ENVVENO MEDICAL CORPORATION 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$1,159,758 and$1,573,726 for the three months endedMarch 31, 2020 and 2019, respectively, and had an accumulated deficit of$57,347,683 atMarch 31, 2020 . Cash used in operating activities was$1,152,128 and$1,493,555 for the three months endedMarch 31, 2020 and 2019, respectively. As ofMarch 31, 2020 , the Company had cash balances of$720,131 , restricted cash of$810,055 and a working capital deficit of$1,412,686 . 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 will need to raise additional capital to sustain its operations, pursue its product development initiatives and penetrate markets for the sale of its products.
Management believes that the Company could have access to 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. 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.
6
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 inthe 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 inthe 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 ofMarch 31, 2020 andDecember 31, 2019 , and for the three months endedMarch 31, 2020 and 2019. The results of operations for the three months endedMarch 31, 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 endedDecember 31, 2019 included in the Company's Form 10-K filed with theSEC onMarch 18, 2020 . The condensed balance sheet as ofDecember 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 inthe 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. 7HANCOCK 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 ofFinancial 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.
The fair value of derivative liabilities as of
Quoted Prices in
Active Markets for
Identical Assets or Significant Other Significant
Liabilities Observable Inputs Unobservable Inputs
Description: (Level 1) (Level 2) (Level 3)
Derivative liabilities - Common
Stock Warrants $ 199,907
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 Derivative Liabilities OnFebruary 25, 2020 in connection with a private placement of its securities (Note 9), the Company issued warrants to purchase 1,282,279 shares of its common stock. The Company determined these warrants are derivative financial instruments. 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.
The Company recorded a gain on the change in fair value of derivative
liabilities of
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. 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 ofMarch 31, 2020 and 2019:March 31, 2020 2019 Shares of common stock issuable upon exercise of warrants 5,749,239
4,003,679
Shares of common stock issuable upon exercise of options 2,417,207
1,182,624
Potentially dilutive common stock equivalents excluded from diluted net loss per share 8,166,446
5,186,303 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.
8
HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Concentrations
The Company maintains cash with major financial institutions. Cash held inUnited States bank institutions is currently insured by theFederal Deposit Insurance Corporation ("FDIC") up to$250,000 at each institution. There were aggregate uninsured cash balances of$1,280,186 and$1,867,286 as ofMarch 31, 2020 andDecember 31, 2019 , respectively. For the three months endedMarch 31, 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 fromMarch 18, 2016 toMarch 18, 2019 . The Company did not have any similar revenue in the three months endedMarch 31, 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 10 - Subsequent Events.
Recent Accounting Pronouncements
InDecember 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 afterDecember 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 ofMarch 31, 2020 , the Company had$810,055 in restricted cash. OnJanuary 18, 2019 , theSuperior Court grantedATSCO, Inc. (see Note 8 - Commitments and Contingencies - Litigations Claims and Assessments) a Right to Attach Order and Order for Issuance of Writ of Attachment in the amount of$810,055 , which the Company plans on appealing. OnMarch 21, 2019 , theSanta Clara, CA sheriff department served the Writ of Attachment and has taken custody and is holding the$810,055 , pending final judgement of the appeal or suit.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the balance sheets that sum to the total of the same amounts shown in the statement of cash flows.
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