Hancock Jaffe Laboratories, Inc. (HJLI) — Q3 2020 Form 10-Q
Period: Three and nine months ended September 30, 2020. The supplied filing identifies the registrant as Hancock Jaffe Laboratories, Inc., not Envveno Medical Corp.
Business context
HJLI is a development-stage medical-device company developing the VenoValve, a porcine-tissue device for chronic venous insufficiency, and the CoreoGraft, a bovine-tissue coronary bypass conduit. Both require clinical testing and FDA approval. The company reported no revenue in the first nine months of 2020; the prior-year period included $31,243 of royalty revenue under an agreement that ended in March 2019.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $31,243 |
| Operating expenses | $1.92 million | $1.83 million | $4.98 million | $5.41 million |
| Net loss | $1.97 million | $1.81 million | $4.76 million | $5.33 million |
| Net loss per common share | $0.06 | $0.10 | $0.19 | $0.35 |
| Cash used in operating activities | Not separately presented for the quarter | $5.06 million | $4.27 million |
There was no revenue in 2020, so revenue-based margins are not meaningful. Q3 net loss increased 9% year over year, while the nine-month net loss decreased 11%. Nine-month SG&A fell 25% to $3.00 million, partly reflecting lower stock compensation, travel and office costs; R&D rose 39% to $1.97 million as staffing and study costs increased. The nine-month loss included a $211,807 gain from changes in derivative fair value; the Q3 period recorded a $53,046 loss on that item.
At September 30, cash and cash equivalents were $5.63 million, working capital was $4.06 million, and total assets were $7.04 million. Total liabilities were $2.25 million, including a $312,700 Paycheck Protection Program loan and $640,119 of operating lease liabilities. The PPP loan bears 1% interest and matures in April 2022; qualifying amounts may be forgiven, but forgiveness was not reported as established. Cash was $1.31 million and working capital was a $452,434 deficit at December 31, 2019. Cash at November 10, 2020 was $8.84 million, after subsequent financing.
Financing during the first nine months provided $8.73 million in net cash, including public and private equity offerings, preferred stock and warrant exercises, plus the PPP loan. The company reported approximately $12.2 million of aggregate net proceeds from five 2020 financings through the filing date, including the October offering.
Changes, outlook and material risks
- Clinical progress: Nine of 11 VenoValve first-in-human participants had completed one-year follow-up; reported average improvements were 50% in reflux, 58% in VCSS and 70% in pain scores. The company expected to be positioned to file a U.S. pivotal-trial IDE application in Q1 2021, subject to FDA discussions and required testing. CoreoGraft’s first-in-human study in Paraguay had enrolled two patients by August; the filing notes the first successful implantation was announced October 28, 2020.
- Going concern: The company reported recurring losses, an accumulated deficit of $60.95 million and substantial doubt about its ability to continue as a going concern. Management believed cash, including the October financing, would support operations for at least one year after filing. It expects continued losses and may need further capital; access to financing is uncertain.
- COVID-19: Risks include restrictions affecting facility access, studies and patient enrollment, hospital capacity, supply procurement, regulatory timelines and capital markets. The CoreoGraft study had been delayed by the pandemic.
- Capital structure: Stockholders approved increasing authorized common shares from 50 million to 250 million, along with a potential reverse split. Series C preferred stock carries an 8% cumulative dividend and liquidation preference. Warrants and options represent substantial potential dilution; 39.34 million common-stock equivalents were excluded from diluted loss per share as anti-dilutive at September 30.
- Legal matters: The ATSCO supplier dispute was settled, with $810,055 of restricted cash released to ATSCO in August. A former CFO’s employment-related lawsuit remained pending; the company said it intended to defend the claims. It also disclosed a disputed legal-services claim that had been accrued.
- Controls: Management identified a material weakness in accounting controls after failing to record a warrant-related derivative liability on a timely basis. The company said the weakness did not require revision of previously issued statements and was developing a remediation plan; disclosure controls were reported ineffective.
- Subsequent events: The October 2020 equity-and-warrant offering generated approximately $4.45 million in net proceeds before estimated company offering expenses. In November, the company agreed to pay Spartan Capital $355,000 and issue warrants covering 891,851 shares to resolve disputed compensation; the investment-banking agreement was terminated with no further obligations.
Key facts for investors to verify
- Whether the October proceeds and available cash were sufficient to fund operations for the stated one-year period, and the pace of subsequent cash use.
- FDA feedback, required studies and the timing and feasibility of the anticipated VenoValve IDE filing and U.S. pivotal trial.
- Clinical outcomes and safety from the small VenoValve study and early CoreoGraft human trial; these are preliminary and do not establish FDA approval or commercial efficacy.
- The status and terms of potential PPP loan forgiveness, the former CFO litigation and the accrued legal-services dispute.
- Remediation of the material weakness and the dilutive impact of outstanding preferred shares, warrants, options and subsequent issuances.