Hancock Jaffe Laboratories, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; filed August 13, 2020. The filing identifies the issuer as Hancock Jaffe Laboratories, Inc. (NASDAQ: HJLI, HJLW). It is a development-stage medical-device company developing VenoValve for chronic venous insufficiency and CoreoGraft for coronary bypass surgery. Neither product had FDA approval, and the company reported no product revenue.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $0 in 2020 and 2019 | $0 in 2020; $31,243 in 2019 |
| Operating expenses | $1.546 million in 2020; $1.960 million in 2019 | $3.054 million in 2020; $3.574 million in 2019 |
| Net loss | $1.627 million in 2020; $1.946 million in 2019 | $2.787 million in 2020; $3.520 million in 2019 |
| Loss per share, basic and diluted | $0.08 in 2020; $0.13 in 2019 | $0.14 in 2020; $0.26 in 2019 |
| Net cash used in operating activities | Not presented for the quarter | $2.472 million in 2020; $2.923 million in 2019 |
- At June 30, cash and cash equivalents were $1.564 million, with a further $810,055 in restricted cash. Working capital was negative $1.168 million; total assets were $3.733 million and total liabilities were $3.364 million.
- The company had a $312,700 Paycheck Protection Program loan, bearing 1% interest and maturing April 2022; some or all may qualify for forgiveness. Operating lease liabilities totaled $712,291.
- Accumulated deficit was $58.975 million. Management disclosed substantial doubt about the company’s ability to continue as a going concern, while stating that financing completed after quarter-end was expected to fund operations for at least one year after the report date.
Changes versus prior-year periods
- Q2 net loss declined 16% year over year, as lower selling, general and administrative costs more than offset higher research and development expense.
- For the first half, net loss declined 21%. SG&A fell 35% to $1.838 million, while R&D rose 64% to $1.217 million, reflecting a larger team and animal-study laboratory costs.
- First-half 2019 included $31,243 of royalties under an agreement that ended in March 2019; there was no comparable revenue in 2020. The 2020 first-half result also included a $264,853 gain from revaluing warrant-related derivative liabilities; Q2 alone recorded an $81,276 loss from that revaluation.
- Cash used in operations remained substantial despite improving year over year. Financing cash inflows were $2.856 million in the first half of 2020, versus $5.637 million in the comparable 2019 period.
Outlook, developments and risks
- Funding and dilution: After June 30, a public offering and concurrent private placement closed July 21, generating reported net proceeds of $5.186 million. The company reported cash of $6.235 million as of August 10. It also reported approximately $7.5 million of aggregate net proceeds from four 2020 equity sales through the filing date. These financings involved substantial share and warrant issuance; the company said it lacked sufficient authorized common shares to settle all outstanding options and warrants until shareholders approve an increase in authorized shares or a reverse split.
- Product development: Management reported encouraging early VenoValve results, including an average 72% improvement in VCSS for five patients one year after surgery. Across 11 implanted patients, reported improvements from pre-operative levels were 51% for reflux, 61% for VCSS and 65% for pain scores; one patient’s valve was occluded. Next steps included monitoring patients, completing FDA-required testing and obtaining an IDE to begin a U.S. pivotal trial. CoreoGraft results were from a nine-sheep feasibility study, not human clinical testing.
- Risks and contingencies: COVID-19 could disrupt facility access, studies, procedures, supplies, financing and regulatory timelines. The company identified a material weakness in controls over accounting for warrants and derivative liabilities and said it was developing a remediation plan. A former CFO filed a lawsuit after quarter-end; the company intends to defend it. ATSCO litigation was settled after quarter-end, with the company agreeing to release the $810,055 restricted cash in exchange for a release of claims. The company said the disputed amounts were accrued.
- Management expects continued losses and a need for additional capital. The filing provides no formal revenue or earnings guidance.
Important facts for investors to verify
- Whether the July financing and subsequent cash position provide adequate runway, given recurring operating cash use and the going-concern warning.
- Shareholder approval, authorized-share capacity, warrant terms and the resulting potential dilution from outstanding and newly issued securities.
- Progress toward the VenoValve IDE and U.S. pivotal trial, and whether early Colombian results are sustained in a larger study; also the next CoreoGraft development milestones.
- Resolution and financial impact of the former employee lawsuit and ATSCO settlement, including the restricted-cash release and accrued liabilities.
- Remediation of the material weakness and any further reporting or control issues.