improved an average of
70%, all when compared to pre-surgery levels. 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.
VenoValve
safety incidences have been minor and include one (1) fluid pocket (which was aspirated), intolerance from Coumadin anticoagulation
therapy, three (3) minor wound infections (treated with antibiotics), and one occlusion due to patient non-compliance with anti-coagulation
therapy.
In preparation for the VenoValve U.S. pivotal
trial, we have submitted a Pre-IDE filing with the FDA requesting a Pre-IDE meeting. An investigational device exemption or IDE
form the FDA is required for a medical device company to proceed with a pivotal trial for a class III medical device. Next steps
for the VenoValve include the Pre-IDE meeting with the FDA, the continued monitoring of the two remaining VenoValve patients in
our first-in-human trial, and the completion of a series of functional tests and an animal safety study mandated by the FDA, which
are pre-requisites for the filing of an IDE application. We expect to be in a position to file our IDE application with the FDA,
seeking approval to proceed with the VenoValve U.S. pivotal trial, in Q1 of 2021.
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 a Saphenous Vein Graft (SVG). In addition to avoiding the invasive and painful
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 SVGs.
In
addition to providing a potential 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 LIMA 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 cells that naturally exist
throughout healthy veins and arteries and that that act 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.
In
May of 2020, we announced that we had received approval from the Superintendent of Health of the National Health Counsel for the
Republic of Paraguay to conduct a first-in-human trial for the CoreoGraft. Up to 5 patients that need coronary artery bypass graft
surgery will receive CoreoGraft implants as part of the first-in-human study. In July of 2020, we announced that we had received
permission to proceed with the first-in-human study, which had been put on hold due to the COVID-19 pandemic, and in August of
2020 we announced that the first two patients had been enrolled for the first-in-human CoreoGraft trial.
On October 28, 2020, we announced the first
successful implantation of the CoreoGraft in a patient in Colombia.
Comparison
of the three months ended September 30, 2020 and 2019
Overview
We
reported net losses of $1,974,769 and $1,814,895 for the three months ended September 30, 2020 and 2019, respectively, representing
an increase in net loss of $159,874 or 9%, due to an increase in operating expenses of $88,253, and a net increase in other income
and expense of $71,621.
Revenues
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, 2020, selling, general and administrative expenses increased by $7,025 or 1%, to $1,164,089
from $1,157,064 for the three months ended September 30, 2019. The small net increase reflects increases in legal, consulting
and insurance expenses totaling approximately $170,000, partially offset by decreases in travel, compensation and other
administrative expenses totaling approximately $152,000.
Legal
expenses increased approximately $57,000 mainly due to the Company’s increased level of public filing activity not directly
related to funding transactions in 2020 when compared to 2019, partially offset by lower ATSCO litigation related expenses. Consulting
expenses increased $58,000 primarily due to placement agent fees for the Company’s research and development director.
Compensation cost was approximately $95,000 lower due mainly to the change in classification of $65,000 employee benefits
charged to research and development expenses in 2020 that were previously included in Selling, General and Administrative Expenses,
lower travel expenses of approximately $43,000 in 2020 due to COVID-19 travel restrictions, and approximately $22,000 in
lower facility and office related expenses.
Research
and Development Expenses
For
the three months ended September 30, 2020, research and development expenses increased by $81,228 or 12%, to $758,198 from $676,970
for the three months ended September 30, 2019. The increase is primarily due to increases of $95,000 in compensation and
related costs due to a larger team, $41,000 in lab cost related to our APS study, partially offset by $19,000 in lower tissue
purchases in 2020 due to stay-at home work orders related to COVID-19, and $11,000 in lower consulting expense due to the
external cost being replaced with an employee in 2020.
Interest
Income
Interest
income of $564 and $19,139 was earned during the three months ended September 30, 2020 and 2019, respectively.
Change
in Fair Value of Derivative Liability
For
the quarter ended September 30, 2020, we recorded a loss on the change in fair value of derivative liabilities of $53,046. Our
derivative liabilities are related to warrants issued in connection with our Bridge Offering in February 2020.
Comparison
of the nine months ended September 30, 2020 and 2019
Overview
We
reported net losses of $4,761,483 and $5,334,644 for the nine months ended September 30, 2020 and 2019, respectively, representing
a decrease in net loss of $573,161, or 11%, due to a decrease in operating expenses of $399,609, and an increase in other income
and expense of $173,552.
Revenues
Revenue
earned during the nine months ended September 30, 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 nine months ended September 30, 2020, selling, general and administrative expenses decreased by $987,554 or 25%, to $3,001,720
from $3,989,274 for the nine months ended September 30, 2019. The decrease is primarily due to decreases of approximately $382,000
in stock-based compensation expense primarily from the settlement of a legal dispute in 2019 and from lower expense related
to awards of common stock options to employees and consultants in 2020, $67,000 in legal fees due to lower costs related
to the ATSCO litigation, $140,000 in lower consulting and outside services cost related to recruiting fees in 2019 that
were not incurred in 2020 and reductions in other consulting, $142,000 in lower travel costs due to COVID-19 travel restrictions,
and in facility and other office expenses which were $104,000 lower due to the office closure related to stay-at home work
orders, partially offset by $134,000 in higher insurance costs in 2020.
Research
and Development Expenses
For
the nine months ended September 30, 2020, research and development expenses increased by $556,702 or 39%, to $1,974,995 from $1,418,293
for the nine months ended September 30, 2019. The increase is primarily due to increases of $272,000 in compensation and related
costs due to a larger team, $271,000 in lab cost related to our APS study, and $39,000 in consulting related to support for our
GLP protocol. These increases were partially offset by approximately 26,000 in lower tissue purchases due to COVID-19.
Interest
Income
Interest
income of $3,425 and $41,680 was earned during the nine months ended September 30, 2020 and 2019, respectively.
Change
in Fair Value of Derivative Liability
For
the nine months ended September 30, 2020, we recorded a gain on the change in fair value of derivative liabilities of $211,807.
Our derivative liabilities were 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 nine months ended September 30,
2020. As of September 30, 2020, we had an accumulated deficit of $60,949,408. These factors, among others, raise substantial
doubt about our ability to continue as a going concern. Since inception, we have funded our operations primarily through our
IPO, public and private placements of equity, and private placements of convertible debt securities as well as modest revenues
from royalties, contract research and sales of the ProCol Vascular Bioprosthesis. To-date in 2020, including the October 2020
offering, we have closed five financings providing aggregate net proceeds of approximately $12,200,000.
As
of November 10, 2020, we had a cash balance of $8,841,899.
We
measure our liquidity in a variety of ways, including the following:
|
|
September
30
2020
|
|
|
December
31,
2019
|
|
|
|
(unaudited)
|
|
|
|
|
Cash
|
|
$
|
5,629,003
|
|
|
$
|
1,307,231
|
|
Restricted
Cash
|
|
|
-
|
|
|
|
810,055
|
|
Working
capital (deficiency)
|
|
|
4,062,232
|
|
|
|
(452,434
|
)
|
Based
upon our cash and working capital as of September 30, 2020, and after giving effect to the transactions completed on October 9,
2020, we believe we have sufficient cash to sustain the Company’s operations at least one year after the date of filing
this Report.
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.