UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended JuneSeptember 30, 20182020

OR

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to ___________________

Commission file number:001-38325

Hancock Jaffe Laboratories, Inc.

(Exact name of registrant as specified in its charter)

70 Doppler

Irvine, California 92618

(Address of principal executive offices)

(949) 261-2900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ] No [X]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [x][X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [X]

As of August 10, 2018,November 16, 2020, there were 11,717,30749,775,443 shares of common stock outstanding.

HANCOCK JAFFE LABORATORIES, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1 – Financial Statements

HANCOCK JAFFE LABORATORIES, INC.

CONDENSED BALANCE SHEETS

See Notes to these Unaudited Condensed Financial Statements

HANCOCK JAFFE LABORATORIES, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

See Notes to these Unaudited Condensed Financial Statements

HANCOCK JAFFE LABORATORIES, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIENCY)

(unaudited)

[1] net of offering costs of $2,554,848$386,724.

[2] net of offering costs of $549,060.

[3] net of forfeiture of 6,137 shares.

[4] net of offering costs of $79,658.

[5] net of offering costs of $360,026.

[6] net of offering costs of $718,093.

[7] net of offering costs of $197,901.

See Notes to these Unaudited Condensed Financial Statements

HANCOCK JAFFE LABORATORIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

[1] Net of cash offering costs of $79,568 and $386,724 in 2020 and 2019, respectively.

[2] Net of cash offering costs of $197,901.

[3] Net of cash offering costs of $1,078,119 and $549,060 in 2020 and 2019, respectively.

See Notes to these Unaudited Condensed Financial Statements

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS OF CASH FLOWS

(unaudited)

[1] Net of offering costs paid from escrow of $967,573

See Notes to these Unaudited Condensed Financial Statements

HANCOCK JAFFE LABORATORIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS - continued

(unaudited)

See Notes to these Unaudited Condensed Financial Statements

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

Note 1 – Business Organization and Nature of Operations

Hancock Jaffe Laboratories, Inc. (“Hancock Jaffe”we”, “us”, “our”, “HJLI” or the “Company”) develops and sells biological tissueis a medical device company developing tissue-based solutions that are designed to treat patients with coronary, vascular, end stage renal and peripheral arterial diseases in the United States and Europe. Hancock Jaffe was incorporated in the State of Delaware on December 22, 1999.

The Company develops and manufactures implantable cardiovascular bioprosthetic devicesbe life sustaining or life enhancing for patients with cardiovascular disease, and peripheral arterial and venous disease, and end stage renal disease, and has manufactured anddisease. The Company’s products are being developed to address large unmet medical needs by either offering treatments where none currently exist or by substantially increasing the following medical devices that have, orcurrent standards of care. Our two lead products which we are developing are: the VenoValve®, a porcine based device to be surgically implanted in the processdeep venous system of seeking Class IIIthe leg to treat a debilitating condition called chronic venous insufficiency (“CVI”); and the CoreoGraft®, a bovine based conduit to be used to revascularize the heart during coronary artery bypass graft (“CABG”) surgeries. Both of our current products are being developed for approval by the U.S. Food and Drug Administration (“FDA”) approval:

. We currently receive tissue for development of our products from one domestic suppliers and one international supplier. Our current business model is to license, sell, or enter into strategic alliances with large medical device companies with respect to our products, either prior to or after FDA approval. Our current senior management team has been affiliated with more than 50 products that have received FDA approval or CE marking. We currently lease a 14,507 sq. ft. manufacturing facility in Irvine, California, where we manufacture products for our clinical trials, and which has previously been FDA certified for commercial manufacturing of product.

The Company also realizes sub-contract manufacturingEach of our product candidates will be required to successfully complete clinical trials and royalty revenue from salesother testing to demonstrate the safety and efficacy of the ProCol® Vascular Bioprosthesis for hemodialysis patients with end stage renal disease, which has beenproduct candidate before it will be approved by the FDA, as well as revenue from researchFDA. The completion of these clinical trials and development services performed on behalftesting will require a significant amount of Hancock Jaffe Laboratory Aesthetics, Inc. (“HJLA”), pursuant to a Developmentcapital and Manufacturing Agreement dated April 1, 2016.the hiring of additional personnel.

On October 31, 2017, our Board of Directors approvedSeptember 15, 2020, at a 1 for 2 reverse stock split ofspecial stockholders meeting, the Company’s common stock, which was effected on December 14, 2017. Per share and share amounts presented herein have been adjusted for all periods presented to give retroactive effect tostockholders approved the aforementioned stock splits.

Note 2 - Initial Public Offering

On May 30, 2018, the Company’s registration statement on Form S-1 relating to its initial public offeringincrease of its authorized common shares to 250,000,000 for a sufficient authorized number to settle all outstanding stock (the “IPO”) was declared effective by the Securitiesoptions, warrants and Exchange Commission (“SEC”). The Company completed its initial public offering of 1,500,000 units (the “Units”) at $5.00 per unit on June 4, 2018, each consisting of one share of the Company’s common stock, par value $0.00001 per share (the “Common Stock”), and a warrant to purchase one share of common stock with an exercise price of $6.00 per share. Aggregate gross proceeds from the IPO were $7,500,000, before underwriting discounts and commissions.

In connection with the IPO, on June 1, 2018, the Company filed an Amended and Restated Certificate of Incorporation (the “Restated Certificate”) with the Secretary of State of the State of Delaware and adopted Amended and Restated Bylaws (the “Restated Bylaws”). The Company’s Board of Directors and stockholders previously approved the Restated Certificate and the Restated Bylaws to be effective immediately prior to the closing of the IPO.convertible preferred stock.

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

On June 8, 2018, the underwriters notified the Company of their exercise in full of their option to purchase an additional 225,000 Units (the “Additional Units”) to cover over-allotments. On June 12, 2018, the underwriters purchased the Additional Units at the IPO price of $5.00 per Unit, generating $1,125,000 in gross proceeds before underwriting discounts and commissions.

Pursuant to the Restated Certificate, the Company is authorized to issue an aggregate of 60,000,000 shares of stock, of which 50,000,000 shares are designated as common stock, and 10,000,000 shares are designated as preferred stock (see Note 9 – Temporary Equity and Stockholders’ Equity (Deficiency)).

Note 32 – Going Concern and Management’s Liquidity Plan

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.concern for the next twelve months from the filing of this Form 10-Q. The Company incurred a net loss of $9,792,900 during$4,761,483 and $5,334,644 for the sixnine months ended JuneSeptember 30, 20182020 and 2019, respectively, and had an accumulated deficit of $45,312,719$60,949,408 at JuneSeptember 30, 2018.2020. Cash used in operating activities was $3,166,481$5,063,516 and $4,273,179 for the sixnine months ended JuneSeptember 30, 2018.2020 and 2019, respectively. 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.

As of June 30, 2018, Hancock Jaffe had a cash balance of $5,942,424 and working capital of $3,513,936.

The Company expects to continue incurring losses for the foreseeable future and willrecognizes the need to raise additional capital to sustain its operations, pursue its product development initiatives and penetrate markets for the sale of its products.

Historically, Toward that end, the Company has been successfulcompleted five separate equity sales in 2020 through the filing date of this report raising fundsaggregate net proceeds of approximately $12,200,000 (see Notes 10 and 11). As of September 30, 2020, the Company had cash balances of $5,629,003 and working capital of $4,062,232. Management believes the proceeds from these transactions should provide sufficient cash to support its capital needs. Managementsustain the Company’s operations at least one year after the issuance date of these financial statements.

If necessary, after one year, management believes that the Company hascould have access to additional capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means; however,means. However, there is a material risk that the Company cannot provide any assurance that it will be ableunable to raise additional capital or obtain new financing when needed on commercially acceptable terms. Such aterms, if at all, or if it will be successful in implementing its business plan couldand developing its medical devices. 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.

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

Note 43 – Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the 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 in the 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 of JuneSeptember 30, 2018,2020 and December 31, 2019, and for the three and sixnine months ended JuneSeptember 30, 20182020 and 2017.2019. The results of operations for the three and sixnine months ended JuneSeptember 30, 20182020 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 ended December 31, 20172019 included in the Company’s Form S-1/A10-K filed with the SEC on May 30, 2018.March 18, 2020. The condensed balance sheet as of December 31, 20172019 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 in the 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.

Deferred Offering Costs

Deferred offering costs, which primarily consist of direct, incremental professional fees relating to pending initial public offerings, are capitalized within non-current assets and are offset against the proceeds upon the consummation of the offering. Deferred offering costs of $2,554,848, consisting primarily of legal, accounting and underwriting fees, werecharged to additional paid in capital upon the consummation of the IPO on June 4, 2018.

Investments

Equity investments over which the Company exercises significant influence, but does not control, are accounted for using the equity method, whereby investment accounts are increased (decreased) for the Company’s proportionate share of income (losses), but investment accounts are not reduced below zero.

The Company holds a 28.5% ownership investment, consisting of founders’ shares acquired at nominal cost, in Hancock Jaffe Laboratory Aesthetics, Inc. (“HJLA”). To date, HJLA has recorded cumulative losses. Since the Company’s investment is recorded at $0, the Company has not recorded its proportionate share of HJLA’s losses. If HJLA reports net income in future years, the Company will apply the equity method only after its share of HJLA’s net income equals its share of net losses previously incurred.

HANCOCK 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 of Financial 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:

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.

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

TheOn September 15, 2020, the fair value of derivative liabilities was reclassified to equity when the Company’s stockholders approved the increase of its authorized shares of capital stock. (See Note 10 –Stockholders’ Equity (Deficiency) Common Stock). Accordingly, there is no fair value of derivative liabilities as of JuneSeptember 30, 2018 and December 31, 2017, by level within the fair value hierarchy appears below:2020.

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:

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

Preferred Stock

The Company applies the accounting standards for distinguishing liabilities from equity under U.S. GAAP when determining the classification and measurement of its Series A and Series B Preferred Stock (together, the “Preferred Stock”). Preferred stock subject to mandatory redemption is classified as a liability instrument and is measured at fair value. Conditionally redeemable preferred stock (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) is classified as temporary equity. At all other times, preferred stock is classified as permanent equity. As of the issuance date, the carrying amount of the Preferred Stock was less than the redemption value. If the Company were to determine that redemption was probable, the carrying value would be increased by periodic accretions such that the carrying value would equal the redemption amount at the earliest redemption date. Such accretion would be recorded as a preferred stock dividend (see Note 9 – Temporary Equity and Stockholders’ Equity (Deficiency)).

Derivative Liabilities

On February 25, 2020 in connection with a private placement of its securities (Note 10), the Company issued warrants to purchase 1,430,000 shares of its common stock. The Company determined these warrants were derivative financial instruments when issued.

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.

On June 4, 2018, in connection with the Company’s IPO,all of its previously issued convertible notes were converted and paid in full (as discussed in Note 6 - Convertible Notes and Convertible Note – Related Party), and the embedded conversion options and warrants no longer qualified as derivatives; accordingly, the derivative liabilities were remeasured to fair value on June 4, 2018 andSeptember 15, 2020, the fair value of derivative liabilities of $3,594,002 was reclassified to additional paid inequity when the Company’s stockholders approved the increase of its authorized shares of capital (see Fair Value of Financial Instruments, above)stock. (See Note 10 –Stockholders’ Equity (Deficiency) Common Stock).

The Company recorded a gain (loss) on the change in fair value of derivative liabilities of $227,279 and $191,656$211,807 during the three and sixnine months ended JuneSeptember 30, 2018, respectively,2020 and $22,147 and $(1,622)a loss on the change in fair value of derivative liabilities of $53,046 during the three and six monthsquarter ended JuneSeptember 30, 2017, respectively.2020.

Convertible NotesSequencing Policy

The convertible notes payable discussedOn July 15, 2020, the Company adopted a sequencing policy, whereby, in Note 6 – Convertible Notes and Convertible Note – Related Party, had a conversion pricethe event that couldreclassification of contracts from equity to assets or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient authorized shares, shares will be adjusted basedallocated on the Company’s stock price, which resulted in the conversion feature being recorded as a derivative liability and a debt discount. The debt discount was amortized to interest expense over the lifebasis of the respective note, usingearliest issuance date of potentially dilutive instruments, with the effective interest method.

On June 4, 2018, principalearliest grants receiving the first allocation of $10,000 owed on the Convertible Notes was paid in cash, and allshares. Pursuant to ASC 815, issuances of the remaining principal and interest owed pursuantsecurities to the Convertible Notes were converted into common stockCompany’s employees and directors, or to compensate grantees in connection witha share-based payment arrangement, are not subject to the Company’s IPO. The conversion of the Convertible Notes was deemed to be a debt extinguishment; accordingly, the warrant and embedded conversion option derivative liabilities were remeasured to fair value on June 4, 2018 and reclassified to additional paid in capital (See Derivative Liabilities, above).

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)sequencing policy.

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. Net loss income attributable to common stockholders consists of net loss, adjusted for the convertible preferred stock deemed dividend resulting from the 8% cumulative dividend on the Preferred Stock and the beneficial conversion feature recorded in connection with the conversion of the(see Note 10 - Stockholders Equity (Deficiency) Series C Convertible Preferred Stock (see Note 9 – Temporary Equity and Stockholders’ Equity (Deficiency)).

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, plus the conversion of preferred stock or convertible notes, in the calculation of diluted net loss per common shares would have been anti-dilutive.

The following table summarizes net loss attributable to common stockholders used in the calculation of basic and diluted loss per common share:

The following table summarizes the number of potentially dilutive common stock equivalents excluded from the calculation of diluted net loss per common share as of JuneSeptember 30, 20182020 and 2017:2019:

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

Revenue Recognition

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations”, in April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing” and in May 9, 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606)”, or ASU 2016-12. This update provides clarifying guidance regarding the application of ASU No. 2014-09 - Revenue From Contracts with Customers which is not yet effective. These new standards provide for a single, principles-based model for revenue recognition that replaces the existing revenue recognition guidance. In July 2015, the FASB deferred the effective date of ASU 2014-09 until annual and interim periods beginning on or after December 15, 2017. It has replaced most existing revenue recognition guidance under U.S. GAAP. The ASU may be applied retrospectively to historical periods presented or as a cumulative-effect adjustment as of the date of adoption. The Company adopted Topic 606 using a modified retrospective approach and will be applied prospectively in the Company’s financial statements from January 1, 2018 forward. Revenues under Topic 606 are required to be recognized either at a “point in time” or “over time”, depending on the facts and circumstances of the arrangement, and will be evaluated using a five-step model. The adoption of Topic 606 did not have a material impact on the Company’s financial statements, at initial implementation nor will it have a material impact on an ongoing basis.

The Company recognizes revenue when goods or services are transferred to customers in an amount that reflects the consideration which it expects to receive in exchange for those goods or services. In determining when and how revenue is recognized from contracts with customers, the Company performs the following five-step analysis: (i) identification of contract with customer; (ii) determination of performance obligations; (iii) measurement of the transaction price; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

The following table summarizes the Company’s revenue recognized in the accompanying condensed statements of operations:

Revenue from sales of products is recognized at the point where the customer obtains control of the goods and the Company satisfies its performance obligation, which generally is at the time the product is shipped to the customer. Royalty revenue, which is based on resales of ProCol Vascular Bioprosthesis to third-parties, will be recorded when the third-party sale occurs and the performance obligation has been satisfied. Contract research and development revenue is recognized over time using an input model, based on labor hours incurred to perform the research services, since labor hours incurred over time is thought to best reflect the transfer of service.

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

Information on Remaining Performance Obligations and Revenue Recognized from Past Performance

Information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less is not disclosed. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was not material at June 30, 2018.

Contract Balances

The timing of our revenue recognition may differ from the timing of payment by our customers. A receivable is recorded when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, deferred revenue is recorded until the performance obligations are satisfied. The Company had deferred revenue of $49,000 and $103,400 as of June 30, 2018 and December 31, 2017, respectively, related to cash received in advance for contract research and development services. The Company expects to satisfy its remaining performance obligations for contract research and development services and recognize the deferred revenue over the next twelve months.

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.

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

Concentrations

The Company maintains cash with major financial institutions. Cash held in United States bank institutions is currently insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. There were aggregate uninsured cash balances of $5,692,424 at June$5,379,003 and $1,867,286 as of September 30, 2018. There were no cash balances in excess of federally insured amounts at2020 and December 31, 2017.2019, respectively. The Company periodically evaluates the financial stability of the financial institutions with whom it maintains its cash balances. As of September 30, 2020, and as of the date of filing this report, the Company is not aware of any circumstances which would indicate they are not financially sound.

DuringFor the three and sixnine months ended JuneSeptember 30, 2017,2019, all of the Company’s revenues from continuing operations were from royalties as a result of the sub-contract manufacture of product to forthree-year Post-Acquisition Supply Agreement with LeMaitre Vascular, Inc. (“LeMaitre”), and royalties earnedthat was effective from the sale of product by LeMaitre, with whom the Company entered a Post-Acquisition Supply Agreement effective March 18, 2016. During the three and six months ended June 30, 2018, 35% and 52% of the Company’s revenues from continuing operations were from royalties earned from the sale of product by LeMaitre.2016 to March 18, 2019. The Company did not recognizehave any subcontract manufacturing revenues duringsimilar revenue in the three and sixnine months ended JuneSeptember 30, 2018. During the three and six months ended June 30, 2018, 65% and 48%, respectively, of the Company’s revenues were earned from contract research and development services performed for HJLA.2020.

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

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 1011 - Subsequent Events.

Recent Accounting Pronouncements

In February 2016,December 2019, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” (“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 2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. ASU 2016-02 will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-022019-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating ASU 2016-02 and its impact on its financial statements

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230)” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. ASU 2016-15 requires adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The adoption of ASU 2016-15 did not have a material impact on the Company’s financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718); Scope of Modification Accounting. The amendments in this ASU provide guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. If the value, vesting conditions or classification of the award changes, modification accounting will apply. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of ASU 2017-09 did not have a material impact on the Company’s financial statements.

On June 20, 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting, which simplifies accounting for share-based payment transactions resulting for acquiring goods and services from nonemployees. ASU 2018-07 is effective for fiscal years, and2020, including interim periods within those fiscal years, beginning after December 15, 2018. Earlyand early adoption is permitted. The new standard was adopted effective April 1, 2018,usingWe are currently evaluating the modified retrospective approach; however,impact that this guidance will have on our condensed financial statements.

Note 4 – Restricted Cash

As of September 30, 2020, the Company did not identify or recordhave any adjustmentsrestricted cash. Previously, the Company had maintained a restricted cash balance in connection with a vendor litigation matter with ATSCO, Inc. (see Note 9 - Commitments and Contingencies - Litigations Claims and Assessments). The matter was resolved on July 20, 2020, and on August 28, 2020 ATSCO took possession of the restricted cash as full settlement of the dispute.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the balance sheet as of September 30, 2019 and that sum to the openingtotal of the same amounts shown in the statement of cash flows for the nine months ending September 30, 2019 with the comparative cash balance without restricted cash as of retained earnings on adoption.The new standard did not have a material impact on the Company’s financial statements.September 30, 2020.

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

Note 5 – Accrued ExpensesProperty and Accrued Interest – Related PartyEquipment

As of JuneSeptember 30, 20182020 and December 31, 2017, accrued expenses2019, property and equipment consist of the following:

Accrued interest - related parties consisted of accrued interest on notes payableDepreciation expense amounted to $66,857 and $26,828 for the majority stockholdernine months ended September 30, 2020 and to Leman Cardiovascular S.A. (see Note 7 - Notes Payable2019, respectively. Depreciation expense is reflected in general and Note Payable – Related Party) totaling,administrative expenses in the aggregate, $0 and $20,558 at June 30, 2018 and December 31, 2017, respectively.

Asaccompanying statements of June 30, 2018, the termination of employment of the Company’s chief financial officer (the “CFO”) was deemed to be probable and, as a result, the Company accrued severance expense of $313,650 pursuant to the terms of his employment agreement, which is included in accrued compensation costs in the table above. The employment of the CFO was terminated effective July 20, 2018.

operations.

Note 6 - Convertible Notes– Right-of-Use Assets and Convertible Note – Related PartyLease Liability

Convertible Notes

During the period from June 15, 2017 through December 7,On September 20, 2017, the Company issued senior secured convertible promissory notes aggregating $2,750,500.renewed its operating lease for its manufacturing facility in Irvine, California, effective October 1, 2017, for five years with an option to extend the lease for an additional 60-month term at the end of lease term. The Company incurred cash offering costs of $186,100 (including $129,030 of placement agent fees) resulting in net cash proceeds of $2,564,400. The notes, as amended on December 29, 2017 (the “2017 Convertible Notes”), matured on February 28, 2018, and bore interest at 15%initial lease rate was $26,838 per annum. The principal and interest due on the 2017 Convertible Notes were convertible into shares of common stock at a conversion price equal to the lesser of (i) $12.00 per share, or (ii) 70% of the highest price per common stock sold in an initial public offering (the “2017 Conversion Price”). The 2017 Convertible Notes included warrants exercisable for the number of shares of common stock equal to 75% of the total shares issuable upon the conversion of the related 2017 Convertible Note, at a price equal to the lesser of (i) $14.40 per share or (ii) 120% of the 2017 Conversion Price.month with escalating payments. In connection with the sale of the 2017 Convertible Notes,lease, the Company issued five-year warrantsis obligated to pay $7,254 monthly for operating expenses for building repairs and maintenance. The Company has no other operating or financing leases with terms greater than 12 months.

The Company adopted Accounting Standards Codification (“ASC”) Topic 842, Leases (Topic 842) effective January 1, 2019 using the placement agentmodified-retrospective method and elected the package of transition practical expedients for expired or existing contracts, which does not require reassessment of previous conclusions related to contracts containing leases, lease classification and initial direct costs, and therefore the financing forcomparative periods presented are not adjusted. In addition, the purchaseCompany elected to adopt the short-term lease exception and not apply Topic 842 to arrangements with lease terms of 15,339 shares12 months or less. On January 1, 2019, upon adoption of common stock at an exercise priceTopic 842, the Company recorded right-of-use assets of $15.84 per share (see Note 9 – Temporary Equity$1,099,400, lease liabilities of $1,121,873 and Stockholders’ Deficiency – Warrants).eliminated deferred rent of $22,473. The fairCompany determined the lease liabilities using the Company’s estimated incremental borrowing rate of 8.5% to estimate the present value of the conversion option and warrants issued in connection with the 2017 Convertible Notes had an issuance date value of $1,175,668 and $397,211, respectively, and the aggregate of $1,572,879 was recorded as a debt discount and a derivative liability.remaining monthly lease payments.

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

From January 5, 2018 through January 16, 2018, the Company issued senior secured convertible notes (the “2018 Convertible Notes”) in the aggregate amount of $2,897,500. The Company incurred cash offering costs of $293,750 (including $289,750 of placement agent fees) resulting in net cash proceeds of $2,603,750. The 2018 Convertible Notes bore interest at 15% per annum and were due on February 28, 2018 (the “Maturity Date”). The 2018 Convertible Notes were convertible into shares of common stock at a conversion price equal to the lesser of (i) $12.00 per share, or (ii) 70% of the highest price per common share sold in an initial public offering (the “2018 Conversion Price”). The 2018 Convertible Notes include five-year warrants exercisable for the number of common stock equal to 50% of the total shares issuable upon the conversion of the 2018 Convertible Note, at a price equal to the lesser of (i) $14.40 per share or (ii) 120% of the 2018 Conversion price. The 2018 Convertible Notes (and accrued interest) are convertible at any time at the option of the holder; however, if the Company consummates an IPO on or prior to the Maturity Date, the principal and interest due under the then-outstanding 2018 Convertible Notes will be automatically converted into shares of the Company’s common stock. In connection with the sale of the 2018 Convertible Notes, the Company agreed to issue a five-year warrant to the placement agent for the financing for the purchase of 24,146 shares of common stock, exercisable at a price equal to the 110% of the greater of (i) the price at which the securities are issued, or (ii) the exercise price of the debt holder warrants. The fair value of the conversion option and the warrants issued in connection with the 2018 Convertible Notes had an issuance date value of $1,239,510 and $1,046,763, respectively, and the aggregate of $2,286,273 was recordedOur operating lease cost is as a debt discount and a derivative liability.

follows:

The 2017 Convertible Notes and the 2018 Convertible Notes are together, the “Convertible Notes”.

Supplemental cash flow information related to our operating lease is as follows:

On February 28, 2018, the Convertible Notes were amended such that the maturity date was extended to May 15, 2018, the 2017 Convertible Note warrants became exercisable

Maturity of our lease liabilities by fiscal year for the number of shares of common stock equal to 100% of the total shares issuable upon the conversion of the 2017 Convertible Notes and the 2018 Convertible Note Warrants become exercisable for the number of shares of common stock equal to 75% of the total shares issuable upon the conversion on the 2018 Convertible Notes. The amendment of the Convertible Notes was deemed to be a debt extinguishment and,our operating lease is as a result, during the six months ended June 30, 2018, the Company recognized a $1,524,791 gain on extinguishment of convertible notes payable within the accompanying statement of operations consisting of the extinguishment of $2,420,390 of derivative liabilities associated with the embedded conversion option of the extinguished Convertible Notes, partially offset by the issue date value of additional warrants issued (deemed to be a derivative liability) in the amount of $895,599. Additionally, the embedded conversion option within the re-issued Convertible Notes was deemed to be a derivative liability and the relative fair value was recorded as a discount in the amount of $2,413,079.follows:

On June 4, 2018, principal and interest of $10,000 and $267, respectively, were paid in cash and all remaining principal and accrued interest balances of the Convertible Notes were automatically converted into 1,650,537 shares of common stock upon the closing of the IPO at a conversion price of $3.50 per share. The conversion of the Convertible Notes was deemed to be a debt extinguishment and, as a result, the Company recognized a $43,474 loss on extinguishment of convertible notes payable within the accompanying statement of operations consisting of the fair value of the common stock issued upon the conversion of the Convertible Notes of $8,252,685, less the extinguishment of $5,743,391 of principal and interest converted and $2,465,820 of derivative liabilities associated with the embedded conversion option of the extinguished Convertible Notes.

For the three months ended June 30, 2018 and 2017, interest expense incurred in connection with the Convertible Notes was $105,658 and $6,164, respectively. Interest expense incurred in connection with the Convertible Notes was $305,452 and $6,164 during the six months ended June 30, 2018 and 2017, respectively.

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

Note 7 – Accrued Expenses and Accrued Interest

As of September 30, 2020, and December 31, 2019, accrued expenses consist of the following:

Convertible Note 8 – Related PartyNote Payable

On June 30, 2015,April 12, 2020, the Company entered into aobtained loan agreement with its then-majority (78%) common stock shareholder, (the “2015 Note”). The 2015 Note had a maximum borrowing capacity of $2,200,000 and bore interest at 3% per annum. On April 1, 2016, the 2015 Note was amended such that the 2015 Note became convertible into shares of common stock at the option of the lender at a conversion price of $10.00 per share. During the six months ended June 30, 2018 and 2017, the Company borrowed $0 and $311,000, respectively, under the 2015 Note. On April 26, 2018, the outstanding principal balance and accrued interest of the 2015 Note was converted into 120,405 shares of common stock at a conversion price of $4.30 per share. The Company incurred interest expense related to the 2015 Note of $4,613 and $6,235 during the six months ended June 30, 2018 and 2017, respectively. For the three months ended June 30, 2018 and 2017, the Company incurred interest expense in connection with the 2015 Note was $879 and $3,622, respectively.

Note 7 - Notes Payable and Note Payable – Related Party

Notes Payable

During December 2017, the Company borrowed an aggregate of $275,000 pursuant to two promissory notes, which bore interest at 10% per annum. The notes were repaid in full during January 2018. The Company incurred interest expense of $0 and $958 during the three and six months ended June 30, 2018 in connection with these notes.

On May 15, 2018, the Company received aggregate proceeds of $722,500 in exchange for certain promissory notes (the “May Notes”“Loan”) in the aggregate principal amount of $850,000 and 55,000 shares$312,700, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Company’s common stock, net of commissions of $27,500. The $27,500 commission and the original issue discount of $100,000 were recorded as debt discount, and the relative fair value of the common stock issued in connection with the May Notes of $228,966CARES Act, which was recorded as a debt discount with a corresponding credit to additional paid-in capital. The May Notes bore interest between 0-10% per annum and were repaid in full upon the consummation of the IPO on June 4, 2018. The Company incurred $4,911 of interest expense during the three and six months ended June 30, 2018 in connection with the May Notes.

Note Payable – Related Partyenacted March 27, 2020.

The Loan, which was in the form of a Note dated April 12, 2020, matures on April 12, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing on November 12, 2020. The Note may be prepaid at any time before maturity with no prepayment penalties. Funds from the Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before February 15, 2020. The Company had abelieves it has used the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.

As of September 30, 2020, the note payable to a related party (the “Related Party Note”), of which the Company’s Former President and Vice President of Operations were officers, and of which a member of the Company’s Board of Directors is a shareholder. The Related Party Note, as amended, bore interest at 6% per annum and matured on May 10, 2018. On April 26, 2018, the outstanding principal balance and accrued interest of the Related Party Note was amended such that the note became convertible into common stock at a conversion price of $4.30, and on the same day, principal and interest in the aggregate of $150,553 due in connection with the Related Party Note was converted into 35,012 shares of common stock. The Company incurred $632 and $5,978 of interest expense during the three months ended June 30, 2018 and 2017, respectively, and incurred interest expense of $4,078 and $12,621 during the six months ended June 30, 2018 and 2017, respectively, in connection with the Related Party Note.$312,700.

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

Note 89 – Commitments and Contingencies

Litigations Claims and Assessments

In the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. The Company is not currently a party to any legal proceedings nor is it aware of any threatened legal proceedings which are expected to have a material adverse effect on the Company’s financial statements. The Company records legal costs associated with loss contingencies as incurred and accrues for all probable and estimable settlements.

On September 21, 2018, ATSCO, Inc., a vendor, filed a lawsuit with the Superior Court seeking payment of $809,520 plus legal costs for disputed invoices to the Company dated from 2015 to June 30, 2018. The Company had entered into a Services and Material Supply Agreement (“Agreement”), dated March 4, 2016 for ATSCO to supply porcine and bovine tissue to the Company. On January 18, 2019, the Orange County Superior Court granted a Right to Attach Order and Order for Issuance of Writ of Attachment in the amount of $810,055 (the “Disputed Amount”) and on March 21, 2019, the Santa Clara, CA sheriff department served the Writ of Attachment and took custody of and was holding the Disputed Amount (see Note 4 – Restricted Cash). On July 20, 2020, the Company and ATSCO agreed to settle the dispute. Pursuant to the terms of the settlement, the Company agreed to release the Disputed Amount of restricted cash in exchange for a full release from all claims made by ATSCO related to this matter. On August 28, 2020, ATSCO took possession of the Restricted Cash. Accordingly, as of September 30, 2020, the Company has removed the restricted cash and related accounts payable from its financial statements.

The Company has replaced ATSCO and has entered into new supply relationships with two domestic and one international company to supply porcine and bovine tissues.

On October 8, 2018, Gusrae Kaplan Nusbaum PLLC (“Gusrae”) filed a complaint with the Supreme Court of the State of New York seeking payment of $178,926 plus interest and legal costs for invoices to the Company dated from November 2016 to December 2017. In July 2016, the Company retained Gusrae to represent the Company in connection with certain specific matters. The Company believes that Gusrae has not applied all of the payments made by the Company along with billing irregularities and errors and is disputing the amount owed. The Company recorded the disputed invoices in accounts payable and as of June 30, 2020, the Company has fully accrued for the outstanding claim against the Company.

On July 9, 2020, the Company was served with a civil complaint filed in the Superior Court for the State of California, County of Orange by a former employee, Robert Rankin, who resigned as the Company’s Chief Financial Officer, Secretary and Treasurer on March 30, 2020. The complaint asserts several causes of action, including a cause of action for failure to timely pay Mr. Rankin’s accrued and unused vacation and three months’ severance under his July 16, 2018 employment agreement with the Company. The complaint seeks, among other things, back pay, unpaid wages, compensatory damages, punitive damages, attorneys’ fees, and costs. The Company intends to vigorously defend the claims, investigate the allegations, and assert counterclaims.

Employment AgreementsHANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

Note 10 –Stockholders’ Equity (Deficiency)

On March 20, 2018,September 15, 2020, the Company completed a special meeting of stockholders (the “Special Meeting”). At the Special Meeting, the Company’s stockholders, among other things, (i) approved an amendment to the Company’s Amended and Restated Certificate of Incorporation (the “A&R Certificate of Incorporation”) to increase the aggregate number of authorized shares of common stock by 200,000,000 shares from 50,000,000 to 250,000,000 shares; (ii) approved an amendment to the A&R Certificate of Incorporation to reduce the vote required to amend, repeal, or adopt any provisions of the A&R Certificate of Incorporation from the approval of 66 2/3% of the voting power of the shares of the then outstanding voting stock of the Company entitled to vote to a majority of such shares; and (iii) approved a reverse stock split of the Company’s common stock at a ratio of between one-for-five and one-for-twenty-five, with such ratio to be determined at the sole discretion of the Company’s Board of Directors (the “Board”) and with such reverse stock split to be effected at such time and date, if at all, as determined by the Board in its sole discretion.

Common Stock

On February 25, 2020, the Company raised $650,000 in gross proceeds through a private placement bridge offering of its common stock and warrants to purchase its common stock to certain accredited investors (the “Bridge Offering”). The Company sold an aggregate of 1,300,000 shares of common stock and warrants to purchase 1,300,000 shares of common stock in the Bridge Offering pursuant to a securities purchase agreement between the Company and each of the investors in the Bridge Offering (the “Purchase Agreement”). The warrants are exercisable for a the period commencing the date the Company’s stockholders approve either an increase in the number of the Company’s authorized shares or a reverse stock split and ending on February 25, 2025 and have an exercise price of $0.79 per share. Pursuant to the terms of the Purchase Agreement, the Company agreed to hold a meeting of its stockholders on or prior to May 25, 2020 for the purpose of seeking approval of either an increase in the number of shares of common stock the Company is authorized to issue or a reverse split of the Company’s common stock (a “Capital Event”). The Company did not hold a meeting until September 15, 2020, at which time the Company’s stockholders approved various measures including those comprising a Capital Event.

On April 24, 2020, the Company entered into a Securities Purchase Agreement (the “April 2020 Purchase Agreement”) with certain investors for the purpose of raising approximately $1.0 million in gross proceeds for the Company. Pursuant to the terms of the April 2020 Purchase Agreement, the Company agreed to sell, in a registered direct offering, an aggregate of 1,886,793 shares of the Company’s common stock, at a purchase price of $0.405 per share, and in a concurrent private placement, warrants to purchase up to 1,886,793 shares of common stock, at a purchase price of $0.125 per warrant, for a combined purchase price per share and warrant of $0.53. The warrants are exercisable immediately on the date of issuance at an exercise price of $0.405 per share and will expire five years following the date of issuance.

The closing of the sales of these securities under the April 2020 Purchase Agreement occurred on April 28, 2020. Net proceeds to the Company from the transactions, after deducting the placement agent’s fees and expenses but before paying the Company’s estimated offering expenses, and excluding the proceeds, if any, from the exercise of the warrants, were $811,641.

On June 1, 2020, the Company entered into a Securities Purchase Agreement (the “June 2020 Purchase Agreement”) with certain investors for the purpose of raising approximately $1,333,000 in gross proceeds for the Company. Pursuant to the terms of the June 2020 Purchase Agreement, the Company agreed to sell, in a registered direct offering, an aggregate of 2,930,402 shares of the Company’s common stock at a purchase price of $0.33 per share, and in a concurrent private placement, warrants to purchase up to 2,930,402 shares of common stock at a purchase price of $0.125 per warrant, for a combined purchase price per share and warrant of $0.455. The warrants are exercisable immediately on the date of issuance at an exercise price of $0.33 per share and will expire five years following the date of issuance.

HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

The closing of the sales of these securities under the June 2020 Purchase Agreement occurred on June 3, 2020. Net proceeds to the Company from the transactions, after deducting the placement agent’s fees and expenses but before paying the Company’s estimated offering expenses, and excluding the proceeds, if any, from the exercise of the warrants, were $1,161,667.

On July 17, 2020, the Company entered into an AmendmentUnderwriting Agreement relating to Employmenta firm commitment public offering (the “Public Offering”) of 12,500,000 units (the “Units”), consisting of an aggregate of 12,500,000 shares of common stock and warrants to purchase up to 12,500,000 shares of common stock at a public offering price of $0.32 per Unit. Pursuant to the terms of the Underwriting Agreement, (the “Employment Amendment”) with the CEO, pursuantunderwriters also exercised their overallotment option in full, purchasing an additional 1,875,000 shares of common stock and warrants to which the CEO was removedpurchase up to 1,875,000 shares of common stock for an aggregate purchase of 14,375,000 shares and warrants to purchase up to 14,375,000 shares of common stock. The warrants have an initial exercise price of $0.32 per share, subject to customary adjustments, and will expire seven years from the positiondate of CEO andissuance. Exercisability of the warrants was appointedsubject to servestockholder approval of an increase in the number of authorized shares of common stock or a reverse stock split, in either case, in an amount sufficient to permit exercise in full of the warrants, which was obtained on September 15, 2020.

Pursuant to the Underwriting Agreement, the Company also issued to the underwriters as compensation a warrant to purchase up to 750,000 shares of common stock with substantially the same terms as the warrants issued in the Public Offering.

The closing of this transaction occurred on July 21, 2020. Net proceeds to the Company, after deducting the underwriters and placement agent’s fees and expenses, including the Company’s Chief Medical Officer Outsideestimated offering expenses, and excluding the proceeds, if any, from the exercise of the United States. The Employment Amendment represented a changewarrants issued in position only; all other terms and conditionsthe Public Offering, were $3,882,000. As of the CEO Agreement remain in effect. Further, on March 20, 2018, the employment of the Company’s Co-CEO was terminated without cause,July 21, 2020 closing, did not have sufficient authorized common shares to share settle all outstanding stock options and warrants.

On February 7, 2019, the Company entered into an agreementAgreement (“MZ Agreement”) with MZHCI, LLC a new Chief Executive Officer (the “New CEO”MZ Group Company (“MZ”), which provides for MZ to provide investor relations advisory services. The MZ Agreement was for an annual base salaryinitial term of $400,000 as well as standard employee insurancetwelve (12) months with six-month automatic extension periods. MZ received cash compensation of $8,000 per month and other benefitseighty-five thousand (85,000) restricted shares which vested quarterly over the initial twelve-month term. Effective on July 24, 2020, the Company and MZ terminated the agreement.

Series C Convertible Preferred Stock

In a private placement occurring concurrently with the Public Offering, the Company entered into a Securities Purchase Agreement with certain investors pursuant to which the Company agreed to sell 4,205,406 shares of its Series C Convertible Preferred Stock (the “New CEO Agreement”“Preferred Stock”). and warrants to purchase up to 6,078,125 shares of its common stock for a combined purchase price per share and warrant of $0.37. Pursuant to this agreement,its terms, the New CEO is eligible for annual salary increases atPreferred Stock may convert into 6,078,125 shares of common stock. The warrants issued have an initial per share exercise price of $0.32, subject to customary adjustments, and will expire seven years from the discretiondate of issuance.

The gross proceeds were $1,556,000 and the net proceeds to the Company from the transaction, after deducting the underwriters and placement agent’s fees and expenses, including the Company’s estimated offering expenses, and excluding the proceeds, if any, from the exercise of the boardwarrants issued in the private placement, were $1,358,000.

The holders of directorsthe Company’s Preferred Stock vote with holders of the Common Stock, and with any other shares of preferred stock that vote with the Common Stock, with each holder of Preferred Stock being entitled to one vote per share of Preferred Stock, and are entitled to receive 8% non-compounding cumulative dividends, payable when, as well as annual bonus payments of up to 50% of base salary, as determinedand if declared by the Compensation Committee of the Board of Directors. The New CEO Agreement provides for severance payments equalSeries C Preferred Stock ranks senior to six monthsthe common stock as to dividends and the distribution of base salaryassets in the event of termination without cause, severance paymentsany liquidation, dissolution, or winding up of the Company, either voluntary or involuntary or any sale of the Company.

HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

In the event of any liquidation, dissolution, or winding up of the Company, either voluntary or involuntary, or any sale of the Company, the holders of Preferred Stock are entitled to receive, before and in preference to any distribution of any of the assets to the holders of the common stock, or any other series of the Company’s preferred stock that is junior to the Preferred Stock, an amount per share equal to one year$0.37 for each outstanding share of base salary ifPreferred Stock (the “Original Series C Issue Price”), plus all accrued but unpaid dividends thereon through the date of such termination occurs on or afterevent.

As of September 30, 2020, the two-year anniversaryholders of Preferred Stock are entitled to receive a liquidation preference payment of $0.37 per share, plus accrued and unpaid dividends totaling, in the aggregate, $23,859. During the three and nine months ended September 30, 2020, the Company recognized the $23,859 as a deemed dividend for the purpose of calculating loss attributable to common stockholders and loss per share. The liquidation preference of the Preferred Stock is subordinate and ranks junior to all indebtedness of the Company.

The Company may elect to convert the Preferred Stock to common stock in the event the Company either (i) consummates a merger, or (ii) raises an aggregate of at least $8,000,000 in gross proceeds in a transaction or series of transactions within any twelve (12) month period. In the event the Company elects to effect such a conversion, each share of Series C Preferred Stock is convertible into 1.445 shares of common stock.

The Company determined that the Preferred Stock represented permanent equity due to the absence of a redemption feature and the embedded conversion option was clearly and closely related to the equity host and did not require bifurcation. The $2,431,250 fair value of the warrants was calculated using the Black-Scholes option pricing model, using the $0.44 stock price, an expected term of 7.0 years, volatility of 118.7%, a risk-free rate of 0.47% and expected dividends of 0.00%. The $1,556,000 of gross proceeds were allocated on a relative fair value basis of $607,220 to the Preferred Stock and $948,781 to the warrants. The Preferred Stock includes a contingent beneficial conversion feature (“BCF”) which was valued at its $2,067,155 intrinsic value using the commitment date stock price of $0.44 per share and the effective conversion price of $0.10 per share, but was limited to the $607,220 of proceeds that were allocated to the Preferred Stock. The contingent BCF will be recognized when the contingency is resolved. If the BCF is recognized, it will be recorded as a deemed dividend for the purposes of calculating earnings per share. In addition, since the Company does not have retained earnings, the dividend will be recorded against additional paid-in capital.

Warrants

Certain investors in the Public Offering agreed with the underwriter to enter into a lock-up and voting agreement (the “Lock-Up and Voting Agreements”) whereby each such investor was subject to a lock-up period through July 21, 2020 and agreed to vote all shares of common stock each beneficially owned on the closing date of the New CEO Agreement and severance payments equalPublic Offering with respect to two years of base salary if such termination occurs within 24 months of a change in controlany proposals presented to the stockholders of the Company. In addition,Additionally, certain investors that agreed to enter into the Lock-Up and Voting Agreements, as consideration for their waiver of certain rights described in connectionthe April 2020 Purchase Agreement and June 2020 Purchase Agreement, were issued unregistered warrants (the “Waiver Warrants”) to purchase an aggregate of 3,495,000 shares of common stock. These warrants were substantially similar to the warrants issued in the concurrent private placement, except that they warrants have a term of five (5) years, an exercise price equal to $0.37 per share and carry piggy-back registration rights.

Exercisability of the warrants issued in the February 25 transaction was subject to stockholder approval of a Capital Event. The warrants issued in the April and June transactions were immediately exercisable. Exercisability of the warrants issued in the July Public Offering and Private Placement was subject to the later to occur of (i) date that the Company files an amendment to its amended and restated certificate of incorporation to reflecting stockholder approval of either an increase in the number of our authorized shares of Common Stock or a reverse stock split (in either case in an amount sufficient to permit the conversion in full of the Preferred Stock and exercise in full of the warrants), and (ii) the date of approval as may be required by the applicable rules and regulations of The Nasdaq Stock Market LLC (or any successor entity) from the stockholders of the Company with respect to the New CEOtransactions contemplated by the Securities Purchase Agreement, including the New CEOissuance of all of the shares issuable upon conversion of the Preferred Stock and warrants in excess of 19.99% of the issued and outstanding common stock on the closing date of the private placement.

On June 15, 2020, the Company filed a registration statement covering the warrants issued in the April and June transactions. The registration statement was declared effective on June 23, 2020. At the Special Meeting held on September 15, 2020, the Company’s stockholders approved measures comprising a Capital Event, as defined in the February transaction, increasing the authorized common shares by an amount sufficient to cover the exercise of warrants purchased in that transaction as well as the Public Offering and Private Placement, and including common shares issuable upon conversion of the Company’s Series C Preferred Stock. The Company filed its amended and restated certificate of incorporation on September 17, 2020 and filed a registration statement covering the warrants issued in the February and July transactions. This registration statement became effective on October 22, 2020, such that all of the warrants issued in 2020 are now exercisable.

On January 3, 2019, the Company entered into an Agreement (“Alere Agreement”) with Alere Financial Partners, a division of Cova Capital Partners LLC (“Alere”) for Alere to provide capital markets advisory services. The Alere Agreement is on a month to month basis that can be cancelled by either party with thirty (30) days advance notice. The Company will receivepay a monthly fee of $7,500 and issued to Alere five-year warrants to purchase 35,000 shares of the Company’s common stock at an option forexercise price of $1.59, equal to the purchase of up to 6.5%closing price of the Company’s common stock on February 7, 2019, the date of approval by the Company’s board of directors. On June 11, 2019, both parties agreed to terminate the Alere Agreement as of June 30, 2019 and the unvested warrants as of June 30, 2019, totaling 17,500, were forfeited.

HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

In addition to the warrants issued to investors in the Bridge Offering described above, the placement agent received a fully-diluted basiswarrant to purchase 130,000 shares of the Company’s common stock containing substantially the same terms as the warrant issued to investors in that transaction. The Company determined that all of the warrants issued in connection with the Bridge Offering were derivative instruments because the Company did not have control of the obligation to obtain shareholder approval by May 25, 2020 to increase the number of authorized shares or to approve a reverse stock split. The accounting treatment of derivative financial instruments requires that the Company record the warrants as a liability at fair value and mark-to-market the instruments at fair values as of each subsequent balance sheet date. Any change in fair value is recorded as a change in the fair value of derivative liabilities for each reporting period at each balance sheet date.

The fair value of the warrants was determined using a Monte Carlo simulation, incorporating observable market data and requiring judgment and estimates. The Company reassesses the classification at each balance sheet date. If the classification changes as a result of events during the period, the contract will be reclassified as of the date of the IPO. The New CEO’s employment withevent that causes the Company is “at-will”, and may be terminated at any time, with or without cause and with or without notice by either the New CEO or the Company.reclassification.

Note 9 – Temporary EquityThe warrant derivatives were valued as of the February 25, 2020 issuance date, as of the quarter ended March 31, 2020, as of June 30, 2020, and Stockholders’ Equity (Deficiency)as of September 15, 2020 when the Company’s stockholders approved an increase in authorized shares in an amount sufficient to allow full exercise of these warrants. The value at issuance was $546,036 and was recorded as a derivative liability. The value of the derivative liability was $199,907 at March 31, 2020, $281,183 at June 30, 2020, and $334,229 at September 15, 2020.

Common StockThe derivative liability increased $53,046 and decreased $211,807 during the three and nine months ended September 30, 2020, respectively. The changes in derivative liability is reflected in Other Income on the Condensed Statement of Operations.

On September 15, 2020, the fair value of derivative liabilities was reclassified to equity when the Company’s stockholders approved items comprising a Capital Event. Accordingly, there is no fair value of derivative liabilities as of September 30, 2020.

The following inputs and assumptions were used for the valuation of the derivative liability:

The Company completed the initial public offering of its common stock on June 4, 2018. See Note 2 - Initial Public Offering.

On April 26, 2018, the Company issued 44,444 shares of common stock with an aggregate value of $200,000, in satisfaction of deferred salary to its Chief Medical Officer Outside the United States. During June 2018, the Company issued 30,000 shares of common stock with an aggregate value of $90,000, in satisfaction of fees payable to its Medical Advisory Board, and granted 160,000 shares of immediately vested common stock with an aggregate value of $798,400 and 20,000 shares of common stock which will vest monthly over next twelve months to certain consultants. As of June 30, 2018, there was $96,521 of unrecognized stock-based compensation expense related to the unvested shares of common stock that will be recognized over the remaining vesting period of one year.

HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

Preferred Stock

The Company’s preferred stock had certain redemption rights that were considered by the Company to be outside of the Company’s control. Accordingly, the Series A Preferred Stock and Series B Preferred Stock are presented as temporary equity on the Company’s condensed balance sheets.

The Series A and Series B Preferred Stock were convertible at the option of the holder at a conversion price of $10.00 and $12.00 per share, respectively, which was reduced to $4.50 and $4.30 per share, respectively, if the conversion resulted from a mandatory IPO conversion. On June 4, 2018, all Series A and Series B Preferred Stock and dividends in arrears of $911,151 and $107,556, respectively, were mandatorily converted into 1,743,231 shares of common stock, upon the completion of the IPO (see Note 2 – Initial Public Offering).In connection with the mandatory conversion of the Preferred Stock, the Company recorded a deemed dividend equal to the number of additional shares of common stock issued upon conversion of the Preferred Stock resulting from the reduction in the conversion price upon the mandatory IPO conversion, multiplied times the fair value of the common stock on the commitment date.

WarrantsWarrant Exercises

During the sixthree and nine months ended Juneending September 30, 2018, the Company issued five-year2020, warrants (“Investor Warrants”) for theto purchase of 1,269,3841,818,682 shares of common stock with an exercise price equalwere exercised resulting in proceeds to the lesserCompany of (i) $12.00 per share, or (ii) 70% of the highest price per common stock sold in an initial public offering, to investors in connection with the sale of the Convertible Notes, and issued five-year warrants for the purchase of 123,285 shares of common stock to with an exercise price equal to 110% of the Investor Warrants exercise price to the placement agent, in connection with the issuance of the Convertible Notes and as a result of the increase in warrant coverage in connection with the amendment to the Convertible Notes (see Note 6 - Convertible Notes and Convertible Note – Related Party). In connection with the IPO, the exercise price of the warrants issued to investors and the placement agent in connection with the Convertible Notes became fixed at $4.20 per share and $4.62 per share, respectively, pursuant to the terms of the warrants.

On June 4, 2018, the Company issued five-year warrants for the purchase of 1,725,000 shares of common stock at an exercise price of $6.00 per share to purchasers of Units in the IPO and issued five-year warrants for the purchase of 86,250 shares of common stock at an exercise price of $6.25 to the underwriter for the IPO. Further, in connection with the IPO, warrants for the purchase of 100,570 shares of Series A Preferred Stock were amended such that they became exercisable for the purchase of 116,912 shares of common stock at an exercise price of $4.30 per share.

On June 18, 2018, the Company issued five-year warrants for the purchase 100,000 shares of common stock to certain consultants. The warrants vested immediately, were exercisable at $5.00 per share and had a grant date value of $179,000 using the Black-Scholes Model pricing model, with the following assumptions used: stock price of $4.93, risk free interest rate of 2.67-2.80%, expected term of 3-5 years, volatility of 42.6% and an annual rate of quarterly dividends of 0%. A summary of warrant activity during the six months ended June 30, 2018 is presented below:

HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

A summary of outstanding and exercisable warrants as of June 30, 2018 is presented below: