enVVeno Medical Corp

Note 1 –Business Organization and Nature of Operations

enVVeno Medical Corporation is a late clinical-stage medical device company focused on the advancement of innovative bioprosthetic (tissue-based) solutions to improve the standard of care for the treatment of venous disease. The Company is developing surgical and non-surgical replacement venous valves for patients suffering from severe CVI of the deep venous system of the leg.

The Company’s lead product is the VenoValve®, which is a surgical replacement venous valve that is currently being evaluated in a U.S. pivotal study. The Company is also developing a second product called enVVe®, which is a first-in-class, non-surgical, transcatheter based replacement venous valve. The Company is currently conducting pre-clinical testing on enVVe. Both the VenoValve and enVVe are designed to act as one-way valves, to help assist in propelling blood up the veins of the leg, and back to the heart and lungs.

The VenoValve and enVVe are being developed first for approval by the U.S. Food and Drug Administration (FDA). We expect the VenoValve to be eligible for FDA approval first, followed two to three years later by enVVe. If approved, we expect the VenoValve and enVVe to co-exist, with the VenoValve as a surgical replacement venous valve option and enVVe as a non-surgical replacement venous valve option

Note 2 –Management’s Liquidity Plan

As of December 31, 2023, the Company had a cash balance of $3.6 million, investments of $42.8 million and working capital of $45.6 million. Although the Company expects to continue incurring losses for the foreseeable future and may 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 our capital resources are sufficient to meet our obligations as they become due within one year after the date of this Annual Report.

Note 3 –Significant Accounting Policies

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.

Investments

We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. Investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year are classified as long-term investments.

Debt investments are classified as trading securities and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in unrealized gains (losses) from investments. Fair value is calculated based on publicly available market information. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. We recognize interest income based on the stated coupon rate of the investments purchased.

Property and Equipment, Net

Property and equipment are stated at cost, net of accumulated depreciation using the straight-line method over their estimated useful lives, which range from 5 to 7 years. Leasehold improvements are amortized over the lesser of (a) the useful life of the asset; or (b) the remaining lease term. Expenditures for maintenance and repairs, which do not extend the economic useful life of the related assets, are charged to operations as incurred, and expenditures, which extend the economic life are capitalized. When assets are retired, or otherwise disposed of, the costs and related accumulated depreciation or amortization are removed from the accounts and any gain or loss on disposal is recognized.

Impairment of Long-lived Assets

The Company reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount.

Income Taxes

The Company follows the asset and liability method of accounting for income taxes under ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of December 31, 2023 and December 31, 2022. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position.

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 payable are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments.

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 shares outstanding during the period including warrants exercisable for little or no cash consideration. 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.

Stock-Based Compensation

The Company has an Equity Incentive Plan under which the Board of Directors may grant restricted stock or stock options to employees and nonemployees. The accounting treatment for share-based payments to employees and non-employees is substantially equivalent.

Share-based compensation cost is recorded for all option grants and awards of non-vested stock based on the grant date fair value of the award, and is recognized over the service period required for the award.

The fair value of the Company’s stock options is estimated at the date of grant using the Black-Scholes based option valuation model. For the expected term, the Company uses SEC Staff Accounting Bulletin No. 107 simplified method for “plain vanilla” options with following characteristics: (i) the share options are granted at the market price on the grant date; (ii) exercisability is conditional on performing service through the vesting date on most options; (iii) if an employee terminates service prior to vesting, the employee would forfeit the share options; (iv) if an employee terminates service after vesting, the employee would have 30 to 90 days to exercise the share options; and (v) the share options are nontransferable and nonhedgeable.

The Company estimated the expected term of the options using the simplified method. The Company uses its stock’s historical market information to calculate volatility used in estimating fair value of options granted. The volatility assumption is based on the historical volatility of the Company’s common stock with an equivalent remaining expected term. The risk-free interest rate is based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent remaining expected term. The dividend yield assumption is based on the Company’s history and expectation of future dividend payouts on the common stock.

For option grants without performance conditions, the Company recognizes compensation expense over the requisite service period ratably, recognizing expense for each tranche of each grant starting on the grant date. For grants that have both service and performance conditions, the Company recognizes compensation expense using the graded attribution method. Compensation expense for grants with performance conditions is recognized only for those awards expected to vest.

Forfeitures of unvested stock options are recorded when they occur.

Loss Contingencies

The Company will accrue an estimated loss if information available before the financial statements are issued or are available to be issued indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and the amount of loss can be reasonably estimated.

Note 4 –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 $3.4 million as of December 31, 2023.

Note 5 –Investments

The components of investments were as follows at December 31, 2023 and December 31, 2022:

(In thousands)

Unrealized gains of $0.5 million and unrealized losses of $0.1 million for the year ended December 31, 2023 and 2022, respectively, from fixed-income securities and primarily attributable to changes in interest rates.

Note 6 –Property and Equipment

As of December 31, 2023, and 2022, property and equipment consist of the following:

Depreciation expense was $0.2 million and $0.2 million for the years ended December 31, 2023 and 2022, respectively. Depreciation expense is reflected in general and administrative expenses in the accompanying statements of operations.

Note 7 –Right-of-Use Assets and Lease Liabilities

On November 17, 2021, the Company amended its operating lease for its manufacturing facility in Irvine, California, to extend the term an additional 60 months from its September 30, 2022 expiration date to a new expiration date of September 30, 2027. The initial lease rate at the date of the amendment was $30,206 per month with escalating payments. In connection with the lease, the Company is 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 determined the lease liabilities using the Company’s estimated incremental borrowing rate of 3.95% to estimate the present value of the remaining monthly lease payments.

Our operating lease cost is as follows*(in thousands)*:

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

Remaining lease term and discount rate for our operating lease is as follows:

Maturity of our lease liabilities by fiscal year for our operating lease is as follows:

Note 8 –Accounts payable, accrued expenses and other current liabilities

As of December 31, 2023 and 2022, accounts payable, accrued expenses and other current liabilities consist of the following:

Note 9 –Income Taxes

The following summarizes the Company’s income tax provision (benefit):

The reconciliation between the U.S. statutory federal income tax rate and the Company’s effective tax rate for the year’s ended December 31, 2023 and 2022 is as follows:

Significant components of the Company’s deferred tax assets at December 31, 2023 and 2022 are as follows:

ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Because of the Company’s history of operating losses, management believes that recognition of the deferred tax assets arising from the above listed future tax benefits is currently not more likely than not to be realized and, accordingly, has provided a full valuation allowance. The valuation allowance increased by $5.6 million and $5.0 million during the years ended December 31, 2023 and 2022, respectively.

Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-change net operating loss, or NOL, carryforwards and other pre-change tax attributes to offset its post-change income taxes may be limited. In accordance with Section 382 of the Internal Revenue Code, the usage of the Company’s NOL carry forwards are subject to annual limitations due to greater than 50% ownership changes in 2018 and 2021.

At December 31, 2023 and 2022, the Company had post-ownership change net operating loss carryforwards for federal income tax purposes of approximately $61.7 million and $52.7 million, respectively. Pre-2018 federal NOLs of approximately $12.0 million may be carried forward for twenty years and begin to expire in 2029. Based on the 2020 and 2021 ownership changes, the Company expects $10.4 million of its pre-2018 federal NOLs to expire unused. Under current federal tax law, post-2017 federal NOLs in the aggregate amount of $50.3 million can be carried forward indefinitely although the annual limit of deduction equals 80% of taxable income. To the extent the Company utilizes its NOL carryforwards in the future, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state tax authorities of the future period tax return in which the attribute is utilized. The Company also has federal research and development tax credit carryforwards of approximately $0.2 million which begin to expire in 2027.

As of December 31, 2023 and 2022, the Company had net operating loss carryforwards for state income tax purposes of approximately $61.1 million and $52.5 million, respectively, which can be carried forward for twenty years and begin to expire in 2029.

The Company files income tax returns in the U.S. federal jurisdiction as well as California and local jurisdictions and is subject to examination by those taxing authorities. The Company’s federal income taxes for the years beginning in 2019 remain subject to examination. The Company’s state and local income tax returns for the years beginning in 2020 remain subject to examination. No tax audits were initiated during 2023 or 2022.

Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s financial statements as of December 31, 2023 and 2022. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date. The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as general and administrative expenses in the statements of operations.

Note 10 –Commitments and Contingencies

Litigation Claims and Assessments

In the normal course of business, the Company may be involved in legal proceedings, claims and assessments. The Company records legal costs associated with loss contingencies as incurred and accrues for all probable and estimable settlements.

Robert Rankin Complaints

The Company and its Chief Executive Officer are parties to civil complaints filed by a former employee, Robert Rankin, who resigned as the Company’s Chief Financial Officer, Secretary, and Treasurer on March 30, 2020. Originally filed as two separate complaints, Rankin v. Hancock Jaffe Laboratories, Inc. et al., Case No. 30-2020-01146555-CU-WR-CJC and Rankin v. Hancock Jaffe Laboratories, Inc. et al., Case No. 30-2020-01157857, they have now been consolidated and will be tried concurrently.

The complaints assert causes of action alleging constructive discharge in violation of public policy, failure to timely pay Mr. Rankin’s accrued and unused vacation and three months’ severance under his July 16, 2018 employment agreement, Retaliation under Labor Code Section 1102.5, unfair competition, defamation, and sex-based discrimination, and seeks damages for back pay, lost and unpaid wages, emotional and mental distress, consequential damages, punitive damages, compensatory damages and attorney’s fees and costs.

The Company denies all claims in these matters, is vigorously defending same, and has asserted counterclaims against Mr. Rankin contending that he breached his fiduciary duty and employment agreement with the Company and the Company incurred damages as a result. The Company continues to believe it has meritorious defenses to these matters, which are currently set for trial on May 13, 2024.

As of the date of these financial statements, the amount of loss or range of loss associated with these complaints, if any, cannot be reasonably estimated. Accordingly, no amounts related to these complaints are accrued as of December 31, 2023.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Note 11 –Stockholders’ Equity

Equity Issuance

The Company entered into a financing transaction in 2023 whereby it raised net proceeds of $25.8 million and issued 3.8 million shares of common stock,9.6 million warrants subject to performance conditions,1.0 million prefunded warrants and 0.2 million warrants to the placement agent. The weighted average exercise price of the warrants is $6.94.

Transaction fees in connection with the capital raise were $2.2 million.

If the performance conditions are not achieved, 50% of the performance warrants will expire in October 2024 and 50% in October 2026. If the performance conditions are achieved the holder has 30 days to exercise.

The warrants have a fair value of $19.7 million based on the Black Scholes method and the following weighted average input assumptions:

Warrants

A summary of warrant activity during the years ended December 31, 2023 and 2022 is presented below:

Note 12 –Share Based Compensation

Omnibus Incentive Plan

The Company issues share-based awards under its Company’s 2016 Omnibus Incentive Plan, which enables the Company to grant stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, other share based awards and cash awards to associates, directors, consultants, and advisors of the Company and its affiliates, and to improve the ability of the Company to attract, retain, and motivate individuals upon whom the Company’s sustained growth and financial success depend, by providing such persons with an opportunity to acquire or increase their proprietary interest in the Company. Stock options granted under the 2016 Plan may be non-qualified stock options or incentive stock options, within the meaning of Section 422(b) of the Internal Revenue Code of 1986, except that stock options granted to outside directors and any consultants or advisers providing services to the Company or an affiliate shall in all cases be non-qualified stock options. The option price must be at least 100% of the fair market value on the date of grant and if issued to a 10% or greater shareholder must be 110% of the fair market value on the date of the grant.

The 2016 Plan is to be administered by the Board, which has discretion over the awards and grants thereunder. No awards may be issued after November 21, 2026.

The Plan was adopted in 2016 and amended in 2018, 2020 and 2021 to increase the number of shares authorized to be awarded under the Plan. The number of shares subject to the Plan is automatically adjusted from time to time such that shares authorized under the plan shall always be equal to at least 20% of the issued and outstanding shares of the Company on a fully diluted basis. As of December 31, 2023 there are 6,939,796 shares authorized under the Plan which is equal to the 20% minimum.

Stock Options

The fair value of each option grant is estimated at the grant date using the Black Scholes method. The following assumptions were used in estimating fair value:

A summary of the option activity during the years ended December 31, 2023 and 2022 is presented below:

The Company includes share-based compensation expense in selling, general and administrative expenses, and recognized $5.2 million and $9.0 million during the years ended December 31, 2023 and 2022, respectively.

As of December 31, 2023, there was $5.9 million of unrecognized share-based compensation expense related to outstanding stock options and restricted stock units that will be recognized over the weighted average remaining vesting period of 1.9 years.

Restricted Stock Units

The Company also issues restricted shares and restricted stock units under the 2016 Plan. A summary of the restricted share and restricted stock units activity during the years ended December 31, 2023 and 2022 is presented below: