Hancock Jaffe Laboratories, Inc. — Q2 2018 Form 10-Q
Entity note: The request identifies Envveno Medical Corp, but the filing is for Hancock Jaffe Laboratories, Inc. The summary below reflects the filing’s registrant. The unaudited reporting period ended June 30, 2018; comparisons are with the three and six months ended June 30, 2017.
Business context and reporting period
Hancock Jaffe is a development-stage medical-device company developing biologic cardiovascular and vascular products, including the Bioprosthetic Heart Valve, CoreoGraft and VenoValve. ProCol, its FDA-approved vascular bioprosthesis, was sold to LeMaitre Vascular in 2016; the company receives royalties and may provide contract research services. The company says its product candidates require significant clinical trials and FDA approval before commercialization.
Financial performance and liquidity
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 | Comparable 2017 period |
|---|---|---|---|
| Revenue | $83,363 | $114,428 | $38,800 / $219,108 |
| Gross profit | $83,363 | $114,428 | $38,800 / $30,374 |
| Operating expenses | $3,195,142 | $4,682,643 | $1,270,543 / $2,392,746 |
| Loss from operations | $(3,111,779) | $(4,568,215) | $(1,231,743) / $(2,362,372) |
| Net loss | $(5,045,413) | $(9,792,900) | $(1,248,912) / $(2,412,562) |
| Net loss attributable to common stockholders | $(8,226,273) | $(13,102,901) | $(1,362,691) / $(2,627,473) |
| Basic and diluted loss per share | $(1.06) | $(1.88) | $(0.22) / $(0.43) |
Revenue comprised royalties and related-party contract research in Q2 2018; there were no product sales. For the first half, royalty income was $60,028 and related-party research revenue was $54,400, versus $152,400 in product sales and $66,708 in royalties in 2017. Reported cost of revenue was zero in 2018 and $188,734 in first-half 2017. Accordingly, reported gross profit equaled revenue in 2018; no separate margin percentage was stated.
Q2 SG&A was $2.91 million and R&D was $280,419; first-half SG&A was $4.16 million and R&D was $520,912. The first-half net loss included $6.58 million of noncash debt-discount amortization, a $1.48 million gain on extinguishment of convertible notes, and a $3.31 million deemed preferred-stock dividend. The second-quarter loss attributable to common holders also reflected a $3.18 million deemed dividend.
Cash used in operating activities was $3.17 million for the first half, compared with $1.72 million in 2017. Financing activities provided $9.03 million; cash was $5.94 million at June 30, against $77,688 at December 31, 2017. Working capital was $3.51 million, compared with a deficit of $8.00 million at year-end. At August 7, cash was $5.27 million. Total liabilities were $2.60 million at June 30, with no notes payable or derivative liabilities reported; most debt had been converted or repaid in connection with the IPO. The company reported accumulated deficit of $45.31 million.
Material changes versus the prior period
- First-half revenue fell to $114,428 from $219,108, primarily because there were no 2018 ProCol product orders from LeMaitre; 2018 research revenue partly offset the decline. Q2 revenue rose from $38,800 to $83,363 due to related-party research services, despite lower royalties.
- First-half operating expenses increased $2.29 million, including higher SG&A, stock compensation, professional fees and R&D. Net loss increased $7.38 million, chiefly reflecting debt-discount amortization and higher operating costs.
- The June IPO raised $8.625 million gross from 1.725 million units, each consisting of one common share and a warrant. The filing reports approximately $6.5 million net proceeds after underwriting and offering expenses. Convertible notes and preferred stock converted into common shares; other bridge notes were repaid. Common shares outstanding rose to 11,717,307 at June 30 from 6,133,678 at year-end.
Outlook, risks and unusual items
Management expects continued losses and says additional capital will be needed to sustain operations, fund product development and support commercialization efforts. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern within one year after issuance; management could not assure additional financing on acceptable terms. Further financing may dilute shareholders, and failure to secure funding could force the company to curtail or cease operations. Management expects revenue, if any, to remain small and says near-term revenue is substantially dependent on LeMaitre’s ProCol sales until product candidates are approved. No quantified revenue or earnings guidance is provided.
Unusual items include substantial noncash amortization of debt discounts and fair-value accounting for derivatives, which were reclassified to equity when the IPO-triggered debt conversions occurred. The company recorded a $3.31 million first-half deemed dividend tied to preferred-stock conversion. Cash balances included $5.69 million above FDIC-insured limits at June 30. A $313,650 CFO severance accrual was recorded; the CFO’s employment ended July 20, 2018. The company reported no pending or threatened litigation expected to have a material adverse financial effect and no off-balance-sheet arrangements. Management concluded disclosure controls were effective as of June 30. The filing’s cover page marks “No” for having filed all required reports during the preceding 12 months; investors should verify the significance and context of that response.
Important facts for investors to verify
- Confirm the registrant identity: the filing is Hancock Jaffe Laboratories, Inc., not Envveno Medical Corp.
- Assess cash burn, financing needs and the going-concern warning, including cash declining to $5.27 million by August 7.
- Review the IPO’s actual net proceeds and offering costs, and the potential dilution from warrants, options and future fundraising.
- Track clinical-trial, FDA-approval and development milestones for the Heart Valve, CoreoGraft and VenoValve candidates.
- Monitor ProCol royalty dependence on LeMaitre, related-party research revenue from HJLA, and the filing’s “No” response concerning timely prior reports.