Envveno Medical Corp quarterly report, Q1 FY2019

Business context and reporting period

Hancock Jaffe Laboratories, Inc. (HJLI) filed this unaudited Form 10-Q for the quarter ended March 31, 2019. The company is a development-stage medical-device business developing VenoValve for chronic venous insufficiency and CoreoGraft for coronary bypass procedures; both require further development and regulatory approval. The filing metadata names Envveno Medical Corp, but the filing itself identifies Hancock Jaffe Laboratories, Inc. as the registrant.

Financial results and liquidity

At March 31, cash and cash equivalents were $2.753 million; an additional $810,055 was restricted under a court attachment order. Working capital was $1.107 million, down from $1.314 million at year-end 2018. Total assets were $5.488 million and total liabilities were $2.623 million. The balance sheet shows no convertible notes payable; operating lease liabilities totaled approximately $1.056 million. A March private placement generated $2.704 million gross proceeds, or $2.317 million net proceeds after offering costs. Cash and restricted cash totaled $3.563 million at quarter-end; by May 8, unrestricted cash had fallen to $2.105 million, with restricted cash unchanged.

Revenue consists entirely of royalties from the ProCol product under an agreement with LeMaitre Vascular. The three-year royalty term ended March 18, 2019; HJLI states that it expects no royalty revenue thereafter unless a product candidate is commercialized. Profit margins are not meaningful given the company’s minimal revenue and operating losses.

Material changes versus prior period

• Net loss narrowed by $3.174 million, primarily because Q1 2018 included $4.570 million of noncash debt-discount amortization and a $1.525 million gain on extinguishment of convertible notes; these items did not recur in Q1 2019. The lower reported net loss does not reflect improved operating performance.
• Operating loss increased by $125,905. SG&A rose 4% to $1.301 million, while R&D rose 30% to $313,013, partly reflecting VenoValve first-in-human trial work.
• HJLI raised equity in March and issued 2,329,615 shares at $1.15 per share; the CEO also purchased 18,382 shares at $1.36. The company’s weighted-average shares outstanding approximately doubled year over year.
• ASC 842 lease accounting was adopted in January 2019, adding a right-of-use asset and lease liabilities to the balance sheet.

Outlook, risks and unusual items

• Going concern: Management states that substantial doubt exists about HJLI’s ability to continue as a going concern within one year after issuance. It expects continuing losses and says additional capital is required; financing may not be available on acceptable terms or at all.
• Development outlook: The company reported that its first VenoValve was implanted in Colombia in February, with four additional implants announced in April and no early adverse events reported. It expected preliminary study results in June 2019 and further results in Q4 2019. These are management-reported early observations, not evidence of regulatory approval or established efficacy.
• Litigation: ATSCO’s amended claim increased to $1,606,820 plus incidental damages and interest. HJLI disputes the claim, says it has accrued the amount it believes is outstanding, and plans to appeal the $810,055 attachment order. A settlement conference was scheduled for July 26, 2019, and trial for September 9, 2019. HJLI also disputes a law firm’s claim for $178,926 plus interest and costs and reports a threatened, unfiled placement-fee claim.
• Other items: The restricted cash reflects the ATSCO attachment. The filing reports $3.313 million in uninsured aggregate bank cash balances at March 31. Management said disclosure controls were effective and reported no material changes in internal control during the quarter.

Important facts for investors to verify

1. Current unrestricted cash, cash burn, and available financing runway, including the decline in cash reported between March 31 and May 8.
2. Whether the company can raise capital on acceptable terms and how additional equity financing could dilute existing shareholders.
3. Outcome and potential financial exposure of the ATSCO litigation, attachment, and other disputed claims; compare the amended ATSCO demand with amounts accrued.
4. VenoValve study progress, safety and efficacy data, regulatory path, timing, and funding requirements; also the CoreoGraft development timeline.
5. Revenue and commercial prospects after the LeMaitre royalty term ended, given that Q1 revenue was almost entirely royalties.
6. Share-count consistency: the balance sheet reports 14,155,644 shares outstanding at March 31, while the cover page reports 14,149,507 shares as of May 9.